Our descendants will wonder how America fell from a pinnacle of prosperity and power such as the world has never seen. Our policies for the past thirty years have been both astonishingly foolish and broadly supported by America’s elites (Left and Right). This note focuses on the core of our irrational economic policy, the “twin deficits” — the growing liabilities of the Federal Government (actual debt is only a fraction of this), and the current account deficit (US consumption in excess of our income, financed by foreign debts). Like any drunken binge, this felt good. Now a new day dawns, and the hangover.
We have been warned. Here are a selection of warnings from 2003 and 2004, given by a wide range of experts and institutions. This list could easily be extended both backwards and forwards in time; a few such are included to illustrate this.
As noted in Chapter I, warnings given with sufficient lead time to avoid disaster — allowing battleship America to avoid the ice ahead — were derided as obviously false. Only sightings of peril directly ahead — too late for corrective action — can gain the attention of America’s elites and citizenry.
Now the time for warnings has passed, as we no longer can avoid what lies ahead. The following materials tell what we need to know: our situation, the danger, and how we got to this point. The geopolitical implications will be the subject for a later chapter.
To see Chapter I of this series: The post-WWII geopolitical regime is dying.
The Impact of the Euro on the International Monetary System, Robert A. Mundell (Nobel Prize for Economics), The International Speculator (April-June 1998) Excerpt:
“The time will arrive when the pile-up of {America’s} international indebtedness — in itself a consequence of faith in the dollar — will make increased reliance on the dollar as the world’s only main international currency untenable. … the boom will not go on forever and when it ends, there could be a spectacular run on the dollar. The huge stock of international reserves held in dollars makes that currency a sitting duck in a currency crisis. It was no accident that the dollar fell to 79 yen in 1995 at the peak of the fallout from the Mexican crisis, wrecking havoc with Japan’s already distressed economy. The position of the United States as a the great debtor will eventually undermine the stability of the dollar as an international reserve currency.”
The U.S. Economy: A Changing Strategic Predicament, Wynne Godley, Levy Institute (March 2003)
The Downward Spiral, Jim Rogers (4 March 2003)
Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities, Jagadeesh Gokhale and Kent Smetters (July 2003) — Properly computed the total of Federal Government liabilities (estimate of future liabilities minus future revenue) is $44 Trillion. A radical conclusion at the time, since confirmed by other major institutions.
“Truth and Transparency: the Federal Government’s Financial Condition and Fiscal Outlook” by the Honorable David M. Walker, Comptroller General of the United States, at the National Press Club, Washington, D.C. (17 September 2003) The first of his astoundingly honest and bold speeches warning America about the dangerous financial condition of the Federal government. He is a Paul Revere for our time.
Kenneth Rogoff, Economic Counselor of the IMF, speaking at the World Economic Outlook (18 September 2003) Excerpt:
“Right now the U.S. is just charging ahead. The United States has the best recovery that money can buy. It has a very high fiscal stimulus, a huge current account deficit. It’s borrowing a great deal in order to sustain this very high recovery. That really is part of the difference between the growth we see in the United States and the euro area. But this comes at a cost of mortgaging growth further down the road.”
Deficits, Debts, and Growth: A Reprieve but Not a Pardon, Levy Institute (October 2003)
America’s Growing Trade Deficit is Selling the Nation Out from Under Us, Warren Buffett, Fortune (26 October 2003)
Implications of Rising Fiscal Deficits for the US Government’s Credit Ratings, Moody’s Investors Service (21 November 2003)
The Future of the Dollar: Has the Unthinkable Become Thinkable?, Korkut A. Ertürk, Levy Institute (December 2003)
Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray, by Allen Sinai, Peter R. Orszag, and Robert E. Rubin (former Treasury Secretary) (5 January 2004)
U.S. Fiscal Policies and Priorities for Long-Run Sustainability, International Monetary Fund (7 January 2004). Excerpt:
“These considerations have led to a renewed emphasis on estimates of the fiscal gap, which take into account longer horizons and the intergenerational transfers that are involved. Section IV presents estimates of the U.S. fiscal imbalance using an intergenerational accounting framework that encompasses the entire federal fiscal system over an infinite horizon. The results suggest that the fiscal imbalance is as high as $47 trillion, nearly 500 percent of current GDP, and that closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits. The analysis also illustrates that this gap is associated with a severe intergenerational imbalance, with the burden on future generations increasing further if corrective measures are delayed.”
