Saturday, August 6, 2011

Will US Debt Cause the World Global Crisis

Is US debt REALLY as safe as German debt? If foreigners hold US debt and we print money, we devalue the dollar and screw the foreigners. If the rating agencies had started doing their jobs sooner (i.e. before the dodgy mortgage mess), we would have been a lot better off.

The US debt owned by China is actually more of a problem for them than it is for us. The reason is that they can't do anything with it. They could take those T-Bills and burn them for all the good it does them. To figure this out, look at Germany in 1970's.

The US Debt Limit was increased from $10.615 trillion to $11.315 trillion effective October 3, 2008.


The US debt problem is not just a fiscal matter, but a political one. But politics is dominating the discussion. That doesn't mean that the US debt problem is not as bad as it seems in media outlets nationwide. It's bigger than the Latin American debt crisis because the US is not just a puzzle piece in the global economy, it's the entire border.


The rating of US debt may be important, not for what it tells you, but for the reaction it causes in other investors and possibly foreign central banks. It is, after all, they who determine the prices of the assets you own.


The interest on the US debt only costs 13% of the Federal Budget. If the Government could get rid of tax loopholes, take a chainsaw to military spending and seriously reform social programs, America would actually have a good shot at survival.


The biggest holders of US debt are American individuals, institutions, and Social Security. We own more than 2 out of every 3 dollars of US debt -- about over 67%. Hence, we depend far less on the kindness of strangers than you might imagine if your listen to the intertubes .


First of all, eliminating all US debt should not be the goal. US debt (in the form of US Govt bonds) is an important investment vehicle to individuals and other governments and serves many other purposes that I won't go into here.



The US Treasury has warned that if the US debt ceiling, the amount that the country may legally borrow, is not raised by 2 August, the country will not legally be able to pay all its obligations. Republican members of Congress have demanded cuts to the budget as a condition of agreeing to raise the debt ceiling and avoid a default. Both Republican and Democratic proposals would cut more than US$1 trillion in spending over a decade, amounting to a budget reduction of at least $100 billion per year. Nature examines how this might affect the scientific community.

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