How the Financial Collapse Would Happen in an Obama Second Term
The stakes in the coming election could not be higher. While crystal ball-gazing always is hazardous, the trail America's economy would follow, should President Obama's re-election effort succeed, has already been blazed. Naturally, the media will tell you none of this.
The upcoming election, despite the best efforts of the Obama campaign, the mainstream media, and various polling firms, is going to revolve around two questions: are you better off than you were four ago, and what is the future going to be if Barack Obama is re-elected? The Obama team is attempting to finesse the first question by obfuscating the second. They claim that their policies have begun to work, and, given a second term, life would redeem the promises Obama made in 2008.
A discussion centered on what the future will bring can be confusing and arcane. The Democrats rely on an emotional argument tied into the cult of personality surrounding Barack Obama, essentially stating that because their motives are pure and they have historically been for the "little" guy, they should be trusted when they say that their plans will be best in the long run. The Republicans and conservatives, on the other hand, too often rely on cold, hard facts and figures, which oftentimes succeed only in making them appear impersonal and pedantic, spouting numbers which cause the eye of the average voter to glaze over with confusion.
Further playing into the hands of the Obama cabal is the sense among far too many Americans that the worst could never happen here. This nation has experienced unprecedented prosperity for over 66 years, with only a few minor hiccups along the way. It is extraordinarily difficult to accept that today, America is living on the residue of its past economic achievements and facing a bleak future if the nation remains on its present course.
So rather than get bogged down in statistics from the Republicans or emotional and deceptive rhetoric from Barack Obama, let's look at a real-life and current example of where this nation is headed: Spain.
For much of the previous decade, Spain was one of the most stable economies in Europe. On the surface it experienced stable growth and managed to keep the national debt below that of its neighbors; in some years, Spain experienced budget surpluses, allowing the country to pay down some of its debt. However, underneath this veneer, other factors were in play.
In 1999 and 2000, when Spain adopted the euro as its currency, interest rates fell to historic lows as the European Central Bank (similar to the U.S. Federal Reserve) made money easily available. So Spain's banks, its property developers, and the everyday home-buyers (with prodding from the government) embarked on a frenzy of commercial and residential building and buying. From 1996 to 2007, Spanish property values tripled.
Spain has a massive social safety net which accounts for a vast a majority of its government spending -- spending that absorbs nearly 46% of the country's annual economic output or GDP. Further, the nation's unfunded long-term social commitments account for more than 15 times its yearly GDP. Despite this, the Spanish government embarked on one of the most ambitious green energy programs in Europe, pouring untold billions of euros into solar and wind energy.
In the meantime, because of rigid labor laws, union influence, and government regulations which prevent wage reductions and mandate ever-increasing benefits, the Spanish unit labor cost has risen by 40% (as compared to Germany), making Spanish industry uncompetitive. Many have, by necessity, moved their operations overseas. Nonetheless, large-scale immigration, much of it illegal, continued unabated through 2008, further exacerbating the cost of government.
Does all this sound familiar?
So what is happening in Spain today, and what is its future? Their real estate bubble burst in 2007-2008. The construction industry collapsed, throwing hundreds of thousands out of work. Home prices have fallen by nearly 50%, leaving many homeowners owning property worth less than their mortgages. Spanish banks were left with a mounting pile of bad mortgage debts which have required major bailouts from the government and the European Central Bank.
Concurrent with the real estate debacle in 2008, the nation entered into a recession, causing many businesses and industries to cut back or close their doors altogether. Further, the green industry initiative collapsed, as it turned out that each new job created cost nearly $800,000.00, while for every four jobs created, nine were lost. Within a year, the national unemployment rate doubled to 17.4%, thereby greatly reducing tax revenue to a government that had not only a banking crisis to contend with, but also ever-increasing spending for social and other obligations. The chosen option to confront his dilemma was massive deficit spending financed by the sale of bonds.
In just four years Spain has more than doubled its national debt, with no end in sight unless there is a massive reduction in government spending or a commensurate growth in its economy. There is no confidence that the Spanish government can do either. Today, in order to borrow money in the international financial market, Spain has had to agree to pay an exorbitant interest rate approaching 7.5% for a 10-year bond (by comparison, Germany pays 1.5%). This additional financial drain has exacerbated the economic dilemma and forced the nation to turn to the European Central Bank to purchase its bonds in exchange for further spending cuts as dictated by the Bank and other European nations.
As it loses its sovereignty, Spain finds itself in a vortex from which it cannot escape. It has entered into a second recession within three years. It has no money to combat this dilemma, as the private sector is collapsing, and so, as a result, are tax revenues, and the government is stuck with massive social programs. The national unemployment rate as of August 2012 is 24.6%, but for the young (16-24 years of age) it is now 52.9%. For those between the ages of 20 and 29, the rate is 39%. People are withdrawing and hoarding what cash they have, and many are moving to other countries. Tax revenues thus continue to decline, and few businesses will contemplate a start-up or move to Spain under these circumstances. The nation cannot cut spending beyond a certain point without fomenting a national upheaval, and it cannot promote programs to grow the economy. A financial and societal collapse is thus inevitable.
The United States is on the same path.
Since 2008, the nation's debt has increased by 75% and will, per Obama's own budget proposal, more than double (up 130%) by the end of an Obama second term, just four years away. The unfunded liabilities of the U.S. are now 14 times larger than the nation's annual economic output (GDP). Government at all levels (federal, state, and local) is now spending the equivalent of 40% of the nation's annual GDP. It will increase to 46-plus percent when ObamaCare and other programs are fully implemented.
The real unemployment rate today (counting all who dropped out of the labor force) is approaching 19%, and over 50% of recent college graduates are unemployed or grossly under-employed, with no hope in sight. There has been a concerted effort by this administration to centralize economic control in Washington through onerous mandates, regulations, and proposed taxes, thus discouraging wealth- and job-creation and forcing many businesses to contemplate a move overseas. The result of all the above is little or no economic growth, thus diminishing tax revenues and forcing more reliance on borrowing to fund the promised spending.
Borrowing that will one day in the not too distant future cost the United States an exorbitant interest rate, combined with a demand for real austerity and a de facto loss of sovereignty, would cement in stone an inevitable collapse.
For those who are maybe undecided or enamored of the Obama cult of personality, there is no need to listen to any of the political speeches and the distortions inevitably contained therein or to read green eye-shade economic reports. Just look across the Atlantic Ocean for a reality check and see the future if the Obama team is given four more years.