The “official” indebtedness of the U.S. has reached $16 trillion, the real number of course if you add in all of the guarantees and future liabilities is somewhere over $100 trillion but let’s take a look at the “official” number. We are piling on $1.4-$1.5 trillion per year which approaches 10% growth to our debt, this, while our economy (after massive fiscal and monetary stimulus) is growing at less than 2 percent. I might add that the “growth” number is only positive because the inflation numbers used for calculations are a below ridiculous 2%.
We are backed into the proverbial corner here. We have more debt (official) than the entire economy produces in one year, we are adding to that debt at a nearly 10% annual clip just to keep the doors open and “show” a growth rate at all. If we were to have normalized interest rates of 7% or so, the interest alone would be over $1 trillion or MORE THAN 30% of all the taxes that are collected. This is obviously unsustainable. Since this is an election year and the Republicans are holding their convention I thought I might bring up the famous phrase coined by Vice President Cheney, “deficits don’t matter”. Well, au contraire, they do matter!
We have lived in a world where deficits didn’t matter. They didn’t matter because we had the fat of so many years of savings and investment to live off of. When the fat was gone, then we still had muscle to consume, now that the muscle is gone, the only thing left is to eat into the bone. The time line of this process went roughly as follows. Up until the 1960’s, we largely spent less than we earned (individuals, corporations and the government), it was from then that we started to consume more than was earned. Then around the turn of the century, the “fat” (extra capital and savings) was gone and and we started to consume muscle (borrowing against anything and everything) which led to 2007-08 where there is nothing left but bone. My point is this, we are eating our seed corn and not investing into plant capacity or research and development at anywhere near what is needed to be self sufficient. We have gotten to the point where if trade suddenly just stopped, shortages of all sorts would emerge overnight because the products are no longer produced here anymore. To make matters worse, the machines that once did our production have been scrapped, sold or are in disrepair. The point is that if trade slows or stops for some “unforeseen” reason, we no longer have the ability to flip a switch and start producing widgets of any sort because the productive capacity simply does not exist.
So…where am I going with this? You will notice that I used the word “unforeseen” above. What I am suggesting is that trade will slow or even halt for a time when we finally DO realize that deficits matter. Or should I rephrase this to say, when foreigners REALIZE that our deficits matter. I have maintained all along that at some point, the Dollar’s acceptance for trade will be balked at on a universal scale. This has already started to occur as various nations sign trade contracts in their own currencies and not using Dollars. This occurrence will of course be reported as unforeseen and the headlines will read “who could have seen it coming?”
THIS is what ALWAYS happens when a country runs a deficit whether it be financial or trade (we have abused both). When a country runs a fiscal/trade deficit, their lenders/trading partners will eventually shut them off from credit and goods, this is purely common sense and nothing more. My purpose for writing this piece was twofold, first I wanted to point out the obvious that deficits do matter and cannot go on forever. Secondly, I wanted to tie in the ramifications of deficits, especially when the abuser is also stupid enough to gut their manufacturing base as we have done. The connection? Our standard of living is going to drop NO MATTER how wealthy you are because many goods will simply not be available unless you order them from overseas and pay with an acceptable currency to the producer.
The above is not a pretty picture nor something pleasant to think about but it is reality, it is common sense and it is certainly NOT something that is “unforeseen”.