Tuesday, May 17, 2011

US National Debt : A lesson for all nations

Today the American Congress is debating whether to raise the debt ceiling of $14.294 trillion so that the govt can continue to spend. Not raising the debt ceiling will result in a payment default that will send, the US economy & govt straight into another crisis. So there is little choice but to raise the debt ceiling, borrow more money and "kick the can" further down the road.

I once had a conversation with an American who was furious at his govt for the national debt and he felt strongly that his govt should be forced to default on that debt and be taught a lesson on prudence. That was 1994! 17 years later the debt is even bigger and a default would be instant disaster because it will plunge the global economy into a crisis that will perhaps take decades to get out of.

Many people have the misconception that Western govts get into this type of trouble overspending on welfare. This is not true. The US national debt fell steadily until Ronald Regean became president. He cut welfare spending, increased military spending and cut taxes. His deputy George Bush senior and his son continued the tradition piling up more national debt and fighting wars in the middle east. In the 80s, when the national debt was low, the US had what many saw as an overly generous welfare system. One of Regean's achievement was to slaughter the "welfare queen"[Link] the sterotype of a lazy woman who did not work and lived on govt handouts. Research later showed the "welfare queen" was a myth[Link]. Regean proceeded to put US into a path of large budget deficits by spending on the military after cutting taxes. A one point, Regean decided cut govt funding for mental institutes  [Link] saying it was not the state responsibility to take care of these people sending thousands of mentally unsound individuals onto the streets. Whatever he saved by cutting welfare program, he spent on the military - he would later claim victory for the Cold War saying the Soviet Union bankrupted itself trying to keep up with the US in military spending. This again proved to be another myth [Link] and Gorbachev explained that the inefficiency in the Soviet economic system was what did them in not the Cold War.

Recently, the US debt ballooned due to the need to rescue the financial system with bailouts and the US economy had to be revived with massive govt spending. During the financial crisis, people like Jim Rogers suggested allowing the system to fail. reset the financial system and rebuild it to fix all the problems. That was not do-able politically as there would be too much pain for the populace to take in a major disruption of the system.

Today for every dollar the US govt spends, 40 cents is used to service its debts.[Link].

What got the US govt into this situation is not welfare spending but tax cuts, military spending and bankers who created the financial crisis.

Beware of govts that exercise extreme parsimony in social spending but love tax cuts, military spending and deregulating the activities of banks. You have to ask whether a govt that debate vigorously for a $1 per day increase in assistance should also have its defense budget scrutinised because a weak social infrastructure will make us just as vulnerable because we are counting on ordinary men to be willing to die for their country in battle.


hayek said...

Actually I see the implosion of US being the consequence of moral decay.

Its true, the US elite are stealing from the state by refusing their tax obligation now.

But not to forget, other groups with some lobby power are doing similar things. Take for example, the teachers union, the doctor cartel, the federal government employees.....etc.

The baby boomers are the pioneer of loose moral and individualism in USA. In a generation, the baby boomers destroyed the nation.

Singaporean are generally an extremely moral and generous people. Over the decades, PAP has been destroying our values through extreme social darwinism, inculcating us to worship monies, to be selfish and wicked.

And now, our society is already at the beginning of breaking down.

Amos said...

Dear Lucky,

Tnank you for your post! I agree with you 100%

Any rational nation with a clear moral compass will push its elected representatives to redirect savings from a reduced defense budget toward increased health care for the aged and the terminally ill. There is nothing "sexy" about cutting a bloated defense budget to take care of the elderly who sacrificed so much in the 50's and early 60's.

I hope the new parliament can get to grips with issues cited above and stop wasting their time on meaningless projects to make our neighbourhoods look "pretty".

hyom said...

The US reliance on debt is like a drug addict's reliance on drugs. He claims that he has to keep on taking drugs because the withdrawal symptoms will kill him. This may be true in the 2008 financial crisis but this argument cannot be used every time. If not now, then when? Eventually, the drug addict will be killed by the drugs.

