But It's Just a SMALL Hole In the Dike, Right?
Today, America is the world's largest debtor nation. We are running unbelievably huge deficits, and facing even larger deficits as we confront a demographic bump that will require the government to start paying back all the money it borrowed from the Social Security system and to fully fund Medicare. Our government borrows money by selling bonds to foreign governments, including China, and our people borrow money, largely in the form of mortgages, a large percentage of which ultimately are bought in the secondary market by, again, China.
So what happens if foreign governments, especially China, decide to stop investing in the U.S.? The cost of borrowing money skyrockets. The interest payments on the national debt become so huge that other government prorams can't be funded. Mortgage interest rates increase to late 70s levels. The construction industry tanks, and the jobless rate increases. Ignore everyone who tells you that our country's financial position is strong, or that there's nowhere else for foreign countries to put their money. We are not invulnerable; we are increasingly beholden economically to other countries, and that weakness makes our military strength irrelevant. He who owns our debt, owns our policies and our destiny.
Well, here's bad news: it's happening. China has announced it will start selling off U.S. bonds. Which, of course, means that it won't be buying as many of our new offerings. Which could be really, really bad news.
And, as if to confirm that institutional investors are seeing the same thing I am, gold futures just topped $540/ounce.
If China stops buying our debt, it could be a perfect storm that brings down the entire U.S. economy, domino by domino. It won't happen suddenly -- foreign investors will want to pad our landing somewhat to preserve the value of their investments as much as possible -- but it will still be severe and longlasting, not just a cyclical recession but a complete structural change to our economy, and to our position in the world. The end game may not come for another decade or more, but we can see it coming.
I love my country and I hate the fact that our leaders, of both parties, have not positioned us to avoid what's coming. Being able to say "I told you so" will be no solace at all if what I fear comes to pass. In the time we have left, the U.S. needs to rapidly rebalance its budget, strengthen our domestic manufacturing base, educate our people for a more diverse and self-sufficient economy, create tax disincentives for U.S. companies moving jobs overseas, dump wads of cash into an Apollo program to end our dependence on foreign oil and make us energy-self-sufficient, disentangle ourselves from our expensive overseas commitments (including Iraq, which is costing $2 billion per week that we cannot afford), and bolster Social Security and Medicare while we still have the leverage to do so. We need to be self-sufficient again, and we need to have something to sell to the rest of the world, neither of which we can claim at present.
No pithy conclusion. I hope I'm wrong. But we may not have three more years to start making significant change to salvage our position in the world, and we all need to WAKE UP a.s.a.p.