This following analysis further explores this warning by describing:
1. The 4 key reasons an economic collapse is likely imminent
2. Why these 4 reasons make the economy vulnerable
3. Warning signs and triggers to monitor to foresee a collapse before it happens
4. What can result from an economic collapse
5. Ideas for preparation
The 4 Key Reasons an Economic Collapse is Likely Imminent
1. The U.S. has unprecedented, massive amounts of current and coming debt.
2. Foreign countries have experienced their own crises, and they cannot offer added levels of debt funding for the U.S. Even if they could, they are unlikely to do so.
3. Productivity is declining, and everything the government is doing is further hurting productivity.
4. The U.S. is printing unprecedented, massive amounts of money and no longer has an ability to control inflation and deflation.
1. The U.S. has unprecedented, massive amounts of current and coming debt.
1. Over $11.4 trillion in current debt and growing
2. $1.8 trillion deficit in current budget - $9.3 trillion over next decade (likely to be higher)
3. Outstanding future debt of $43 trillion to $102 trillion from entitlements
4. Debt Comparison to U.S. GDP
A. Over $11.4 trillion in current debt and growing
U.S. federal debt is now over $11.4 trillion. As this graph is slightly outdated, you can imagine how far off the graph the line will need to go to chart the increase.
B. $1.8 trillion deficit in current budget - $9.3 trillion over next decade (likely to be higher)
The $3.6 trillion budget most recently passed is estimated to incur a $1.8 trillion deficit. The deficit is estimated to add up to $9.3 trillion over next decade. These are estimates by the government, but they include economic assumptions that have already been exceeded.
For example, the budget assumes a max of 8.1% unemployment. We are now at 9.4% unemployment. This means the deficit will most likely be larger than projected.
Even with the current estimates, the deficit line on the outdated graph below will go far off the chart. Also, the federal debt discussed above (bullet "A") will increase over time by the amount of the deficit.
C. Outstanding future debt of $43 trillion to $102 trillion from entitlements
The U.S. has made long-term commitments to fund Social Security, Medicare, and Medicaid. Because of the increase in the retiring Baby Boomer population and the continuing increase in medical costs in the U.S., the demand on these payments is also increasing. Additionally, the U.S. government borrows from already-collected funds to undertake additional spending, adding to the entitlement funding problem.
The coming added debt estimates from entitlements are as low as $43 trillion and as high as $102 trillion. To put these debt levels in context, total U.S. Gross Domestic Product (GDP) is about $14.1 trillion and falling.
Graph from a 2008 U.S. Government Accountability Office report
As the above U.S. Government Accountability Office graph is outdated from 2008, here are a few important points to note:
1. The graphed values are based on the $43 trillion low-end estimate as of 2008. There are several other estimates all the way up to $102 trillion.
2. Since this graph was created, there are already significant increases required given the recently reported acceleration of the social security shortfall.
3. Increasing interest rates beyond 2008 projected levels are likely to add to the debt beyond what is stated here.
4. Likely slower GDP growth will increase the percentage of GDP stated here.
Healthcare reform is an attempt to ease the blow of the coming Medicare debt tsunami. While it is possible that this will have some medium-term effect on the debt outlay (to the detriment of healthcare quality, of course), on the contrary it is also quite possible that it will quickly add cost/debt, and regardless, the timing for these changes to take effect will have little impact for several years.
D. Debt Comparison to U.S. GDP
Below is a government-created graph of U.S. public debt (i.e. not including intragovernmental holdings, which bring the current debt total to $11.4 trillion) projections as a percent of GDP through the coming decades.
Graph from a 2008 U.S. Government Accountability Office report
As the above U.S. Government Accountability Office graph is outdated from 2008, here are a few important points to note:
1. We have already exceeded debt that is 50% of GDP and we are moving quickly past this level given our unexpectedly large current and projected budget deficits.
2. The data line must be shifted significantly to the left given the recently reported acceleration of the social security shortfall.
3. Increasing interest rates beyond 2008 projected levels are likely to add to the debt beyond what is stated here.
4. Likely slower GDP growth will increase the debt percentage of GDP stated here.
2. Foreign countries have experienced their own crises, and they cannot offer added levels of debt funding for the U.S. Even if they could, they are unlikely to do so.
The issuance of U.S. Treasury securities is how the government gets loans to fund its spending activity beyond what it collects in taxes. If you buy a Treasury, you are giving the government a loan, which it has to pay back to you with interest. About half of public-owned government debt is held by foreign creditors.
The 3 most significant U.S. debt holders are Europe (European Union and UK), Japan, and China. Japan and China make-up almost 50% of foreign held U.S. Treasurys at 21% and 24% respectively. It is unlikely that these lenders will continue funding U.S. debt to its requirements.
Largest Holders of U.S. Debt - U.S. Treasury (2009)
The 2 key reasons why the U.S. is losing support from its debt holders are:
1. Countries are experiencing their own crises and funding (and having trouble funding) their own stimulus
2. Countries do not like our currency devaluation as it hurts the value of the return on their U.S. Treasury investments.
Take a look at the recent status of the larges U.S. creditors:
Europe
Several EU countries and Russia are significant holders of U.S. debt. All of these countries have their hands full with economic problems in their own countries and with countries for which they are responsible within the EU. Take a look at the current landscape in Europe.
Countries in Europe that have recently collapsed or are on the brink of collapse:
- Iceland (collapsed) - Latvia (collapsed) - Russia (on brink) - Hungary (on brink) - Ukraine (on brink) - Additional Eastern Europe countries (on brink)
In recent time as Eastern European countries have attempted to emerge as viable economies they have become significant borrowers from Western Europe. As Eastern Europe feels pain, the banks and economies of Western Europe feel pain as well.
No comments:
Post a Comment