Can you imagine a drug addict telling you that the solution to my drugs problem is more drugs? He is simply making excuses for his lack of will to take the pain to wean off the harmful habit.

Anonymous said...

Even though the US National Debt is huge, the whole world still has faith in the US dollar as an international currency!

In fact the US dollar even strengthened against the Sing dollar in the past few days!

So what's the worry?

Suppose you are bankrupt but if people still want to lend to you to spend, or else they will be in trouble too if they don't, what's the problem with being bankrupt?

Just like if people hate you and are unhappy but still vote for you, what's the problem with being hated or making people unhappy?

Tio bo,(right or not)?

Lye Khuen Way said...

Thank you, Lucky for this article.
The Hard Truth is that Singapore is going the same way in terms of scrimping on "welfare", hiking on defense spending & having a super loose touch with regards to financial governance.
OK, we do not have outright sign of distress.

Anonymous said...

morale of the story is simple: dont spend what you have not earned.

Daily Struggles of a Singaporean Joe said...

I think the poor will choose not to defend Singapore in the even of a war or natural disaster because we have nothing worth defending for. Whereas the rich have everything to defend for. The rich have their million/billion dollar bank accounts, multiple private properties, posh cars, private jets, millionaire lifestyle etc to defend for. But they will deem their lives too valuable to sacrifice for the good of the nation. For the poor, most live in HDBs, some rent them, some camp at West Coast beach, so what are the poor defending? Defend the properties of the elites and foreigners? Hell no. Our social fabric is already broken. Like what someone said,"In Singapore if you don't have $10 in your pocket even dogs don't bother to look at you".

Anonymous said...

As it is, I hated serving 2 and half years of NS and I dread my reservists call-ups and RTs as well to the core.

Believe you me, many of my fellows reservists told me they didn't vote for PAP because they had to service reservists at 39 while new citizens are enjoying themselves at Sentosa at the age of 29.

There is injustice and unfairness and people know it all by now. How many singaporeans hate ns and reservists call-ups as they know they are serving to protect the assets of the rich in this country?

Anonymous said...

Hi Lucky,

Going forward, with the US debt crisis unfolding before our eyes, what do you suggest Singaporeans to put their liquid asset in? What is the implication on Sing dollar vs commodity like gold? What is the implication on property price and interest rate? It would be great if you can provide some insights for your readers.

Chow said...

I think that's the way things go as a country gets richer and lobbysits and special interests groups get into the act. It remains to be seen if China's mode of governance is better. I doubt it. The rich and influential get everywhere and anywhere.

Lucky Tan said...

anon 11:33,

The modern financial crisis goes something like this. When it starts, there is a great unwinding of leveraged speculative positions, including commodities, gold and stocks. The destruction of debt is in itself deflationary. It is the response to the crisis, lowering interest rates + quantitative easing that is inflationary. Oil is back to where it was in 2007 but US employment & growth is no-where near where it was in 2007. We are seeing elevated prices without the corresponding increase in income.

I guess this whole thing becomes Humpty Dumpty when breaks and nothing can put it back together again..... when prices rose due to easy money but people cannot afford to buy because they have no jobs - stagflation scenario. That is why some schools of thought is not to rescue the system every time it fails....because one day it will fail and you only make it worse with your rescue effort.

Anonymous said...

Don't worry, Lucky. Fed has the authority to buy unlimited amount of US treasury to "stabilize" the financial market, in case no one else want to buy Us treasury.

think from the other perspective, US gov debt is kind of indirect tax on those who hold the US dollar. It dilutes the value of dollar. Since US gov can't tax the rich effectively, taxing those cash rich guy is a viable option.

US gov won't go bankrupt with Fed support. But US is an unique country. Hope GOD bless the other country who try to follow US.

Anonymous said...

Hi Lucky,

I agree with you about the need for government to stop intervening in the market. The whole slew of measures such as quantitative easing is making investor like me to stay away from the market. The unwinding of speculative trades is supposed to reveal the true value of investments. The 2nd dip which was predicted to be last December never materialize due to all these "kicking the can down the road" measures. The ordinary people has to suffer from government made inflation to save the rich business owners.

