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In March 2008, the U.S. national debt was $9.4 trillion. In the 925 days since then, our national debt has risen to almost $15 trillion. That means our government has spent almost $6 billion a day more than taxes available, although we are now spending $7 billion a day more than revenues available. During this brief period, every family of four in America has incurred additional federal government debt obligations of $70,000.
Then consider that 50% of the families in this country pay no taxes. The long-term outlook is that the producers (makers) are facing huge future taxes, and the spenders (takers), are facing no additional obligations because they can't pay them anyway.
Matters become worse as we look a little deeper and some other facts are examined:
1. Federal Reserve System: An audit of the Federal Reserve System discovered that 70% of the money borrowed in the worst week of our crisis (October 2008) was borrowed by foreign banks. The largest borrowers accounted for $2.7 trillion (primarily banks from the United Kingdom, Scotland, Germany, Switzerland and France). Where did any authorization come from for the Fed to obligate American taxpayers to bail out the banks of foreign countries?
2. U.S. debt's maturity: The average maturity of all U.S. debt is 4.3 years which, even the government has realized, is way too short a maturity for so much money. What happens if short-term interest rates go from 1% to 6%, which is likely with looming inflation?
The federal government, which already cannot meet its obligations and borrows money to pay its interest, would become more insolvent. To resolve this problem, because interest rates are unrealistically low, the Fed is going to sell a higher percentage of debt with maturities longer than 10 years. Ten-year notes pay about 2.3% now, which is ridiculously low given that inflation already exceeds 2.3%.
3. How can the Fed do this?: The euro mess is even worse than the mess in the United States. That has caused other countries that own large euro reserves to want to sell them, which has increased demand for dollars. An increased demand for dollars allows the Fed to sell more treasury debt at lower interest rates with longer maturity. The dollar is now “prospering” because of Europe's disaster.
4. The Heritage Foundation: A recent report substantiates that the cost of government agencies to enforce 160,000 pages of rules is more than $1 trillion per year. The bottom line is that bureaucrats cost us about 7% of our GNP just to tell us how our businesses should be run. It is as if Americans are too stupid to do things themselves. Plus, that “cost” of regulation has made us uncompetitive in international markets because our goods are over-priced.
5. How high can debt get before it harms growth?: The National Bureau of Economic Research study shows that economic growth is noticeably reduced when gross government debt exceeds 90% of GDP. Our debt is almost 100% of GDP and will pass 100% of GDP within a few months. Since 1946, in 22 advanced economies, debt exceeded 90% of GDP only 8% of the time. All of these governments have failed. Now on the brink of monetary crashes we have: Japan, the United States, the United Kingdom, Ireland, France, Italy, Portugal, Greece and Belgium, just to name a few. They are all indebted to the Fed. The Fed has nothing to back up its credit but thousands ($15 trillion worth) of IOUs from governments that are about to collapse.
How did we get here?
The reason is simple: A small group of men control the money of the United States, which, in turn, controls the money of the world. The Constitution was written to help this country avoid consolidation of power among only a few men.
The primary aim of regulatory policy should be to make it possible for banks, for example, to fail without endangering the rest of the system. Remedies, however, always end up increasing the size, and reach, of government through additional regulation, rules and taxation.
Some investment history
In times of over-indebtedness, hard assets such as gold, silver, real estate, copper and so forth, do best. That's because in an over-indebted society, in which inflation must take hold, the value of “limited” hard assets increases with inflation.
It's noteworthy that the Japanese stock market sells about 25% of the value of its high 20 years ago. The markets have never recovered. It's also little known, and interesting, that on an inflation-adjusted basis, it wasn't until 1955 that U.S. stock prices fully recovered from the crash of 1929. During the market's difficulties from 1974 to 1987, inflation-adjusted stock prices were actually lower than they were in 1928. Moreover, since 2000, the Dow and S&P are both down, accounting for inflation. The NASDAQ is down 30%, and, believe it or not, real estate values are up more than 40% from 10 years ago.
Conclusion
The only way to overcome this crisis and restart growth is to cut budget deficits and government debts. We must restructure the economy to increase labor productivity and international competitiveness. Until then, limited assets will continue to increase in value while stocks are likely to go nowhere. Bond prices are manipulated by the Fed through the setting of unrealistically low interest rates designed solely to make it easier for the government to finance its debt. Paying off one's debt, and putting oneself in a good cash position, are important in weathering this economic storm destined to last several years.
As President Ronald Reagan said, “As government expands, liberty contracts.” We are at the crossroads of “liberty, or empire.” The direction we go is decided by the middle man, our government. So far, during all the financial crises of the last several years, our government has shown no willingness to stabilize the ship of state, but, rather, it has indicated a strong desire to increase the power of government, to increase our taxes and to increase its own power, pay and benefits at our expense.
Bet on empire.
Caveat emptor.
George Rauch, Longboat Key, is chief executive officer of Bradenton-based General Propeller and a former Wall Street investment banker.
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