November 16, 2009
The Future Is NowBy Steve McCann
The credibility and economic future of the the United States as viewed by the international financial community has never been at such a low point as it is today. The rest of the world has awakened to the end result of the economic policies being pursued by the current government in Washington, D.C.
Yet the vast majority of our fellow citizens are oblivious to what may well happen not only to their children and grandchildren, but increasingly to nearly everyone alive today. What many dismiss as happening far into the future (other people's problems) is now looming on the horizon.
Once passed, the expenditures necessitated by various proposals now on the drawing board (such as health care reform) in Congress will become nearly impossible to reverse and will ensure a dismal future for the United States.
The Government Accountability Office has recently issued a report to Congress on the long-term fiscal outlook for the United States. It is a bleak picture (and does not include the impact of government policies now under consideration). A quote:
By the nature of economic reporting and the enormity of the numbers involved, this work by the GAO will not be seen or understood by the majority of the population, and it will be ignored by the majority of the Democratic members of Congress, as they are captive to their ideology and their quest for long-term political power.
The underlying problem as revealed by the GAO report is that the borrowing by the federal government begins to spiral out of control in order to meet ever-expanding spending requirements. This in turn increases interest costs, resulting in the government raising tax rates in an attempt to generate more revenue, which history has shown only stifles economic growth further, which reduces tax receipts. Thus the house of cards collapses.
The projections by the GAO can best be understood if we apply the underlying statistics to a family's financial situation.
Assume a family has prosperous middle-class assets of $500,000.00 and annual revenue of $105,000.00, but as with many families, they spend much more (deficit) and charge it to their credit card. This is a typical family, except that the grandparents live in the same household.
The report focuses on four years: 2009, 2019, 2030, and 2040. Using the GAO simulation and assumptions plus constant 2009 dollars, this hypothetical family situation would be as follows:
The long-term family debt:
2009: $269,000.00 53.8% of assets
2019: $521,500.00 104.3% of assets
2030: $911,500.00 182.3% of assets
2040: $1,466,000.00 293.3% of assets
Spending on interest and grandparents (social security and medicare):
2009: $29,500.00 28.0% of family revenue
2019: $80,000.00 76.2% of family revenue
2030: $114,000.00 108.6% of family revenue
2040: $152,000.00 144.8% of family revenue
It is unimaginable to think that any family would even contemplate operating their household finances on such an absurd basis. No financial institution would continue to lend money to such a profligate entity, nor allow it to increase its debt by a factor of 7.3 over this period.
By 2027, only seventeen years away, the entire federal revenue stream will be spent on two items: interest and social security/medicare. (If we add in the interest impact of the House-passed Health Reform Act, the year becomes 2024). Other than borrowed money, there will be no funds available for such items as the Defense Department, national parks, and education.
Will the United States be able to continue borrowing from the rest of the world and its own citizens?
It has been generally accepted that a country's economy is a good credit risk as long as its debt remains in the 50% range of that nation's annual Gross Domestic Product. For those who think we have time, this percentage will reach 71.6% in 2012, the end of President Obama's term. Per the GAO, the prospects for the United States are as follows:
Debt Held by the Public as Percent of GDP
Already there are ominous warning signs about the nation's ability to continue to borrow. Foreign countries are openly discussing eliminating the dollar as the international exchange currency, and bond-rating companies are broaching the possibility of dropping the credit rating of the United States, which would effectively raise interest cost.
There are three options a country has to avoid complete economic collapse: 1) raise revenue, 2) cut spending, and 3) inflate the value of the currency.
Per the GAO, revenue would have to be increased by 47% and noninterest spending cut by 33%, or a combination of the two, over the next 75 years to keep debt at the same level as the end of 2008 (40.8% of GDP). Waiting another ten years to address this issue would require a revenue increase of 58% and noninterest spending cuts of 39%, or a combination of the two.
The most important aspect of the GAO recommendation is the increase in government revenue. Yet the House has passed a carbon cap-and-tax bill that will hamstring the economy. Furthermore, they are proposing massive new taxes and regulations on businesses and the financial sector that would drastically reduce potential and much-needed growth in the economy. The only way for the government to increase revenue is for the economy to expand dramatically.
Yet this administration and Congress are pursuing policies that will create not a positive business environment, but one that will make the country fully uncompetitive in the world market. Unlike in previous major economic downturns in the past 80 years, there is now a true world economy in which the United States must compete.
The politicians and the general public can no longer assume our economic hegemony and permanent growth. Current government policy of unfettered spending such as the health care reform proposal must change dramatically if we expect to continue to increase personal incomes and wealth, and more importantly, remain the preeminent military power in the world as a guarantee of our security.
The remaining option of hyper-inflating the currency, while having the effect of paying off the debt with near-worthless dollars, would destroy the United States as we know it and relegate us to "banana republic" status: unable to compete in the world economy and at the mercy of those who wish us harm.
The alarm has been sounded -- not by those in the private sector, but by a major government agency. The electorate must become increasingly engaged and understand that the America has little time. We can continue to live in peace and prosperity and survive as a nation, but only if the United States is a dominant moral and economic force able to underwrite being the unrivaled military power in the world.