Will the U.S. Follow Lehman's Footsteps?

Roberts came to this conclusion in his article:-

“Most Americans, including the presidential candidates and the media, are unaware that the US government today, now at this minute, is unable to finance its day-to-day operations and must rely on foreigners to purchase its bonds. The government pays the interest to foreigners by selling more bonds, and when the bonds come due, the government redeems the bonds by selling new bonds. The day the foreigners do not buy is the day the American people and their government are brought to reality.”

Personally, I’ve always believed that it is the reckless, irresponsible spending-forward habit and gluttonous appetite for debt of the Americans (and people elsewhere for that matter), not only at the government level but also at the consumer level, that is at the root of all of America’s (and other places’) present-day financial woes. As Roberts implies, Americans’ debt addiction has finally caught up with them:-

“In the 21st century, the US economy has been kept going by debt expansion, not by real income growth. Economists have hyped US productivity growth, but there is no sign that increased productivity has raised family incomes, an indication that there is a problem with the productivity statistics. With consumers overloaded with debt and the value of their most important asset--housing--falling, the American consumer will not be leading a recovery.”

Anyone who has the slightest understanding of the American economy knows about her “double deficits” – the budget deficit and the trade deficit. In recent years, both the budget deficit and the trade deficit have been ballooning way out of control, in the former case in large part due to the Iraq War and in the latter mainly because of U.S. corporations aggressively outsourcing production offshore, with the goods thus produced returning to the U.S. as imports.

And the current financial fiasco, while overshadowing the problems with the two deficits for the time being, will ultimately exacerbate the budget deficit, if not both. The article explains:-

“If we look realistically at the US economy, we see that what is not moved offshore is being bailed out. Last year, the US Department of Energy was authorized to make $25 billion in loans to auto manufacturing firms and suppliers of automotive parts. Last week the Secretary of the Treasury took $5 trillion dollars in Fannie Mae and Freddie Mac home mortgages under its wing. The Congressional Budget Office says this action by the Treasury means ‘that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.’”

Roberts asks the question whether the new liabilities will worsen the Treasury’s own credit standing. Isn’t the answer obvious enough?

“….sooner or later the large US budget deficit, worsened by recession and bailouts, and the large trade deficit, which requires constant recycling of dollars held by foreigners into US financial and real assets, will result in renewed effort on the part of foreigners to lighten their dollar holdings. When this time arrives, US interest rates will have to rise in order for the government to be able to continue to rely on foreigners to recycle the dollars acquired in trade to finance the US government’s annual budget deficit.”

One does not even want to think about what rising interest rates will do to the already beleaguered economy. What appears likely on the horizon is one big vicious downward spiral….

What makes matters even worse is that there is no quick fix to the current financial crisis. This Oxford Analytica article describes the current crisis induced by collapse of Lehman Brothers and the attendant weakness of other major financial institutions as the worst U.S. financial crisis since the 1933 banking panic.

“Even if the immediate systemic risks posed by Lehman's failure are contained, a U.S. (and global) economic recovery is not a near-term prospect. Stabilization of the U.S. housing market is a necessary condition for the end of the global credit crisis--given that most of the problematic assets that trouble the balance sheets of major financial institutions are linked to U.S. housing. However, there is little indication that U.S. housing prices will stabilize until mid-2009, at the earliest. This means that banks and financial firms face further write-downs, greatly increasing the chances of additional failures.”

With Americans’ year-in, year-out reckless spending habit and debt addiction, coupled with rampant financial industry malpractice and a lack of regulation of the “shadow banking” sector - hedge funds and structured investment vehicles, and you have a perfect recipe for a financial debacle at some point. It’s just unfortunate that it takes a meltdown of epic size and global reach to wake people up, if they can be woken up at all.