Daily Archives: August 6, 2011
Mark Steyn, writing in Investors Business Daily, isn’t pulling any punches about what the near future holds for us if the Federal government keeps spending like there is no tomorrow. There won’t be.
[B]y 2020 just the interest payments on the debt will be larger than the U.S. military budget. That’s not paying down the debt, but merely staying current on the servicing — like when you get your MasterCard statement and you can’t afford to pay off any of what you borrowed but you can just about cover the monthly interest charge.
Except in this case the interest charge for U.S. taxpayers will be greater than the military budgets of China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey and Israel combined.
When interest payments consume about 20% of federal revenues, that means a fifth of your taxes are entirely wasted. Pious celebrities often simper that they’d be willing to pay more in taxes for better government services.
But a fifth of what you pay won’t be going to government services at all, unless by "government services" you mean the People’s Liberation Army of China, which will be entirely funded by U.S. taxpayers by about 2015…
And even those numbers presuppose interest rates will remain at their present historic low. Last week, the firm of Macroeconomic Advisors, one of the Obama administration’s favorite economic analysts, predicted that interest rates on 10-year U.S. Treasury notes would be just shy of 9% by 2021. If that number is right, there are two possibilities:
The Chinese will be able to quintuple the size of their armed forces and stick us with the tab. Or we’ll be living in a Mad Max theme park. I’d bet on the latter myself.
And we all know who’ll be running Bartertown.
Look, there’s no way to sugar-coat this. What’s coming isn’t gonna be pretty. Too many politically powerful groups have their fingers stuck too deeply into the DC pie to let it all just slip away without fighting tooth and nail. There are too many people who believe the gravy train of benefits coming out of DC should be endless to kiss that goodbye without a fight.
Look at what has been happening in Greece. They’ve built up two generations of people who cannot and will not accept that they’re simply out of money. Despite the fact that system has been thoroughly looted, they are adamant that the looting should continue.
If we don’t cut spending—and I mean real cuts, not cuts to some imaginary baseline that has $9 trillion is spending increases baked in—and some sort of serious tax reform that widens the tax base to raise more revenue, we’re done.
And don’t come back at me with some lame "Our GDP:Debt ratio was 120% at the end of WWII" silliness. Yes it was. And you know how we fixed it? We cut Federal spending from $92 billion in 1945 to $38 billion in 1949. For 2011, 40% of the federal budget was financed with borrowed money: We’ll spend $3.818 trillion, of which $1.645 trillion is borrowed. If we funded only defense, Medicare/Medicaid, and Social Security, and interest on the debt, we’d still have a deficit of $673 billion. Just to balance the budget this year—forget paying off any debt—we’d have to cut an additional ~25% from Health, Defense, and Pensions. Follow the link and download the CSV file, open it up in Excel, and run the numbers yourself. The magic number to balance the budget this year is the revenue of $2.174 trillion.
There’s no big mystery as to why we got a downgrade from S&P. The mystery is why Fitch and Moody’s haven’t downgraded US debt yet.
To begin paying down the debt will require massive cuts in government spending, substantially widening the tax base, and some healthy economic growth—and good luck with that as we add another couple hundred k government workers to the unemployment roles, lay off 1/3 of government contractors to boot, and start asking the bottom 50% of taxpayers to actually, you know, pay taxes, along with everyone else.
If you’re under 50, and reach retirement age with any modicum of personal wealth, you can forget seeing a dime in Social Security or Medicare benefits when you retire. You’ll be means-tested right out of all that.
You think the debt ceiling battle was disruptive? Well, hold on to your hats, folks.
First among the reactions globally was that of China:
China bluntly criticized the United States after the S&P ratings cut to AA-plus, saying Washington had only itself to blame and calling for a new stable global reserve currency.
"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China’s official Xinhua news agency said in a commentary.
Xinhua scorned the United States for a "debt addiction" and "short sighted" political wrangling. China, it said, "has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets."
"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.
If you think it is bad now, consider our predicament if the dollar was to be replaced as the new global reserve currency. However it is ironic to be lectured by the Chinese on economic matters given their ideological bent. Communists telling Capitalists (pseudo anyway) how they should conduct their business.
France, on the other hand is expressing faith in the US’s ability to get its house in order, as is Poland’s Prime Minister:
France’s Baroin said France had faith in the United States to get out of this "difficult period." Friday’s U.S. unemployment numbers were better than expected and so things were heading in the right direction, he said.
"One should not dramatis, one needs to remain cool-headed, one should look at the fundamentals," he told France’s iTele.
"There is no need for panic," Polish Prime Minister Donald Tusk said. "We will see in August, and maybe more intensively in September what the effects for the world economy will be."
Of course, with the huge problems in Europe, both France and Poland are inclined to play down the significance of a US downgrade. And more interesting than what will happen later this month or next may be what happens on Monday, the first day global markets will mark their reaction to the US credit downgrade:
Because the S&P move was expected, the impact on markets may be modest when they reopen on Monday. But the ratings cut may have a long-term impact for U.S. standing in the world, the dollar’s status and the global financial system.
"The consequence will be far reaching," said Ciaran O’Hagan, fixed income strategist at Societe Generale in Paris.
"It will weigh on secure assets. The bigger reaction will be on risky assets, including equities and on agencies (Freddie Mac, Fannie Mae) and states backed directly by the federal government."
But he added: "U.S. Treasuries will remain a benchmark. This is a ship which takes a long time to turn around."
Norbert Barthle, a budget expert for German Chancellor Angela Merkel’s conservatives, said the downgrade would certainly provoke further turbulence in markets.
Everything mentioned is very important to the future of the US economy and its financial health. Unfortunately most of it is negative. In the next few months we’ll see how this shakes out, but at this point, even the optimists are pessimistic.