"It’s a terribly hard job to spend a billion dollars and get your money’s worth."
     -- George M. Humphrey, U.S. Treasury Secretary, February 23, 1954.
"According to some estimates, we cannot track $2.3 trillion in transactions."
    
-- Donald H. Rumsfeld, U.S. Defense Secretary, September 10, 2001.

 

The Elephant in the Living Room
Posted May 9, 2005 | Link

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.

Mr. Greenspan, 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.

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