According to an article on The New York Times, this has had serious economic consequences for Europe. Because of an increase in the instability of the European markets, the strength of the Euro is seriously being called into question. As a result of the wavering value of the euro and turnover of some major leaders in the EU, the European stock markets have been hit very hard. The European Union is nervous about Greece, as well as Portugal, Italy, and Spain allowing their debt to GDP ratios get out of control because it may cause the other countries in the EU with stronger economies to question whether or not they should remain members in the Union. And why shouldn’t they? If Greece, Portugal, Italy, and Spain continue in this direction, they will become a great credit risk to the EU. The other members of the EU may begin to feel like there’s no reason to help countries like Greece run deficits if the country isn’t using the money on loan to help get itself out of debt.
Does any of this sound familiar? It should. This is what has been happening in the United States for the last 8-10 years. China has been funding the United States debt, most notably since the Bush Administration took the reins, and our debt to GDP ratio appears to still be completely out of whack. What should frighten us the most is the thought of China pulling the plug on this funding. Just like people do not want to invest in a company that shows no signs of becoming profitable, China may begin to feel the same way. Something else worth noting is how we, as citizens of the United States, exhibit almost identical behavior. It is what our country was founded on: credit. We have the ability to take out loans (with some restrictions and guidelines of course) and blow all the money on something that does not benefit us in the long run. Anybody can apply for a credit card with an enormous spending limit, without even having the money to pay the credit card companies back. So many people spend over their limits on useless items and get so far into debt that they can’t get out. If the United States does not get its spending under control and begin making serious progress in getting out of debt, the US may find itself in the same position as all those ignorant citizens living above their means.
There was a great special on 60 Minutes two or three years back where one of the primary US officials responsible with calculating the national debt was giving speeches around the country informing anyone who would listen to call for more responsible fiscal policies. It's a shame that hasn't had a huge effect - we're still very much a credit card economy as you said.
ReplyDeleteBut of particular irony in all this is how a country such as China, where the per capita income is significantly lower than in the United States chose to use its money by lending it to us for a greater return rather than helping its own country which so desperately needs it. Perhaps though, if it were not for this investment China wouldn't be in the economic position its in today preparing to rival our own economy by the end of the decade as some suggest. In committing us to paying a greater debt than we can chew its had the short-term effect of hurting China's population at large but the long-term effect may very well be a game-changer in their favor.
As far as Greece, Portugal, Italy, and Spain are concerned, however, clearly their political leadership is dropping the ball - there's no excuse for not learning from our mistakes.
We have seen and actually felt in our wallets the consequences of personally overborrowing and taking advantage of too much credit. It resulted in a mortgage crisis, crash in home prices, and financial market and economic meltdown. Take this kind of situation and multiply it to what would happen if the U.S. were to default on its debt...God help us all.
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