On the Road to Trouble

road

“Is America’s Financial Collapse Inevitable?” asks the title of a recent piece by Patrick Buchanan. The article points out something we have repeatedly discussed here: There is no way the federal government can meet its financial obligations.

If our government were ever to do so, it would first have to eliminate its colossal deficits. For this to happen deep budget cuts would be required. But this is something that is not conceivable in today’s environment. We will understand why when we look at the largest budget items, which are Medicare, Social Security, Medicaid, defense and interest on the debt. Since these constitute the bulk of government expenditures, any meaningful deficit reduction would require that substantial cuts be made there. The problem is that all of the above are for all practical purposes untouchable.

Interest on the debt is out of question, since not paying it in full would put our federal government in default. This cannot be allowed to happen as it would result in the immediate collapse of our currency. As far as Medicare, Social Security and Medicaid are concerned, no elected official will touch them with a ten foot pole, since doing so would mean political suicide. When it comes to defense the prospect of any reductions is likewise nil. The ongoing operations in Iraq, our deepening commitment in Afghanistan as well as numerous challenges presented by the War on Terror make any deep cuts a practical impossibility.

But what about taxes? Could they not be raised to increase revenue and close the budget gap that way? To begin with, any sharp hikes are out of question for the increasingly unpopular president who pledged during the campaign not to raise taxes on the middle class. To even suggest such a thing would be politically precarious if not suicidal. But even if Obama would somehow managed to do it, higher taxes would only further depress the already-overtaxed and over-regulated economy. This would in turn shrink the tax base and forestall the possibility of higher revenue intake.

Buchanan asks how are we ever going to get a handle on our runaway finances if “taxes are off the table, Afghan war costs are inexorably rising and cuts in Social Security, Medicare, Medicaid and entitlement programs are politically impossible.” There is, of course, no satisfactory answer. The truth is that our government is not going to get its fiscal house in order. And even though Buchanan does not state so explicitly, the implied answer to his starting question – is America’s financial collapse inevitable – is “yes.”

Pat Buchanan is not alone suffering from dark premonitions. Last week legendary investor and market commentator Marc Faber pulled no punches when asked what he thought of America’s prospects. “We are doomed,” was his response. The reason for his bleak assessment? The immense and rapidly growing indebtedness of the federal government. In addition to all the other problems, Faber predicts that the rate interest that the government has to pay on the debt will shoot up rapidly in the next few years. Last year interest claimed about 12 percent of the government’s tax revenue. Faber estimates that within five years the figure will climb to some 35 percent. It goes without saying that such a jump would have a devastating impact on the already overextended federal budget.

Marc Faber is not the only one who worries about this. It has been pointed out by a number of finance experts that up until now the federal government has been able to borrow at very low rates due to the dollar’s status as the world’s reserve currency. But there are clear signs that this favorable situation is coming to an end. Sensing that the US will not be able to make good on its debt, governments and investors have been growing increasingly wary of financing our borrowing by buying treasuries. But even as they plead with Washington to end its spendthrift ways, they have been earnestly searching for an alternative to the dollar. Admittedly, this is no easy task, since there is no major government today that can be trusted to conduct its fiscal affairs in a way that would guarantee a stable currency.

It would seem that long-term currency stability is not a realistic possibility in the era of central banking. This is because politicians will invariably exploit the looseness of fiat money to satisfy their insatiable spending urges. But the advantage is only temporal. In the end there is always a price to pay for spending more than one has. This applies to everyone including sovereign governments. In their case the price that is paid is the depreciating currency as central banks print money in order to pay for politicians’ promises. It is paradoxical that the brunt of this is born by ordinary people and not by those who are most directly responsible for the situation. While politicians keep promising and getting elected, the population bears the cost as the real value of their assets and savings decreases with the depreciating currency. This is the situation that we see taking place in this country today.

It may be objected that the people themselves are ultimately responsible, because they vote for politicians who promise all those expensive programs. Perhaps so. There are, however, encouraging signs that the American people are becoming increasingly aware of where the problem lies. In what amounted to a referendum on President Obama’s expansive agenda, the victory of Scott Brown in Massachusetts showed that even a left-leaning electorate can grow wary of government’s ability to provide and finance massive undertakings such as national healthcare. Another sign of shifting sentiment can be detected in a recent Washington Post ABC News poll which asked this question: “Generally speaking, would you say you favor smaller government with fewer services, or larger government with more services?”
Only 38 percent wished for a larger government with more services while 58 percent wanted a smaller government with fewer services.