Anonymous said...

That's why I took myself off the reservist cycle when I realised the corruptedness of the whole system. And this was way back in 1995 -- even then I had a growing unease with the PAP system. I had served 3 high-key ICTs (including 3 weeks in Taiwan) before the real world slapped me up my head and woke me up. Seeing how unappreciated and discriminated NSFs and reservists were, and seeing how PRs and foreigners took advantage of the system. All these back in 1995. Today is even worse.

Anonymous said...

Anon 12:41

Without congress increasing the debt limit beyond 14.24 trillion, the US Treasury is unable to issue any more treasuries and govt bonds for the Fed to buy. The politicians will argue back and forth, but after seeing the stock markets drop by another 10%-15%, they will lan-lan increase the debt limit.

But for how long this can continue?!?! The US public debt already almost 100% of their GDP. How much higher can it go?? How much more will creditors like China, Japan, Europe and yes, Singapore too, will tahan?!?! The US is already spending 40% of its revenue on debts --- it's like you spending 40% of your take home salary to pay off banks, loan sharks, creditors etc. At this rate, the US will soon spend 70% of its income just to service debts. By then, other countries will demand 10+% interest to buy US treasuries and bonds, and US will soon realise that it will take more than 100% of its income to service its debts i.e. all the govt revenue is not able to cover the debt interest payments and capital repayments i.e. forced default.

Anonymous said...

"By then, other countries will demand 10+% interest to buy US treasuries and bonds, and US will soon realise that it will take more than 100% of its income to service its debts i.e. all the govt revenue is not able to cover the debt interest payments and capital repayments i.e. forced default."
Anon 17/5/11 14:26

By then means when? 20 years time? 50 years time?

Or not even within your lifetime?

Anonymous said...

anon 14:26,

there is the beauty of inflation. Let's say that inflation rate is 2% ( Fed's target rate) and annual GDP growth is 3%, US nominal GDP will be 60% higher at 10 year later compared to now. Assuming they paid 1% of interest on debt, their debt level will be going from 100% of GDP now to 70% of GDP at 10 years later. That is right, US gov financial will become healthier without paying a single cent for debt servicing and interest. The trick is to keep interest rate lower than inflation.

now you know why they must die die to keep the interest rate low.


Frugality said...

Throw out all the old economics theories.

Will the world end up like Zimbabwe?
Having to pay 1 billion Zimbabwean dollar to buy 1 Time magazine?

Not likely.

Bill Gates
Warren Buffet
Donald Trump
Li Ka Shing

all need cash to spend and buy food

Just keep your exepnses in check,
Just learn how to cook your favourite dishes
Just throw away your car
Travel budget
Grow your own spring onions

You will be fine.

Kojakbt said...

Former army chief ready to do battle

MG (NS) Chan Chun Sing kicks off political career with salvo at Opposition's call to reduce defence spending

by Leong Wee Keat


Apr 15, 2011SINGAPORE - It may be "sexy" to call for a reduction in defence expenditure to spend more on social benefits but Singapore should never take peace for granted, said former army chief Major-General (NS) Chan Chun Sing, who kicked off his official introduction into politics taking aim at the call by the Opposition.

No country with the size and composition of Singapore has survived more than 100 years in the history of South-east Asia, he pointed out.

"We must always be prepared and never take for granted the peace that we have," said MG (NS) Chan, who spent 23 years with the Singapore Armed Forces.

He added: "We owe it to ourselves, we owe it to our nation to make sure that we do not get carried away by this populist sentiment. Defence is a long-term business, not a short-term business."

Married with two children - aged 10 and two - MG (NS) Chan was army attache to Jakarta between 2001 and 2003. In his introduction yesterday, he impressed with a short speech in Bahasa Indonesia, on top of switching between English and Mandarin.

While he may have traded his army greens for whites, MG (NS) Chan peppered his speech yesterday with his personal experiences in the army, while sounding a rally call to fellow citizens.

