Federal Debt: A Rock Around America's Neck
The Federal Debt has tied a stone around the United States' neck. It grows and grows in a dizzying way as sleepwalking dominates Washington D.C.: Will the U.S. wake up in time to avoid the fall? Difficult job because debt, like a resistant web, wraps and suffocates it. The United States Federal Debt great drives: USA foolish ambition of supremacy in all corners of the planet, and the necessary public benefits to citizens to avoid social breakdown.
The Federal Debt of the United States, April 30, 2021
$ 28.2 trillion
$ 85,332 per person living in the U.S.
$ 219,342 for each US household
134% of the US Gross Geographic Product
"There is no return to normalcy if the debt issue is not resolved. It is the elephant in the room. If we understand that the policies of the last thirty years have created a growing mountain of debt and instability in the system, we must confront these policies," said William Dudley, former President of the Federal Reserve Bank of New York as quoted by John Mauldin, "The Great Reset"
The Pandemic Overstates the Debt Situation, but it is not its Cause
The graph shown above makes it clear that the problem began in the 1980s when the United States' debt reached a prudent 30% of its GDP. Before the Pandemic, at the end of 2019, the U.S. Federal Debt had already exceeded 100% of its GDP, reaching U.S. $ 23.5 trillion dollars.
The United States After the World Championship in the Race of the Indebted
The United States with a debt equivalent to 134% of its GDP, has possibly already achieved third place in the contest, leaving behind rivals difficult to overcome: Italy and Portugal which, together with Greece, appeared until recently as models of the irresponsibility of the South of Europe. Japan, the current world champion of the indebted, bears the title thanks to the high savings rate of its population that can therefore finance public deficits. Savings rate in Japan is 29% of GDP (2010-2019). In the United States it is 19%. That is why the increase of the debt in the United States will create a crisis much earlier than in Japan.
Bread for Today and Hunger for Tomorrow?
It is possible that in the future the Federal Debt of the United States may be classified as "the rock tied around the neck" of the country. Isn’t adding more and more debt worse than pouring water into the soup? Something harmless? Some preachers like Reuters in 2019 in this article, argue that increasing Federal Debt is beneficial for the US economy (as it sounds!). Reuters ends with this paragraph: "Even if you don't like government debt, large deficits often stimulate the economy, to the extent that the Federal Government can afford the cost of servicing the debt." Will the United States be able to do it considering the magnitude of its debt today?
Public Debt can help to reactivate an economy when economic activity has slowed down. It is a tool for very precise economic conditions. It is very different when it is permanently applied, as the United States has done in the last 40 years, by subtracting resources that could have been used for productive activities. The return that the Federal Government obtains from these resources is doubtful to say the least. What rate of return has yielded the obviously excessive U.S. spending on military arsenals?
The excess of Public Expenditure over Revenue has its origin in two United States policies which have been in force for at least the last fifty years.
Egolatry in the Global Village
First, the United States sought to become the authority of the Unipolar World or, in less far-fetched and clearer terms, an Empire. Since this cannot be achieved by means of diplomacy alone, the U.S. has required a disproportionate Defense Spending (a no doubt misleading term: it would be more appropriate to call it Bellicose Spending). If it had spent 2% less of its GDP in the last fifty years, –at the level that the vast majority of the world's countries do– the Federal Government's debt would be at normal and acceptable levels. What led the United States to the unbridled ambition that today has it on the brink of the grave? Did the gluttony bug bite it?
As Time Goes By…
Second, the transfer of resources from the Federal Government of the United States to the citizens to correct the increasingly obvious differences in income, a trend that began fifty years ago and that today consumes a substantial part of federal income. What caused these differences in income? Loss of good jobs to competition from "obnoxious" Chinese and other Orientals? The excessive increase in the workforce due to immigration? The Transformation of IT and Communications? The truth of the matter is that unlike the economy that made the United States great and that distributed its results fairly among the citizens of the time, validating the "American Dream", the current economy makes the so-called "1%" great, the elite, and leaves the remaining 90% (a 9% manages to make ends meet) hunting flies without them seeing true increases in their income. As a consequence, The Federal Government must distribute federal funds to temper the shocking disparity in citizens' incomes. A trend that cannot be seen whether it could ever change. Thus, from 21% of Federal Expenditure in 1960, Transfers became in 2019, 62% of Federal Expenditure. (another source mentions 69% in 2019). Is it the same country?... The same society?... There is no doubt that time passes and leaves traces but, in this case, time seems to have turned everything upside down. Federal aid reflects a radically different society from that of the 1960s. The same territory, the same flag, the same States... but a different country. As time goes by!
The "Transfers" and Defense Spending together comprise 80% of Federal Spending. The remaining 20% covers the payment of the Federal Debt, Public Works, the cost of bureaucracy, Security and Public Order. (Nothing strange is then the obvious deterioration of the Infrastructure and Public Works: for them only the "scraping of the pot" remains). It seems very difficult to reduce the number of Transfers –there are structural reasons that explain them and that will be the subject of a next column– so the adjustment to the Federal Budget should come from a radical change in the so-called Defense-Bellicose Spending.
This is how they nick-named the newly elected President Joe Biden. The programs he announced to the public upon taking office, including aid to cope with the Pandemic, added six trillion dollars. He didn't think it was enough and he announced an annual budget of another six trillion dollars that would begin in September of this year if approved by Congress. Special plans on the one hand and, on the other, a good part of the current budget, both financed with more debt. Increasing taxes on companies and the wealthiest will be nothing more than fireworks. Since the 1970s, the deficit has been a chronic problem in the United States (except during the Clinton administration). Revenues should grow 30% to just cover the deficit that already existed in 2019! The United States has not managed to balance its federal budget in the last 50 years except for the Clinton years, and the new Administration believes it will do so now that the deficit has become gigantic!
