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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: regli who wrote (52692)	2/5/2006 3:25:44 AM
From: CalculatedRisk	Respond to of 110194

A Nation Addicted to Oil -- and Debt latimes.com Excerpt: The problem with any discussion of U.S. debt levels is that the nation has largely become inured to the topic. Warnings about excessive debt have been a staple on Wall Street since the early 1980s. Yet stock and real estate prices have soared and interest rates have plunged since then. ... What we do know for certain is that the U.S. has been on a borrowing binge in this decade. The federal debt, for example, now is $8.2 trillion, up from $5.5 trillion just seven years go. ... U.S. household debt, including mortgages, jumped from $6.4 trillion at year-end 1999 to $11 trillion by the end of the third quarter last year, a 72% increase, according to Federal Reserve statistics. The growth rate in household borrowing has reached double digits in recent years, a pace not seen since the mid-1980s. The pace of borrowing by state and local governments also has accelerated sharply since 2000; lately it has picked up in the corporate sector as well. Borrowers have been encouraged in this decade by the Federal Reserve, which from 2002 through mid-2004 kept interest rates at rock-bottom levels to bolster the economy. And part and parcel with the rise in debt levels has been the surge in the U.S. current account deficit, the broadest measure of the nation's balance of trade and investment with the rest of the world. That deficit was about $200 billion in each quarter last year, double the pace of 2000 and nearly four times that of 1998. A current account deficit tells you that a country is consuming more than it produces. One way to sustain that trend is to borrow to fund your consumption. Americans have heard plenty in recent years about the ravenous appetite foreign governments have had for our Treasury securities. Foreign holdings of Treasury debt zoomed from $1.02 trillion in December 2000 to $2.17 trillion as of November. But it isn't just Treasury debt foreigners have bought. The U.S. housing boom has been funded in part by foreign investors via their purchases of bonds backed by home mortgages. This circular relationship has served all parties well so far. You know the story: Governments like China's effectively lend us the money to consume the goods they produce. By buying our debt, they help keep long-term interest rates down (and also finance the war in Iraq). We help keep their workers employed and enjoy the fruits of their labor. Larry Fink, chief executive of BlackRock Inc., which manages more than $400 billion in assets for investors worldwide, says his Asian clients tell him they're very happy with this relationship. "They would like this circle to last forever," Fink says. "And that's what frightens me. The whole world likes this model. It feels too good." The danger, of course, is that we will borrow more than is healthy — meaning more than we can afford in the long run. And the more we're on the hook to foreign creditors, the less we control our own economic destiny. <MORE IN ARTICLE>