EPTNEW YORK, April 7 (Reuters) - With time running out for a budget deal in Congress, Fitch expects Democratic and Republican leaders will set differences aside and recognize the "dire consequences of failing to raise the debt ceiling in a timely manner."
The ceiling is currently set at $14.294 trillion. As of March 31, the debt subject to that limit totaled $14.218 trillion -- or $76 billion shy of the cap.
The ceiling is currently set at $14.294 trillion. As of March 31, the debt subject to that limit totaled $14.218 trillion -- or $76 billion shy of the cap.
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
-Ben Bernanke, current chairman of the federal reserve, speaking in 2002 (source)
Facing Inevitability
For much of my life, I have had a great passion for the subject of economics. The combination of science, politics, and wealth has always intrigued me greatly. Economics has been known, however, as the "dismal science." I am afraid I am going to be reinforcing that stereotype today. I feel for too long the public has had their head buried in the sand on these issues, and it is time to start raising awareness of an undeniable and frightening fact: That economic collapse and another Depression is inevitable.
In the following post, I will be focusing my attention on the United States economic situation, as that is the area I am most familiar with. However, do not think these issues are isolated to our country alone; they are endemic across much of the world, and economic instability in one nation will easily influence another due to the interconnected nature of the modern economies.
As I know how easily subjects such as these can be treated with sensationalism and paranoia, I've decided to focus my attention simply on the facts at hand. I feel the facts speak for themselves in this matter.
The U.S. Federal Debt - A look at the numbers
According to the United States Department of the Treasury, Bureau of the Public Debt, as of March 25, 2011, the Total Public Debt Outstanding of the United States of America was $14.26 trillion and was 97.3% of calender year 2010's annual gross domestic product (GDP) of $14.66 trillion. (source)(source) Given such a number, it does not appear that the problem of debt is insurmountable. Such a percentage of GDP certainly represents a clear problem, but it has not reached a level that will inspire a lack of confidence in U.S. debt and therefore affect our credit rating in the near future.
What will NOT be reported in the official debt numbers, however, is that the United States federal government uses cash-basis, rather than accrual-basis accounting, which is in violation of standard Generally Accepted Accounting Principles (GAAP), and utilizes a series of accounting labeling tricks which underscore the actual debt owed. In particular, "liabilities" are labeled transfer payments and are not considered a form of the public debt, though they do represent obligations which must be paid at some time in the future. How disingenuous it is to call these "transfer payments" can be seen in the fact that the Social Security payments have historically been used as a general slush fund for spending in the legislature and in fact is NOT transferred to future generations.
The two greatest unfunded liabilities alone, Social Security and Medicare, easily surpass $100 trillion in liability. Add to that prescription drug benefits and a host of other liabilities, and add it to the "official" debt numbers, and the estimates can reach as high as $200 trillion in total federal debt. In other words, several multiples of GDP. The total liability per taxpayer? Prepare yourself... $1,500,000.
How can this be possible? To quote Laurence Kotlikoff of Bloomberg news:
"Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.
"This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck."
IMF Analysis
The Selected Issues Paper released by the International Monetary Fund in July of 2010 can be found here, and includes a thorough and technical analysis of the United States Federal deficit and possible solutions for averting the coming financial crisis. To quote:
"Directors welcomed the authorities' commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.
"The U.S. fiscal gap associated with today's federal fiscal policy is huge for plausible discount rates[...] closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP."
To put this number in perspective, current federal revenue totals approximately 15 percent of GDP. So what the IMF in effect is calling for is an immediate and permanent doubling of our personal income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act. Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP rather than a 9 percent deficit.
The simple fact of the matter is, enacting such policies would be almost guaranteed to crash the entire economy. The number of companies alone in the U.S. whose profit margin is less than such a projected increase in the tax rate reveals the unfeasability of this suggestion. The average American is already struggling under personal debt, how can they be expected to foot the bill either? It would result at the minimum in a decades long recession, at the worst a complete depression.
