The United States: Headed For a Crash?
Experts warn that heavy debt threatens America
Growing debt has long been a concern in the United States,
from individuals buying on credit to Washington budgets. But many economists are
now warning that runaway spending and borrowing have the nation on track toward
a major economic crash. The first in a three-part series, "Drowning in Debt,"
this story offers an overview of what many financial experts see as the
gathering storm.
Special Report- Part One
August 26, 2005
By ROBERT TANNER
You owe $145,000. And the bill is rising every day.
That's how much it would cost every American man, woman and
child to pay the tab for the long-term promises the U.S. government
has made to creditors, retirees, veterans and the poor.
And it's not even taking into account credit card bills,
mortgages -- all the debt we've racked up personally. Savings? The
average American puts away barely $1 of every $100 earned.
Our profligate ways at home are mirrored in Washington and in
the global marketplace, where as a society we spend $1.9 billion
more a day on imported clothes and cars and gadgets than the entire
rest of the world spends on its goods and services.
A new Associated Press/Ipsos poll finds that barely a third of
Americans would cut spending to reduce the federal deficit and even
fewer would raise taxes.
A chorus of economists, government officials and elected leaders
both conservative and liberal are warning that nonstop borrowing
could bring fiscal disaster -- one that could unleash plummeting
home values, rocketing interest rates, lost jobs and threats to
government services ranging from health care to law enforcement.
David Walker, who audits the federal government's books as the
U.S. comptroller general, put it starkly in an AP interview:
"I believe the country faces a critical crossroad and that the
decisions that are made -- or not made -- within the next 10 years or
so will have a profound effect on the future of our country, our
children and our grandchildren. The problem gets bigger every day,
and the tidal wave gets closer every day."
Undeniably, borrowing isn't all bad -- easy access to money has
been a critical tool in building America's businesses, from
mom-and-pops to multinationals. Areas like Las Vegas are sprawling
with new homes that will be purchased with borrowed money. But
something has changed.
An epidemic of American indebtedness runs from home to
government to global marketplace.
To examine it, let's start at home.
Americans used to save, but no longer. The savings rate rose and
fell in the post-World War II era, up to 11 percent, down to 7
percent. But in the last few years, savings have plummeted: to just
1.8 percent last year, nearly to zero in the last few months.
The lack of savings is mirrored by a rise in debt. In 2000,
household debt broke 18 percent of disposable income for the first
time in 20 years, meaning debt eats almost $1 in every $5 American
families have to spend after they get past the bills that keep them
fed and housed.
In lieu of savings, Americans have been taking comfort in the
soaring value of their homes. But there's a vigorous debate over
whether the housing boom is becoming a bubble that will burst.
"I see people younger than me with comparable jobs that drive
new vehicles and have a boat and mortgage and things," says Jo
Canelon, a 46-year-old social worker in Statenville, Ga. "And I
just wonder about their debt."
Canelon sees echoes in the rise of obesity: a pervasive
I-want-it-now attitude no matter what the consequences. The
American people seem to want the best of both worlds -- tax cuts and
government services -- while they hope the dollars sort themselves
out.
An Associated Press/Ipsos poll of 1,000 adults taken July 5-7
found that a sweeping majority -- 70 percent -- worried about the
size of the federal deficit either "some" or "a lot."
But only about a third, 35 percent, were willing to cut
government spending and deal with a drop in services to balance the
budget. Even fewer -- 18 percent -- were willing to raise taxes to
keep current services. Just 1 percent wanted to both raise taxes
and cut spending. The poll has a margin of error of 3 percentage
points.
A few years ago, government finances were the strongest they had
been in a generation. But it didn't last. The budget surplus of
$236 billion in 2000 turned into a deficit of $412 billion last
year. The government had to borrow that much to cover the hole
between what it took in and what it had to spend; a difference
that's called the federal deficit.
