Is America going broke!
-MacLean's March 2,
2005
David Chapman
March 7, 2005
It certainly was a dramatic
front page for the most recent issue of MacLean's Canada's
weekly magazine (Canada's version of Time/Newsweek). If one were
picking up this story at www.financialsense.com
or www.gold-eagle.com
you would have thought of it as normal. Instead it is coming
from Canada's national magazine that is about to celebrate its
100th anniversary. It may be media for the masses but the message
gets across to a completely different audience.
The story begins in the office
of the Comptroller General of the United States, David Walker.
He says bluntly that "the United States of America's public
finances are a shambles". And "they're getting rapidly
worse". America has a $43 trillion (including unfunded liabilities)
problem. With GDP approaching $11trillion that is almost a Debt/GDP
ratio of 4 to 1. Even at the height of the Great Depression it
only reached 2.5 to 1. America is addicted to debt. But its very
survivability and the financial survivability of the world is
dependent on this not turning into a problem. The major question
is can it avoid becoming a problem?
Alan Greenspan certainly thinks
so. As head of the most powerful central bank in the world he
oddly stated that he wanted to be Fed Chairman during the Kondratieff
winter as he believed he could beat it. So how is he doing? Well
on the surface pretty damn good. Throughout the late 1990's and
thus far through the early part of the new century the Fed has
provided a never ending stream of liquidity with money supply
seemingly endlessly growing somewhere between 6 to 10% (or between
1.5 to 2.5 times the rate of economic growth) and certainly since
9/11 interest rates have been artificially maintained at exceptionally
low levels. Indeed as we and many others have pointed they are
negative.
But all that excess liquidity
due to the expanding money supply and artificially low interest
rates has to go somewhere. And somewhere is into speculative
activity in bonds, stocks, houses and for the really big players
(banks, investment dealers and hedge funds) leveraged plays utilizing
derivatives. Now the whole thing has gotten so big it is almost
at the point where it can't afford to fail. Because if it fails
the entire world's financial system is at risk not just America's.
As MacLean's points out when
George W. Bush came to power in 2001 the forecast from the Congressional
Budget Office was for federal surpluses of $5.6 trillion over
the next 10 years. While that was probably overstated (some estimate
closer to $2.2 trillion over the 10 years) it was at least a
surplus. No more. Massive tax cuts of which they are trying to
make them permanent coupled with massive spending increases primarily
for Homeland Security and War have turned those paltry surpluses
into massive deficits now totalling over $400 billion annually
and climbing. To date the various wars have cost over $157 billion
and it is has no real end. As one pundit pointed out we could
have ended world poverty for that amount.
Of course the $43 trillion
debt is the estimated cost of unfunded liabilities such as Social
Security, Medicare and Medicaid. The Federal Reserve Flow of
Funds Accounts shows debt of $23.6 trillion outstanding at the
end of the 3rd quarter 2004 that included $4.3 trillion for the
Federal Government, $9.9 trillion for the consumer of which 73%
is mortgages and $7.7 trillion for corporate America. The Federal
Government can add another $3.4 trillion for the cumulative trade
deficit for a total of $7.7 trillion. The States add another
$1.7 trillion and the financial institutions add $11.7 trillion.
Ten years ago the debt stood only at about $13 trillion so it
has about doubled.
Some of the numbers tossed
around are quite disconcerting. The Economic Policy Institute
estimates that by 2014 all government revenue would be consumed
by just 4 areas: health care for the elderly and poor, Social
Security for retirees, National Defence and interest on the debt.
Forget about education, transportation, justice and the environment.
At some point in the future debt payments would consume the entire
budget. Something would have to give.
Alan Greenspan has expressed
concern about the deficits. "The consequences for the US
economy of doing nothing could be severe". Could be? So
what did the market do? It yawned. Greenspan went on to support
the plan of privatizing Social Security a pet plan of the Bush
White House that is meeting a decidedly very cool reception.
Privatization of Social Security is estimated to cost $1 to $1.5
trillion over the next decade. That's adding to the deficit not
subtracting even if after that it starts to pay back.
Greenspan has even hinted strongly
that the upcoming elderly are going to have to do without considerable
of the benefits that have accrued to today's seniors. Some of
course would do just fine but the vast majority would fall into
permanent poverty burdened with the huge consumer deficits that
currently exist. He worries that the current budget is clouding
the economic outlook "especially in the longer run"
without "major deficit reducing actions" by Congress.
Of course the Bush White House
has proposed major deficit cuts but it comes at huge expense
to the domestic economy and to the benefit of the Defence Department,
War, and Homeland Security whose budgets would actually rise.
