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US Economy Review
The U.S. Economic super-highway now being traveled is headed in the wrong direction!
The character of the United States of America is at the threshold of an era of enormous challenges. Conflicting philosophies and beliefs will be severely tested
Since the 2001 recession there have been many economic developments in the USA that indicate economic good health. Measured by public and private statistics, indexes and surveys; the U.S. economy currently (Oct 2007) appears strong. Employment is high, business enjoys double digit profits and the economy is generally viewed as vibrant. However; beneath the “numbers”, there exists an undercurrent of public unease about the future health of the U.S. economy. That anxiety is not without merit.
Revitalization of the economy is not without costs. Each cyclical recovery over the past several decades has required more stimulation than the one that preceded it. This one has taken the largest deficit spending in history, 13 successive interest rate cuts by the Federal Reserve, two massive tax cuts, three wars (War on Terrorism, Afghanistan and Iraq), establishment of another redundant bureaucracy (Homeland Security), massive tax incentives (i.e. Capital Gain and Dividend tax rate reductions to 15%), significant growth in Money Supply, short term negative interest rates, a tax induced housing ‘boom’ and a ‘low-interest’ induced mortgage refinancing ‘Boom’ to emerge from a relatively modest recession.
Until 2005, strong housing activity contributed significantly to national economic vigor. A prolonged reversal of this vital force (and contiguous factors) might now lead to the next recession, possibly in 2008. The cheap money to finance this ‘Boom’ has decimated savings and punished savers to a degree not seen since the early 1980s. During the 5 year period 1978 to 1982 inflation reduced purchasing power of the US Dollar by 50%.
The combined force of a depreciating currency, US government fiscal and Federal Reserve monetary policies have shattered incentives to save. Tax penalties combined with the inflation impact on earned interest and capital; results in negative yields on savings accounts. Domestic inflation coupled with global devaluation of the dollar has created a highly volatile economic environment that is neither manageable nor sustainable.
The Truth of American Debt
Congress recently increased the government national debt ceiling from $8.965 trillion to $9.82 trillion, a boost of $850 billion, and the fifth increase since Bush took office in 2001. It took this country 205 years (1776 to 1981) to accumulate $1 trillion in US government debt that is limited by “statute”, (often referred to as the Public or National Debt). It has taken only 26 years to exceed $9 trillion, an 800% increase. If monetized at an actuarial rate of 5%, the annual interest expense would currently be over $450 billion.
The $9 trillion of federal debt (limited by statute) is just the tip of the iceberg. Total contractual American Debt (federal/state/local + federal debt to trust funds + business + household + domestic financial sectors) exceeds $50 trillion. The Net Present Value (projected future expenditures less future revenues, in current dollars) of under-funded US government explicit and implicit obligations such as Military and Civil Service retirement programs, Social Security, Medicare, etc. add another $45 trillion to the nation’s debt. http://www.gao.gov/financial/fy2006/fy06finanicalrpt.pdf
Total American debt and (including explicit and implicit unfunded liabilities) can be conservatively estimated at being no less than $100 trillion. Not included in the total, are costs of means-tested Social Insurance entitlements (no trust funds) such as Medicaid, Supplemental Security Income (SSI), State Children’s Health Insurance Program (SCHIP), Veterans’ medical and pension benefits, etc. plus government discretionary subsidies to farmers and others.
Also not included, above, are other discretionary government expenses (resulting from charitable federal tax policies) such as the Earned Income Tax Credit (EITC) that returns more than $40 billion per year of FICA and FIT taxes to eligible low wage households. Loss of revenues to the federal government because of “interest expense deductions”, Child Tax Credits and other deductions/exemptions from gross income tax liabilities of businesses and households further compound accounting complexity to a degree that development of sensible monetary and fiscal policies is a practical impossibility.
Defective US Public Policy has created an accounting charade that is impenetrable. The bottom line is an accurate amount of total debt and the cost of future obligations that is being passed on to the next generation of tax-payers is immeasurable; a fact that will not forever escape the attention of domestic and foreign lenders or bond rating services.
US Economy Spinning out of Control
Several economic forces that shape human behavior are spinning out of control. The US is overloaded in debt. An oversized federal government spends more than the tax base can support. Citizens spend more than they earn. Politicians promise more than is possible to deliver. Powerful financiers, international cartels, and special interests sucker punch all three.
The fiat dollar has lost 80% of its purchasing power since the “gold window” closed in 1971 and over 40% of its value against the Euro since January 2002. The US is engaged in huge expansions of social welfare and foreign adventurism, funded by an overloaded tax base, printing-press money, national credit card and unredeemable debt.
The Social Security (OASI) retirement Trust Fund has over $1.8 trillion in unredeemable (at full value), non-marketable IOUs that are supposed to provide stable income for a growing retirement population (expected to double by 2031) who increasingly become more dependent on government to support them. When these powerful energies reach critical mass, the explosion will annihilate the US economy and send shock waves throughout the globe. Confidence in money and government will plummet. It will likely take as many decades to return to normalcy as it did to reach the summit of destruction.
There is abundant evidence that economic conditions for disaster are accelerating. Commodity prices are near, or exceed historic highs. Energy and precious metals prices (denominated in depreciating US Dollars), harbingers of inflation, have increased by huge percentages since “9-11”. The national debt has grown by 150% to over $9 trillion since 2000. The net present value (the difference between realistic expected revenue and costs, in currents $) of Unfunded Government social obligations (Social Security, Medicare, Medicaid, Supplementary Security Income, etc.) have grown by 150% (from $20 trillion to almost $50 trillion since 2000. The US current accounts (trade) deficit has accelerated at a similar pace. There have been many public warnings of the perils of continuing with failed policies. President Bush spent much of his political capital attempting to reform Social Security. In February 2005, President Bush, in several speeches to arouse supports for Social Security, Private Retirements Accounts (PRA); said this:
"As a matter of fact, in 2018, the system goes into the red. And by the way, there's not a Social Security trust. In other words, people think your money goes into the trust and it's held for your account and then you get it out. That's not the way it works. It's pay as you go. It goes in and it goes out. And to the extent that there's money more than the retirees receive, like it is today, it goes to other programs. And so, what you've got is an IOU, kind of a bank of IOUs. It's an important concept." The public is not listening!
Under current public policy constructs and constraints, the government and the banking system are powerless to prevent the economic calamity that is about to occur. Housing, an asset that used to be relied upon to protect against inflation will be less potent in this new era. Loaded with debt and at unaffordable costs and laden with increasingly high property taxes and insurance expenses and predictable high interest rates, prices will likely decline during the economic turmoil.
Ironically, all of these conditions could have been avoided with sound money and sensible public policies. Unfortunately the US has neither. Phony money and defective public policy are the root cause of this deteriorating state of affairs. Tax laws that reward debt and punish savings head the list of policies that require deep-seated reforms.
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