repost from yesterday
John McCain wants to make permanent the tax cuts instituted by President Bush. These tax cuts plus the wars in Iraq and Afghanistan have dramatically driven up the federal debt. This deficit spending has been funded primarily through US Treasury notes purchased by foreign countries.
Of all the publicly held debt added since 2001, 80% has been purchased by foreign countries. The largest purchaser since 2001 has been China. And oil exporting countries have also significantly increased their share of American debt since 2001.
There is a now a perverse incentive in our economic system. In order to keep financing this debt under the existing tax policy, the system now favors greater outsourcing to China and higher prices for oil - all in an effort to keep providing capital to foreign countries so that they can turn around and finance our government.
It is an invisible tax on the American people. It is the money spent for household goods, clothing, and energy that first goes overseas before ending up in our Treasury - a Republican money-laundering scheme designed for claiming to maintain government services while reducing taxes on the American people.
It is a scam that we get stuck paying for twice.
THE COSTS OF WAR AND THE TAX CUTS
Debt held by the public totaled $3.4 trillion at the end of FY2000. Through August 28, 2008, debt held by the public has ballooned to nearly $5.5 trillion. The balance of the government's total debt of $9.6 trillion is held in government trust funds and special reserves.
The tax cuts enacted in 2001 (and accelerated in 2003) along with the wars in Iraq and Afghanistan are the primary drivers of all this new debt.
Congress estimated the total 10 year cost of the 2001 tax cuts to be $1.35 trillion. Of that total, the Joint Committee on Taxation calculated that $864 billion in revenue was lost between 2001 and 2008.
The CBO pegged the direct cost of the Iraq and Afghanistan wars at $752 billion through February 2008. An additional $162 billion in funding was approved by Congress and signed by President Bush in July 2008 (out of the total $257 billion supplemental bill), bringing the total direct costs of the wars to $914 billion.
Combining the tax cuts with the direct war spending totals $1.8 trillion of new debt between 2001 and 2008. This accounts for 85% of total borrowing through public debt.
FOREIGN HOLDERS OF PUBLIC DEBT
Foreign countries hold $2.6 trillion of that $5.5 trillion in public debt. Foreign owned public debt increased $1.6 trillion since the end of December 2000.
The chart on the right shows that the primary lenders to the United States since the beginning of 2001. China, Japan, and the UK hold the most public debt purchased since 2001. They are also the 2nd, 4th, and 6th largest exporters to the US. Imports from China and Japan are dominated by consumer goods - autos, electronics, clothing, housewares, and foot wear.
While imports from the UK are diverse, a large component of their total is oil. And as you review the rest of the list, you see that oil producing countries dominate the list. The "Oil exporters" listed together in the Treasury reports regarding foreign held debt primarily represents OPEC members and rank 6th in foreign held public debt. Russia ranks 8th in debt purchased since 2001. Norway ranks 9th, and Brazil ranks 4th. All three rank in the top 15 in oil production according to the US Energy Information Agency. Russia and Norway rank in the top 5 of worldwide oil exporters.
The other two big holders of debt issued since 2001 are the Caribbean banking centers and the European banking centers. A Treasury Department report detailing the investment of oil revenues noted how difficult it is to track these investments. They noted an increase in investment vehicles and foreign partnerships using Caribbean and European banks for privacy purposes by these oil producing countries. So it is likely that the role of oil revenues financing US debt is understated.
BURDEN ON THE MIDDLE CLASS
Oil producers and consumer goods producers have bought $8 out of every $10 in US public debt since the tax cuts were enacted in 2001. Economic expansion of the US economy has not plugged the revenue gap created by the tax cuts (and exacerbated by the cost of the wars). Our reliance on foreign lenders has created an invisible tax on the middle class. These imported goods - autos, clothing, housewares, and oil (refined into gasoline) - dominate the non-housing costs of American household budgets. The giant trade imbalances the US has with these countries provides the capital necessary to buy American debt.
Think about it. The gas you buy to fill up your car goes to OPEC countries who turn around and buy US debt with your money. The clothing you buy that was made in China is turned into US Treasury notes. Bush may have offered tax "relief" but the costs are squarely born by the middle class.
That is the invisible tax. The gas and the everyday goods we buy are making it possible for foreign countries to buy American debt. It is a giant money-laundering scheme that takes your money, runs it through foreign companies and countries (who take their profit), and returns it back into our economy as a loan (where they profit a second time off the interest paid). It allows Republicans to claim that they reduced the burden on your wallet of paying for government.
And you get the privilege of paying for it twice. Pay once at the pump, pay again when the note comes due. Plus interest!
LONG TERM IMPLICATIONS
This dependence on foreign financing will continue to grow if these tax cuts are made permanent. As more baby boomers enter the Social Security system, there will be fewer Social Security trust fund dollars available to purchase Treasury notes. The low US individual savings rates means that the government will need to look overseas for more financing.
As oil becomes scarcer, oil producers should have more capital available to invest because of higher oil prices. But that scarcity also means that oil producers will be looking to diversify their investments. And if the US is still a heavily oil dependent economy, then investments in the US won't look very attractive.
To complicate matters, China and Japan not only buy a large percentage of US debt, but they also rank as the 2nd and 3rd highest consumers of oil, right behind the US. If these economies remain heavily oil dependent, then they too will face extremely high production costs which will make investing in the US difficult.
Finally, competition with China (for oil consumption) and Russia (over oil resources) may become the defining foreign policy crises of the 21st Century. If relations between the US and these countries turns worse, the cost of foreign sources of oil and financing available to the US will become astronomical or may dry up altogether.
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Our reliance on foreign oil to run the economy and on foreign debt bought with petrodollars to run our government is not sustainable. The Bush tax cuts have put America in a tough economic situation. John McCain's promise to perpetuate this tax policy is irresponsible. What it does promise is to lead America down the path of economic ruin. And it may fulfill McCain's promise that "there will be other wars."