Friday, June 23, 2006

America’s Disappearing Wealth By Carlos T. Mock, MD

America’s Disappearing Wealth By Carlos T. Mock, MD
Chicago, IL

Federal borrowing eventually results in a transfer of income from U.S. taxpayers to the investors who hold the Treasury bonds. As long as Americans own the bonds, the transfer is simply from one American to another. Bondholders may get richer, while taxpayers who don't own bonds get poorer. But shuffling the income between the two groups doesn't reduce America's overall wealth.

Today, however, 43 percent of the United States' publicly held debt of $4.8 trillion is held abroad, mainly by central banks in Japan, China, and Britain and by offshore hedge funds. That's up from a 30 percent share in 2001, an extraordinary increase.

Indeed, during the Bush years, 73 percent of new government borrowing has been from abroad. Paying the interest on the foreign- owned portion of the debt will be a burden on future generations of Americans, draining their wallets, and siphoning off America's wealth.

America is at war and the budget is so wildly out of balance that the government cannot pay its bills without borrowing money from foreign investors. America is living beyond its means, and foreigners are increasingly supporting the excess - in exchange for a government guarantee that a chunk of America's future collective income will benefit them, not the Americans who earn it. The problem will come when there is a shift in global foreign exchange reserves away from the dollar, perhaps driven by events in the Middle East.

Meanwhile, David Goldman of Cantor Fitzgerald worries that the Federal Reserve and the European Central Bank have become sources of risk for the markets. The rise in inflation breakeven rates (derived from bond markets) has been driven by oil and gold prices. He believes these factors are geopolitical, not economic. 
Then, there is the run on resources such as oils, metals and construction materials! The Commodity Research Bureau (CRB) index has doubled since January 2002, thanks to surging demand from China, India, and other developing countries. Recently prices slid, but the high-demand story still has years to run, says CRB chief economist Richard Asplund.

As we absorb the true meaning of these words we have seen in just the past month, the Dow slid 6.4 percent, the S&P 5.5 percent and the NASDAQ 9 percent—reminding us that investors have little faith on the New Fed Chairman and his ability to produce a “soft landing.” They even believe that The Fed is a source of risk for the markets, perhaps the culprit of our next recession.

Europe's economy is expanding, Asia's is sizzling, and countries that export oil and metals are raking in the chips. "The shifting sands of the global economy aren't moving our way, they're moving Asia's way," says chief global economist Allen Sinai of Decision Economics. "You don't want to be only in dollar investments anymore." Besides, the dollar will weaken when the Fed stops raising interest rates, he says. When the dollar declines, internationals do even better for American investors.
While this is happening, our Senate spends its precious time debating Gay Marriage and Flag Burning. Any day in which the U.S. Congress refrains from doing something destructive is about as good as it gets in Washington lately. At what point is the Republican majority in congress going to reverse this economic drain?


Post a Comment

<< Home