Today's Opinions, Tomorrow's Reality
Getting Away With It
By David G. Young
Washington, DC, October 29, 2019 --
America engages in the same irresponsible financial behavior that sinks Argentina. America will keep doing it as long as it can.
The Peronist return to power in Argentina in the midst of yet another debt crisis is causing rich-world observers to shake their heads in disgust. Unlike other Western countries, Argentina never really returned to normal after the Great Depression -- the country has oscillated between cycles of recovery, overspending and financial default. Its most recent defaults in 2001 and 2014 are set to be repeated again this year.
Conventional wisdom is that Argentina is a financially irresponsible nation that never learns its lesson. Its government continually spends more than it takes in and borrows overseas to compensate. The country regularly imports far more than it exports and relies on commodities for most of its export earnings.
While all of the above charges are true, every single one of them is also true for the United States. America's government spends 4.6 percent more than it takes in, compared with 4.2 percent in Argentina.1 America's trade deficit is 2.4 percent of GDP compared to Argentina's 1.1 percent.2 By these measures, America's collective financial irresponsibility exceeds that to Argentina, and this has been going on for a long time. Witness America's far larger total external government debt of $58,200 per person (115 percent of GDP) compared to Argentina's $8,280 per person (66 percent of GDP.) 3
Yet unlike Argentina, creditors are not beating on America's door demanding exorbitant interest rates to pay for the country's profligate spending. Interest rates on America's 10-year bonds are a minuscule 1.8 percent whereas Argentina's government pays nearly six times as much -- 11.3 percent -- for a similar bond.4 What gives?
Clearly, the fact that Argentina has repeatedly defaulted on its debts are a major factor. Investors understandably demand a premium from a serial deadbeat who they know may never pay them back.
Trust in American debt, however, is not unlimited. A decade ago, in the wake of the financial crisis that saw America's outstanding government debt skyrocket, America's Treasury Secretary's description of his bonds as the safest investment in the world was met by laughter from an audience of mainland Chinese university students. China's holdings of U.S. bonds had about that time surpassed those of Japan to reach over $1 trillion. But the country stopped buying more, letting its portfolio stagnate.
Both Japan and China now hold about $1 trillion in American treasury bonds, and accept a tiny interest rate in return. They do this partly because the U.S. Dollar is the world's reserve currency and despite America's financial troubles, remains one of the most stable large-scale stores of value. But as China's refusal to buy more bonds shows that the market is not unlimited. In recent years, one of the biggest buyers of treasuries has been America's central bank, which has bought 2 trillion5 worth of treasuries (nearly as much as Japan and China put together) as part of their quantitative easing programs in the wake of the financial crisis.
This is effectively printing money, something that Argentina has also been known to do. Yet given its immense size and international financial dominance, America has gotten away with irresponsible behavior that Argentina never could.
Budget hawks, including this columnist, have warned about America's unsustainable financial behavior for years, yet the chickens have never come home to roost. When interest return to the levels typical of most of the past century, the cost of America to service its debts will skyrocket. Less than 10 percent of the U.S. budget goes to service the debt today, but if American interest rates were like in today's Argentina (which they have not been since the early 1980s), then debt service would grow to nearly half of America's government budget, squeezing out much other spending, or sending the debt spiraling quickly higher.
Why haven't the rich world's interest rates returned to normal? Economists have been struggling to explain this (and the low rates of inflation) since the end of the financial crisis. Aging populations and declining productivity are leading theories. Many say that the current low rates are the new normal that will last into the foreseeable future.
Yet these low rates are enabling America's bad behavior. Since the explosion of America's national debt at the end of the financial crisis, tax cuts at a time of economic prosperity continue to push America's debts ever higher. While a budget surplus existed at the end of the last long economic boom in the 1990s, America currently has no such financial cushion. On the contrary, tax cuts during good times are further fueling the national debt, sponsored by Republican politicians who have abandoned any pretense of fiscal conservatism..
Americans should pray that low interest rates are indeed the new normal, and they can continue getting away with their behavior for the foreseeable future. If not, America's financial future looks like a worse version of today's Argentina, with a huge amount of pain for its creditors as well.
Related Web Columns:
Coming Drama, March 12, 2013
Living Like There's No Tomorrow, November 9, 2010
While the Gettin's Good
From America to Zimbabwe, March 24, 2009
Yawning Toward Disaster, September 2, 2008
1. Economist, Economic Data, October 26, 2019
2. Economist, Ibid.
3 Wikipedia, List of Countries by External Debt, as posted October 29, 2019
4. Economist, Ibid.
5.Bloomberg News, QE May Be Over, But the Fed's U.S. Debt Hoard Is set to Double, May 21, 2019