- In the United States, the danger of debt insolvency is
growing, putting at risk the currency reserves of foreign countries, China
chief among them. According to new figures published by Bloomberg in
recent days (Nov. 25, 2008 [1]), the American government has employed
a total of 8.549 trillion dollars to stop the financial crisis. This means
a total of about 24-25.4 trillion dollars of direct or indirect public
debt weighing on American taxpayers. The complete tally must also include
the debt - about 5-6 trillion dollars - of Fannie Mae and Freddie Mac,
which are now quasi-public companies, because 79.9% of their capital is
controlled by a public entity, the Federal Housing Finance Agency, which
manages them as a public conservatorship.
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- In 2007, public debt in the United States was 10.6 trillion
dollars, compared to a GDP (gross domestic product) of 13.811 trillion
dollars. In just one year, direct and indirect public debt have grown
to more than 100% of GDP, reaching 176.9% to 184.2%. These percentages
exclude the debt guaranteed by policies underwritten by AIG, also nationalized,
and liabilities for health spending (Medicaid and Medicare) and pensions
(Social Security)[2]. By way of comparison, the Maastricht accords require
member states of the European Union (EU) to reduce their public debt to
no more than 60% of GDP. Again by way of comparison, in one of the EU
countries with the largest public debt, Italy, public debt in 2007 was
equal to 104% of GDP.
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- In 2007, 61.82% [3] of America's public debt was held
by foreign investors, most of them Asian. So the U.S. public debt held
by nonresident foreigners is equal to about 109.39% (113.86%) of GDP.
According to a study by the International Monetary Fund, countries with
more than 60% of their public debt held by nonresident foreigners run
a high risk of currency crisis and insolvency, or debt default. On the
historical level, there are no recent examples of countries with currencies
valued at reserve status that have lapsed into public debt insolvency.
There are also few or no precedents of such a vast and rapid expansion
of public debt.
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- The United States also runs large deficits in its public
balance sheet and balance of trade. Families and businesses are also deeply
in debt: in 2007, American private debt was equal to a little more than
100% of GDP. At the moment, it is not clear how much of America's private
debt has been "nationalized" with the recent bailouts.
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- In the early months of next year, when the official data
are published, the United States will run a serious risk of insolvency.
This would involve, in the first place, a valuation crisis for the dollar.
After this, the United States could face a social crisis like that in
Argentina in 2001. A crisis in U.S. public debt would likely have a severe
impact on the Asian countries that are the main exporters to the United
States, China first among them. Chinese monetary authorities, thanks to
a steeply undervalued artificial exchange rate, at about 55% of its fair
value, have limited imports (including food) and have achieved an export
surplus.
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- This has allowed them to accumulate a large stockpile
of dollar reserves. In a currency crisis, China risks losing much of the
value of its accumulated currency reserves. At the same time, pressure
on imports (wheat, other grains, and meat) have led to inflation in the
prices of food, the most important expenditure for more than 900 million
Chinese. This is nothing more than a small confirmation of the recent
statements of the pope, in his message for the World Day for Peace, where
the pontiff calls the current financial system and its methods "based
upon very short-term thinking," without depth and breadth (nos. 10-12),
preoccupied with creating wealth from nothing and leading the planet to
its current disaster. [4]
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- [1] See Bloomberg, 2008, 11-25 16:35:48.130 GMT "U.S.
Pledges Top $8.5 Trillion to Ease Frozen Credit (Table)"
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- [2] In this case, exluding AIG policies, one arrives
at a total equal to 429.37 of GDP.
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- [3] Cf. Economic crisis: US, China and the coming monetary
storm
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- [4] Cf. AsiaNews.it 11/2/2008 Message for Peace 2009:
the poor, wealth of the world; Global solidarity to fight poverty and
build peace, says Pope
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