This is good all news, but it still does not solve that $100 trillion question: How is our government going to pay for all the massive obligations that it has so unadvisedly assumed?

  • USMCSniper

    How exactly does this $56.4 trillion bill add up? First, there are the federal government's known liabilities that it is legally obliged to fulfill. These include publicly held debt, military and civilian pensions and retiree health benefits. As of September 30, 2008, these liabilities added up to $13.5 trillion.

    Then there are various commitments and contingencies – i.e., contractual requirements that the government is expected to fulfill when, and if specified conditions are met. These include federal insurance payouts, loan guarantees, and leases. As of September 30, 2008, they added up to $1.4 trillion.

    So where does the remaining $43 trillion or so come from? That's what the government has promised to pay in Social Security and Medicare benefits in excess of related revenues. As of January 1, 2008, current and promised future Social Security benefits amounted to $6.6 trillion. And between Medicare's three programs (hospital insurance, outpatient, and prescription drug), current and future promised Medicare benefits amounted to $36.3 trillion.

  • BS1977

    The government usually does not pay its bills….only the taxpayers are expected to do that…the hacks in the government just pass the debts and deficits along to the next Administration. If any private business behaved the way the government does, the principals would be in jail, like Madoff, for fraud, theft, grand larceny, you name it….but the government seems immune to prosecution…..Freddie Mac and Fannie Mae….no one has been charged with anything, although billions were lost due to corruption, malfeasance, gross negligence…but who cares, right?

    • Raymond in DC

      Indeed, with all the justifiable outrage against $50+ Billion bilked by Madoff, the true masters of the Ponzi scheme are the Medicare and Social Security trust funds.

      As Margaret Thatcher was reported to have said, the problem with socialism is that sooner or later you run out of other people's money.

      On a separate note, it's unfortunate the author focuses on Buchanan. Others with better economic credentials and without Buchanan's "baggage" have more credibility on this serious issue.

  • LYKOS

    Fire Government employees. Duh. Smaller government. Less useless spending. Problem solved. Start with Obamas czars, wifes posse, Pelosi, Reid, etc. The list of useless, over paid government enployees is endless.

    Get people off well fare and make them get a JOB. More worthless government employees.

  • Jim Smith

    Great article. Only thing you left out is our foreign deficit which over the last 20 years exceeds $7 Trillion and this dollar amount does not include the lost jobs and lost manufacturing base. I still can't figure why people continue to ignore this reality. There is no free lunch, our country is now full of cheap foreign products which people love to buy. At the end of the day this is what we get.

    We do this to ourselves and make excuses to justify it. As much as our corporate and political leaders have betrayed us we ultimately have done this to ourselves.

    I happen to agree with Pat Buchanan and Mark Faber, We Are Doomed!!!! All we seem to wish to do today is argue and fight amongst ourselves about the Democrats vs Republicans!

    • http://www.intellectualconservative.com StevenLaib

      I believe the reason why people have "ignored the reality" as you put it, is a failure to connect the dots between government spending and revenue sources. It is easy to say "let the government pay for it" when you don't understand that the government gets its money from the tax paying public. That is a subject that is not covered sufficiently in high school civics classes. When I was in high school about 35 years ago it wasn't covered at all.

      We have been encouraged to believe that there is an endless supply of cash on which to draw. Now, the lie is catching up with us. I expect that someone will use the crisis to their personal advantage. A dim prospect for liberty.

    • http://cluesmarvincohen.com marv Cohen

      The problem is not that we have cheap foreign products. The problem is that we cannot manufacture cheap products ourselves. I don't know why that is, but maybe the cost of living here is higher due to taxes, regulations, debt, etc.) and the cost of business is also higher because of some of the same factors.
      If we were to shut off all cheap foreign products, then people would have to pay more for everything – is that really a good solution?