"I do believe, like I always tell my men, if we stay cohesive, stay united, then even Ghim Moh Secondary School will beat RJC (Raffles Junior College)," said the RJC alumnus.

Asked about sentiment concerning new citizens who became Singaporeans - and one possibly becoming a Member of Parliament - even though they had not served National Service, MG (NS) Chan said he would rather look at their potential contributions to Singapore.

Only by doing so can Singapore be more inclusive, and continue to attract the best talent here "to build a common future", he added.

Kojakbt said...

This guy must be a Ronald Reagan fan:

People's Action Party
Major-General (NS) Chan Chun Sing
Former chief of Army, 42


- Spent 23 years in the Singapore Armed Forces

- Has served on the boards of several public agencies, including Civil Service College, International Enterprise Singapore, and Defence Science Organisation

- Was a President's and SAF Overseas Scholar.


"Singapore is like a yacht, not a supertanker. We need a cohesive team of leaders, people that can watch the waves, respond swiftly, catch the winds and then we can sail round the world. If we lose that keen sense of awareness, then there is nothing that will guarantee that we will not be swept away by the tides of history."


Tanjong Pagar GRC

Anonymous said...

Anon 14:56

By then means within the next 5 years.

Anon 15:23,

Too bad Fed can only control 90-day long interest rate. Longer term interest rates are controlled by the markets. So anything beyond 5-yr treasuries are at the mercy of real-world fundamentals and willingness of international buyers to subsidise the US, buyers include your CPF money and S'pore reserves in GIC.

Are you willing to convert all your SGD into M'sian ringgit? No?!? Why, no confidence?? That will be the situation for US within the next 5 years. And the ironic truth is that M'sia's finances are in much better health than US.

Anonymous said...

"Too bad Fed can only control 90-day long interest rate. Longer term interest rates are controlled by the markets. So anything beyond 5-yr treasuries are at the mercy of real-world fundamentals and willingness of international buyers to subsidise the US, buyers include your CPF money and S'pore reserves in GIC."

You have no idea about quantitative easing, don't you?

Fed bought $30b 2-10 year treasury bond each month since last year in QEII. Fed CAN influence the long term interest rate if they want to.

Anonymous said...

"Fed bought $30b 2-10 year treasury bond each month since last year in QEII. Fed CAN influence the long term interest rate if they want to."

Sounds like you don't mind working for a boss that stops paying your salary and issues you IOUs instead, while claiming that you can sleep in the office and eat at the company canteen. Sooner or later, the staff will demand higher wages to cover the risk, or demand immediate debt repayments, or simply walk out (and go complain to MOM).

Your $30b monthly Fed buying is like you pissing in the ocean, which will stop in June 2011, compared to the trillions of outstanding treasuries and bonds being held by various countries and foreign investors. Fed can continue QE3 or QE4 or QE100, but with QE3 you will see major creditors start dumping these treasuries and bonds, pushing down prices and increasing yields and interest rates.

If Fed stops "money printing" with QE2 like they strongly hinted, then overnight 70% of the demand for treasuries & bonds will vanish, with same result of pushing up yields and interest rates in order to attract sufficient buyers. Either way, you're fucked.

Good news is that you'll be able to buy property on the cheap within the next 5 years, probably sooner. With mortgage rates at 8%-10%, I guarantee you that property market won't be so gung-ho. Oh, you already bought property in the last couple years? Too bad loh.

Anonymous said...

why not gov give a us some space.every thing want tax,want money,dont be so greedy can,even hse u also want make profit for it.

30yrs loan.
propert tax.
stamp fee.
lawyer fee.
pub bill.
telephone bill.
internet bill.
funiture ,personal loan,and so much more to pay and pay and pay.we need to eat,children need to eat,study,need to take care parent,dont mention car,gst,imcome tax and so many many tax...i almost lost count...pls lah.....we dont earn million like u.i beg u gov.

just a root for us to relax after
our hard work,cant ready see us gd izzit.....pls lah....

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yatesspain.blogspot.com said...

It can't really have effect, I think this way.

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