If Bush Stays in Office We're in Major Trouble: The Next Shock: Not Oil, but Debt

[Guest guest]

If Bush Stays in Office We're in Major Trouble: The Next Shock: Not Oil, but

Debt

[This is one of the reasons Bush's tax cuts to the rich are so disastrous. If he

is allowed to make them permanent, the middle class, and the lower middle class,

will end up paying taxes through the nose once the bill comes due in the very

near future. The middle classes will also be losing more, and more, public

benefits once the debt bill comes due. And it will come due!!! Make no mistake

about it, we'll end up paying record high taxes - the likes of which have never

been seen before in America. Were in a lot of trouble folks, if we don't get

Bush out of there in Nov. Even worse is he is going to absolute destroy Social

Security, and Medicare. John Kerry is no Saviour, but he's no where near the

nightmare that Bush is. Americans better wake up, and wake up fast! (Read

N.Y.Times. article about the debt below. Keep in mind the article is watered

down, as it's from a corporate source. In other words, the debt problem is far

worse than the article is willing to admit!) ]

 

The Next Shock: Not Oil, but Debt

By DANIEL GROSS

Source > http://www.nytimes.com/2004/09/05/business/yourmoney/05view.html?th

Published: September 5, 2004

 

ITH oil prices hovering above $40 a barrel, experts have calmed frayed nerves by

noting that today's services-driven American economy is much less addicted to

the black stuff than yesterday's industrial economy. From 1973 to 2003, after

all, the amount of oil and gas needed to create a dollar of gross domestic

product fell by half. Structural changes in the economy have let the nation

absorb the recent shock of rising crude.

That's the good news. The bad news is that other recent structural changes in

the economy - the federal government's shift from surpluses to huge deficits,

the national predilection for consumption over saving and housing prices that

climb faster than incomes - have increased the country's reliance on another

kind of fuel: credit.

As a result, the American economic ship, which has weathered the recent run-up

in crude oil prices, may be more vulnerable to sudden surges in the price of

money. If the rate on 30-year fixed mortgages were to rise from 5.4 percent

today to 7.5 percent next February, homeowners could get walloped.

" Rather go to bed supperless than rise in debt, " Benjamin Franklin wrote in Poor

Richard's Almanac. Well, in recent years, American consumers, businesses and

governments have been hitting the sack with their stomachs bloated and their

charge cards maxed out. From 1988 to 2000, the ratio of nonfinancial debt to

gross domestic product held steady at about 1.8 to 1. But recently, consumer,

business and government credit has bulged like the belly of a contestant at a

hot-dog eating contest at Coney Island.

From the beginning of 2001 to the end of 2003, the economy added $1.317 trillion

in gross domestic product and $4.2 trillion in debt.

That means that each new dollar of economic output was accompanied by $3.19 in

new debt. So now, for the first time, the debt-to-G.D.P. ratio stands at more

than two to one.

Throw in financial credit - the debt that investment banks and others use to

finance trading activities and the like - and total debt has more than doubled

since 1994. The mere existence of huge debt needn't be a source of panic. You

and I may view debt as an economic input - we borrow so we can spend and invest,

and hence, as politicians like to say, " grow the economy. " Academic economists

view it more as a byproduct. Debt is created when people, governments and

companies spend money, trade and produce.

VIEWED that way, the sharp rise in credit in recent years isn't surprising or

even, in and of itself, alarming. " When interest rates are low, you'd expect

people to pile on more debt per G.D.P. because it's cheap,'' said J. Bradford

DeLong, an economist at the University of California at Berkeley.

What's more, as anyone who has ever used a mortgage calculator knows, lower

debt-service costs can make higher levels of debt seem eminently manageable.

Here is a gigantic example:

In 1997, when the total national debt stood at $5.4 trillion, Washington paid

$356 billion in interest. In 2003, when the national debt grew to $6.8 trillion,

Uncle Sam's interest bill fell to $318 billion. The environment of ultralow

interest rates engineered by Alan Greenspan, the Federal Reserve chairman, thus

sharply muted the impact of Washington's fiscal recklessness.

But the economy's apparent reliance on credit to fuel everything from home

buying to the military budget is troublesome. If incomes and revenues fail to

rise, stressed consumers may have a tough time keeping up with payments. " It's

been much more a matter of households borrowing than businesses, " said Benjamin

M. Friedman, a Harvard economist. " You have to hope that people are going to be

able to service the obligations they've taken on. "

An economy hooked on debt also is vulnerable to the seemingly inevitable rise in

interest rates. And in a period when prudence would seem to dictate locking in

rates, Americans have rushed to assume greater interest-rate risk. Borrowers -

especially homebuyers - haven't reacted to recent increases by borrowing less.

In the first quarter of 2004, debt rose at an annual clip of 8.6 percent, more

than double the growth rate of the economy. No, we've kept the interest bill

down by swapping fixed-rate for adjustable-rate financing. The Mortgage Bankers

Association reported that adjustable-rate mortgages constituted 35 percent of

new mortgages in the second quarter this year, up from 27 percent in the fourth

quarter of 2003.

Consumers, whose maxed-out credit cards generally bear floating interest rates,

and the federal government, which skews its borrowing to short-term instruments,

have essentially done the same thing. So if interest rates rise, we'll all have

to spend more dollars on debt service, leaving fewer dollars for more productive

uses - like buying 90-inch flat-screen TV's. If money becomes more expensive, we

may have to downshift our spending and consumption, like drivers trading in

expensive Hummers for gas-sipping imports. And that may shrink the economy.

HIGHER collective leverage, in turn, means that we're more susceptible to

external shocks. " The bigger the debt, the smaller the margin for error,'' said

Austan D. Goolsbee, a University of Chicago economist. Companies with no debt

can weather several lean quarters; companies with piles of debt often find that

a single bad quarter spells disaster.

The same holds for consumers. All kinds of wild cards that are scary even in

placid times - another spike in gas prices, a rupture of the housing bubble,

fresh job losses, a period of sustained inflation - become nightmares during

times of greater leverage. So as we go to bed with our suppers and our

home-equity lines of credit, Professor Goolsbee says: " I think we should be a

little nervous. "

 

 

 

 

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