When you do most of your business with one customer, the financial health of that customer can impact mightily on your own, no matter how frugal or responsible you may be. That's why the following item from today's Guardian ought to be chilling to Canadians. It's about America's debt time bomb. It's about George w. Bush and his profligate ways. It's about how Bush has driven America's debt up from $5.7 trillion when he took office to $9.3 trillion today and which will top $10 trillion by the time he leaves the White House for good.
Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day - or nearly $1 million a minute.
It means almost $30,000 in debt for each man, woman, child and infant in the United States.
...like homeowners who took out adjustable-rate mortgages, the government faces the prospect of seeing this debt - now at relatively low interest rates - rolling over to higher rates, multiplying the financial pain.
So long as somebody is willing to keep loaning the U.S. government money, the debt is largely out of sight, out of mind.
But the interest payments keep compounding, and could in time squeeze out most other government spending - leading to sharply higher taxes or a cut in basic services like Social Security and other government benefit programs. Or all of the above.
A major economic slowdown, as some economists suggest may be looming, could hasten the day of reckoning.
Over the next 25 years, the number of Americans aged 65 and up is expected to almost double. The work population will shrink and more and more baby boomers will be drawing Social Security and Medicare benefits, putting new demands on the government's resources.
These guaranteed retirement and health benefit programs now make up the largest component of federal spending. Defense is next. And moving up fast in third place is interest on the national debt, which totaled $430 billion last year.
Aggravating the debt picture: the wars in Iraq and Afghanistan, which the nonpartisan Congressional Budget Office estimates could cost $2.4 trillion over the next decade.
"The problem is going forward,'' said David Wyss, chief economist at Standard and Poors, a major credit-rating agency.
"Our estimate is that the national debt will hit 350 percent of the GDP by 2050 under unchanged policy. Something has to change, because if you look at what's going to happen to expenditures for entitlement programs after us baby boomers start to retire, at the current tax rates, it doesn't work,'' Wyss said.
"The government is in the same predicament as the average homeowner who took out an adjustable mortgage,'' said Stanley Collender, a former congressional budget analyst and now managing director at Qorvis Communications, a business consulting firm.
"The first day the Chinese or the Japanese or the Saudis say, `we've bought enough of your paper,' then the debt - whatever level it is at that point - becomes unmanageable,'' said Collender."
This isn't just America's problem any longer. We in Canada can see the possibility of this train wreck coming. Isn't it time we tried to figure out what might be in store for us?
Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day - or nearly $1 million a minute.
It means almost $30,000 in debt for each man, woman, child and infant in the United States.
...like homeowners who took out adjustable-rate mortgages, the government faces the prospect of seeing this debt - now at relatively low interest rates - rolling over to higher rates, multiplying the financial pain.
So long as somebody is willing to keep loaning the U.S. government money, the debt is largely out of sight, out of mind.
But the interest payments keep compounding, and could in time squeeze out most other government spending - leading to sharply higher taxes or a cut in basic services like Social Security and other government benefit programs. Or all of the above.
A major economic slowdown, as some economists suggest may be looming, could hasten the day of reckoning.
Over the next 25 years, the number of Americans aged 65 and up is expected to almost double. The work population will shrink and more and more baby boomers will be drawing Social Security and Medicare benefits, putting new demands on the government's resources.
These guaranteed retirement and health benefit programs now make up the largest component of federal spending. Defense is next. And moving up fast in third place is interest on the national debt, which totaled $430 billion last year.
Aggravating the debt picture: the wars in Iraq and Afghanistan, which the nonpartisan Congressional Budget Office estimates could cost $2.4 trillion over the next decade.
"The problem is going forward,'' said David Wyss, chief economist at Standard and Poors, a major credit-rating agency.
"Our estimate is that the national debt will hit 350 percent of the GDP by 2050 under unchanged policy. Something has to change, because if you look at what's going to happen to expenditures for entitlement programs after us baby boomers start to retire, at the current tax rates, it doesn't work,'' Wyss said.
"The government is in the same predicament as the average homeowner who took out an adjustable mortgage,'' said Stanley Collender, a former congressional budget analyst and now managing director at Qorvis Communications, a business consulting firm.
