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From: Millie (pepper2-253.aeneas.net)
Subject:         If China is financing our debt, how tough can we be the next time there's a Tiananmen Square?
Date: February 17, 2006 at 3:02 pm PST

In Reply to: Thanks to GW, we have a Birth Tax...... posted by Millie on February 17, 2006 at 2:33 pm:

....When Bush took office in January 2001, the government was forecasting a $5.6 trillion budget surplus between then and 2011. Instead, it is now expecting to accumulate an extra $3 trillion in debt -- including a record $415 billion in the fiscal year that ended Sept. 30. The government has to borrow an average of more than $1.1 billion a day to pay its bills, and it spends more on interest payments on the federal debt each year -- about $159 billion -- than it does on education, homeland security, justice and law enforcement, veterans, international aid, and space exploration combined.....

....The consequences are just coming into view. The White House has ordered draft budgets for 2006 that would cut spending on homeland security, veterans affairs and education, according to White House documents. Some economists -- although by no means most -- see a reckoning on the horizon, when foreign lenders reject U.S. debt, interest rates rise, and the value of the dollar crashes.

"The [deficit] pressures going forward are too great to allow us to borrow these kinds of moneys on the international market on a sustained basis," said Douglas Holtz-Eakin, a former White House economist who heads the Congressional Budget Office.

Through it all Bush has stood his ground, pushing through four tax cuts in four years totaling $1.9 trillion over a decade, and opposing repeated efforts to roll back any of them......

... Four years ago, the outlook was very different. During a campaign debate in Boston, presidential candidate Bush surveyed the economic landscape and forecast that "over the next 10 years, there's going to be $25 trillion of revenue that comes into our Treasury, and we anticipate spending $21 trillion." He urged taking advantage of that surplus to cut taxes for "the hard-working people who pay the bills."

In retrospect, Bolten now says, that vision was a mirage. "Those surpluses never existed; that's the important part," he said. "It's not that there was some change in reality. It's that the projections were simply wrong."....

..."The Bush administration didn't just sit there and watch the deficit get wider. They actually exacerbated it," said Larry Kantor, global head of economics and market strategy at the British financial giant Barclays Capital.

The president's first tax cut, at a cost of $1.35 trillion, was passed in June 2001 by a Congress still convinced the government would run a large surplus even without those tax revenues....

...To finance its deficits, the Treasury has increasingly looked to investors overseas, especially foreign governments, to buy U.S. Treasury bonds. But recent economic data suggest foreign buyers may be losing interest, afraid that a sudden drop in the value of the dollar will upend portfolios swollen with U.S. currency....

...The result? "Global recession," predicted John Williamson, a senior fellow at the Institute for International Economics.

If the lending splurge continues, however -- and some feel it is bound to, if only because China and Japan now have an interest in propping up the dollar to keep their exports cheap -- some fear U.S. policymaking will be constrained by the reliance on foreign capital. "What does this mean to our bargaining power as a nation?" asked Michael D. Granoff, president of Pomona Capital, an investment firm. "If China is financing our debt, how tough can we be the next time there's a Tiananmen Square?"....

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