![Death by Debt: the US Will Never Be Able to Balance its Budget Again [photo: Jordan Wright]](http://www.getmoneyenergy.com/wp-content/uploads/2010/04/Jordan_Wright_Desolate_web.jpg "Death by Debt: the US Will Never Be Able to Balance its Budget Again [photo: Jordan Wright]")
Thus spake the Congressional Budget Office on the long-term future of American fiscal integrity (or rather, the coming lack of it). As Niall Ferguson reported in his piece for the Financial Times back in February,
“The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.”
So is the US the next Greece? All this talk of the US debt might seem to some like needless additional US-bashing or at worst, anti-Americanism. After all, just look at Europe, right? The Euro is supposedly worse off than the greenback – that’s why the US dollar has gained in strength against the Euro so far this year.
But the first fact is that the United States is not far behind Greece. Ferguson reports that the IMF released figures showing the extent to which developed economies would have to rein in their deficits to restore economic stability over the next decade. Japan and the UK both need fiscal tightening around 13% of GDP – next are Ireland, Spain and Greece at 9% of GDP. The US is next, at 8.8%. Not much difference.
Moreover, just consider the fiscal state of states like California – Los Angeles is able to time precisely when it will run out of money (May 5th this year, 2010) – which is already bankrupt, and Illinois, Nevada and New York are not far behind. You know that California’s economy is larger than Greece’s, right?
The second fact is that there are important ways in which the United States could never be Greece – that in fact, the situation is worse than it is for Greece, although it might at first appear that the United States of Printing Presses has an endless supply of “get out of jail free” cards. The US can print its way out of its debts, yes, – and many analysts think this is exactly what it will have to continue to do – but the key difference is that the US dollar also acts as the world reserve currency, the key medium for trade in oil, gold and other base commodities.
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It would be one thing if the US could just hyperinflate on its own, but since the world’s core commodities are also denominated in USD, it means the price of oil, gold and copper is going up for everyone else as well.
If you’re surprised at the ripple effects little old Greece is having on global trading patterns (due to the potential “domino effect” it is feared to have if it were not bailed out), just imagine what a crater the USD will cause.
Arguments from the fact that the US can just print its way out of its debts are certainly true, but appear to blithely overlook the massive side effects this will have on the world commodity trade – the very foundation, even engine, of the world economy. We’ve all woken up to the fact that the printing press is going to be the only means of escape (in the same way that a hamster outruns its wheel by running faster); but what we (the mainstream media, or even some independent commentators) haven’t come to yet is how to deal with the reality that will ensue – the consequences of this monetary change at the level of the unit of measure of the world’s basic goods.
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My suggestions: pay off all your debts within the next two years at the latest (this year is preferable). Figure out what is essential (personally, materially, spiritually, etc.) to your life now. Pare down – cut back on spending; cut back on eating; cut back on all your “stuff”. This will all be good for you to do anyway. Figure out where all your money is. Start converting your assets into the form(s) that are going to actually help you.
If you have $300,000 sitting in near-cash, for example, maybe you want to pay off your mortgage and own a house free and clear (I’d say that’s very wise, given inflation prospects). Perhaps you want to ensure that your means of transportation are owned free and clear. And that you have a source of income that you can control. If your portfolio is still small, consider converting your growth stocks into high-quality income-producing assets (such as dividend stocks – I wouldn’t recommend most bonds).
It’s not that anything overdramatic is happening here. You don’t have to be a Tea Partyer to want to protect yourself from the obvious, even if we don’t yet know what obvious is going to look like.
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Believe me, the forecasts looked just as bad in the 1980s as they do now. And yet, by 1998 the budget was in surplus. Just a few years later, Greenspan was warning Congress that we were in danger of paying the debt off so quickly as to be disruptive to the economy.
I disagree with the previous comment. The forecasts couldn’t have looked so bad in the 80’s for the simple reason that much of the fiscal trouble forecast by the CBO will come from unfunded liabilities from the Social Security and Medicare, which were not there then. In the 80’s, the baby boomer generation were in their prime working years, while nowadays they’re entering retirement and expecting to draw Social Security benefits for an increasingly large number of years.
The US has behaved for many years as a family living beyond their means and passing their debt from credit card to credit card to just get along.
I agree with the post’s advice to pay down your mortgage if possible. I, for one, wouldn’t discount hyperinflation. I hope I’m wrong, though.
