2/8/2012 7:20 PM ET|
No, America isn't broke -- yet
You may have heard the nation is out of money. In fact, despite our fast-growing national debt, markets are eager to lend us money, cheap. But this won't last unless we act.
Of all Super Bowl commercials, Chrysler's latest pro-America, Imported-from-Detroit pep talk may be getting the most attention. As you've no doubt seen by now, Clint Eastwood's steely gaze and growling baritone speak of a county knocked down but not out. A country that's hurting, scared and angry. A country that's lost its AAA credit rating. A country that needs to pull together to pick itself up.
The advertisers are trying to tap into the sense that all's not right in the economy. Something is fundamentally broken, and, until it's fixed, problems like chronic joblessness, bombed-out home prices and stagnant wages will continue. These are all problems I've been exploring over the past couple of years.
At the very top of the list, according to the polls, is the fiscal situation in this country. The total national debt stands at nearly $15.4 trillion, and the annual budget deficit is expected to total $1.1 trillion this year -- levels that as a percentage of the overall economy haven't been seen since World War II. Our deficit, relative to the size of our economy, is larger than that of any other major nation, including Greece and Portugal, according to estimates by the Organisation for Economic Co-operation and Development. Not good.
With tepid economic growth, dysfunctional bitterness in Washington and some big decisions looming on taxes and spending, the situation is likely to get worse, according to new estimates from the nonpartisan Congressional Budget Office.
The worry is that America will eventually face the same fate as Greece: Broke, unable to pay its bills and begging for mercy from its creditors. Not exactly the national image of rugged self-reliance embodied by the "Man with No Name." And something you'll hear a lot about from Republicans running against President Barack Obama this year.
But we're not broke. We have by far the biggest, richest economy in the world. And we enjoy some of the lowest borrowing costs in history.
Yes, we're spending too much, even on popular things like Medicare, Social Security and defense, while cutting taxes to 60-year lows and largely neglecting drivers of future growth such as infrastructure, energy and education. But our huge economy gives us the ability to fix the problem. And we have to.
Because if we don't fix it soon, we will lose that ability.
Plenty of money, for now
The government can currently borrow at negative interest rates; the bond market is so eager to funnel cash into the U.S. Treasury that it's willing to pay for the privilege. Last month, investors accepted a negative real yield of 0.05%.
In other words, investors are begging the White House and Congress to borrow. Lenders don't beg to lend money to those who won't be able to pay it back.
In fact, back as far as 1285 -- using bond data starting with city-states of Venice and Genoa before moving on to medieval powers of Italy, Spain and the Netherlands, and modern powers Britain and the United States -- we see that government borrowing costs are near historical lows. (See the chart below.)
This is a consequence of nature of the downturn we're in: a balance-sheet recession driven by debt deleveraging and massive monetary policy stimulus from the Federal Reserve and other major central banks. (For more on these structural issues, be sure to review "The world's $8 trillion debt hole" and "Will Ron Paul-onomics beat Obama?")
We have no problem raising money to fix the things that need repairs. But this won't last indefinitely.
Our credit card bill
The root of the problem is shown in the chart below.
The money the government has been taking in (as a percent of gross domestic product) has been falling, while the amount it spends has been rising, roughly since 2001. Think the tech crash, the Bush tax cuts, two wars and a long economic downturn. That's a recipe for rising debt.
The U.S. debt load, on its current trajectory, is set to reach scary heights in the years to come -- levels that will put America "in the same position as the peripheral eurozone countries that have seen their borrowing costs soar and left Greece on the verge of a massive default," according to the experts at Capital Economics.
What would it take to turn this around?
Last week, the CBO presented two economic scenarios. The "baseline scenario" would see the deficit fall to less than $200 billion, or 1% of the nation's GDP, by 2018. Sounds great.
The trouble is, it would require that the Bush tax cuts expire, more people pay the Alternative Minimum Tax and doctors accept sharply lower Medicare payments. In addition, there would need to be a trillion dollars' worth of the automatic spending cuts related to the failure of the congressional deficit supercommittee to find a deal late last year. It would also require the end of extended unemployment benefits and the payroll tax cut. The top tax bracket would rise to nearly 40%.
Apart from the political uproar that would cause, the economy wouldn't be able to tolerate such a sudden fiscal tightening. Barclays Capital estimates the cuts would be worth around $500 billion next year, more than of 3.5% of GDP. That, combined with the hit to confidence, would be enough to send the United States down the same recessionary path as austerity-obsessed Europe.
Given election-year politics, this scenario won't happen. And given how eager the bond markets are to finance U.S. debt, such a drastic tightening isn't needed anyway. It would just make the deficit worse, since part of the annual shortfall is driven by economic performance.
So instead, the CBO offers an alternate fiscal scenario. Under this model, the biggest pain points I listed above -- ending the Bush tax cuts, changing Medicare reimbursements, keeping the AMT where it is and those automatic spending cuts -- are all avoided to keep the electorate happy. The only change is allowing the expiration of the payroll tax cuts, which is already scheduled.
Under this scenario, which assumes the economy recovers fully and the unemployment rate falls back below 6%, the deficit is still $1 trillion in 2017. Growth alone doesn't get us out of the hole, just as austerity alone isn't the answer.