"The first day the Chinese or the Japanese or the Saudis say, `we've bought enough of your paper,' then the debt - whatever level it is at that point - becomes unmanageable,'' said Collender."
This isn't just America's problem any longer. We in Canada can see the possibility of this train wreck coming. Isn't it time we tried to figure out what might be in store for us?
8 comments:
If you focus on the debt and fiscal responsibility, you let the terrorists win. Twenty years ago it was the communists. The worse thing the US did was give Dubya a blank cheque in both the Senate and House. They learned their lesson, and corrected that matter in 2006 mid terms. Republicans have destroyed the US and no wonder their dollar is in the shape it is.
If the U.S. had to use the same accounting rules it forced businesses to use after Enron then the U.S. is already at 350% or more of GDP.
The U.S. system of trust funds to fund federal pensions, medicare, etc has been rapped for 2 decades, the money is gone and the funds were given IOUs in the form of treasury bills they probably cannot honour.
the Combined shortfall of recorded debt and unfunded liabilities is close to 56 Trillion Vs a GDP of 13.2
In real accounting terms the U.S.A. Should be in recievership.
This is going to crash down hard, U.S. insolvency, destruction of the dollar and perhaps the total breakdown of the world fiat money system. Canada has 50% of its currency reserves in greenbacks, and everyone is calling on us lower interest rates so we can follow the U.S. dollar down to oblivion.
I'd like to see any party actually look at the big picture and give Canadians a view of how they would deal with this issue.
Unfortunately, PH, I haven't seen any genuine commitment on the part of the Dems to really turn this mess around. LoW, thanks for your insights. I'd forgotten the Social Security IOU fiasco. It's curious how a country that considers itself so at risk to attack can wilfully ignore its greatest vulnerability. It won't be Osama who brings down the US but it might well be his third cousin sitting behind a desk in Dubai dumping greenbacks for euros. It would be a helluva hit all round but everyone else would get back on their feet except the world's only superpower.
MoS
I think it's much more than harmful than you are imagining. You like many are starting to see the fringes but the depth of this problem is being hidden by the smiling happy heads of network business reporting. 2 years ago only the fringe even knew what subprime was, the banks and builders claimed there was no problem until they were forced to report loses. U.S. insolvency is in this same denial stage.
The international markets are full of CDOs, SIVs, Derivatives, Currency reserves, Treasury bills all denominated in U.S. dollars. There are likely 10 countries who use the U.S. dollar instead of indiginous currency, and at least another 10 pegged directly to the Dollar.
A major U.S. default could erase at least 100 trillion from the markets, money as we know it would implode.
This could be a long slow burn where people could get some of their value out but when it hits the point of no return there will no bidders for U.S. valued paper.
The recent Abu Dabi bail out of citi is a perfect example of the "end is nigh"
Citi actually needed more like 26 billion but needed a lengthy gov approval process for any 1 investor to take more than 4.9 stake. They were so desperate they took what they could get up to the limit and had to offer 11% return on a special share issue to secure this money.
Unlike an Argentina style default where only the locals get hurt, everyone will get hurt unless they islolate themselves from U.s. dollars. Even then no one will escape unscathed, it will just be a matter of how much you can protect.
I find it weird that Mulroney can be fixated on by news and blogs while such pressing issues as this are ingored. In the long run discrediting or jailing Mulroney won't protect my way of life, or my country.
LoW, you're obviously up on this problem. What do you think Canada needs to do? What can the US do? If the American economy tanks how can we best deal with that reality?
Canada needs to, with agreement of other countries face the U.S. down, refuse to devalue our currencies so that they can continue consuming. Lowering our currency basicaly transfers our buying power to those with weaker money who have spent their way to poverty. That is really what this is about a debt and trade war. The U.S. wants to lower interst rates and devalue so they can
1. pay off debt with devalued currency
2. undercut the competition and win back manufacturing jobs.
3. reinflate either the housing bubble or some other asset class as a way of showing prosperity.
