Donald Trump recently sounded a warning on the growth of the U.S. Government’s debt. He thinks that the USA is headed toward the condition of Greece and Spain.
My view: that will take time. Greece and Spain are nations where trade unions are dominant. This is not true in the USA. The unions have at most 10% of the jobs, and a lot of this is in the government sectors of the economy. Unemployment for young people here is nothing like the 50% rate in Greece and Spain.
According to Trump, the United States is no longer a rich country. “When you’re not rich, you have to go out and borrow money. We’re borrowing from the Chinese and others. We’re up to $16 trillion in debt.”
That is a lot of debt. But foreign central banks have believed that they should buy the Treasury’s IOU’s anyway.
There is something else — rarely discussed. The money that Americans receive from investments abroad is close to the money that Americans pay to foreigners. This has been true for 25 years. This indicates that foreigners’ debts to us as a nation are pretty close to our debts to them. This is not reflected in the official statistics. Most economists prefer to ignore this anomaly. The great financial commentator Warren Brookes first called this to our attention in 1990. He died in 1991. It is still true. He thought the Bureau of Economic Analysis’ statistics on America’s net national indebtedness were wrong. The BEA has long resisted providing a coherent answer as to how this “payments in = payments out” phenomenon is possible if the USA as a nation is deeply in debt to foreigners. No one else has explained it, either. It’s a statistical elephant in the living room.
Trump went on to say that a downgrade of U.S. government debt is inevitable. “We are going up to $16 trillion [in debt] very soon, and it’s going to be a lot higher than that before he gets finished. When you have [debt] in the $21-$22 trillion, you are talking about a downgrade no matter how you cut it.” He is correct. But this is equally true of Japan and China.
National governments are running up a lot of debt. Investors are still buying it. So are central banks.
I mentally picture Trump as a bearded man (with a strange hairdo) carrying a placard: “The end is near!” The end is surely nearer, but we will probably get another few years before a downgrade. QE3 is still rolling along nicely.