Debt, Deficit and Spending - A Financial Outlook
In fiscal year 2011, Washington will spend $1.65 trillion more than revenues. Economist and author Walter Williams recently wrote with despair and lamented both public ignorance and willful deception by both the news media and politicians fostering lies about this subject. Remember that Article 1, Section 7 of the Constitution specifies that “All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.”
The President of this nation has zero, zilch, zip, nada authority to raise or lower taxes. There were never any “Reagan deficits,” “Clinton surpluses,” “Bush tax cuts” or “Obama tax increases.” Congress alone, and the House of Representatives solely, is (and always has been) responsible for our now desperate financial mess. Congress can do anything it wants to regarding budgets and spending. There is no 60% of the federal budget that is off limits. There are no federal “investments” for “entitlement payments.” Government cannot create jobs. What government does is spend the people’s money as authorized and appropriated by Congress. Congressional weasels of both parties are liars when they claim anything other than these truths. Both party’s Presidents make demagogic comments to claim glory or avoid blame but, in doing so, are self-serving. Maybe this sets the stage for the topic I suggest you consider: Let’s make it personal.
American families each owe about $700,000 for all government, private and corporate debt. So, debt service (annual interest) alone is about $56,000. (The $14.3 trillion total federal debt is composed of $9.7 trillion publicly owned plus $4.6 trillion intergovernmental debt. This divided among 300 million people is $48,000 per capita.)
Interest needs are based on using Producer Price Index inflation rates of 5.5% and adding a risk premium of 2.5% to total 8%, and the result is about the national, per family, total income. Just to pay interest on this debt consumes all U.S. personal income. Recall that this is real debt today. It does not include implicit debt, “unfunded obligations,” to cover future commitments such as Medicare, Medicaid or federal pensions. All implicit federal debt is estimated to add $119.5 trillion more to the current debt load, but this estimate is based on the assumption that interest rates will stay at current levels of 2.2% whereas the historical average over the past two decades has been 5.7%.
This obligation is important as there are zero assets for collateral in borrowing, unless you want to consider selling 80% of western U.S. federal lands to get out from under. In order to make the debt situation more tolerable to the public, which essentially has no clue about coming fiscal calamities, the Federal Reserve Bank has printed money and issued increasingly less valuable bonds. This is termed “quantitative easing.”
There is a 90% probability that at the end of June, the Fed will initiate a third round of this exercise in currency devaluation to monetize the debt. This means that your government prints money and/or bonds to pay interest on the debt. In actuality, dollars have depreciated about 50% against sound world currencies over the past two years. Remember, I told you that Congressional weasels are liars. Now you can add Federal Reserve and Treasury management to that list.
All of these matters are quite important to Americans and will have significant impacts on both U.S. individuals and industry. In late April, China’s finance minister made public comments recommending that U.S. bond holdings be reduced from $3.04 trillion to about $1 trillion. This says that the largest U.S. debt holder is losing confidence in the dollar. Concurrently, Standard & Poor’s downgraded U.S. bond quality from stable to negative.
With actual U.S. inflation already over 10%, regardless of federal spin that the public distrusts more and more, world confidence in the dollar wanes. It is evident that dollars as the reserve currency for the world is being questioned. (Transactions between countries have been denominated in dollars since World War II when the pound sterling and Europe’s economy suffered and was replaced by the dollar.) Reserve currency replacement has not been identified, but the dollar is not on the short list.
There are other indicators such as the fact that almost half of world consumers buy oil with a new “basket currency,” not dollars. This is a topic still being defined. Oil purchases are no longer in dollars only. While U.S. political liberals say that “debt is only money we owe ourselves,” that is wrong if the rest of the world owns some of our debt and walks away with an expression of no confidence.
Readers of this journal should be prepared in six to 12 months to face: high (even hyper) inflation, energy costs of two to fourfold increase, problems in bank lending (none) compared to today and continued outflow of industrial production to more hospitable venues. IH