4. Get elected by showing bogus manipuated/manufactured stats
Following their lead perpetuates their need to continue the cycle, interest rates fall world wide, monetary creation goes up even more and we all join in a currency war/death spiral
The Europeans and Canada are trapped, lose market share and jobs to keep a strong currency or they join the downward spiral of buying power with the U.S. and match interest rate cuts.
Historically fiat money eventually fails because of these very actions. The recession a strong dollar will inflict on us is potentially a lot less damaging than inflating ourselves to poverty. The only difference is that devaluation and inflation nickel and dime you into submission where a strong dollar policy kills jobs.
The frog in the boiling water analogy works for inflation too, slow steady death rather than a short sharp plunge you might survive to get out of.
One advantage of a strong Canadian dollar is when the U.S. goes tits up and the red light specials start, Canada will have a currency with retained value and we can pillage and rape them for a change.
Canada needs to market our wares away from the U.S. as we have too many eggs in on basket and must diversify our markets, we've grown lazy being beside the worlds biggest dorito scarfing beer swilling coach potato. It was an easy market and we did not modernize
Rather than cut the GST invest in moderinzation to compete with our new higher dollar.
Fund value added industries rather than just ship raw wood/ore/food.
Canada should as quietly as possible move our currency reserves from their current state of about 50% U.S. dollars to more currencies especially the Renminbi and we should rebuild our gold levels to a minimum of 10% of our reserves.
I think the key really is gold. While modern economist claim it has no value a good part of the world (ie India, China, Middle East) still retain the tradition that metals are real money. If they are wrong why the sudden jump from 250ish to $800 in recent years.
Gold is real, cannot be counterfited, and has outlasted 100s of experiments in fiat currency throughout the ages. As a insurance policy against the failure of todays system gold is and always has been the anti money, in comparison to fiat currency. You insure your house, car, life but not your finacial holdings, why? Unlike insurance(or paper) gold has never been worthless, it aways maintains some value.
Canadian citizens need to do several things depending on their means and how much of my argument they buy.
1. Get out of any U.S. holdings,
U.S. dollar valued stocks
Bonds
property
U.S. dollar accounts
2. Get out of debt,
There are arguements it might be a deflationary depression rather than a inflationary depression but the important thing to note is less people are questioning there will be a crash of some sort. Debt in a inflationary spiral evaporates but bankrupts you during deflation, therefore zero debt is the best and most prudent choice.
3. Deposit insurance is all fine and dandy but in case of a monetary crisis or bank failure you should have access to 1 months cash in a home safe. Deposit insurance will not pay out instantly and you need day to day living money. If you can swing it 2-3 months in your safety deposit box is good also. It's unlikey they will freeze you out of your boxes even if they don't have any cash.
4. If you are out of debt, or only have marginal debt you should have 5-10% of your portfolios worth in metals. Gold and silver. Physical bullion not paper contracts, certificates or ETFs. If the U.S. dollar failed metals would see a deluge of money fleeing to safety, it would not take that big an influx(considering the desparity in size between the worlds money supply and the gold Market) to give you muliples of profit to offest your paper loses.
The U.S. needs to accept that its role of world leader is over, it needs to curb spending, reform its entitlement programs, stop playing world policeman and both Government and citizens need to live withing their means.
I'm not a libertarian and don't agree with some of his views but the U.S. needs to elect Ron Paul, the only person I've seen in the race who knows how money works.
The U.S. is probably past the tipping point but delusional citizens and idiotic politicians won't accept it. The longer this goes on the more likey the horror story I predict will come true.
My primary blog covers this stuff regularly, but gets a totaly different audience than my Green Assassin Brigade persona. The political crowd ingores this stuff when really money, its handling and the maintainence of a sound currency is the basis of good Government and should be fairly prominent.
My belief is both unconventional and contrarian in nature, I don't expect you to accept it all but would suggest you follow some of it up with your own research.
If nothing else write down a few of the books on my amazon list and go to the local library, at least a few should be available.
http://canadiansilverbug.blogspot.com/
I'm not sure that your views are particularly contrarian now LoW. America seems to be reaching what Krugman called its Wile E Coyote moment when the coyote looks down and discovers he's run off the cliff.
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