Thieves in the House
Recently I had the pleasure of having lunch with the Comptroller General of the United States, David M. Walker. He heads up the U.S. Government Accountability Office (GAO, the government’s internal watch dog. As he was about to give a talk on out of control government deficits he had in his brief case a chart on the size of the government’s obligations over time. Our discussion on those obligations over lunch were followed with an email exchange and Walker kindly pointing me to the GAO site, all of which allowed me to confirm my analysis of the budget with projections from the Congressional Budget Office (CBO.
I have also met with Douglas Holtz-Eakin, head of CBO, who can competently recite the situation of 6 different budget projections without notes. The combined scenarios of the GAO and CBO provided me with the basis to create the following projection of the US budget:
The clear picture is of a government completely out of control. The blue line is the history of the US Federal Government debt. The green line shows the path we are now on, with the debt soaring to impossible levels against projected GDP. Importantly, the source isn’t some crazy hand waving blogger: These are the government’s own projections – and we all know they have every incentive to accent the positive. If this is the best they can do at this point, then you know things are not just bad, they are calamitous.
This glimpse at the future clearly shows that the Debt of the US will, in the foreseeable future, go from being a troubling yet manageable fraction of the economy to being several times the size of economy. That can’t happen without repercussions.
The government will be spending money they don’t have, which means creating more of it out of thin air, which dilutes the value of all the dollars that came before it. It doesn’t take a Harvard MBA to know that the kind of deficits projected above guarantee a persistently weak dollar, higher inflation and higher interest rates.
You may be right to criticize this analysis as only one of many scenarios developed all the time and that there are other assumptions that lead to other estimates, and you would be right.
But I’ve looked at the assumptions, as has David Walker, and it is more likely that the assumptions have underestimated how serious the situation could become, and maybe by a significant margin. For example, in the projections above, the interest rate paid by the government stays flat. Interest rates fell for 23 years and have only just recently bounced off of 45 year lows. The odds of interest rates staying at these low levels for decades into the future are, in my opinion, nil. I have analyzed the scenario of the impact of higher interest rates. The problem can get out of hand because the problem feeds on itself: Higher interest rates lead to higher interest on the debt, which leads to higher debt, which leads to bigger loss in confidence in the dollar, which leads to higher interest rates and the loop makes itself worse .
The Blame
Who is responsible for this sin of profligate spending? You could start by pointing a finger at he House of Representatives as they are constitutionally charged with holding the purse strings of the US government. They vote the spending and programs we are now saddled with, they pass tax programs, and vote in the big supplemental bills that fund the wars.
Entrusted with allocating the biggest sums of funding in the world, they clamor for more, assuring the future bankruptcy of the nation in the process. And it is not just the modern politicos that are responsible, but a failure to pursue sound monetary policies that extends back decades. Why do they do it? That answer is easy and reflective of human nature… they do it to curry favor with their constituents in order to get re-elected.
Which further points the finger at us, the American public, who instead of voting the bums out for wasting our money, and handing a legacy of debt to our grandchildren’s grandchildren, we happily pocket the pork belly doled out and reward the prolifigates with our votes.
The bottom line is that debt and deficits are baked into the cake, exacerbated by the demographics of retiring baby boomer and a government that not only shows no intention of slowing its spending, but quite the opposite. In fact, like an alcoholic in self denial,, the government has already spent the supposed “Trust Funds”of Social Security and Medicare.
The government is closer to bankruptcy than anyone who has not studied the situation can guess. You will hear government apologists claim that the government can’t go bankrupt because they are the government and along with a complicit Federal Reserve, they can meet any debt obligation because they have the printing press. That is precisely the problem. They can print any amount of money they want. That has been theoretically possible since we went off the gold standard in 1971.
It is this loss of any constraint on government spending that has let the genie out of the bottle. The track is now laid. The long term future of the dollar is not in question. And to the extent that it is the basis of all other currencies, which it is now that it has become the reserve currency of the world’s central banks, then all currencies are doomed.
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