Tuesday, June 24, 2008

Debt in the US - The Legacy of Bush?

George W. Bush has left America and the World many different legacy's - Guantanamo Bay, a snub to Kyoto, Iraq; but, on the economy one issue is worth exploring - a legacy of debt.

National Debt

National debt has passed a remarkable $9.3 trillion. (see debt clock) As a % of GDP it is approaching a 50 year high; a level not seen since the effects of WWII spending.

National Debt as a % of GDP Fell Under Clinton and Rose under Bush

National debt has increased for various reasons including:
  • Tax Cuts, especially for high income earners and business. However, spending has not fallen to match the tax cuts.
  • Military operations in Iraq (not necessarily accounted for in defense budget) have increased spending
  • Demographic changes of an ageing population leading to more welfare spending.
The result has been an increase in national debt. As the economy slows down in 2008 and 2009, the National Debt as a % of GDP will only deteriorate further.

Personal Debt

The boom years of the 00s, were financed by unprecedented levels of consumer borrowing. According to latest figures from the Federal Reserve, US consumer debt has reached $2.5 trillion (link)
The US savings rate dipped to a remarkably low figure. IN 2006, it dipped into a negative savings ratio. Debt increased because:
  • changes in attitudes - good times will keep rolling
  • People remortgaged against rising property prices - leaving many facing negative equity.
  • Lack of regulation in the finance sector.
The government cannot take all the blame. Partly it relies on individual spending patterns. Partly we can blame financial institutions which encouraged lax lending criteria. But, the government can be criticised for not doing more to regulate a financial system, seemingly incapable of regulating itself.

Sub Prime Debt

Perhaps the most caustic legacy is the subprime mortgage loans which have caused so many repercussions around the financial system. Many mortgages were sold to people who had little chance of repaying them. When interest rates rose slightly, there was a rise in mortgage arreas which led to banks having to write off billions of pounds in bad debts. The rise in interest rates in 2006 was relatively modest, but, the problems it caused showed how the banks had willingly taken on excessive risk and passed it around the whole financial sector. The losses in various banks have involved billions of dollars and has threatened the survival of many banks and mortgage companies.

Current Account Deficit.

The current account deficit measures how much America has imported relative to exports. The current account deficit reached a peak of 6.5% of GDP (imports $600 more than exports). The current account deficit has been financed by capital flows from Asian countries such as China and Japan. The legacy of this continued deficit is that a high % of American debt has been purchased by America's creditors - China, Japan and others. However, as their appetite for purchasing American debt fell, it became more difficult to finance the deficit and as a consequence the dollar's depreciation accelerated.

Current Account Deficit in US

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