Paul Samuelson’s Ominous Message
Paul Samuelson has written a rather short and bleak article on our current economic situation.
Some day — maybe even soon — China will turn pessimistic on the U.S. dollar. That means lethal troubles for the future U.S. economy. When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared.
China, Japan and Korea now hold dollars not because they think dollars will stay safe. Why then? They do this primarily because that is a way that can prolong their export-led growth.
I am not alone in this paranoid future balance-of-payment fear. Warren Buffett, for one, has turned protectionist. Alas, protectionism may well soon become more maligned.
President Obama struggles to support free trade. But as a canny centrist president, he will be very pressed to compromise. And he will be under new chronic pressures. His experts should right now be making plans for America to become subordinate to China where world economic leadership is concerned.
The Obama team is a good one. But will they act prudently to adjust to America’s becoming the secondary global society? In the chess game of geopolitics between now and 2050, much stormy weather will take place. Now is the time to prepare for what the future will likely be.
About 4 months ago I hinted at something like this. Back then I wrote,
As I’ve noted in my last post and in comments to other posts that currently the U.S. relies to a considerable extent on foreigners to buy U.S. government debt. Further, without these foreign buyers of U.S. government debt the U.S. would likely have to offer its debt at a higher interest rate.
At the same time the current recession will likely result in a budget deficit of at least a trillion dollars this year and probably next. Further, we have TARP, the current stimulus plan and a $75 billion dollar proposal to help bailout homeowners sideways on their mortgages and talk of TARP 2.0. All of this could add close to $2.3 trillion dollars to the national debt. Adding on the deficits just due to reduced tax revenues and we are looking at $4.3 trillion dollars, at least. Currently the national debt is around $10 trillion. So in a few years we could be looking at a national debt of $14 trillion dollars. 
In addition as I have mentioned several times Medicare and Social Security are in actuarial imbalance to the tune of at least $40 trillion dollars. Further, the problem with Social Security and Medicare are not that far off.
All of this combined could make foreign buyers of U.S. government debt very cautious of buying even more. The U.S. could have to offer such debt at a higher interest rate. The effects of this would be to reduce potential economic growth for the foreseeable future.
Now we have this story,
Foreign demand for long-term U.S. financial assets fell in April as both China and Japan trimmed their holdings of Treasury securities.
The Treasury Department said Monday that net purchases of stocks, notes and bonds obtained by foreigners fell to $11.2 billion in April, from $55.4 billion in March.
China, the largest holder of U.S. Treasury securities, trimmed its holdings to $763.5 billion in April, from $767.9 billion in March. Japan, the second largest holder of Treasury securities, reduced its holdings to $685.9 billion, from $686.7 billion a month earlier.
Treasury Secretary Timothy Geithner traveled to Beijing earlier this month to assure the Chinese government that the Obama administration is determined to get control of an exploding U.S. budget deficit, which is projected to hit a record $1.84 trillion this year.
China’s holdings of Treasury securities represent about 10 percent of America’s publicly held debt.
The administration has said while its aggressive moves to fight the recession and a severe financial crisis will push up the budget deficit temporarily, it intends to reduce the deficit as soon as the economic situation permits.
And that final comment about reducing the deficit is just short term, the longer term picture is indeed bleak. Medicare, Social Security, Obama Care, and so forth will likely mean that the deficits will start to rise shortly after the end President Obama’s first term in office. The Chinese, Japanese, and other investors are not stupid. They have undoubtedly read the reports on Medicare, Social Security and so forth. They also likely know that pledges to reduce budget deficits are standard political cheap talk as well.
With the government’s borrowing needs soaring, there have been some concerns that foreign interest in holding U.S. debt might falter, causing interest rates to rise.
The administration contends that recent increases in the interest rates for U.S. Treasury securities were not a sign of investor unease but a reflection of improving economic conditions.
Yeah, a great economic recovery is just around the corner (ask Brad DeLong). Don’t get me wrong, I want DeLong to be right and I have to eat my words. It is just that in looking at data I have available, data Prof. Hamilton has put together, and keeping in mind the long lag time for unemployment to recover from the past two recessions I don’t think Brad DeLong is going to be right.
I think the answer to Paul Samuelson’s question is no.