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The Danger of Financial Meltdown

The United States Congress over every administration since about 1980 has been spending more that the Federal Government takes in. The resulting Federal debt has looked like a ski slope since that time. The most recent congresses, though, have made previous administrations look like pikers.

Richard Fisher, President & CEO of the Federal Reserve Bank in Dallas recently told a conference of Society of American Business Editors and Writers that the situation for the US economy is precarious. . Excerpts from his comments: “This will be a titanic struggle. Our Congress must find a way to align spending with income through taxation that (a) does not cut off the incipient economic recovery, (b) provides a credible path toward bringing their accounts-including the unfunded liabilities of Medicare and Social Security – to solvency and (c) respects the fact that in a globalized, cyber-ized world, those with the ability to create jobs may create them in places that offer more compelling fiscal and regulatory environments.

This last point is not unimportant. Permanent jobs are created by the private sector. Businesses, large and small, publicly or privately held, have a duty to earn a return on investment for their shareholders. In a globalized, cyber-ized world, they need not invest or expand their payrolls in the United States; they are free to go practically anywhere on the planet. Now, those with the power to levy taxes and direct spending must get with it and adjust to the new world as they seek to incentivize job creation through businesses that, thanks to monetary policy, now have the financial means to put Americans back to work right here at home.”

In his June 2011 speech on withdrawing troops from Afghanistan, President Obama stated that it is time to turn our attention to nation-building at home.” I think he is absolutely right about that. As a guy who has spent much of his time over the last decade rebuilding businesses and economies in Iraq and Afghanistan, I have often wondered whether I would someday find myself deployed again – but this time to Detroit. It certainly seems that if things continue on this incredibly self-destructive path, the economy of the United States, and therefore the world economy, is in great peril.

Fisher goes on to refer to our current course as a “death spiral”: “There cannot be robust direct investment in the United States without confidence in the nation’s ability to reverse its budgetary death spiral, especially the inexorable accumulation of national debt and unfunded liabilities of Medicare and Social Security. Getting our fiscal house in order will not be an easy task. But there are worse alternatives. Resorting to protectionism or capital controls or sustained negative real interest rates or inflation, in lieu of real fiscal reform, would be pyrrhic solutions. Corrupting the independence of the Fed would surely lead the nation to the same fate that befell Weimar Germany and Peron’s Argentina when their central banks took to monetizing debt. The nation cannot, must not, and, in my view, will not go down those sordid paths. Indeed, I sense we have turned the corner and are on the road to fiscal redemption, however bumpy it might be.” I certainly hope that last sentence is accurate, but I am not as hopeful as Mr. Fisher. It has been a long, long time since Congressmen and their Presidents have acted with fiscal responsibility. I think the odds of that happening with the required speed and efficacies are slim. The lure of simply printing more money in order to support more spending, basing that monetary base expansion on public debt, (much of which is now held by foreign governments including China and Russia), has proven too powerful a force to resist over the last few decades.

Based on the 2010 U.S. budget, total national debt will nearly double in dollar terms between 2008 and 2015 and will grow to nearly 100% of GDP, versus a level of approximately 80% in early 2009. The Government Accounting Office, the US Treasury Department, and Congressional Budget Office have all stated that the U.S. is on an unsustainable fiscal path. As the debt ratio increases, the exchange value of the dollar may fall. Paying back debt with cheaper currency could cause investors (including other governments) to demand higher interest rates if they anticipate further dollar depreciation. Paying higher interest rates could slow domestic U.S. growth. Making the situation worse, a high public debt- to-GDP ratio slows economic growth. Economists Carmen Reinhart and Kenneth Rogoff calculated that countries with public debt exceeding 90 percent of GDP grow by an average of 1.3 percentage points per year slower than less debt-ridden countries. The public debt-to-GDP ratio in March 2010 was about 60 percent of GDP. At that time the CBO projected that it will reach 90 percent around 2020 under policies in place. As growth slows, all of the economic challenges the U.S. faces will be exacerbated.

Since about 1980, the Federal Government has continued to levy more taxes, spend more money, and even beyond that, borrow money to spend, resulting in multi-trillion dollar Federal debt that will fall on the shoulders of our children and grandchildren. Our Federal debt level as of this writing is $14,358,442,243,737.99, or $46,200 per American citizen. ( So if you are part of a family of 4, your family is currently indebted for $185,000 over and above your current tax burden. And at this point, there is no end in sight. Overall, I believe that the risk of US financial collapse resulting from the crushing burden of Federal debt and general fiscal malfeasance on the part of the United States Congress is medium to high. And the results of such a collapse are almost unthinkable. If unchecked, I believe the results of the current path could prove catastrophic by 2030.

What do you think?

2 Responses to “The Danger of Financial Meltdown”

  1. Marie Luft says:

    My opinion is that the Afghanistan and Iraq wars are what tipped the scales of our debt problem. And, my opinion is that even tho those wars were/are, debatedly, something that we have to do, President Bush made a great mistake in not going to our people for funding them instead of borrowing from China and others. Were we asked to fund those wars, we would have found a way; emotions were running high at the time … For WWII, once people were convinced of the inevitable, we raised money thru all kinds of sources. However, there is the rub… we have to be convinced of the need.

  2. Bill Duncan says:

    Marie: It’s hard to argue with you on the cost of the wars in Iraq and Afghanistan. Current estimates indicate that the total costs of these engagements is going to amount to $4 Trillion (a far cry from President Obama’s earlier-this-year estimate of $1 Trillion!) However, if you will refer once again to the chart above, you will see that the debt level, which had been very flat at a tolerable level previously, began to climb significantly back at 1980, before increasing again significantly following 2001. I also agree with you that funding wars domestically rather than borrowing money for them would have been prudent, and that American support as well as world opinion would have enabled us to do that. All that said, we are where we are. In order to get out of this mess, which was largely created by the wars but also created by TARP and a host of other bad decisions, we have to stop the bleeding. That means not only getting out of the Middle East (and NOT getting drawn further into arenas like Libya), but also cleaning up our act at home. We need to kill costly wastes of money such as useless Federal Agencies (Department of Energy, Department of Education, etc.) and stop the pork barrel spending methods of the United States Congress. The question in my mind is not “Whose fault is this mess?” – There is always plenty of blame to go around. The question we need to be focused on is “How are we going to fix this?”

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