Walker Understands the Golden Rule

I have to admit I'm surprised.

Even though he's done it before, time and again, David M. Walker, the nation's chief accountant, is saying something so rational, so focused, and so relevant that it's hard to believe he is really a U.S. government employee.

What's more, he persists in carrying on this way, like the well-meaning, thoughful, and intelligent maverick he appears to be, despite the fact that he is probably being subjected to intense political pressure from all sides and likely has few peers in Washington he can emulate.

In "US Financial Watchdog Says Economy at Risk from ‘Non-Ally’ Bondholders," the U.K.'s Times reports on Mr. Walker's latest concerns.

America’s leading public finance watchdog has sounded a warning that the US economy is vulnerable to hostile financial actions by nations that are not its “allies”.

David Walker, the US comptroller general, indicated that the huge holdings of American government debt by countries such as China, Saudi Arabia and Libya could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests.

Mr Walker told The Times that foreign investors have more control over the US economy than Americans, leaving the country in a state that was “financially imprudent”.

He said: “More and more of our debt is held by foreign countries – some of which are our allies and some are not.”

Mr Walker, who heads the Government agency that is responsible for auditing the national accounts and is also the arm of Congress that scrutinis-es spending by the Administration, said that the US has been forced to rely on foreign investors more because Americans are saving so little.

According to US Treasury Department statistics, Japan is the biggest foreign holder of US Treasury bonds, with almost $623 billion (£310 billion) of US government debt as of December last year. Mainland China is the second biggest investor, with about $397 billion, and oil exporters, which include Iran and Saudi Arabia, had $110 billion.

The UK, while the biggest foreign investor in US equities, is the fourth-biggest holder of US Treasuries.

While Mr Walker referred to Britain as “the best ally the US could hope for”, he told The Times that “anybody who looks at that list will see that some of the countries there are not traditional US allies. You will see that China, Korea and a number of Opec nations are there. Not all the countries on the list share the same economic, national and foreign polices as the US.”

The worry is that should any of these foreign nations choose to reduce their holdings significantly, it would trigger sharp falls in US government bond prices, driving up their yield, which would raise borrowing costs sharply for American consumers and companies. While most economists take the view that countries such as China are unlikely to reduce their US bond holdings because they would also suffer a fall in the value of their own investments, China could still be perceived as holding a powerful financial weapon.

Ian Shepherdson, an economist at High Frequency Economics, said: “The US has a symbiotic relationship with China. The US cannot afford for China to sell its US treasuries but, equally, China cannot afford to see the value [of its treasury bonds] slide. They are strategic enemies and are in a financially weird relationship. China’s holdings represent about a third of Chinese GDP.”

China has been buying US Treasury bonds faster than any other big country – it has increased its holdings sixfold in six years. Beijing has accumulated the bonds as a consquence of its extensive programme of intervention in the currency markets. To hold down the value of the yuan, China buys dollar assets and sells the yuan.

This month Mr Walker described the US as suffering from a “fiscal cancer'” because of the massive long-term healthcare liabilities that the nation faces. The financial burden caused by healthcare entitlements has increased from about $20 trillion to $50 trillion over the past six years, representing a $440,000 bill for every American household, he explained. He also added that in 2005 and 2006, Americans spent more money than they took home, the first such pattern since 1933.

With Mr. Walker around, perhaps there is still hope for America?

Comments

[Sackerson]

Michael, coincidentally I have just emailed you on the UK's hugely increased enhancement of its "ally bond-holder" status. The UK has TRIPLED its holding of US Treasury securities within the last year, and is now third only to Japan and China in its exposure to American debt, despite the fact that our country, too, spends its wealth like a sailor on shore leave, whereas Japan and China have very positive balances of trade. I feel this is a most significant development and wonder why commentators are not shouting about it from the housetops.

[Eero Nevalainen]

The last bit about healthcare is just totally ludicrous.... I am not really sure how to take it. I guess at first I'd have to know whether he is politically opposed to universal healthcare or not. Let us assume he is, I'd suppose so, as he's supposedly Republican, right?

Now, if this absurd $440000 bill is for real, this is just simply a shining example of the failure of doing things "the American way". Guys, just PLEASE take an honest look for once in the European direction. We provide universal care for less and it works, regardless of the propaganda you are constantly exposed to.

If the message is that "entitlements" are the problem -- that is, people get treated who do not economically deserve to as they can't pay -- it's just plain bullshit. We do the same thing far more efficiently than you do, with a straight public system, without all the insurance middlemen and the obligations on the employer. It should theoretically result in costs per family of in way excess of $440000, but I'm not seeing it, and we're treating people and my European stock holdings are far superior to anything I might find in the US, thank you very much.

If the entitlements are not the problem but the way of providing for them is, the issue is similar. The system fails.

Yay Socialism, in some things.