Economics is never an exact science and I don’t like to comment on every change of direction on the economic horizon. However, there are some basic principles we can all understand that will help in our own financial management. One principle is don’t borrow more than you can afford to repay. It seems America has been violating that one for a long time. It will impact our standard of living to the negative.
Yesterday’s Wall Street Journal carried one of those articles that occasionally simplifies the problem into language we can all understand. On page one was this article “U.S. Foreign Debt Shows Its Teeth As Rates Climb”. (Subscription required). I will give you some of essential quotes.
If interest rates rise we will be paying more of our incomes to other nations to service that debt. We are paying more to service our debt than we were a year ago this time. It is like we have been running up huge amounts of debt on our Visa card without making payments. That cannot continue because…
“…In years to come, a growing share of whatever prosperity the nation achieves probably will be sent abroad in the form of debt-service payments. That means Americans will have to work harder to maintain the same living standards — or cut back sharply to pay down the debt.”
Nations like China have been willing to loaned us money at lower rates of return for favorable exporting opportunities. At the same time American manufacturing and investors have benefited from high rates of return in emerging markets like Taiwan.
“Foreigners’ willingness to lend at low rates has also encouraged Americans and their government to borrow and spend. By buying U.S. Treasurys, foreign investors put up more than four-fifths of the $1.3 trillion the federal government has borrowed since 2001 to help pay for tax breaks, the new Medicare prescription-drug benefit and wars in Afghanistan and Iraq. Over the same period, foreigners put more than $700 billion into various types of U.S. mortgage-backed securities, providing the money for millions of Americans to buy new homes — or extract cash from their existing homes to spend on goods such as washing machines and Hummers.”
Though our foreign debt is still relatively manageable it will change even if interest rates don’t rise. But if they do rise, or if America is no longer perceived as a good investment or if a whole list of “ifs” kick in then America could find itself in an entirely different economic situation. Things could change and get out of control very quickly.
The size of the nation’s debt payments matters because it represents a share of income that American consumers, companies and government won’t be able to spend or save. The higher the debt payments, the harder it will be for the U.S. to prosper.
“Your standard of living is going to be reduced unless you work much harder,” says Nouriel Roubini, chairman of Roubini Global Economics. “The longer we wait to adjust our consumption and reduce our debt, the bigger will be the impact on our consumption in the future.”
Many other voices, including American investor Warren Buffet, continually warn about this deficit problem.
This WSJ article referred to what some economists call “income-producing-assets that have evaded measurement”, something like the elusive “dark matter” in physics. this sounds a bit too metaphysical for the field of economics. A better explanation would be that God is propping up the American economy according to His plan and purpose and as long as He does we will continue to “ride the high places”- or at least our Hummers and SUV’s. But when He pulls the plug because we have no ides who He is or what he asks us to be the n the party will be over. I cover a bit of this in my recent article on America’s “pride of power”.
A much fuller explanation of this vital Biblical subject is found in our booklet “The United States and Britain in Bible Prophecy”. America’s rise to power and influence is more than politics and economic theory, it is due to the faithful blessing of God.