April 24th, 2011
03:09 PM ET

Fareed's Take on America's debt crisis: why no problem is the problem

Everyone has been in a panic this week over America's impending fiscal collapse, but I think the reality is that America does not face an immediate debt crisis. Take a look at the simplest indicator, the day that Standard & Poor's raised its now famous warnings about America's debt, markets decided to lower America's borrowing costs and the dollar rose against its principal alternative, the euro.

The real problem for America may well be that it does not face a short-term crisis. Over the last few years, everyone has been worrying about America's debt, and despite all that public worrying, markets keep lowering the rates at which we can borrow money.

Why? Well, around the world, people, countries and companies are looking for safe, liquid investments.  The market's judgment is that the safest such investment is Uncle Sam's debt.

Imagine you're the head of China's central bank. You need to invest tens of billions of dollars every year in something secure and liquid so you can get your money back when you need it. There are few good options. You could invest in European bonds, but you've been spooked by the recent series of euro crises. It's fair to ask, will the euro in its current form even be around in 10 years?

Then there are Japanese bonds. You could invest in those, but Japan has the worst balance sheet of the major countries, with debt at 200 percent of GDP, slow growth and a rapidly aging population. Plus you, the Chinese, hate the Japanese, have never forgiven them for World War II, and are not likely to do anything to shore up the yen as a global currency. You could invest in your own bonds, but that would drive up the value of China's currency and make your exports more expensive, which means fewer jobs at China's manufacturing companies.

My point is that Beijing buys U.S. Treasury bills not out of any great love for America, but for good, practical reasons. It's why others buy them as well.

The short-term news about the U.S. economy is also positive. Last week, the International Monetary Fund (IMF) issued a report on global growth that confirms that the U.S. is likely to be the fastest-growing of the world's advanced economies. In fact, the real problem is that this short-term good news means Washington isn't really acting as if it faces a crisis, no matter the rhetoric.

Democrats are still clinging to entitlement programs - Medicare, Social Security - with no talk of real cost cutting, though the current system is clearly unaffordable. Republicans are playing politics with the vote to raise the country's debt ceiling and are still blind to the inevitable need to raise taxes. People are still pushing their ideologies rather than fixing the problem.

Once again, it looks like the American economy will outperform expectations and temporarily relieve politicians from having to make hard choices about entitlements and taxes. But this will only postpone the day of reckoning and make the crash more painful.

You can read more on this in TIME Magazine this week.

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Topics: China • Economy • Fareed's Take • From Fareed • Japan • Time • United States

soundoff (187 Responses)
  1. Mark B.

    Until the United States gets over the "entitlement menatality", union hand-tying, and regulatory strangulation we will never be able to compete globally again. The Chinese are in the position they are because they have no such nonsense. The only real answer Feareed is offering here is to raise taxes. If God can do his work on 10% from EVERYONE. Why can't the U.S.?

    April 25, 2011 at 1:38 pm | Reply
    • skytag

      "The Chinese are in the position they are because they have no such nonsense."

      Americans decided a long time ago they didn't want their air and water to be toxic waste dumps, for their people to die by the thousands in industrial accidents working in unsafe conditions, work in sweatshop conditions, and so on.

      In 2007 China had 1.485 deaths per 1 million tons of coal extracted versus our 0.04 deaths per 1 million tons. You're certainly welcome to believe the regulations responsible for our rate of coal mining fatalities being 1/37 of Chinas are nonsense, but I don't thing you'll find yourself in the majority. It's a better than that now, but their miners still die at about 30-50 times the rate in developed countries.

      Thanks for your vision of America, though.

      "The only real answer Feareed is offering here is to raise taxes."

      What point do you think he's making when he says:

      "Democrats are still clinging to entitlement programs – Medicare, Social Security – with no talk of real cost cutting, though the current system is clearly unaffordable."

      "If God can do his work on 10% from EVERYONE. Why can't the U.S.?"

      Because the U.S. is real and has real responsibilities.

      April 25, 2011 at 3:39 pm | Reply
  2. gordon atl

    @Mark B- Really? Comparing the USA to God?

    April 25, 2011 at 9:38 pm | Reply
  3. Bob J

    HEALTHCARE & FREE ENTERPRISE is an OXYMORON

    Free enterprise and the goal of increasing sales and profit is not compatible with taking care of poor people's health. – – And it never will be. – – To the wealthy and the Government Leaders who have a separate healthcare from Medicare and a separate Retirement program from Social Security – they have no real motive to take care of the people. Thus we have to have entitlement programs as a safety net for the masses of average and poorer people of this country. – But their integrity and challenges to fraud is really the action steps this government should be focusing on.

    May 1, 2011 at 1:04 pm | Reply
  4. barrymillay

    Fareed Zakaria – pimping for Obama and Soros. A plant. A stooge. Bought and paid for by The One. This explains the fawning interview he had with his paymaster, George Soros.

    May 14, 2011 at 8:22 am | Reply
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