A Realization of Reality in the USA
I reprint parts of a speech by a US Democratic Senator as it illustrates just how bad the deficit and debt can grow.
We sometimes ridicule the Republican Party in the USA for being totally obstructionist. Yet when one realizes the scope of the problem, sometimes it is better to draw a line in the sand than to compromise, especially if the compromise worsens the problem.
I do not agree with the Republic hyperbole and obstructionism, yet I find some reason in their theatrics. The following reprint illustrates the scope of the problem.
The Solution
As I have repeated before, if the USA simply stops increasing the debt, and lets the private economy grow, the problem will lessen every year.
A Quote to Put the US Deficit in Perspective
The U.S. Is Perfecting A Formula for Budget Failure:
April 30 (Bloomberg) — Erskine Bowles, a true Southern gentleman and co-chairman of President Barack Obama’s erstwhile budget-deficit commission, came to New York City from his home in North Carolina the other night to talk sense about the nation’s perilous fiscal condition.
“I think today we face the most predictable economic crisis in history,” he told an audience on April 24 at the Council on Foreign Relations -…………. if you do simple arithmetic, that the fiscal path that the nation is on is simply not sustainable.”
Bowles, a Democrat, then laid on the crowd some pretty simple, but devastating, arithmetic. He explained that 100 percent of the tax revenue that entered the Treasury in 2011 went out the door to pay for mandatory spending — such as Medicare, Medicaid and Social Security — and to pay the interest on our staggering $15.6 trillion national debt.
That means that every single dollar we spent on everything else, including two wars, national defense, homeland security, education, infrastructure, high-value-added research and the like, was borrowed. “And,” he warned, “half of it was borrowed from foreign countries. And that is a formula for failure in anybody’s book.”
Interest-Rate Help
He said the U.S. is now paying $250 billion a year in interest on the debt, and that is only because, mercifully, interest rates are at historic lows. That’s chiefly because investors are more worried about the risk of default by European nations, and because the Fed is doing everything in its power to keep interest rates low. “It’s because we’re the best-looking horse in the glue factory,” he said.
If interest rates were normalized, Bowles said, the annual bill would be $600 billion a year. “We’ll be spending over $1 trillion on interest alone before you know it,” he said.
To nervous laughter, he offered the example of the country’s obligation, by treaty, to defend Taiwan in the event that China decides to invade the island. “There’s only one problem with that,” he said. “We’ll have to borrow the money from China to do it.”
……………………………….. Bowles remains optimistic that the circumstances are so dire that Congress will have to act, although it probably won’t happen until the seven weeks between Election Day and the end of the year. “We have to,” he said.
“We’ve simply made promises that we can’t keep.”
Health-Care Costs
The big driver is clear, he said: “We have a health-care system that’s absolutely crazy. We spend twice as much as any other developed country in the world on health care, whether you talk about it as a percent of GDP or on a per-capita basis. And that might be OK if we could afford it, and it might be OK if the outcomes were any good.
But if you look at most outcome measures, we rank somewhere between 25th and 50th in such important measures as infant mortality and preventable deaths and life expectancy. And anybody who thinks those 50 million people who don’t have health-care insurance don’t get health care, you’re just wrong. They get health care, they just get it at the emergency room at five to seven times the cost it would be in a doctor’s office. And that cost doesn’t go away, it gets cost-shifted.”
……………………….. Without serious debt reduction, it won’t take much of an increase in interest rates to create a fiscal crisis for the country the likes of which only those who lived through the Great Depression can recall. Once interest rates reach a level that reflects the genuine risk inherent in our ongoing fiscal mismanagement, and debt-service eats up more and more of a shrinking pie, the financial crisis we just lived through (and are still living through) will seem like a sideshow.
“Deficits are truly like a cancer,” Bowles said, “and over time they are going to destroy our country from within.”
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
