Cliff and all members, The government officials currently in charge of the US government believe that the US economy can withstand the deficit that the government has incurred. The reasoning behind this thinking is that the deficit is probably less than 5 percent of the total Gross National Product.
Due to this deficit, the US government has to borrow money from lenders who are willing to gamble on the US economic viability. To attract these lenders, the US invariably would have to increase the interest rates to attract the lenders. However, the government officials have to be careful in increasing the federal prime rate at an incremental rate to make sure that the economy continues at a healthy rate. If the optimum federal prime rate is breached, there is the likelihood that the economic growth of the US will be affected. This is the reason why the federal reserve board director, Mr. Greespan, is talking to people through the news media about the economic reality in the US. In effect, he is trying to talk his way out of the inflationary pressure that is building up in the economy. He does not want to raise the interest rate unless he is forced to do so because of the creeping inflation. The inflationary pressure is coming from the creeping high prices of homes in the US. This is due to the availability of low interest loans for the purchase of homes. In consequence, more people are willing to pay higher prices for homes that they would not ordinarily be able to afford. The bottom line is that the present deficit of the US federal budget is attributable to the (1) excessive tax cut by Bush a few years ago, and (2) the wars in Iraq and Afghanistan. In my opinion, the federal prime rate will continue to increase unless the deficit is eliminated through tax increase (which would be a political suicide for a candidate who proposes such measure) and the end of the wars in the Middle East. Regards, John R. --- In FairfieldLife@yahoogroups.com, "Cliff" <[EMAIL PROTECTED]> wrote: > Well stated. I was surprised to see someone on this forum jump in with > a real-world explanation instead of the knee-jerk reaction TurquoiseB > had to offer. > > The bottom line - no one would be loaning the US $2B/day (which comes > out to much higher than the projected deficit for this fiscal year, so > I'm assuming you're exaggerating for effect) if they didn't expect to > get that money back plus interest. The challenge for the US is to continue > to be the innovative, "free" place it has mostly been over the years, so > that we continue to inspire confidence in the world's investors. > > --- In FairfieldLife@yahoogroups.com, akasha_108 <[EMAIL PROTECTED]> wrote: > > --- In FairfieldLife@yahoogroups.com, TurquoiseB wrote: > > > Wake up. The United States of America has to borrow > > two billion dollars a day to stay afloat. I'd say > > that the world was supporting them. > > > > > > ---- > > > > A similar claim could be made of some one buys that $1,000,000 house > > down the street. He only has $200-300 k in assets. He is way over his > > head in debt. Is he a total loser? Not really (housing bubble aside.) > > The reason banks are willing loan him the money is that his earning > > power is such that he can cover the loan payments. AND he has a good > > probability of being able to do so into the forseeable future. > > > > Similiar with the US. Foereign countries see the US as the, or among, > > the safest places to invest. And see the US gov't as one of the most > > reliable debtors -- that is they "never" default on loans or bonds. > > > > Why do some countries have so much to invest in US treasuries? Well, > > China has a greatly undervalued currency. They keep it low so that > > their exports appear cheap, thus propping up their economy. In the US > > and other importing countries, they get a "bargin" -- goods with a > > chinese gov't 30% discount. Thats a good deal for US consumers and > > businesses. > > > > Why does the US issue its level of debt? The cartoon version is > > similar to the homeowner -- don't pay 100% cash for a long term asset > > -- borrow funds to match payments over the life of the asset. But in > > this case its not houses but buildings, bridges and roadways. (Its > > actually more complex -- the unitary budget process etc. ) Another > > reason for borrowing is to stimulate the economy in times of > > recession. Thats what has happened since the 2000 downturn in the > > economy. And build up a surplus in times of strong economic growth. > > Thats what happened in the last part of the 90s. > > > > So gov't borrowing is not per se bad. Running trade deficits is not > > per se bad. Having a $2 billion daily debt service is not necessarily > > bad per se. It can in some circumstances be a good thing, and does not > > in itself indicate imminent demise. > > > > What are the conditions when that level of gov't borrowing is a bad > > thing? Thats the relevant case to make. 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