The aftermath of the so-called “debt deal” reached by President Obama and the Congress in the USA clearly shows that nothing meaningful was accomplished in that deal. The day after the deal was done, China’s central bank governor firmly told the USA that it needs to “take responsible policy measures to handle its debt” (see first link below). This is stated in diplomatic language, but the timing of the statement shows that the USA’s foreign creditors are not at all pleased with the debt deal and are losing patience with the refusal of the USA’s leaders to deal with America’s excessive debt problem. My final paragraph will offer a surprising possibility for future debt negotiations about the US federal debt levels.
The Chinese official statement “also warned that stability is needed in the highly traded US debt market.” This also indirectly states China’s belief that “stability” currently does not exist in the US debt markets and that nothing Obama or the Congress did in the so-called debt-deal did anything to restore confidence in US debt markets. As a further indication of China’s displeasure with the unwillingness of US leaders to get serious about controlling America’s debt, a Chinese bond-rating agency lowered its bond rating on US treasury debt. There have been media stories that the US bond-ratings agencies may have to also lower the AAA bond rating now given to US Treasury debt, but the US rating agencies are under such huge pressure from the government and Wall Street that they are more likely to retain the current AAA rating due to political expediency instead of doing what is right based on the reality of the numbers.
Just how out-of-control are the US debt levels? One hears the figure of a $16 trillion federal debt level bandied about in some media reports, but a USA Today article on June 7, 2011 revealed the real level of the USA’s unfunded debt obligations is $62 trillion, or “$534,000 per household” (see second link). Shockingly, the article also revealed the real increase in federal debt obligations in 2010 was $5.3 trillion (!), not the “mere” $1.5 trillion commonly reported in media articles.
The stock markets yesterday lost an immense amount of ground in reaction not only to America’s refusal to come to grips with its debt problems, but also the Eurozone debt crisis which is getting worse on the other side of the Atlantic Ocean (see third link for a perspective on that issue—that link was sent to me by a reader of this blog). The one-day market crash amounted to a massive vote of “no confidence” in the abilities of American and Eurozone leaders to make the hard spending and taxing decisions that are critically necessary and overdue.
Now for my surprising suggestion on what may occur in the future when Obama and the Congress are forced to make the hard choices they need to make. Proverbs 22:7 states the inexorable financial law that “borrowers are servants to the lenders.” When borrowers get totally out-of-control in their indebtedness, creditors are eventually forced to step in and impose solutions on reckless debtors. The recent farcical debt negotiation was mere political posturing that accomplished nothing in the way of spending or debt reductions. I would not be surprised if in a future debt negotiation in Washington, DC, that the USA’s foreign creditors will demand a seat at the table as the negotiations are made. As the chief foreign creditor, China would have the greatest right to have a role in a future serious spending/debt reduction summit meeting. Other creditor nations such as Japan, Russia as well as foreign central bank creditors and the IMF may be there as well (see final link for the new IMF’s leader’s warning to the USA about its inability to control its debts).
The deeper that Obama and the Congress send the USA into debt oblivion, the more the USA will lose its sovereignty over internal financial matters. We may see a future situation where the foreign creditors tell the USA to cut federal expenses to the bone “or else” coordinated and drastic actions will be taken against the USA and the US dollar in all world markets. Indeed, alternate foreign reserve currencies may be threatened if the USA does not cut its federal spending to the bone. We may see foreign creditors giving Obama and Congress ultimatums with lists of the US federal departments, agencies and functions that need to be shut down or drastically cut in order to forestall a coordinated global action against the USA on world markets. China may especially demand big cuts in US military spending. If a future debt negotiation results in serious spending cuts like the ones suggested above, I think there is a high likelihood that foreign creditors are the ones imposing such spending discipline on the US federal government. It may be openly done or it may be done entirely behind the scenes, but at some point, I expect the USA will be dealt with by its foreign creditors as the pitiful spending deadbeat that it has become.