And how do we honestly expect to elect the politicians who will run on THAT platform? Any politician suggesting the changes that NEED to be made, promising drastic tax increases coupled with drastic spending decreases and a weaker national economy would wait for hell to freeze over before being elected.
To put it bluntly, the U.S. is bankrupt. There is no foreseeable solution to dig us out of the hole we are in. Our economy as it is has been artificially grown through lax interest rate policy set by the Federal Reserve perpetuating decades long mal and overinvestment throughout a long history of "bubbles," and is on weak footing already.
We have continually resorted to the dire measures of inflation, which is nothing more than an indirect form of taxation on all federal reserve note holders, countless "stimulus" bills, and absurd degrees of credit expansion. Not to mention the endless string of bailouts which have been offered to save not only American companies but even entire nations such as Greece! What can be done when the failing organization is "too big to bailout?" What else can be said on the matter?
What baffles me most is that this issue so often takes a backseat to any other. To be honest, nothing could possibly be more important. What matters the events in Libya or health care reform or abortion policy if your children are facing the next Great Depression? We have stolen their future wealth from them, much as was done during the "roaring" 20's.
Non-Federal Debt
The federal debt numbers are of course only a part of the problem. According to the federal reserve, the total personal debt in the United States including mortgages is $16.15 trillion. That's an average debt per citizen of $51,912.(source) You can add that on to the million dollar federal debt share you owe. But wait, let's not forget about the state level. In my home state of California, you can expect an additional $14,800 per citizen. (source)
There is no doubt many states are in a crisis. Their financial woes are complicated by the fact that they cannot print their own money as the previous organization we covered. States have been striving desperately to make the cuts necessary to reduce their budget deficits, but the stranglehold the American unions have on the public sector is seemingly insurmountable. Many states have already entertained the idea of default, relying on the federal government to bail them out as well. This would of course be a disaster due to the loss of confidence in public investments. But more and more it is appearing to be the only answer.
My home state of California is a case in point. We have 8 counties in the state with unemployment rates of over 20 percent. We have a budget deficit over $20 billion and expected to grow. California already has the lowest credit rating of all 50 states, and there are rumors it will go lower. Leaders from both major political parties in California have been increasingly using the word "bankrupt."
"California is deeply in debt. You could say that it's bankrupt." -Jerry Brown, Governor
"We are on the verge of system failure." -Jean Ross, executive director of the California Budget Project
(source)
Be Prepared
The Boy Scout Motto. I have carried the wisdom of those two simple words with me throughout most of my life. Now the question is, given the data we have, how do we prepare?
And this is where once reasonable people turn away from the conversation. They assume that the proper response is no response at all, whether due to despair, apathy, or denial. Anyone proposing perfectly rational responses to the possibility of economic collapse will inevitably be publicly derided. The jokes about preparing your tin foil hats will come out. That of course will not dissuade me.
In my mind, there are three fundamental steps that need to be taken to prepare for such a crises:
1) To recognize the signs and symptoms of economic instability and to convert your fiat currency to tangible goods while it still has value. This is perhaps the most difficult part of all, as a market crash can literally occur overnight. However, I am certain warning signs will be evident for those who can distingish them. I would personally avoid gold and other precious metals, due to their lack of actual utility apart from the possibility of transaction, which is of course dependent upon a second parties' willingness to accept it.
2) Supplies and education regarding first aid, survival techniques, emergency preparedness, etc. These are of course good things to have regardless of your beliefs on economics.
3) A weapon and the competence to defend yourself. All the preparation in the world can go out the window when you have a gun pointed at you. You may believe that we will peacefully weather the coming storm just as we did the previous Great Depression. I, however, have difficulty accepting the idea that the modern generation will be content to work for pennies and stand in soup lines.
I recognize these statements will be very controversial to the TL community, but after years of formal and independent research I have been unable to reach any other conclusions. For those who agree with these conclusions, I would like to ask why you have not yet done anything about it? I look forward to having an informed discussion.
