Forecast #4: bankruptcy
Perhaps only a crisis will catalyze America’s transition to a new form of government. There is no lack of candidates.
The last stone in the foundation of America’s greatness was laid by Alexander Hamilton, who as Secretary of the Treasury published the Report on the Public Credit in January 1790. He argued that America should – unlike most nations – pay its war debts. With the support of Washington, opposed by Jefferson and Madison, it was enacted through one of the great compromises that distinguish early American history.
Now we owe trillions to foreigners and plan to borrow trillions more – scurrilously – as we have neither the ability nor intention of paying back these loans. Worse, childishly, we hope our creditors will never demand repayment.
Look at our domestic balance sheet. Most American households have few savings – many lack even a 60-day emergency fund – and massive debts. The aggregate totals (so loved by economists) conceal this by including both Bill Gates and thousands of unemployed auto workers. It’s not an irrational way to see things, if Gates will donate money to pay off their debts and fund their retraining for well-paying jobs at Microsoft.
Our international balance sheet is equally frightening. Our massive foreign debts, accumulating at over $2 billion per day, spell the likely end of the US Dollar as the world’s reserve currency – and the end of the post-WWII economic regime and America’s role as the world’s hegemon. Without the unlimited ability to borrow in our own currency, America’s current economic condition becomes impossible to sustain.
This is, of course, old news. We’ve heard these warnings for many years.
On September 23 his fleet hove in sight, and all came safely to anchor in Pevensey Bay. There was no opposition to the landing. The local fyrd had been called out this year four times already to watch the coast, and having, in true English style, come to the conclusion that the danger was past because it had not yet arrived had gone back to their homes.
Description of William the Conqueror’s arrival, from History of the English Speaking People by Winston S. Churchill.
The list of agencies, experts and high officials who have warned us could fill many pages. I need not do so, as I believe we all at some level know we are on a course of near-certain self-destruction. A few references will suffice.
Since September 2003 David M. Walker, Comptroller General of the United States, has acted as a modern Paul Revere. He’s crossed the nation giving extraordinarily blunt speeches warning of the fiscal catastrophe looming ahead. Didn’t you see the front-page stories about this?
Here are two of his recent presentations:
Here is another wake-up call – you must have seen the special TV new bulletins when this was published!
Is the United States Bankrupt?. Laurence J. Kotlikoff (Professor of Economics at Boston University), Published by the Federal Reserve Bank of St. Louis Review (July/August 2006)
Perhaps the Fed’s reputation for obfuscation is not deserved. Note the opening of the article’s abstract:
Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future. …
Have you ever wondered at the total debt of US Government? Treasury Secretary O’Neil did, and asked some experts to compute the answer. Surprisingly, Bush fired him shortly afterwards. Our total liability was $44 trillion. Then. It’s much larger now, of course.
Fiscal and Generational Imbalances, By Jagadeesh Gokhale and Kent Smetters
We cannot say that we were not warned.
This precarious load of debt can totter and fall at even a small disturbance.
- Inflation: rising interest rates are lethal to millions of households with adjustable mortgages and floating-rate consumer loans.
- Deflation: a recession that generates unemployment, cutting US consumer spending (an incredible 20% of global GDP) and creating layoffs, which can easily spiral out of control.
The already high deficits of the federal government, during the peak of the up phase – the large number of two-worker, high debt, no savings households – and many other factors make our economy far more vulnerable than at any time since WWII. Anything that destabilizes our economy could spark foreclosures and bankruptcies at levels not seen since the 1930s.
For what will have traded our greatness, our very solvency? We’ll have spent billions on weapons, welfare, and granite countertops. Only the debts will remain.
For more on this see End of the post-WWII geopolitical regime.