Of the $11.2 trillion of U.S. public debt — this doesn’t count the $4.8 trillion held by our government, largely in IOUs to itself for Social Security — the Chinese own $1.2 trillion, making them the largest holder of U.S. Treasurys after the Federal Reserve.
This situation is as dangerous as it is ironic. The Treasury Department’s 2011 annual report shows U.S. debt as a share of the economy (gross domestic product) rising — to 125 percent of gross domestic product by 2042 and 287 percent by 2086 — as retirement promises turn into cash outflows. And if Medicare’s costs per beneficiary grow at historical rates, as the Medicare trustees fear is likely, the U.S. debt-to-GDP ratio will eventually exceed 500 percent. Recall that Greece was pushed into crisis with a debt-to-GDP ratio of 113 percent.
How long will foreign investors, who own half of outstanding Treasurys, be willing to use their savings to finance our promises? In December, the head of China’s sovereign wealth fund, which invests $400 billion of his country’s savings, criticized Europe’s welfare system in blunt terms, saying that it induces “sloth, indolence.” What do the Chinese think of our system?
In the States, the investment management firm Pimco, the largest private buyer of Treasurys, said last month that our retirement promises have “similar characteristics” to Bernie Madoff’s scheme and predicted a Greek-like crisis if the system is not reformed. Meanwhile, the Federal Reserve bought 60 percent of Treasurys issued last year. This rate of purchases cannot continue indefinitely.
Today’s leaders did not design Medicare and Social Security as an intergenerational transfer, and they did not choose the government’s misleading accounting standards. But because these bad choices have not been corrected, many Americans believe that a cut to Medicare or Social Security is a confiscation of money they paid into a trust fund. This misconception greatly complicates our politics.
The good news is that Americans know changes are needed. And our health-care system can be reformed to reduce the burden on our children. We need better information to have this critical national discussion.
Will our leaders give us an honest accounting and discussion of our choices, or will we have to wait for a debt crisis to force the issue?
Loading...
Comments