Transcript | 4. lecture: About the causes of the debt crisis in the USA (Juraj Karpiš) - University for modern Slovakia

Even despite of the pessimistically tuned lecture about the debt problems in Europe there’s no need to hang our heads. Because it seems that the USA has it much worse. The public debt of the USA in 2011 will exceed 100% of the GDP, the debt of the countries of the Euro-zone was in 2010 85.1% of GDP. While in Europe there’s signs of some saving arrangements, the negotiations and agreed savings have shown during the shifting of the debt limit in the USA that their politicians aren’t yet fully aware of the severity of the situation.

The debt of Italy after 20 months

America is still producing “Greek” deficits, that exceed 10% of the GDP yearly. Considering the gigantic size of the American economy those are really horrific amounts, that suck in the capital of the whole world. USA borrows 40 cent from every dollar spent by the public management and the deficit from year 2011 of 1.6 billion dollars is twice as big as the deficit of the whole Euro-zone in 2010. Or another way, the deficit of the USA is so big that only in 20 months will the American debt have grown by more than the whole national debt of the, nowadays often mentioned, Italy (1.89 billion Euro)! The debt of the USA has been growing for some decades. The separation of the dollar from the gold chain and the monopolization of the money production by the state makes it possible to lower the trade interest rates in the long term, which supports the massive increase of the national debt, but also further debt of the private sector and households. The overall debt of the USA including the debt of the households and businesses reaches today record-breaking levels- 350% GDP.

The crisis notably sped up the unsustainable growth of the debt

The tempo of the growth of the public funds has been dramatically sped up by the crisis outbreak. The causes of the debt growth are similar to the ones in Europe. First is the expanding social country, which doesn’t correspond to the willingness of the people to save the influential financial institutions and private companies from the verge of bankruptcy through the socialisation of the losses for the use of public resources. The losses, resulting from the outbreak of the crisis and the vanishing of the previous money illusion, didn’t disappear, they only moved in the form of public management expenses and non-quality financial assets on the balance of the American central banks to the tax payers. The giant public debt is pushing out the private subjects that have problems to borrow, from the savings market. At the same time it lowers the willingness of the businesses to invest, since they fear the growth of taxes in the future, from which it will be necessary to pay the debt. And so the business are sitting today on record-breaking amounts of cash (American non-financial companies held in 2010 up to 1.8 billion dollars in cash).

The worsening situation in the public finances led one of the rating agencies, S&P, to a step, that would be a few years ago considered to be impossible by the economist. To take away the best investment rating AAA from the United States. They gained a lot of unwanted attention from the political representatives of the USA. But the interest rates on the national debt aren’t given by the rating agencies but by the market. Which is yet not sceptical towards the American bonds and on the contrary, their interest rates have reached a historical minimum.

Despite of the high debt record-breaking low interest rates...for now

It has a number of causes. The main cause, why the interest rates of the USA for the bonds look as if they had the public debt of Estonia (6.6% GDP), is the “blatant privilege” mentioned in the second lecture. The American dollar is a global reserve currency. That means that there is a massive demand after the American dollar and the American national bonds outside of the USA area. And this mainly in times of growing fear of another global recession, in which the American bonds with a solid political situation and a strong economy, they are often too small to fit the nowadays extremely fast travelling savings of the nearly whole world. This was unpleasantly experienced by Switzerland, of which currency got strengthened against the dollar thanks to the savings leaking before the euro catastrophe during the last year by nearly 40%. But from the position of the dollar as the world reserve currency stems a certain risk. Nearly half of the American bonds is held by foreign subjects, and that’s why the strength of dollar and expenses for the refinancing of the American debt depend heavily from the trust of the outland in the responsible monetary and fiscal policy. That’s why they are beyond the direct control of the representatives of the USA. And this trust can disappear very quickly. That the bonds markets are extremely short sighted has been tried out recently for example by Greece. From one month to another at the beginning of the year have the private investors decided that its chances are slim and radically increased the interest rates that were required for the holding of the debt. Everything that can’t last forever will end eventually.

Even despite of the extremely big debt and giant deficit will the USA with a high probability not go bankrupt in a classical manner. As the ex-governor of the American central bank Alan Greenspan said recently, America doesn’t have to go bankrupt, ever. Because it can print dollars for which it will buy its own bonds. And that’s exactly what the American central bank already did during the QE 2 program, which we will describe in more detail in the 6^th lecture. The private financial institutions are also helping the demand, they borrow with 0% interest rates resources from the FED and invest those for a few per cent profit into the “risk-less” American 10 year bonds.