Tuesday, March 20, 2012

The Cinderella Problem

How long will foreign central banks keep buying so much of our debt? James Kwak has a good piece on this, with a nice graphic showing how much more aggressive buying by foreign central banks has gotten over the past decade-plus.

In the past three years, the federal budget deficit has been more than $1 trillion annually. We can do this only with heavy borrowing. In that sense, we are like Cinderella at the ball. Our carriage will turn into a pumpkin at midnight, but as Warren Buffett once put it, there is no clock on the wall.

I am not predicting doom; we may have a lot more time. I think it is not smart to assume that we do, however. In just about all areas of life, borrowing power should generally be used as a back-up plan, not as a primary strategy. In other words, even assuming we do have a lot more time, we will be better off taking the attitude that we don't.