Imbalance in cash flow could lead to debt crisis

I am getting very concerned about the national economy and the debt the United States is building up. It reminds me of the 1980s, except on a much larger scale and without the justification of the 1981-82 recession. It’s occurring at a time when two other energy hogs (China and India) are helping us create another energy crisis.

It’s hard being an economist, knowing what prudent fiscal policy should be at a time when the U.S. should be running a surplus, and not being pessimistic about what’s going to happen when our country has to pay the piper. It will make the 1991-92 recession appear mild in comparison.

The U.S. was in a worldwide net creditor position 20 years ago; the rest of the world owed us more money than we owed them. We now owe the rest of the world $2.5 trillion, netting out U.S. assets abroad versus foreign assets in the U.S. The U.S. will borrow, from other countries, about 6 percent of GDP in 2005. This will be the most money the U.S. has borrowed from abroad in any year in the 135-year history for which data is available.

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There are few economists or bankers who think the U.S. can continue on this path for much longer.

There are a couple of things that would immediately solve the U.S. problem. First, we could balance our budget at a time when the economy is growing at 3 percent to 4 percent per year. That means tax increases (ouch) or spending reductions; more income or less spending, just like our personal budget.

The second thing that could happen is a major upward move in China’s currency. That would curtail our borrowing from China to purchase goods and services from its economy to maintain our lifestyle. Of course, China’s not going to let that happen because it likes to sell Chinese goods and services to the U.S.

China will allow its currency to appreciate against the dollar when the U.S. reduces purchases of China’s goods and services or another market develops for Chinese goods and services. This could well produce a Category 5 end to worldwide purchases of U.S. debt and foreign investment in U.S. companies and the U.S. economy.

When world monetary flows are out of equilibrium, they tend to move back towards equilibrium. The U.S. is currently out of equilibrium. We spend more than we earn, we invest more than we save and we consume more than we make. We’re headed for a less prosperous future. Foreigners will keep more of their money, forcing the U.S. to curtail investment in our economy, or they will claim an increasing share of U.S. interest payments and profits. In 2004, the U.S. received $36 billion more in overseas investments than it paid out. In the second quarter of 2005, that surplus was down to $1 billion.

Something is going to happen in the U.S. to precipitate a crisis. There are several candidates: interest rate increases (at some point sentiment about their importance will turn), stock and/or bond market declines (the current market strength reminds me of the tech/Internet sector behavior a few years ago), major housing market weakness (setting up), more natural disasters, or tax increases to pay for our profligate spending.

The resiliency of the current U.S. economy continues to surprise me. Deficit spending continues to maintain our prosperity, increasing the burden on our offspring and hastening the eventual decline in worldwide importance of the U.S. economy.

John W. Green is a regional economist who compiles The Northern Colorado Business Report’s Index of Leading Economic Indicators. Green, a Fort Collins resident, was previously chairman of the University of Northern Colorado economics department.