The Associated Press noted last week that the federal deficit reached a record $1.42 trillion for the fiscal year that ended September 30. Up until now, most of the mainstream media have either ignored the exploding deficits or declared them a good thing, since they were supposed to lift us out of the recession. But now that the full figures have come in even some Obama-friendly media stalwarts are struck by their enormity.
This awakening is heartening. The AP report does a good job of putting the deficit number against some other figures to give a sense of scale. The government’s shortfall last year, AP notes, is larger than the whole economy of India and more than the combined deficits during this country’s first two hundred years. It is, in fact, almost as large as the yearly economic output of Canada. AP quoted Kenneth Rogoff, former chief economist for the International Monetary Fund, who pointed out that “The rudderless U.S. fiscal policy is the biggest long-term risk to the U.S. economy.”
Rogoff only states the obvious. The gravest threat to this country’s economic well-being is the policies of this government. A Harvard professor and a Keynesian through and through, Rogoff is no right-wing conservative. But after surveying the grim economic picture, even liberals must recognize that the reckless spending of the Obama administration is taking us toward fiscal Armageddon.
An encouraging sign though it may be, the AP report leaves much to be desired. It asserts, for example, that the $1.42 trillion deficit “includes the cost of the government’s financial sector bailout and the economic stimulus program passed in February.” This is flat out false. Less than $200 billion was spent from the stimulus authorization in fiscal 2009. If the stimulus allotment had been tapped in full, the deficit would have been close to $2 trillion. Needless to say, most of the remainder will be spent in the current fiscal cycle, which will push up the 2010 deficit figure accordingly.
Further, despite its newfound concern about Washington’s overspending, AP exhibits striking fiscal naïveté when it maintains that the huge deficit could itself “be the seeds of another economic crisis.” Here is a newsflash for AP: The $1.42 trillion deficit is a crisis. There is simply no other way to describe our government’s unconscionable fiscal profligacy.
So bad things have become that, when asked about it, Senator Judd Gregg told CNN that “we’re basically on the path to a banana-republic-type of financial situation in this country.” Disturbing as it is to admit, Gregg is largely right. Saddled with more than $65 trillion in obligations, there is simply no way our government can make good on its debts.
The only reason things have not yet fallen apart is the dollar’s status as the global reserve currency. But this too is coming to an end. In recent months we have seen holders of our national debt grow increasingly alarmed about the integrity of their investment, with many openly voicing their desire to decouple themselves from the dollar regime. Their problem is that they have not yet figured out an alternative, so they have to stick with the dollar for the time being. But once they figure it out, the floor will fall out from under the once-mighty greenback and all fiscal hell will break loose.
In another sign of impending trouble, Sheila Bair – the nation’s top financial regulator – has testified before Congress that the Federal Deposit Insurance Corporation (FDIC) is running a shortfall. According to Bair, the fund – which is designed to protect consumer bank deposits – will have a negative balance at least through 2012. The reason for this is the mounting number of bank failures. As of Friday last week the tally for this year was 106 banks. This is most in a single year since the end of the savings-and-loan crisis in the 1980s. There are many more bank failures expected in the months ahead, with more than 400 banks currently flagged as being at risk.
This should be a warning to those who think that their bank accounts are safe, because they are “insured” by the government through the FDIC. This is a false assurance. Mired in debts it cannot pay, the U.S. government will be in no position to bail out anyone should another massive wave of bank failures take place.
Operating under permanent structural deficits, our government has no stash of real dollars to draw upon. Because of this, it can only replenish the sinking FDIC fund in one of two ways: It can either borrow more or it can simply print new money. Since there is every indication that the era of low bond yields is coming to an end, the money the FDIC will dish out during the next crisis will likely be of the printed sort. It will be inflationary diluted money whose value will be less than it was at the time when those “insured” deposits were made. In the last six months alone the dollar lost 10 percent of its value. Two hundred thousand fifty dollars of, let’s say, 2002 will be worth appreciably less in 2012. If things continue this way and if the government is forced to pump up freshly-printed billions into the FDIC, most depositors – especially those who put their money in the bank some time ago – will walk away with only a fraction of their original value.
The idea that a government that is itself in need of a bail out can come to anyone’s rescue is becoming increasingly untenable. Even the administration’s once-loyal supporters in the mainstream media no longer believe it.