Alternative Future for US Budget

kay e. strong

3 december 2008

fed

eral

bud

get

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Commencement 2028Winnie Lui, grand-daughter of former Chinese Premier Wen Jiabao, stood proudly with 56,408 of her peers during the spring commencement on Saturday, May 10.

This year’s commencement was, indeed, unique with 88% of the graduating class being Chinese nationals, the last of the cohort 2008 Study Aboarders.

A story that began in 2008 ...

NBER dated the peak of the business cycle as Dec 2007

downturn dogged the economy +50 months

GDP growth hovered at an anemic 1.6% for the next 4 years

Lost wealth in the financial markets kept retirees in the labor market

Impending shortage of labor of 2015, ½ the graduates found jobs

Weak price pressure kept capacity utilization below 65%

2008 …. fast forward to 2018

Federal Budget Status: “Persistent Deficit”

Permanent tax cuts (2001-2011)

+ “security-related” expenditures = cost -7.2 trillion cumulative budget deficits

By 2014 Reconstruction Cost doubled 2008’s $121,000 per Iraqi

Government Financials (2008)

Sluggish economy Tax Revenue drop

Debt financing exceeded 100% of GDP

Explosion in Retirement Costs compromises economic growth “Investment in the Future”

“Youth-based” health Education & Training R & D Infrastructure

2008 …. fast forward to 2018

Public Alarm Sounds

“The USA requires about $3 billion in foreign capital every working day to finance the huge gap between its consumption of foreign goods and its exports. … People don't realize this, but our economy is on life support from foreign lenders and investors.“

Clyde Prestowitz, President of the Economic Strategy Institute

Public Alarm Sounds

“The US ultimately must choose between painful deficit-shrinking measures or selling foreigners more and more US assets.”

Barry Eichengreen of the University of California-Berkeley

Beaten-up dollar unsettles

investor in US & abroad

“In the long run, though, the sliding dollar could dry up the world's appetite for the USA's oceans of debt. Were that to happen, some warn, we could see surging interest rates, a sinking economy and, perhaps, an end to the dollar's reign as the world's premier currency.”

Round Two: Stagflation bout

Foreigners lost appetite for US Government Debt Instrumentsthe value dollar fell in currency markets

interest rates rose in financial marketsstifled economic growth (planned investment)

Expansionary Fiscal Policy response constrained by cumulative excess External Debt financing of persistent budget deficits

RESULT: Rise in unemployment levels unchecked

2018 Narrowly Adverting….Meltdown!

Expansionary Monetary Policy response failure to Contraction

Domestic Banks precipitated “Credit Crunch” siphoned domestic liquidity off re-invested in safe-haven foreign “oil” market funds

Foreign Central Banksquietly diversified away from dollar-denominated assetsrebalanced foreign reserve holdings to avoid loss of value

The FED exhausted IR assets (holdings of foreign reserve assets & gold) trying to prop up the value of the fallen dollar

Currency Swap Arrangements with foreign Central Banks rejected over “solvency” concerns

RESULT: Inflationary pressure unchecked

Moody’s and Standard & Poor downgraded long-term obligation ratings of US Treasury Securities to Speculative grade “Ba”

….. a.k.a. High Yield or Junk status

Market REACTION: Investors scrambled for “safe haven” alternatives

2018 Narrowly Adverting….Meltdown!

International Markets demanded Securitization of US Debt or “fire sale” of physical national assets!

Coface won a sealed bid contract for “Securitization” of US debt securities

Anonymous Bidder demanded debt securities backing by “reputable US assets,” specifically, cultural heritage sites such as Yellowstone National Park & numerous highly regarded university properties in the mix

2018 Narrowly Adverting….Meltdown!

A new age of Chinese prosperity and innovations in arts, science & technology

Trade involvement open to the West and South

Nationals settle abroad overseeing Chinese government investments

US is No exception: Chinese knowledge workers hold 50% of public offices

Hold the reins in the finance markets

Direct public works projects to rebuild America’s crumbled infrastructure and …

US partners with neo-Tang Dynasty 2028

give “new” meaning to

Alternative Future for US Budget

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