Blame the bust of the dot-com boom, the ensuing recession,
President Bush's federal tax cuts, the Sept. 11 terrorist attacks
and the subsequent wars in Afghanistan and Iraq.
Still, the federal deficit isn't as big, in proportion to the
size of the economy, as it was at times under President Reagan.
Some note things are getting better: The latest reports project a
deficit of $331 billion for 2005, nearly $100 billion less than
expected. Outstanding debt -- the amount of securities and bonds
that must be repaid -- is far below what it was in the early 1990s.
But bigger worries lie ahead.
The nation's three biggest entitlement programs -- Social
Security, Medicare and Medicaid -- make promises for retirement and
health care that carry a huge price tag that balloons as the
population grows and ages.
Add it up: current debt and deficit, promises for those big
programs, pensions, veterans health care. The total comes to $43
trillion, says Walker, the nation's comptroller general, who runs
the Government Accountability Office. That's where the $145,000
bill for every American comes from.
The dangers are clear to Felicia Brown in Saginaw, Mich. It's
the leaders who ignore them, says the cashier and mother of three:
"We're led off on this belief that we should buy, buy, buy. ...
We're not saving anything."
Some people, however -- including economists -- think the picture
isn't so gloomy.
Ben Bernanke, who recently left the Federal Reserve Board to
serve as Bush's top economic adviser, has argued that the problem
is not with the United States. The trouble lies overseas, where
people want to save rather than invest or spend their money. While
the federal budget needs to be balanced, the key is to encourage
other countries to create more economic activity, he says.
The overseas equation gives many other economists the biggest
scare.
The trade deficit -- the difference between what America imports
and what it exports -- is the highest it's ever been, both in
absolute numbers and in comparison to the size the economy.
As a society, Americans are on track this year to spend $680
billion more on foreign goods like Chinese-made clothes and
Scandinavian cell phones than overseas buyers do on American
products. The crush of arriving, Asian-made goods recently spurred
the Port of Los Angeles to switch to 24-hour operations.
Nearly two decades ago, the country fretted over a trade
imbalance equal to 3.1 percent of the overall economy, or the gross
domestic product. It's more than twice as big now, roughly 6.5
percent.
Here's how economists, from former Federal Reserve Chairman Paul
Volcker to analysts at the International Monetary Fund, explain the
danger that creates:
- Americans go into debt to live a life beyond their means,
spending borrowed money to buy goods, many from overseas.
- Government provides more services than it can afford to, and
goes into debt to cover the gap.
- Foreign banks increasingly cover that debt by buying it, in
the form of U.S. Treasuries, which helps keep interest rates low
and keeps American consumers buying.
Experts say the relationship is unsustainable. It could all come
crashing down if foreign banks reduced their investment in the
dollar, says Nouriel Roubini, an economics professor at New York
University.
Economists and business leaders are closely watching China's
decision last month to uncouple the value of its currency, the
yuan, from the dollar and tie it instead to a basket of different
currencies. The move could make the dollar's position less exposed
to a quick shift by international investors -- or it could spur
those investors to look elsewhere and leave the United States'
position more precarious.
So could any of a number of possible economic shocks -- even
greater hikes in oil prices, a major terrorist attack, another war.
In the end, Roubini, Walker and others say, disaster is still
avoidable, but it's going to require the American people and its
leaders to clean financial house -- to reduce the federal deficit
and the trade deficit.
If not, the future poses some frightening what-ifs:
What if the dollar plummets, do stocks follow? What if interest
rates soar, what happens to homeowners and home values? How would
government keep all its promises?
OK, now back to you. No one's asking you to write a check to
cover that $145,000, not yet. But the pressures are building around
the world, in Washington, and in America's homes to straighten out
our finances.
"We're living beyond our means," Roubini says, "and we have
to get our act together."
___
Part Two: Doomsday Scenarios in Which Debt
Could Derail The
US Economy.
AP-ES-08-25-05 1114EDT
|