      • Jim Smith

        Marv, I'm afraid you just don't get it! If you go back 40 or 50 years we manufactured most all of our goods here in the US and our economy was pretty healthy. Back then if you couldn't afford to buy a new car because it was too expensive you had to buy a used car. If you couldn't afford to buy a color television in the 60s, you had to buy a black and white television. Were things so bad back then?? If having to pay more for things many of us don't really need would bring our economy back to health and increase jobs here in the US then I think it is a good solution. Trading with other countries only works if trade is fair. Would you want to continue to buy your groceries from your neighbor if he refused to bring his car into you for repair?? It just has to work both ways. China, South Korea and Japan are countries who created great economies for themselves by exporting goods and subsidizing their industries (not to mention manipulating their own currency) while limiting the imports from those same countries who were supposed to be their 'trading partners'.

  • Geofizz

    Government, and the corresponding political parties, are only part of the problem.

    "It would seem that long-term currency stability is not a realistic possibility in the era of central banking."

    Vasko points to the 800 lb gorilla in the room. Central banking in the U.S. is the Federal Reserve, a private cabal of bankers who's been running our monetary system ever since 1913. Now as a result, we are no longer a Republic, nor even a democracy — we're an oligarchy. The financial elites own our government. Yes, government spending is out of control, but Wall Street is playing casino at our expense. They used the whole housing boom to reap profits at our expense. And when things went bust, who took the losses? Not those who made the bets, but us via loss of jobs, bankruptcies, defaults, foreclosures.

    We've been living high on the hog this past decade and more, but have our incomes increased to support this? NO, they've decreased. Credit card debt funds our lifestyle. Is it our fault? Partly, but who was providing us easy credit to hide our loss of income over the years? LOL anybody see the latest VISA commercial telling us that "VISA: Currency of Progress." Get back to spending debt slaves! Make no mistake: Wall Street and our central bank are complicit with our government for our current predicament. Follow the money folks. It's all about the money (and the power it buys).

  • Splitter

    The solution is to split. If Texas does it, other states will join. Middle and Southern states could make a new conservative America with fiscal responsability, guns, individual liberty and low taxes. It will be younger as well since there will be no money for SS and Medicaid. The other states can have all the leaches and illegals and welfare they can live with. This new nation will have English as its only language and will close the border to the rest of the other states since it will become a third world country. I will have no simpathy for them since they have been bringing this upon us all. We will lose access to the Pacific (let California deal with an advancing China) and Alaska will be isolated but will have plenty of acreage. If you doubt it will happen, you underestimate Texans will to be free. It will start with Texas. The rest will follow.

  • johncarens

    How will we pay of this massive 53,000,000,000,000-dollar debt? The way all nations have done so in the past: About 15 years from now, the Treasury will ask everyone to bring their old, tattered $20 bills in and trade them for the slick, new $1 bills (there will, of course, be limited edition "collector" $1 bills with pictures of this politician, or that Hollywood star, or this State, or that National monument, etc., so that these "collector" bills are "collected" and not put into circulation, to further devalue the currency.)

    At a date and time certain, the old bills will be worthless, and the new ones will have 1/20th the value of the old, but will still be called "a dollar". And the debt will magically be one-twentieth the size. Of course, regular, working-class stiffs will see their retirement savings zip down to 1/20th the value, as well, as will the entire economy contract by that same divisor.

    This will be followed by a wounded, thrashing about to reinflate the currency, which will lead to a general depression, which will lead to rebellion. This could lead to bloodshed, then revolution, then despotism.

    What's so hard to predict?

  • 2maxpower

    the debt is close to being impossible to repay.

    at this rate it will be unpayable by the end of obama's first term.

    good luck people

  • Jim Smith

    Today, you can buy a new South Korean import car for a fraction of the price of a domestic vehicle. The sale of an imported car results in a lost sale for an American company and its employees and the profits go overseas. The factory that made plumbing supplies is now in China, many of the same products are still selling for similar retail prices here but the few owners of what is now basically a holding company are now making a huge amount of money while the 200 people it once employed as workers are collecting unemployment and can't find another job.

    These same countries who are our 'trading partners' operate with a different set of trade policies than we do. Do you really think their markets are open to our goods? If you bother to dig into this with an open mind it's not hard to see what has happened and how it affects our economy. However, people are so bent on defending their right to buy foreign products that our economic spiral downhill just keeps on going.

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