June 15, 2010
Doug McIntosh
© SteveQuayle.com
It is clear to me the issue of a United States debt default is not a fringe topic anymore. Even two or three years ago, if you brought the subject up you would consigned to the outer limits of acceptable economic views. In fact, you would have been viewed as the economic version of someone who thought the earth was flat. This is no longer the case. Since the Obama administration seems intent on running 1.5 Trillion federal deficits yearly, reasonable people can safely ask "How does the USA intend to pay this debt off?" Given the recent comments by Chinese officials, as well as the less than stellar performance of recent US Treasury bond auctions, it would seem a US government debt default is causing concern. Being a long standing howling voice in the wilderness on debt issues, I am glad others are finally starting to see what I saw several years ago.
In my opinion, any discussion of a US debt default has both an economic and a moral component to it. It is a serious mistake to simply view repayment of the US debt as solely an economic issue. I believe two questions must be asked; first, can the US pay off its debt and second, will it pay it off? The first is an economic issue, but the second is a moral one and is a matter of will, character and integrity. Having lived in the United States for over 56 years, it seems to me the first question isn't the real issue. Of course the USA can pay off its debt, now around $13 Trillion, assuming both its government and populace is willing to make the needed sacrifices to do so. The proper question is whether the US government and populace will have the self discipline, moral character and integrity to do so. I do not believe that to be the case, based upon my experiences as an American citizen. The American government is shallow, petty and given to short term views of being reelected. The idea any American government would seek to impose the kinds of sacrifices needed to repay the debt is ridiculous. The kind of political leadership in the United States these days is incapable of risking the political fallout such sacrifices would result in. Further, the American populace is also not inclined to fall on its sword in order to repay the debt. Americans are a people addicted to a lack of personal accountability which is breathtaking in its scope. The idea American culture, which views self discipline, honor, character and integrity as at best, quaint relics; at worst, virtues for fools and chumps, is also ridiculous.
While my words may seem harsh, after having lived in the United States my whole life, I think they are true.
Viewing the amount of the US debt, as well as the kind of sacrifices needed to actually pay it, my views show this clearly. The steps needed to pay off the US debt are simply beyond the capacity of either the US government to implement, or its people to accept. One thing people outside the USA forget is the American people are armed. We will not have riots; we will have violent anarchy if any government tried to make the kind of service cuts needed to actually begin paying off the debt. Like I said, the US debt, the official US debt, is in the $13 Trillion range, although unfunded liabilities are in the $60 Trillion range. The interest alone on the US debt was $187 Billion in 2009. Doing the math on any possible repayment plan, say either ten or twenty years, gives grim numbers indeed. Paying the US debt off in ten years would require yearly interest payments of $187 Billion; in addition yearly principal payments of $1.3 Trillion. The total would be $1.5 Trillion in either tax increases or service cuts. Paying the US debt off in twenty years would require interest payments of $187 Billion and principal payments of $650 Billion, for a total of $837 Billion every year.
Context is everything. While these numbers seem manageable in a Gross Domestic Product of $14 Trillion, this is misleading. The proper framework is not the GDP. The proper framework is the Federal government spending. In fiscal 2009, the US spent $3.517 Trillion. Of that $3.517 Trillion roughly $1.4 Trillion was borrowed. Federal revenue sources in 2009 are listed as: Social Security, $889 Billion, Income Taxes, $1 Trillion, $54 Billion, Ad Valorem taxes, $126 Billion and Business and other revenue, $34 Billion. I will note that these numbers are significantly lower than the 2008 ones; for instance, income taxes were down $400 Billion. The financial crisis caused tax revenues to plummet, while federal spending skyrocketed. I will also note that while the Social Security payroll tax is being used to finance current general spending, it is really an unfunded future liability. Even though the Social Security payroll tax has already been spent, it will require future federal spending to replace it. As such, I do not believe it can, using any accepted accounting practices, be listed as a federal revenue source at all. It is a prepaid tax to fund a future benefit. What the federal government is doing is looting a future pension fund to support current government spending. This will "bite you in the rear end" as the saying goes down the road a few years. It is accounting fraud, but given what has been going on with US banks and Wall Street, it is another example of the moral failure of the government and people.
As if these numbers weren't bad enough, you have to think about what I call the "do no harm" factor. It is clear to anyone with an IQ above single digits that before you begin to payoff a debt, you must first stop going into debt. Before the United States can repay its $13 Trillion debt, it must stop adding to it. What that means in plain terms, is the $1.4 Trillion the US borrowed in 2009 must go to zero. In even plainer terms, this is in addition to the amounts in either the ten or twenty year repayment plan I mentioned earlier. The numbers are even grimmer for those.
Besides the $1.4 Trillion needed to simply stop the increase in debt, you would need $187 Billion in interest payments: Plus you would need either $650 Billion, or $1.4 Trillion in additional taxes or service cuts. The totals are truly mind boggling. In the twenty year plan you are looking at a total of $2 Trillion, $237 Billion< $1.4 Trillion plus $650 Billion, plus $187 Billion.> In the ten year repayment plan, you are looking at a total of $2 Trillion, $987 Billion<$1.4 Trillion plus $1.4 Trillion, plus $187 Billion. Again, the context is not the $14 Trillion US Gross Domestic Product. The context is the roughly $3.6 Trillion dollar federal budget.
The twenty year repayment plan would require budget cuts, or tax increases, equaling 60% of the total federal budget. The ten year plan would require budget cuts, or tax increases, of over 80% of the current federal budget. Obviously, this isn't going to happen. There may be an effort to pay off the foreign debt holders, some $3 Trillion worth. Or the US may just default on all of it and hope its military will fend off the anger of the rest of the world. We shall see about that.
In summary, the United State's federal debt is beyond payment. It has been beyond payment for several years now. Under Obama, things are only getting worse. The only issue is when, not if, the US will default. The more significant issue is when the rest of the world will finally decide the US debt is no longer payable. I believe the process has already started. It is only a matter of time.
All links to this article must include link to www.stevequayle.com/ Copyright reserved