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Buddy, Can You Spare $100 Trillion?

The McCain/Barrack election can be looked at as sort of an illusion. No matter who had won, both these seemingly fine inspired men would have had little effect on preventing the horrible economic impact that is coming: The massive wall America is speeding into. Obama received about 52% of the popular vote and a whole whack of ballots in its antiquated system of electoral colleges. These days 52% is a landslide and good for him. Most students were happy for it, and hopeful for the future. That’s the dream, but here’s the actual nightmare: America’s international trade deficit is -$4 trillion, its accumulated federal government deficit is -$10 trillion, it’s personal household debt (total outstanding private liability) is -$50 trillion and it’s exposure to unfunded Social Security Trust Fund is estimated at about -$40 trillion *, making its total indebtedness well over -$100 trillion. Look at it this way: You and your family have a mortgage, (Federal Accumulated Debt), you owe your neighbor money, (Trade Deficit), you’ve agreed to pay for you and your spouse’s parents’ retirement, (Unfunded Social Security) and your credit cards and house-mortgage have reached a breaking point (Outstanding Private Debt). Now divide that by a population figure of 300 million Americans and it equals a personal debt load over of -$315,000 per man woman and child. Note that none of these pressing concerns were election issues! Note also, this doesn’t include state and municipal debt.

Let’s compare this formula to Canada. It has a trade surplus of +$4 billion, an accumulated federal government deficit of -$500 billion, a personal household debt of -$750 billion, a Canadian public pension (CPP+RRQ) surplus of +$110 billion, making its total indebtedness over -$1200 billion. Divided by the population of 33 million equals a debt load over -$35,000 ** per person. You can see the difference at once. America is in for an economic shock. Their debt load is unsustainable.

As far as saving goes, both the Yanks and Canucks do poorly, (Canadians save at over two times the rate of Americans), but in regards to consumer versus production, America has become a complete consumer nation. Personal consumption has outstripped its production for the last 30 years. A nation must produce more than it consumes to have real savings, that’s a basic fact. Consequently, it’s debt and credit mess is no surprise. Well, the sheer amount of it is perhaps surprising.

Demographic reality is what is threatening to foil any attempt at a quick turnaround. The baby boom in America started in 1946. Now 62 years later that statistical curve with nearly 1/3 of the nation’s population is in the thick of retiring. In other words, it’s about to spend far more than the nation has conserved. Put another way, they’ve not saved enough to fend off a mathematical economic impossibility. Who will pay for the social security bills when the country is tackling a medical insurance crisis, a global environmental problem, an aging population, a sagging economy and massive infrastructure renewal needs? America is exceedingly wealthy, but what to do? Can the fish and loafs be multiplied fast enough?

The American government has limited basic choices. They can devalue the currency, water-down the dollar or withdrawn military commitments from around the globe, (or all three). You might say, “Well, they could reduce consumption.” This is what the American people will do on their own, and we admire them for it, but what effect will it have? It’s not enough to fend off the economic reality coming their way even if it will go a long way to help. What they have to do in the long term is to be more productive and this will take massive sacrifices from the labor pool. Wages will have to fall, benefits decrease and pension expectations will have to be amply reduced. Military bases will have to be closed, government research will have to be cutback for some time and a federal freeze on hiring enacted. Not exactly what President Obama was hired to bring about and not anything the electorate was expecting. But that’s the thing about life; ever complicated, always a storm.
 

* Even the US Government Accountability Office’s, (Gene L. Dodaro, Acting Comptroller General of the United States, April 2008), latest estimate liabilities from underfunded Social Security and Medicare benefits is 34 trillion, though I didn’t use that figure, nor include medicare or medicaid unfunded liabilities. I define an unfunded liability as the difference between the benefits that have been promised to current and future retirees and what will be collected in dedicated taxes.  If no other reform is enacted, this funding gap can only be closed in future years by substantial tax increases, large benefit cuts or a combination of both. I came to a figure from many estimates, all of them higher than 40 trillion.

** Quebec and other seriously indebted provinces may add on as much as $2-3000 more than a comparable American figure, which might include states like California with sizable debts–accurate baseball-park figures are difficult to verify and even more difficult for municipalities.

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