@Philip – it’s good to have the perspective of someone who was paying attention back then! Interesting, indeed, if they were able to turn it all around (and be worried about paying off debt? That sounds crazy) – but I wonder if it was largely due to the growing tech sector – is there anything comparable this time around?
@Maria – I’d still want to pay down my mortgage as fast as possible, too. I don’t think there’s any harm in getting out of debt early. Even if there was hyperinflation, your wages wouldn’t necessarily hyperinflate along with it (or not at first). Yes, the coming social security demographic problem seems to be the elephant that just stepped into the room – it wasn’t there in the 80’s.
Why would you want to pre-pay off any fixed rate loan if you suspect high or hyper inflation? The loan will be worth less in the future.
Paying down any consumer or variable rate debt most definitely.
@Maria:
The unfunded liabilities of Social Security were huge back then! In 1981 the forecast was that the trust fund would run dry before the end of 1983. It was bad enough that a special commission—chaired by Alan Greenspan— was created to come up with a solution.
The commission’s solution, enacted in 1983, raised the retirement age for most people to 67 (from 65), raised the tax rate, and indexed the ceiling for inflation.
@MoneyEnergy:
The key to balancing the budget that time was a particular kind of government gridlock. Clinton raised taxes modestly, then a long economic boom took off, spurred by recovery from the recession of the early 1990s, the ongoing effects of free trade, globalization, declining military spending after the fall of communism, etc. (The dotcom bubble came later.)
The boom boosted tax receipts, but the Republicans won Congress, making it impossible to agree on what to do with the money. Clinton blocked tax cuts. The Republicans blocked new spending. The result was a surplus.
There’s no reason to expect another accidental surplus, but we now have a model of how to get to one if we want to: modest tax increases combined with a spending freeze can do the trick, once we get the economy back on track.
It is true that we’re not going to get a fresh boost of free trade and globalization—that string is about played out—but we could certainly benefit from declining military spending again.
GREAT article ME. I totally agree with you: 1) pay off all your debts as much as you can, 2) figure out what is essential (personally, materially, spiritually, etc.) in your life and get focused on that; as it will help you limit personal expenses and, 3) if you’re in a good asset position (lots of equity in your home), start putting your money into dividend-paying stocks. You’ll want (and may need) that income in the future if hyperinflation hits! It never hurts to be ready for the storm… Cheers!
@InvestorJunkie – well, continuing to make the usual mortgage payments might be a good strategy if, say, you lose your job – but before that happens, and times are “relatively good,” it could still be a good idea to pay more earlier – if your term comes up you can make a lump sum, lower the principal, and then have even lower mortgage payments going forward. If the option is there to pay out your mortgage (or even halve it), I’d do that to lower your month-to-month costs going forward.
@Philip – good points – that is one area where dramatic improvements economically could be made if the powers that be put their mind to it. Although it seems like someone will demonstrate zero point energy before the US ever reins in its military spending.
@FinancialCents – that reminds me; hyperinflation sounds really dramatic but I remember reading or hearing that inflation doesn’t even need to get that high for it to occur. I think the number is seemingly innocuous, like 10% or 9% (someone correct me!). Because it sets off new spirals – initial inflation increases don’t need to be that high to do major damage.
@ME – I’ve read that somewhere too, although the classic definition means an order of magnitude much higher than 10%. Not that wikis are always the most reliable source, but you might want to read this:
http://en.wikipedia.org/wiki/Hyperinflation
I thought these parts of the wiki were interesting, and fairly accurate:
“Hyperinflation is generally associated with paper money because this can easily be used to increase the money supply: add more zeros to the plates and print…”
“While in peacetime the deficit is financed by selling bonds, during a war it is typically difficult and expensive to borrow, especially if the war is going poorly for the government in question.”
Does the latter sound familiar??? Cheers!
I think that inflation will eventually be an issue, but down the road a little further. Before that, I think there’s a good chance we will actually have a bout of deflation.
If Mr. Furguson is right, I will personally give each of you 1.5 million dollars, as well as foot rubs, fertilizing your lawn with as much cow manure as you want and you can all take turns riding around on my back like I am a horse.
I’ll even lower the deadline from never to 20 years, cause I’m nice like that.
So, yeah. I don’t think that prediction is very likely.
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