Big, Complicated Question

[Stevendsmith]

I am terrible with economics.

How is it that the United States--which I've always been led to believe is the economic giant of the planet--is so deeply indebted to other nations?

Can anyone explain, in brief, how and why we find ourselves in such dire financial straits?

Why do we have to borrow so much? Don't we have one of the largest and most advanced economies in the world?

What about our natural and geographic blessings?

Our massive labor force?

I'm baffled.

[RBHam]

1. The enormous cost of the MIC...

The Military Industrial Complex...

[Nite Owl]

3. All done in the name of patriotism

while there is no money for programs that will actually help citizens have a better life, no universal health care, no money for NCLB, no money unless it is for corporations and war. We have arrived, we are a facist state.

[notadmblnd]

2. It's not all in bank loans.

other countries invest in bonds and tbills... etc

[Inland]

4. Here's some econ.

There's two things you can do with your income. You can eat it now. Or you can eat it later. It is one of the big choices.

It is a tautology that income minus consumption equals savings.

When consumption is greater than income, debt (negative savings) is created.

The US as a whole has been consuming more than its income. This would be impossible if the US was a closed economy, because everyone would have to buy from some other American. You can't buy more than you produce without going to other countries. Therefore the US is able to consume more than its income by borrowing from other countries and buying their goods. This shows up, mostly, in the trade deficit. The trade deficit is the amount that the US buys from other countries minus what they buy from us.

Quite simply, because the US wants more than it itself produces, it gives dollars to other countries for its goods and services. Those countries then have dollars. What do you do with them? Well, if you are a foreigner, it turns out that the same country with the Americans who bought your goods and services has things to sell to finance their purchases. Bonds. Stocks. Factories. Real estate. And they want to borrow money, and they want to borrow dollars, which you, the foreigner, have on hand.

The question of behavior is, why do those foreigners buy our assets and lend us money rather than take those dollars and buy our goods and zero out our trade imbalance. The answer is: they don't feel like it. They are savers just as we are consumers, and one allows for the other. This isn't always a good thing--Japan is in a liquidity trap, for example--but it is the way it is.

Is it a sign of impending doom? Some say not. Some say that the US is selling appreciated assets--much in the same way your house appreciates ten thousand on the market and you take out a home equity loan of ten thousand and spend it on vacations. Your net worth is the same and you get the fun of consumption. Others say that by selling loans and assets, we are assigning the future income of the US to foreigners. Which, by definition, we are, because if you ate it now, you can't eat it later.

You should read Paul Krugman and his thoughts on the dollar, which is the crux of the debt issue. Eventually, foreigners are going to stop wanting to buy so much of our assets and loan us so much money. Why? Because a diversified portfolio means foreigners don't want everything in the US, or because the dollar is dropping (causing thier assets to lose value), or because they just don't feel like saving anymore. What then, America? Assuming there isn't anything catastrophic, we will have to cut consumption.