A picture of the future? Soldiers and Security? That is the picture
of what many a Latin American dictatorship looked liked without
the war but certainly the soldiers and security. The vast majority
of their populations lived in poverty while at the top a ruling
elite and the wealthy lived behind the protection of the soldiers
and security. With growing walled private suburban developments
patrolled by private police America appears to be already on
the way there.
Worse because the US saves
so little due to the mentality of spend today because interest
rates are so low that it does not encourage saving that in order
to finance the debt the US is increasingly dependent on the savings
of foreigners primarily Japan and China. One major problem in
this equation though is that Japan and China are economic rivals
to the US. As China becomes wealthier it flexes its military
muscles with military second only the US.
So where is all this going
to lead? Even the MacLean's article premised that within 25 years
the US economy could look like the Russian economy at the beginning
of the millennium one in a permanent state of depression. It
is clear that the US debt problem can in essence never really
be solved and that there may even be at some point in time debt
default. That would be horrendous for the world as the US is
considered the world's top credit. But that reputation is becoming
stretched as foreigners will at some point become increasingly
concerned with financing the US's debts. After all even Bankers
get nervous when they see no progress at the other end and the
day they get nervous is the day we all should be very nervous.
The US's foreign policy, trade and security could become compromised
by the fact that foreign countries hold the chips.
While many scoff at the thought
the US may default or become hostage to some foreign country
even the best of them admit its debt are unsustainable. Some
believe that debt is good because it goes a long way to keeping
the economy greased through fiscal spending and that the US helps
the world by buying their goods. Debt is good is their cry. This
is just wishful thinking on their part because as we noted you
eventually become hostage to your bankers. Ask Argentina how
they felt when the IMF came knocking and told them how to run
their country. As one wag suggested how do you threaten China
over Taiwan when China doesn't have to push a nuclear button
they just have to push the sell button on the massive amounts
of US debt they hold and there goes the US Dollar and US bond
market.
History is full of empires
that thought their rule would last forever. But in the end it
was the mountain of debt that did them in coupled with massive
currency devaluations. All the great empires Greece, Rome, Spain
and even Britain all collapsed under the weight of debt, currency
devaluation and the massive costs of maintaining an empire. Of
course what this circle does is bring one back to an area that
MacLean's never broached. Not once did MacLean's mention that
Gold and Silver have been currencies for three millennia and
they have never lost their value. But then the conclusion is
still only grasped by a few. That money in order to be worth
something must be something of real value. Paper is worth nothing
more than the price of the paper. And that includes stocks and
bonds as well as they are ultimately just paper.
All sorts of sincere people
are proposing solutions but the trouble with it all is that they
are merely band aids. Raising taxes, sales taxes, luxury taxes,
rollback of taxes are anathema to the Republicans that are bizarrely
running up the record debts. But then if you decrease sources
of taxes through tax cuts but continue to spend then there is
of course no way to finance it except borrowing. And to slash
thousands of support programs will just throw thousands if not
millions into poverty. Debt just keeps growing and the consumer
seeing no responsibility in government also continues merely
on his spending spree with a piece of plastic. But again history
has shown that ultimately the debt collapses and is uncollectible.
Debt is merely a number written on a piece of paper.
Complacency abounds everywhere
right now and no more so then the head of the world's key central
bank Alan Greenspan. When asked what would happen to the economy
if foreign banks began selling US Treasury bonds in large volumes,
he said he didn't expect it would cause a surge in interest rates.
"Our general conclusion
at this is we do not perceive that it is a really significant
problem for our domestic economy" Greenspan said. Uh! Soothing
words but in barely 8 months Greenspan will finally fade off
into retirement. Since Greenspan has been the head soother now
for upwards of 18 years he has successfully put America to sleep.
They and the world could wake up to one hell of a hangover and
with it all of the negative ramifications of debt collapse. As
David Walker pointed out there has been little progress to show
for his efforts. He says in the conclusion to the MacLean's article
"You can lead them to water, but they have to drink. And
they better starting drinking fast - and soon."
For the rest of us keep the
Excedrin handy and keep some real money as in Gold and Silver
handy too.
David Chapman
email: david@davidchapman.com
Charts created using Omega
TradeStation or SuperCharts. Chart data supplied by Dial Data.
 David Chapman is a director of Bullion
Management Services, the manager of the Millennium BullionFund
www.bmsinc.ca.
Note: The opinions, estimates and projections stated are
those of David Chapman as of the date hereof and are subject to
change without notice. David Chapman, as a registered representative
of Union Securities Ltd. makes every effort to ensure that the
contents have been compiled or derived from sources believed reliable
and contain information and opinions, which are accurate and complete.
The information in this report is drawn from sources believed
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assume any responsibility or liability. Estimates and projections
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research material is approved by Union Securities (International)
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