Fairytale of 2011
Once upon a time and in a land not so far away, there was a people who willing made personal economic decisions beyond their income capacity. They borrowed money from lenders for not just houses and cars, but they borrowed money for clothes and vacations, homes far beyond their ability to maintain payments. They borrowed money to pay for all sorts of luxury items without much thought as to the overall cost. Their friend, Common Sense told them that even though they were making stable incomes now, if anything changed and the economy declined or suffered from inflation, they would not be able to keep their nice things–because they didn’t really own them.
Few listened.
Things went on like this for sometime and people began to believe that Common Sense was just acting like a scared old woman. They even took their new ideas about money with them to the state and national capitols to use them to run the government, it all seemed to work great–silly Common Sense.
Then one day, the lenders stop lending. The lenders said that the government had borrowed more than it would ever be able to pay back. The lenders said that they would be happy to just to receive the interest on the debt owned and that it would take years, maybe even generations for the government to payback the interest and the principle.
Life changed in the land. Prices on everything went up very quickly. Many of the people were afraid and could no longer afford their nice things and had to give them back to the rightful owners, the banks.
Many people lost their homes. Jobs evaporated and lots of people lost their entire savings and investments as other people in other lands lost faith in the credit of this people and their government. Some people in other lands even talked about getting their money back by using guns and war. It was a very unhappy time.
Simply put—today, this very day and everyday since 2007, the U.S. government has borrowed and continues to borrow approximately four billion dollars every 24 hours to keep and maintain our current lifestyle, governmental operations, social programs, military activities and economic interaction with other nations.
Legally and wisely, we have a debt ceiling, a limit placed on how much debt obligation we as a nation would be willing to carry and owe to other nations or private individuals. The past decade has shown an absolute governmental disregard for the economic principles represented by such a ceiling. Could our representatives in Washington really have intended this ceiling to be used as our national spending target?
I have seen children and young inexperienced couples make these kinds of mistakes, but honored and trusted governmental representatives?
And what is the plan to pay this money back?
What does it mean for the millions of unborn citizens who did not even get a chance to weigh-in on this?
During the past decade, the United States has expanded its money supply and borrowed trillions of dollars to meet an unsustainable lifestyle. And during the past twenty years, a number of economic forecasters have been predicting an economic meltdown in the near future, if these expanding and borrowing practices did not end.
Few listened.
Economic forecasting is the business of predicting economic growth and how it will impact the entities engaged in that particular economy. One element of this kind of forecasting is called Gross Domestic Product (GDP). GDP is the total value of all goods and services produced and sold from the United States. One formula used in economic forecasting is the ratio of public debt in relation to the GDP.
The February 23, 2010 issue of the Boston Globe ran a story entitled “The US public debt hits its tipping point.” This story referred to research conducted by Harvard Professor Kenneth Rogoff and basically goes like this (from the article):
In an advanced industrial society like the US, the gross public
debt of the central government (“public debt’’) can rise from 30
percent to 90 percent of its Gross Domestic Product with surprising
little impact on inflation or economic growth. (The gross public debt
includes Treasury bonds held by public investors and internal obligations
like those to the Social Security trust fund.)
However once gross public debt exceeds 90 percent of GDP, the adverse
effects on the economy come quickly into play. At the end of 2010, the public
debt of the United States will be close to 100 percent of our GDP for this year.
How will this dynamic work? When the US public debt gets close to the US
GDP, foreign investors will become concerned about America’s ability to keep
its deficits under control, and will start to demand higher interest rates to buy
the ever-increasing volume of US Treasury bonds. Although the recession may
delay this spike in interest rates, it is likely to happen during 2011 or 2012.
(This is confirmed by other forecasters including my personal favorite, Harry
S. Dent – www.hsdent.com).
Higher US interest rates will hurt consumers with credit card debt, homeowners with adjustable rate mortgages and businesses with borrowing needs. At the same time, higher interest rates will substantially increase annual payments on the federal debt.
In addition, when the public debt of an advanced industrial country gets close to 100 percent of its GDP, its rate of economic growth slows significantly. This occurs because more capital is needed to finance continuing budget deficits and less is available for productive private investments. With such a huge public debt, Congress will not have the option of enacting a stimulus program to boost economic growth.
Indeed, Congress will come under increasing pressure to cut back on discretionary spending (including defense) to stop the skyrocketing of public debt. However, discretionary spending involves less than one quarter of the federal budget – the bulk goes to debt service and entitlements.
Similarly, the United States is nearing a tipping point for federal entitlements. This year Social Security will pay out more in benefits than it receives from payroll taxes; in 2017, the trust fund for Medicare is almost certain to be exhausted. Yet any reductions in these entitlement programs will take years to impact the federal budget since politically they cannot be reduced for those already in retirement or close to retirement.
Wow, what a mess. And as we have seen in the last week at the capitol, not enough of our representatives are coming to grips with our reality.
Ron Paul recently asked Chairman Bernanke of the Federal Reserve this question, “So how exactly do we decrease inflation by creating more inflation?”
I have a question – “How do we decrease our debt obligations by raising the debt ceiling?”
As my old friend the farmer used to say—Can’t fix stupid.
