22 February 2008


  • Feb 22, 2008


Couple years ago I posted about trends in the US government spending (it popped back up to the top because I updated the first graph)
Since then of course the trend I described has only increased and intensified.

Today I look forward instead of backward, and suggest something crazy!

Our government debt is growing faster than GDP.  Now they say that the housing "crises" is likely to spur another rescission.  The war is still going on, the eminent running out of social security funds hasn't been addressed, and tax cuts on capital gains, stock dividends, and inheritance have been reduced or eliminated and those that haven't been already made permanent are still in the works.

The finance problems in housing loans was primarily due to people deliberately purchasing houses out of their price range with the assumption that the market would not only go up forever, but would continue to go up at the same rate is was at the time.
It didn't, since much of what sent it up was the very speculation based on that assumption, sort of like the dot.com non-sense a decade ago.
And they ran out of money, couldn't make the payments.

The country is being run the same way, on extended credit, on the assumption that GDP will always grow fast enough to encourage outside investors.

But as a recession dawns, spending increases and revenue decreases, the dollar continues to fall against the Yen and the Euro.

Part of the draw in buying US currency, (both in the form of federal bonds, which pays for nearly 9% of all federal spending) and by buying into the American economy (real estate, stock in US companies etc.) is our large overall economy and its fairly consistent growth, but a large part is just that the US dollar has been recognized as the dominate international currency for a long time now.
(note that data from the treasury website don't seem to add up, nor do they perfectly match the wiki data - but they are all fairly close.  Also, I rounded the numbers off)

In 2007:
Total US government debt  $59,100 billion
(44% of total held by foreigners)
(25% by foreign governments specifically)

$1,697 billion total federal receipts (revenue)
48.8% income tax
36.4% SS/medi-care
10.4% corporate
$2,887 total outlay (government spending)

Real deficit=$1,190 billion 
The entire $869 of SS taxes paid in '07 is included in the official receipts, however the time when there are more retirees than workers is fast approaching, and any money spent from the fund will have to be repaid - and will not have gained any interest in the meantime.  In fact, they do spend SS funds, but this is borrowing, not real income
Revenue only pays for 59% of the budget of the government.

Over the year we gained around $549 billion additional debt

$235 billion held by public (bonds, treasury notes, etc)
$314 billion borrowed from funds (social security and other trust funds which aren't supposed to be spent, but are anyway)
$250 billion additional US treasuries held by foreign countries

This still doesn't add up to the total, the difference of which presumably was made up by simply printing more money.  Yes, they actually do that.  There was a time when money represented a limited resource, gold, but since we went 'fiat', governments can and do print money essentially at will.  I can't find data on exactly how much that accounted for in '07.

All of which may help explain why
China and other foreign countries are already reducing the rate at which the buy US bonds and/or selling them off, and why the dollar is falling against other major international currencies.

So what happens when the Euro is more attractive as a foreign treasury holding?  Especially if this occurs during the same time period that the boomers retire and the SS surplus is exhausted, combined with economic recession and inflation caused by increased printing of meaningless money, and a growing trade deficit on top of everything else?
The rescission spurs cut interest rates to stimulate GDP growth, but also makes US treasuries less attractive.  Some of these factors feedback and increase each other, and the net effect is the same as an individual who abuses credit.
The government doesn't have the money to repay the interest on its loans and goes into default.
Of course with a military budget equaling the rest of the world combined, we won't have to worry about collections, but...
Investors (individuals both US and foreign and foreign governments) are no longer interested in purchasing bonds, and the SS fund as well as additional SS taxes are going to pay SS benefits.

In other words, the government simply runs out of money.

The people who hold the 59 trillion in debt all want to cash in, Great Depression style, before the dollar becomes worthless.
This is far more than can be brought in in a year from taxes, even if 100% of government services are cut and taxes are raised by a factor of 10.

So instead the government simply refuses to honor any of its debt on the grounds that it simply doesn't have the money.

Which makes the
US protectionist and the economy increasingly closed.  The one spending which is retained is military, which becomes increasingly justified.
Whether this causes WWIII or revolution from the inside as the middle class finds itself actually struggling to survive for the first time in
US history, or both, I don't know.  My guess is both.  The rest of the world, no longer beholden to US financial interests is no longer willing to put up with our gluttonous consumption, reckless pollution and unilateral actions - though there may not need to be any military action as the world sees our eminent economic collapse coming from the inside much as Russia's economy ended the cold war with no action on our part. 
The revolution would be interesting, as libertarians, religious fundamentalists, liberals and greens, and patriots and loyalists would each be in conflict with each other faction even if any degree of unity within any one of them developed.

Then again, it may not be as dramatic as either of those, but just that we slowly regress and crumble our way to second world conditions and become dependent on international aid - though if a majority of citizens lose the wealth and comfort we have grown accustom to revolution only then begins to be a realistic possibility.

Ok, ok, so I don't really know what will happen.  Realistically whoever is in charge will see this coming (though, thanks to term limits, no one will deal with it any sooner than 8 years from when we run out of money) and make the tax increases, spending cuts, and monetary policy changes necessary to minimize the damage.  Our levels are so unsustainable that any measures may just serve to delay the inevitable horror.

Perhaps at the point we go "Red Tide" (Tom Clancy) and say "we don't have it, we can't afford it, and its absolutely vital - so the only option is we take it"
Or as the guy on "Dr. Katz" said "hey,
Canada, I don't know how to say this.   We're out of trees.  Get out."
In other words, we start WWIII ourselves, attempting to take resources using the one thing we have plenty of: force.
This in turn precipitates unprecedented internal resistance....
wait, this is turning back into my first prediction, just for slightly different reasons.

So, I guess as crazy as it sounds, that will be my prediction.  Our government fiscal policy will ultimately threaten, if not end, our country as we know it.

As I way to prevent ever being proved wrong: I am not claiming this will happen on any particular year.  I don't know when this will happen.  It may not be for decades.

Come to think of it, if it were to take that long, all sorts of things could change, and it may not ever happen.
So, IF current trends continue, something like this may happen - eventually.


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