The Western World Past Its Prime: Sovereign Rating Perspectives in the Context of Aging Populations, Standard and Poor’s (31 March 2004). Some nations have prepared for their aging populations — Australia, Ireland, Sweden, and the UK. Not everyone ignores the obvious and inevitable.
Asset Poverty in the United States, Asena Caner and Edward N. Wolff, Levy Institute (April 2004). Roughly 40% of US households are 3 months or less from bankruptcy. That is, their high debts and low savings mean they cannot withstand even brief periods of unemployment.
Riding for a Fall, Peter G. Peterson, Foreign Affairs (September/October 2004). Peterson is Chairman of the Council on Foreign Relations, the Institute for International Economics, and The Blackstone Group. He served as Secretary of Commerce in the Nixon administration. Excerpt:
“Three long-term trends are threatening to bankrupt America: the burgeoning costs of waging the war on terrorism, the U.S. economy’s increasing reliance on foreign capital, and rapid aging throughout the developed world. Washington must understand that committing the United States to a broader global role while ignoring the financial costs of doing so is deeply irresponsible.”
The U.S. Current Account Deficit and the Global Economy, Lawrence. H. Summers, former Secretary of the Treasury (3 October 2004)
Aging, the World Economy and the Coming Generational Storm, Laurence Kotlikoff, Hans Fehr, and Sabine Jokisch (4 February 2005)
An Economy on Thin Ice, Paul Volcker (former Chairman of the Federal Reserve), Washington Post (10 April 2005): Excerpt:
“The US expansion appears on track. … Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks — call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.“
The Long-Term Budget Outlook, by the Congressional Budget Office. They publish the same warnings again and again, ignored by Americans. December 2003. December 2005. Conclusions from the Executive Summary of the December 2005 report:
- Driven by rising health care costs and an aging population, federal spending for Medicare, Medicaid, and Social Security will claim a sharply increasing share of the nation’s economic output over the coming decades.
- Even if taxation reached levels that were unprecedented in the United States, current spending policies could become financially unsustainable. An ever growing burden of federal debt held by the public would have a corrosive and potentially contractionary effect on the economy.
- As the U.S. tax system is now configured, federal revenues will grow faster than the overall economy. Under current law, taxpayers will face higher rates, with detrimental consequences for work, saving, and economic growth.
- Fiscal policy could be financially sustainable if the growth of health care costs slowed significantly from historical rates. But even in that case, tax revenues would probably need to be higher than they have been in the past, unless the growth of other spending was curbed.
- If taxation is restricted to the levels that prevailed in the past, the growth of spending on programs for the elderly will have to be reduced substantially. Limiting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability.
- Likewise, economic growth alone is unlikely to bring the nation’s long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates rates could significantly reduce economic growth.
Is the U.S. Current Account Deficit Sustainable?, Congressional Research Service (13 December 2005)
Some Unpleasant American Arithmetic, Wynne Godley, Levy Institute (June 2005). “Is it sufficiently realized how intractable those U.S. imbalances — and how dangerous their potential consequences at home and abroad — have now become?”
Debt and Lending: A Cri de Coeur, Wynne Godley and Gennaro Zezza, Levy Institute (April 2006)
Twin Deficits and Sustainability, L. Randall Wray (April 2006)
Is the United States Bankrupt? Laurence J. Kotlikoff, Federal Reserve Bank of St. Louis Review (July/August 2006)
U.S. Household Deficit Spending: A Rendezvous with Reality, Robert W. Parenteau, Levy Institute (November 2006)
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For more information about this subject
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A brief note on the US Dollar. Is this like August 1914? (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
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The post-WWII geopolitical regime is dying. Chapter One (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
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We have been warned. Death of the post-WWII geopolitical regime, Chapter II (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
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Death of the post-WWII geopolitical regime, III – death by debt (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
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Geopolitical implications of the current economic downturn (24 January 2008) – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession? (18 March 208) — More forecasts. The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
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The most important story in this week’s newspapers (22 May 2008) — How solvent is the US government? They report the facts to us every year.
To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.
