We interrupt this blog to discuss America’s economic situation. If you don’t think this concerns you, think again. I’m a simpeton on the subject of economics, and am concerned.
I’m reading a book right now called While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis. Essentially it goes into the details of how social welfare obligations resulted in damaging greatly the companies and public since the Unions had them/us by the balls, sometimes to the point of bankruptcy, by leveraging high future pension obligations. GM workers in the mid 2000’s were making equivalent of over $80/hr when factoring in all benefits. When workers at MTA or GM could retire before 50 (after 25-30 years of service) and take a high pension for another 25-30 years due to expanded lifespan (and less duration on the job – past generations worked maybe 40 years and were only alive 10 years longer), this unsustainable approach finally came to a head, though many public agencies are still digging out of this mess (and have underfunded pensions that the public is ultimately on the hook for since they are usually guaranteed by state constitutions).
Even if you haven’t been paying too much attention, social welfare obligations of the United States are heading down the same path. Social Security will need to be modified at some point (and it’s tough to plan for retirement if you don’t exactly know how, many say to plan for half to 75% of the current benefit structure, but no one knows what will happen – they may abolish future benefits completely). And these social welfare programs is just part of our debt obligation as a country. I’m no economist, but this big picture is concerning to me as a simpleton, and others who understand this so much better such as Keoni and Cappy constantly write about The Decline. This shows up on my radar as a regular dude, and I’m making small prepping steps should things go bad. Anyway, from this CNN/Money article from earlier this week: Despite dropping deficits, debt picture a concern:
While there has been a sharp decline in annual deficits in the past few years, and spending on many programs are on track to reach the lowest level in more than 70 years, the next 25 years will worsen the overall debt picture considerably if tax and spending policies don’t change.
Federal debt held by the public – which is essentially an accumulation of deficits over the years — is already at 74% of GDP, far higher than the historical average of 39%. If current policies remain unchanged, it will top 100% in 25 years, the CBO estimates. And that doesn’t include the debt owed to government trust funds such as Social Security.
The crux of the debt problem: A large and growing gap between the money the federal government spends and the money it takes in.
The jump in spending is due largely to an aging population, rising health costs and an expansion of federal subsidies for health insurance, the CBO said. Spending on the entitlement programs, including Social Security, is on track to rise to 14% of GDP, double its historical average of 7%.
Pew Research had some interesting bits in it’s article National Debt things you should know:
In fiscal 2013, which ended Sept. 30, net interest payments on the debt totaled $222.75 billion, or 6.23% of all federal outlays
Now this alone isn’t a huge deal as debt service in the 1990s was nearly 15%, but the fact that this dollar amount outlay is that high, despite interest rates being at historic lows is a concern because outlays themselves are up nearly 40% over the last decade. Remember this article about how 49% of the population receives some form of government benefits? I expect that to get even higher as more and more boomers end up on Social Security and federal health programs. If interest rates go up, the debt payment obligation increases as well. Our total debt as a nation (as of August 27, 2013) is 100% of gross domestic product (in 2013, this was $16.8 trillion, meaning we owe, as a nation, about $45,000 for every man, woman, and child). The Clinton era had dropped this percentage to below 59% of GDP (around year 2000), at which point it’s steadily increased, with big jumps in the meltdown era circa-2008 as bailouts and such were happening left and right (where did you think this money came from?).
So what does that mean to you? Investopedia had this succinct summary:
First, as the national debt per capita increases, the likelihood of the government defaulting on its debt service obligation increases, and therefore the Treasury Department will have to raise the yield on newly issued treasury securities in order to attract new investors. This reduces the amount of tax revenue available to spend on other governmental services, because more tax revenue will have to be paid out as interest on the national debt. Over time, this shift in expenditures will cause people to experience a lower standard of living, as borrowing for economic enhancement projects becomes more difficult.
Second, as the rate offered on treasury securities increases, corporations operating in America will be viewed as riskier, also necessitating an increase in the yield on newly issued bonds. This in turn will require corporations to raise the price of their products and services in order to meet the increased cost of their debt service obligation. Over time, this will cause people to pay more for goods and services, resulting in inflation.
Third, as the yield offered on treasury securities increases, the cost of borrowing money to purchase a home will also increase, because the cost of money in the mortgage lending market is directly tied to the short-term interest rates set by the Federal Reserve, and the yield offered on treasury securities issued by the Treasury Department. Given this established interrelationship, an increase in interest rates will push home prices down [AMD Note: Something Captain Power has been saying for awhile now though for different rationale – primarily the supply side increasing], because prospective home buyers will no longer qualify for as large of a mortgage loan, since they will have to pay more of their money to cover the interest expense on the loan that they receive. The result will be more downward pressure on the value of homes, which in turn will reduce the net worth of all home owners.
Fourth, since the yield on U.S. Treasury securities is currently considered a risk-free rate of return and as the yield on these securities increases, risky investments such as corporate debt and equity investments will lose appeal. This phenomenon is a direct result of the fact that it will be more difficult for corporations to generate enough pre-tax income to offer a high enough risk premium on their bonds and stock dividends to justify investing in their company. This dilemma is known as the crowding out effect, and tends to encourage the growth in the size of the government, and the simultaneous reduction in the size of the private sector.
Fifth, and perhaps most importantly, as the risk of a country defaulting on its debt service obligation increases, the country loses its social, economic and political power. This in turn makes the national debt level a national security issue.
U.S. isn’t the only one in this situation, Japan has been close to a similar crisis (with debt to their GDP at 240%, see, makes our 100% look not that bad) and article here, and such a change will impact global economy. I’ve talked before about Neftlix movie The End of the Road: How Money Became Worthless. Swiss-based financial watchdog Bank for International Settlements warned just a couple days ago how the world is just as vulnerable to a financial crisis as it was in 2007.
“Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” it said.
Mr Caruana declined to be drawn on when the bubble will burst. “As Keynes said, markets can stay irrational longer than you can stay solvent,” he said.
I have no idea what this means for us, but it is a scary thought. Hopefully those politicians in charge can look beyond their few year terms and can make those tough economic decisions and get our debt house in order, just like we regular folks have to do, so that we as a country can be financially sound. Me, I’m not sure they can. Guess it’s time for us to invest in the key long-hold investements: Guns, Gold, Silver. I’m not sure, but I’ll be slowly prepping a little each year.
I’ll leave you with the final scene from Fight Club, with the Pixies in the soundtrack, where we watch the collapse of the financial district of the Megopolis, about to upheave the economies of the world.