The Elephant in the Living Room
Posted May 9, 2005 |
Since George W. Bush
took office (the first time), our country has
accumulated almost $2.3 trillion in new debt. In
November 2004, we actually had to
amend federal law to raise the national debt
ceiling up to an astounding $8,184,000,000,000 (yes,
that's TRILLION!). Aging fans of Reaganomics must be
having a hard time reconciling this number since
they predicted way back in 1981 that we'd grow out
of this debt. Unfortunately, in the period from
Fiscal Year 1982 to 2005, our national debt has
grown almost twice as much as our GDP (7.1x growth
in debt vs. 3.8x for GDP).
The Office of
Management and Budget’s
conservative estimates predict that our debt
will reach approximately $10.5 trillion by fiscal
year 2010. By that time, the annual, on-budget
interest payment on this debt is estimated to be
about $455 billion. This is just $30 billion less
than the entire Department of Defense budget
estimate for the same year. Ironically, if one of
our creditors decides to stop buying our Treasury
notes, we may have to actually use DOD assets to
resolve the situation (note: this is a joke).
President Bush, Pretending to the
Innocents in Iowa
Do we really want to
run our country such that we have to borrow 2
billion dollars each and every day just to keep our
government running? While the People‘s Bank of China
and the Bank of Japan are still eagerly gobbling up
U.S. Treasury securities, this cannot last forever
and China's rapid economic growth probably means
that "forever" is sometime in the next 4-6 years.
When China decides to let its currency float in the
open market, instead of pegging it to the U.S.
dollar as it does now, the result will be higher
interest rates, as foreign banks stop accumulating
and start selling their dollars.
Inevitably, the U.S.
must pay the piper for the artificially buoyant
economy we've grown accustomed to. Alan Greenspan,
the Chairman of our Federal Reserve Board, knows
that our economy, such as it is, has been built upon
a house of cards. The problem is, however, that
neither he nor our current president has the guts to
do anything about it.
Looking Chipper as Always
Greenspan has been
bending over backwards for more than a decade to
keep interest rates low and the housing market
jumping. The continual increase in home equity over
this period has been the true engine behind our
economy. The problem is that this mathematical
function has a limit and the rubber band will have
to snap back at some point. Economically speaking,
this is a normal cyclical activity, but we've been
goosing the system for so long that the payback will
literally be a bitch. The impact of China's eventual
flight from the dollar will only make matters worse.
At this point, you're
probably thinking, "So, what can I do?" Like most
answers, there is some good news and some bad news.
The good news is that at least part of your destiny
is under your control. Do whatever you can to pay
off your debt or at least get it under control with
a fixed-rate, low-interest loan. Maintaining a large
amount of savings or liquid investments (i.e.,
cash), as always, is highly recommended. When the
recession hits, you will be in much better shape to
weather the storm.
The bad news,
however, is that America is literally facing the
elephant in the living room that it's been ignoring
for more than a decade. If our government is to
maintain any semblance of continuity and provide the
services people have come to expect, it must raise
taxes. The ray of light here is that we truly can
afford such a hit if we start returning to a
progressive tax system. If we ask corporate America
and the wealthiest 1% of our citizens to simply pay
the same tax rates they did only 20 years ago, our
future train wreck can be avoided. Unfortunately, I
doubt the current Congress or President Bush will
consider such a plan.