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FRED
09-25-06, 10:18 AM
US debt to foreigners seen hitting record highs (http://money.cnn.com/2006/09/25/news/economy/foreign_debt/?postversion=2006092507)
September 25 2006 (CNNMoney.com)

Obligations could become drag on U.S. economic growth, meaning that Americans may have to work harder just to keep up, paper reports.

The U.S. is currently paying out more to foreign lenders than it is receiving for the first time in at least 90 years, which could weigh on the dollar and force Americans to work even harder, according to a report published Monday.

Though small compared to the larger economy, the U.S. obligation to foreign creditors reached $2.5 billion in the second quarter of 2006, The Wall Street Journal reported.

Most economists, the paper reported, said the explosion of debt owed to foreign lenders has been helped by their willingness to lend to the U.S. at low rates. That in turn has encouraged American buying and spending both at the government level and the consumer level, helping to cover tax cuts and enable Americans to pay for homes and automobiles.

That debt, which could swell to as high as 5 percent of GDP if the U.S. doesn't rein in its current account deficit, ultimately means that consumers, companies and the government will not be able to spend or save as much of their income, which could hinder the country's ability to grow economically, the Journal reported.

And continued borrowing of new debt from foreign creditors is possibly the most troubling for economists and could lead to larger interest payments while at the same time making it more difficult to control the current account deficit, according to the paper.

"You end up having to pay more and borrow more," University of California's Professor Pierre-Olivier Gourinchas told the Journal. "Things could get out of hand very quickly."

AntiSpin: And things may "get out of hand very quickly" if our 1999 Ka-Poom Theory is correct. The fact of this story making the front page of the Wall Street Journal reminds us of the faltering NASDAQ bubble in Q1 2000, when the iTulip message circa 1998 finally worked its way to the mainstream and iTulip was getting called by everyone from Reuters to Barron's, all asking, what's going to happen? As explained in The Coming End of the US Foreign Investment Bubble (http://www.itulip.com/forums/showthread.php?t=252), as the U.S. economy slows, consumption of imports falls. This reduces the motivation of export countries to lend money to the US to purchase their exports. Lender/exporters like Japan and China have been diversifying to other sources of export revenue for the past several years while building up dollar currency reserves to avoid risks of a repeat of a 1997 currency crisis. (The next currency crisis will be a US dollar crisis, not a yen or baht crisis.) Reduced purchases of US agency and treasury debt put further pressure on the dollar and interest rates.

The essential paradox of the U.S. economy's dependency on foreign borrowing is that the less foreign lenders need U.S. financial assets, the more the U.S. needs to borrow to fund fiscal and trade deficits. The macroeconomic virtuous circle may become a vicious cycle. We've called that "get out of hand very quickly" the Poom phase of the correction.

jk
09-25-06, 12:34 PM
when the chinese and japanese are earning less in dollar revenues, they will have fewer newly earned dollars to recycle. and they will have less motivation to support the dollar, as a stronger dollar won't do much to revive u.s. consumption demand. since asian producers won't earn as many dollars, if they wish to support the dollar they'll have to buy dollars from other holders. but they have so many dollars already, burning a hole in their metaphorical pockets. when/if they lose all incentive to support the dollar, they will lose all inhibition about spending all the dollars they already have. so between the chinese and the japanese we can imagine about $2trillion in released demand. i think it might affect [us$ denominated] prices. :rolleyes:

[i know all this has already been said, in one way or another, but i find it helpful to spell it out for myself.]