Mortgaged future watch (28 September 2006)

The front page of Monday's Wall Street Journal is the gift that keeps on giving to me. Another article there discusses the problems America may face because of its enormous current-accounts deficit, and explains it all much better than I could in the last column I wrote. It's extremely surprising to see something this bearish in WSJ; it's like a stiff dose of fiscal castor oil. Here's the lead:

Over the past several years, Americans and their government enjoyed one of the best deals in international finance: They borrowed trillions of dollars from abroad to buy flat-panel TVs, build homes and fight wars, but as those borrowings mounted, the nation's payments on its net foreign debt barely budged. Now, however, the easy money is coming to an end. As interest rates rise, America's debt payments are starting to climb -- so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad.

So what, right? The significance of this is that "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." Says economist Nouriel Roubini: "Your standard of living is going to be reduced unless you work much harder. The longer we wait to adjust our consumption and reduce our debt, the bigger will be the impact on our consumption in the future." So the heedless consumption of today is coming at the expense of posterity -- we're consuming the sweat of our children's brow. This will cause an especially thorny difficulty if we fail to have those children -- which, if you believe demographical doommongers like Laurence J. Kotlikoff, is already a problem. See also here for a chart explaining why Americans should forget about retiring.

And this also puts the future of our economy in the hands of China. China's borderline irrational predilection for our T-bills at a lower rate of return then they could investing in their own country has permitted our spending binge -- "Foreigners have been willing to accept a much lower return on relatively safe U.S. investments than U.S. investors have earned on their assets abroad. Take, for example, China, which since 2001 has invested some $250 billion in U.S. Treasury bonds yielding around 5% or less -- part of a strategy to boost its exports by keeping its currency cheap in relation to the dollar." If China decides to start dumping this debt, it would roil the dollar and send its value plummeting, diminishing our precious purchasing power. Now, it's not really in China's interest to do so; American consumers have helped fuel the their healthy growth rates. But they've been known to do some counterproductive things in the past.