The last time U.S. debt reached the current levels of ratios to GDP, the country was financing WorldWar II.
Back then, the American citizen got involved in everything. Consumer goods were rationed to keep supplies flowing to industry. The U.S. treasury mounted bond drives where individuals, municipalities, towns and cities were cajoled into buying bonds to help finance the war effort.
Americans responded enthusiastically to all of that as that generation reshaped the world.
Today, there is not a lot of that going around anymore. The American citizen has been the consummate consumer, saving nothing and begrudgingly paying taxes, allowing foreign investors to finance U.S. budget deficits to keep the goods and services flowing to consumption.
The government hasn’t asked anything of its citizens in a long time. They appear scared to, as the mindset is that the government is obligated to serve our every need and should not inconvenience us in any way.
We have entered a “Great Recession.” There have been massive losses of household equity. Investment banks created a web of systemic risk that has forced the government to open the government’s checkbook even to the point of the Fed financing U.S. Treasury debt with imaginary money.
In trying to make all the hurt suffered go away and capitalize major banks, the Federal Government is taking on an unprecedented level of debt.
The American public bought bonds in World War II out of a sense of patriotic duty to support our men and women in the Armed Forces and to defeat fascism. There is no similar sense of patriotic duty in bailing out a bunch of Wall Street bankers who bet their companies in the market and lost.
Back in World War II they sent out movie stars and war heroes to drum up bond sales, putting on traveling shows designed to curry patriotism. Who would volunteer to be the poster child for the AIG bailout? And how many bonds do you think they could sell to fund it?
The U.S. has been dependent on foreign inflows to finance its deficit spending for some time now but the level of debt now being taken on by the Federal government defies all history.
If China is any barometer of foreign investor confidence, they are getting nervous. China is seriously questioning the continued use of the U.S. dollar as the world reserve currency, recommending that the world economic system diversity its currency portfolio.
China suggested minting a new world currency managed by the IMF. When they put more confidence in the IMF then they do the U.S. Treasury then you could say that global investor confidence in U.S. debt has been shaken. U.S. citizens are going to have to step up to finance this debt being assumed by Washington on their behalf.
They are going to need to start promoting Treasury bond sales to the public again.
There is money out there for this. Americans have stopped spending. They had to. Their level of consumption was unsustainable. That means that the U.S. savings rate, which was near zero, is going to rise. The WSJ quotes sources who see a 10 percent savings rate by the end of next year generating a sum equal to $1 trillion a year in excess cash.
U.S. households held 5 percent of total assets in U.S. treasuries in the 1950s. That’s right, 5 percnt. That statistic fell to .4 percent of household assets in 2008 as consumers put all their income into consumption, plus leveraged future income by adding personal debt.
Americans can not save and consume at the old rates. The Journal calculates that just getting back to a 2 percent bond to asset percentage, far short of the 5 percent in the 1950s, would raise $1.2 trillion in treasury demand from households.
That $1.2 trillion will be deducted from consumer spending so the U.S. economy will not reach the growth rates when in recovery, projected by the Obama administration.
Financing this much of the U.S. debt domestically would help keep interest rates low which would sustain long term economic growth. It also makes us less vulnerable to any disruption of foreign capital inflows.
By contrast, Chinese consumers save 25 percent of their incomes, an inconceivable amount by comparable U.S. savings metrics. This gives them a deep kitty that they can dip into when something goes wrong. Also by contrast, when Americans get into trouble, they expect the government to fix it for them, so most Americans don’t even have a kitty.
I believe that Americans will save more and consume less because that is what is going to happen, because it will have to happen. Either consumers will willingly invest in the country or unhappily be taxed by its government.
Foreign investors are not going to send $4.2 trillion to the U.S. in 2011 to finance the projected budget deficit for that year. Congress is not going to tax U.S. citizens to pay for a deficit that size.
U.S. citizens are going to have to help finance it, borrowing money to the government. How patriotic are you feeling?
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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