Life After the Day of Reckoning

The 2011 fiscal year ended on September 30th and the beans of U.S. Government revenue and spending have been counted up.  Total revenue for the year was $2.3 trillion.  Total spending for the year was $3.6 trillion.  The difference – a $1.3 trillion deficit – was made up with debt, pushing the national debt to $14.8 trillion…over 100 percent of GDP.

Just five years ago mention of a $1 trillion dollar annual budget deficit would have been shocking and unimaginable.  Back then, during the blissful days before the 2008 financial meltdown and economic fallout, a budget deficit of $500 billion was considered outrageous.  But in this brave new world, the federal government has spent $1 trillion more than it has taxed the last three years in a row.

Of course, there are consequences for actions.  Paying the interest on the debt is now the fastest growing budget category.  In 2011, net interest payments rose 15.7 percent to $227 billion.

No doubt, the U.S. Government is bleeding money.  Every month is takes over $108 billion of new debt just to keep the lights on.  So far the U.S. Government has gotten by on the generosity of its creditors and their willingness to buy treasuries at historically low rates.

Clearly, this can’t go on forever.  When a U.S. Treasury auction goes no bid the great debt bubble will be over.  Interest rates will rise and stocks will fall, as investors demand a lower price/earnings ratio for owning stocks.  Maybe this is several years out…who knows? Nonetheless, if deficits aren’t dramatically reduced that day will soon come.

A Shoddier World

Moreover, the massive debt burden will be a massive headwind pushing against the economy for years into the future.  Rather than future earnings being spent on new capital investments, which would support further economic growth, this money will be directed to debt interest payments.  In other words, future earnings have already been spent.

For individuals, this means that on balance their incomes will stagnate while their cost of living increases.  In short, they’ll become poorer.  Additionally, the world around them will become shoddier as many state and local governments are not able to pay what they owe.

Here’s what we mean…

In Illinois, for instance, the state is chronically late in paying its bills.  “As of early last month, the state owed on 166,000 unpaid bills worth a breathtaking $5 billion, with nearly half of that amount more than a month overdue and hundreds of bills dating back to 2010,” reported AP.  But at least they’re still eventually paying their bills…for now…

In Prichard Alabama, after being warned for years that if it didn’t do something its city pension fund would run out of money, they did the unthinkable.  The city “stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full,” reported The New York Times.

And just last week, Harrisburg, Pennsylvania, filed for bankruptcy after a massive debt burden associated with an incinerator project, and an assortment of other debt payments, made it impossible to pay for basic city services.

Episodes like these will be playing over and over across the country in the years ahead…

Life After the Day of Reckoning

All debts eventually must be reckoned.  Piling on more debt to pay the interest on existing debt does not make the debt go away…it just postpones the day of reckoning and exacerbates the destruction when it eventually arrives.

It all seems so elementary and simple.  Spending more than you make and papering over the gap with debt is a recipe for disaster.  It doesn’t matter whether it’s personal, business, or government finance.  The same natural law applies.  Denying it is like saying that pi is not the ratio of a circle’s circumference to its diameter or that water doesn’t boil at 212 degrees Fahrenheit.  It’s a basic axiom of how the world works.

Yet, over the last 50 years or so, the world has become enamored with the mirage of debt. Over and over again more debt proved to be the answer to the world’s problems.  Investors and businesses were rewarded by leveraging up with more debt.  Politicians could offer an endless supply of goodies to their constituents without having to pay for them.  Time and time again a growing economy bailed them out.

But by the time the financial crisis hit in 2008 the U.S. economy had reached total debt saturation.  The economy could no longer support the level of debt that had been piled upon it.  The economy had effectively been flat lined.

The day of reckoning is here.  Poverty is increasing.  Incomes are decreasing.  Businesses are slumping.  Unemployment is persistently high.  And there are no political answers.

Welcome to life after the day of reckoning.

Sincerely,

MN Gordon
for Economic Prism

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