Sunday, November 7, 2010

The entire Western world has for voted itself a lifestyle it is not willing to pay for

Kevin Libin examines the connection that Mark Steyn makes between demographics and our economy:
For one, [Mark] believes [the] latest economic crisis represents “the first great demographic recession.” The scheme of Western nations to gorge on entitlement programs financed by debt to be paid for by children that, diminishing birth rates prove will not materialize, is rapidly unravelling.

“The entire Western world has for some time now voted itself a lifestyle it is not willing to pay for,” he says. The riots in Greece and France are the refusal of those societies to give up their freebies. In the United States, the interest payments on public debt borrowed from Beijing will in just five years be so large as to finance the entire budget of the Red Army which, it so happens, is becoming increasingly muscular in challenging American dominance in the Indian and Pacific oceans and the sea routes to the Middle East.

“This is the most ridiculous moment in global history where the dying empire is, in effect, funding the dominance of the would-be successor power.”
While I like Steyn's directness, I do take exception with him with respect to China. It's popular to bash China, but the fact is that they're no longer the main purchaser of our debt:

                                                 (in billions of dollars)
                                               HOLDINGS 1/ AT END OF PERIOD

                       Aug     Jul     Jun     May     Apr     Mar     Feb     Jan     Dec     Nov     Oct     Sep     Aug
Country               2010    2010    2010    2010    2010    2010    2010    2010    2009    2009    2009    2009    2009
                     ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------

China, Mainland       868.4   846.7   843.7   867.7   900.2   895.2   877.5   889.0   894.8   929.0   938.3   938.3   936.5
Japan                 836.6   821.0   803.6   786.7   795.5   784.9   768.5   765.4   765.7   754.3   742.9   747.9   727.5
United Kingdom 2/     448.4   374.3   362.2   350.0   321.2   279.0   233.5   208.3   180.3   155.5   108.1   126.8   104.3

Follow the link above for information about other foreign holders of US bonds. The key points from the data above are that between Aug 2009 and Aug 2010:

  1. China's holdings decreased by $68B
  2. Japan's holdings increased by $109B
  3. The United Kingdom's holdings increased an astounding $344B

Obviously, China still holds more of our debt ($868.4B) than the second largest foreign investor in US Treasuries, Japan ($836.6B). Perhaps China's unwilling to be the first nation to own $1T or more of our debt and they're just waiting for someone else to cross that line before buying more. I don't know.

If you look at the bottom line figure for all foreign investors, you might be surprised to learn that between Aug 2009 and Aug 2010 they only acquired about $82B of our debt. Obviously, we ran massive deficits that exceeded $82B by at least $1T during that time frame, so who financed them?

The Fed and by extension our children.

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