The state of the US economy is not robust. US government debt growth rate since 1835 (no government debt) and particularly since 1971, (US went totally off the gold standard) where it has been growing at 9 % per year, is unsustainable and shall collapse the US and world economies in a matter of years, not decades. Further, due to the debt magnitude, growth rate, and pattern longevity, this is believed to be a planned and purposeful catastrophe.
In part 1, a review of what others are saying is conducted.
In part 2, the US debt since 1835 to 2010 and in particular since 1972 is analyzed. Center on Budget and Policy Priorities (CBPP) debt projections for the next 10 years are added and debt projections reanalyzed.
In part 3, future prognostications are presented
In part 4, individual responses are proposed.
First, the Heritage Foundation has had a lot to say about the US national debt in an article entitled “US Long-Term Debt Solution is one of the World’s Worst”1. The article reflects on the USA as the nation with the most poorly positioned debt challenge. Quoting the CBO they say that the debt will double by 2030, or in 20 years. This reflects a 3.6% compound rate of growth of the debt and is significantly less than the past 38 years. The article indicates that the Bank of International Settlements (BIS) assesses that these increased deficits will persist even when economies recover. Why? The government is obligated for age related spending, for pensions and health care. This article then references debt as a percent of GDP where 100% is where debt equals GDP. The BIS indicates the economic growth is likely to be stunted post recession for several reasons. And finally inflationary pressure will build.
The CBO article entitled: “Federal Debt and the Risk of a Fiscal Crisis”2 also points out that the public debt has been growing rapidly. In fact it is now higher than it has ever been with the one exception at the close of WWII. They point out three reasons for the exploding debt. Long term profligate spending, the recession, and the costs of various federal policies implemented in response to the conditions. CBO also sees the structural deficit from an aging population as pointed out above by the BIS. CBO sees crowding out of investments and higher taxes which reduce savings and further reduce output. When the crisis hits, the CBO indicates that spending cuts and tax increases must naturally follow. In the CBO alternative scenario the surge in debt relative to the country’s output would pose a clear threat of a fiscal crisis during the next two decades. The CBO’s vision of policy options for the US is three fold: debt restructuring, inflationary monetary policy, and an austerity program of spending cuts and tax increases.
The WSJ article from July31/August 1, 20103 shows graphically both the jobs and GDP recovery for 48 months after the start of each of four recessions. Of the four recessions shown, July 1981 – Nov 1982, July 1990 – March 1991, March – November 2001 and the current recession starting in December 2007, the current one has the slowest recovery. But what was not said was in examination of the data each successive recovery is stunted over the previous one as the debt level of the US increases in both real and relative terms. This does not bode well in the future, as growth is one way of dealing with the debt as tax revenues increase with growth. If we can assume that this growth pattern will continue into the future, then growth will become more and more anemic. Then debt will increase even faster as tax revenues fall or stay flat or rise slower than expected.
Further, bond guru Jeffery Gundlach at a three day gathering at the Morningstar Conference at the end of June 2010 was very conscious of government debt and all of the unfunded liabilities of the federal government. In addition, Gundlach was concerned about the huge consumer debt which is a result of people living beyond their means since the 1950’s. While Gundlach likes long term Treasury bonds, he cautions that as sentiment changes about US sovereign debt, this investment could go south rather quickly.4
Lastly, some will say that when the government is free from debt then the private sector has all the debt. Using the scientific method this can be refuted. In the scientific method a theory is proposed and then tested. As long as it is true it is kept, but once it is shown false a single time with bon-a-fide data, then it is false. Take the case where the government is debt free, the private sector has some debt and corn is planted. What is the result? The private sector borrows for the seed money and all other inputs. The corn is planted, watered, fertilized and grows. The current price per bushel is about $6 and the cost without government subsidies is $2.405. Therefore, the difference of $3.60 is profit which goes to pay off the private debt without any government or new private borrowing. Eventually all private debt will be paid off without incurring any government debt at all. Thus, private wealth grows apart form any public debt at all!!! This argument has a single case against it and thus is false. Thinking about this again, one single kernel of corn dies and the stalk grows producing 4800 kernels per stalk (if “six shooter” corn is planted which gives 6 cobs per plant with16 rows per ear which has an average of 800 kernels per cob.) God truly bless mankind with bountiful harvests!
1) Moore, Nicola, US Long Term Debt Situation is One of the World’s Worst, Heritage Foundation, July 27, 2010
2) CBO Report, Federal Debt and the Risk of a Fiscal Crisis, Economic and Budget Issue Brief, July 27, 2010.
3) Dougherty, Connor and Hagerty, James R. “Recovery Loses Momentum”, Wall Street Journal, July 31/August 1, 2010 front page.
4) McBride, Kathleen M., “At Morningstar Conference, Gundlach Opens 3 Day Gathering in Chicago”, Investment advisor.com, June 23, 2010
5) Iowa State University 2010 cost inputs spreadsheet.
About the Author: William J. Michie, Jr. has a BS and MS degree in Chemical Engineering from Drexel University and an MBA degree from Rutgers University. He has had a 32.5 year career in Polyethylene Product Development with Union Carbide and Dow Chemical Corp. and is the holder of a number of patents. H. Marsman and D. Madio also contributed to this article.