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World's Biggest Debtor Nation

America On Top Again

by DON MONKERUD

The typical American family is buried in debt. According to the Federal Reserve Fund, household debt equals almost 25 percent of net household worth, or 136 percent of disposable income. After wages fell behind inflation for a decade, Americans mortgaged their homes and ran up their credit cards to cover living expenses.

In 2005, Americans spent $42 billion more than they earned, and the most recent report from the Commerce Department found savings rates at a negative one percent, the lowest since the Great Depression, and down from 11 percent after WWII. Only four times have savings rates fallen so low: The other two were during the Great Depression when a quarter of the workforce was unemployed and Americans spent their savings for essentials such as food and rent.

Today’s debtors are taking advantage of the lowest interest rates in 40 years by borrowing money from their houses and against their paychecks to buy new cars and make home improvements. They also pay over $1.4 trillion in debt service, or 10 percent of the gross domestic product. The credit card industry alone generates over $30 billion in annual profits.

As long as business in the US continues to grow, even at a slow pace, and consumers feel they will have money in the future for monthly payments, there is little concern, despite some pessimism by contrarian economists. The same is true of the massive foreign debt.

On the national level, each citizen owes almost $29,000 for a collective total of $8,700,769,194,975, roughly $9 trillion. Interest on the federal deficit is now the fastest-growing part of federal spending, consuming $220 billion in 2006 and $270 billion by 2008. For the first time since WWI, the US now pays more to foreign creditors than it receives in investments from abroad.

Paying this interest leaves less money for domestic programs, but free-market economists claim the debt is only a small percentage of the gross national product-6 percent in 2005-and the federal government can write checks at any time, risking only a little inflation, so the national debt is not worrisome.

The flow of funds into US financial markets depresses US interest rates and allows the US to run huge trade imbalances and a high national debt because there is nowhere else countries can invest safely for the returns they receive from US markets. As long as the US continues to import cheap goods from China and India, interest rates in other countries remain low, oil prices don’t shoot up, and there are no serious disruptions, most economist predict that the economy will probably stay on track and be able to absorb shocks such as Hurricane Katrina and the huge expenditures of the Iraq occupation.

If the US could no longer borrow as it has been doing, interests rates would skyrocket, home values would plummet, people would lose their jobs, and government services would have to be cut drastically.

A study by the Brookings Institute on sustained US budget deficits said, "Failing to act sooner rather than later, though, only makes the problem more difficult to address without considerable instability, raises the probability of fiscal and financial disarray at some point in the future, and runs the risks of further constraining policy flexibility in the future."

An even greater danger cited by many economists is the long-term debt created by Social Security and Medicare deficits. Federal Reserve Chairman Ben Bernanke warned Congress in January that the longer we wait to address funding these programs, "the more severe, the more draconian, the more difficult the adjustment is going to be."

The Congressional Budget Office found that Social Security and Medicare will rise from 8.5 percent of annual economic output to 10.5 percent by 2015 and to 15 percent by 2030. This increase would mean that the ratio of publicly held federal debt would rise from 35 percent today to 100 percent by 2030. Bernanke warned that such high debt would slow economic growth, reduce private investment, and lead to low confidence among consumers, businesses and investors.

The press of debt and higher interest rates could lead to a serious recession that could drastically curtail domestic consumption and lead to massive unemployment. Coupled with impending weather disasters caused by global warming, vast areas of the country could be without power, food and shelter for long periods.

Loss of status in the world or terrorism within the US could negatively impact the American psyche, leading to an even greater reliance on military power, permanent warfare, and draconian curtailment of civil liberties.

On the other hand, the US economy could roll along as it is, with the rich getting richer, the poor getting poorer, and the middle class pushed down into a lower socioeconomic class, fostering resentment and squabbles over ever scarcer public resources. Shantytowns could spring up, making America look more like Haiti and South America.

Not the hopeful scenario Americans like to assume but considering the volatility of our time, a stable economy cannot be assured. Today’s worldwide economy is so complex, inter-related and global that no one can predict what will happen.

DON MONKERUD is an California-based writer who follows cultural, social and political issues. He can be reached at monkerud@cruzio.com.