This illustrates a critical point: The real problem runs deeper than things like payroll tax cuts and unemployment benefits. It's structural and caused by rising per-capita health care spending and an aging workforce placing more demands on the underfunded social benefits system..
By then, the U.S. debt load will approach the lofty heights occupied by the likes of Italy, Portugal and Ireland -- increasing the risk that the bond market loses patience and jacks up our borrowing costs (as happened in Greece), precipitating a crisis.
This is only five years away. Sooner if the economy worsens, as I expect.
The picture is even uglier over the horizon. A 2010 study by the Bank for International Settlements estimated that in the absence of reforms and a cap on age-related spending, the U.S. debt-to-GDP ratio will double over the next 10 years to 200%. By 2040, it will be over 400%.
This is the scale of the problem we face.
But, as Eastwood's Chrysler ad suggests, the country is up to the task. To get out of this, we need a two-pronged strategy.
VIDEO ON MSN MONEY
This is the usual liberal crapola, you know the reason why we are in an ever increasing sink-hole of debt.
Socialized medicine will only make things worse and speed up the process of decline. What we need is to revive the objectivist philosophy which will help us return to the sanity of individual responsibility. There are too many people who choose not to work and who are on the government dime, and there are too many who want to be there.
Government schools, (the Dewey educational system), reward students for not thinking and not being able to think. This has resulted in a "dependency" and "victim" mentality, rather than a desire for independence, individual responsibility, and self control, all needed for our culture to continue.
As an up and coming baby boomer I remember the days of not having much. Heck, there were no cell phones, multiple TV's were not really an option and radios still required cords. If you wanted extras you put in the time to work for it. Not even sure if there were government funded programs for the poor outside of SS.
I am thinking that todays populace (under 50) have little idea on what the focus required would be. Perhaps it is time that they learned.
It's too late!
WE"RE SCR#W#D ! ! !
15 trillion in dept means your broke,when you put out more than you take in?
We need to follow Ron Pauls thinking.Get out of wars and being the worlds police.Close overseas military bases.Shut down agencys that arent constitutional. Or agencys that dont do a good job.
Free trade isnt working for the usa.We cant compete with countrys with such cheap labor and little labor laws or environmental laws.And these countrys people cant afford to buy our products.
It needs to be made here and sold here to provide jobs.If a company has built a factory overseas they can sell to people who live there and provide jobs there.
Cutting social programs isnt needed if we had some of the money spent on the military.
Yes we can sell treasury bonds to the world funds who's investment ...who moines...? Yours and mind and what will we get for the investment low return for ur money. Yea tie up the money wait for the default on US Bonds. Look we and the rest of the western world are seeing credit ratings drop from AAA to AA or less. That a sign of being broke folks! It will happen because of globalization to many people to feed and put to work in the world 7 billon people on this planet no future for USA in nation building. COST TO MUCH..two wars to build what..?
The only way we make it is close our borders build our own base back and stop trading with the outside world. If we stay in the globalization nation building business we go broke . Wake up Dr. Ron Paul been yelling at you and ur all deaf and dumb America.
The economy can be very easily fixed by the US simply saying the crude oil price in the US is now $70 a barrel and will be for the next 10 years, and our import tax is now 20%. This would turn the tide on what is being made overseas. As a result our economy would take off like a rocket, gas go down to around $1.80 a gallon, food prices would fall people would go back to work in droves. the Us would have to allow the pipeline from Canada, and start all oil wells now idle, and open drilling into the massive oil reserves of this country, and set a law that the auto makers change over to natural gas.
We would be selling huge amounts of oil to all the countries now buying from OPECK, enough revenue to pay off our debt. We need other changes as well, English as our National Language, close our borders, allow our police forces to arrest and deport all illegal aliens, stop allowing the misuse of our health benefits by those who are getting it illegally.
Put Social Security back in a trust, and start paying it back for all monies stolen from by congress. This would be a good start, and the economy would recover very fast.
Seriously, Mr. Mirhaydari, have you seen recent quotes for health insurance? My group policy through my employer costs me $6000 out of pocket in premiums and carries a $5000 deductable before the insurance company pays anything. Saying the entire country should buckle up and pay like this while we wait for competitive pressures to bring costs down is simply insane.
Try this for a solution: Return insurance companies to what they were intended to be, pooling of resources to handle costs. Do this by requiring all health insurance companies to be NOT FOR PROFIT organizations. If they don't have stockholders to please all the time, then they can get back to doing what they are supposed to do and that is vet and pay claims....instead of what they do now which is to constantly try to find ways to not pay (so they can pay stockholders) which drives quality down and costs up.
Our current debt of 15.4 trillion doesn't inlcuded the 50+ trillion dollars of unfunded liabilities (medicare, social security, ....)
Write this screwed up congress and tell themTO PUT SOCIAL SECURITY FUNDS BACK INTO A TRUST WHERE IT IS HANDS OFF AS BEFORE PRESIDENT JOHNSON and CONGRESS took it from the TRUST THAT WAS SPECIFICALLY MADE TO KEEP THEIR HANDS OFF. and begin payin back the funds used now. Cut aide to other countries, we need it here along with regulation of banking industry NOW...
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