How much the image of Washington in the world has deteriorated! And not only by the work and grace of the "Six Trillion-dollar Man". Before him it was Trump, and before Obama, and before Bush Jr. ... and before, Bush Senior, and before Reagan, and before Carter, and before Ford, and before Nixon!... The only virtuoso of public finance turned out to be Clinton, the President who entertained Monica Lewinsky!
What's Behind the Six Trillion Dollar Man Proposals?
First, will Biden seek to buy the goodwill of the voters? Will the despair of the Washington Establishment (the Swamp, as Trump called it) be urged to captivate public opinion on pain of having to face a new Trump in the next presidential election or perhaps the same one but this time bearing a grudge? Public opinion cried in 2015 (Gallup poll) for someone to clean up all the rubbish accumulated in Washington D.C. and such an end they were willing to vote for an "improvised", the "devil" who came to Washington to change the script for the protégées of the Federal Budget, although in light of the figures, Trump´s remedy turned out the same as the disease. Trump seems to have followed the recipe that Reuters picked up in 2019: "... large deficits often stimulate the economy" where the expression "large deficits" is the same as saying the increase in Public Debt. After Trump's economic growth was thecrux of the matter: the increase in Public Debt by 2.5 trillion dollars from 2017 to the end of 2019 (before the Pandemic) (4% annual growth approximately).
Second, shall Biden actually believe that China's challenge is to be overcome with debt and more public debt financing makeshift public programs? Will his Administration, blinded by the idea of the exceptional role of the United States, escape the understanding that a rival has emerged in a short time, that is indeed exceptional, because of the size of its population (four times the size of the United States) and an ancient civilization that placed China until the seventeenth century at the head of all progress in the world? Although it may seem surprising that China in forty years has turned its economy into the main one in the world according to the IMF´s Purchasing Power Parity, this is nothing more than a return to the preeminence that historically characterized it. Does Biden intend to confront this new rival with the shams and tricks of Washington's politicians?
The desperation of a country that managed the world having a wallet and a bank account that provided for everything and that is now constrained by filthy dollars is understandable. Today, they are not enough to neutralize the newly arrived adversary who, thanks to its astonishing ability to save (more than 40% of its GDP), invests even in the most remote places of the planet.
Biden declared, defending his new programs, that they will be financed with new debt, with a logic typical of the Washington swamp, "If we do not make these investments, we will increase our debt (Public Debt) and we will put our children at a disadvantage compared to our competitors." So, in order to lower its debt, the United States must go into debt! What a remarkable logic! And the children involved! What future awaits them with public policies invented by the dinosaurs of Washington's political spectrum! Who knows what interests they pursue? Children's interests? The children will inherit with these plans a public debt that will bring them to their knees in front of their Chinese competitors.
The official explanations are more of the same: the increase in debt will operate to finance programs that would allow a growth in the product that is expected to alleviate the Federal Budget deficit in the next decade. Can anybody believe the figures that are projected for the next decade when we are just beginning the one of the 20s, and what’s more, after 50 years of deficits that have led the United States to the deplorable situation in which its Public Finances are today?
May God Hear Biden and the Devil Play Deaf!
Far from Biden's daydreams, the stark reality is that "the projected deficit of this fiscal year” sets a new record of $ 3.7 trillion that will drop to $ 1.8 trillion in the following year, an amount that is almost double the pre-Pandemic levels. The National Debt will soon surpass $ 30 trillion after granting more than five trillion in approved measures to alleviate the problems of the Pandemic. As a result, the Federal Government must borrow 50 cents for every dollar it spends this year and next."
The following graph shows that the United States since 1965 has lived with an underfunded Federal Budget except for three of the Clinton years and one year of Bush Jr. That´s four years of surplus and fifty of deficits! The United States sold to the world the image of a serious and responsible country that promoted virtue in the world while behaving like a third world country! What hypocrisy! How far can America's politicians be believed when they tear their hair out and protest about human rights, proclaim democracy, honesty, and all the talk they repeat endlessly pretending to teach the world good parenting lessons?
"There is no such a Thing as a Free Lunch"
The mountain of Federal Debt in the United States should bring with it a mountain of interest. On the contrary, "The Easy Money" since the 2008 Subprime Crisis has kept interest rates close to zero. Since the Pandemic, a good portion of the new Federal debt has been endorsed by the Federal Reserve, which allowed something unusual in the debt market: the higher the Federal Debt, the lower the interest paid by the Federal Government and the lower the interest that the big creditor, the Federal Reserve, perceives, as they are actually close to zero. The reason is easy to see: any additional payment of interest makes the situation of the Federal Government more unbearable, perhaps impossible.
Interest close to zero is not free: They have seriously affected investment funds, mainly investment funds intended to generate resources for retirees. As the Federal Government of the United States and its debt are not insignificant, they have harmed practically all pension systems in the world. Additionally, the policy of the Federal Reserve, “The Easy Money”, has inflated the value of shares and of assets in general. Everything to save a drifting Imperial Government even if the lives of millions of citizens of planet Earth are lost! How will markets normalize when interest rates return to their normal levels? Will it be crying and clenching teeth?
What solutions does the mess have?
The obvious solution is to call on the International Monetary Fund to devise a shock treatment that forces citizens of the United States to put their feet on the ground and their government to undergo a strict adjustment plan. Is it possible? A very difficult task. Not in vain the United States is an Exceptional Nation. It is difficult for it to succumb to the treatment that it imposes on mere mortals.
Another solution, less elegant but effective, is "The Argentine Solution", La Quita, the default of the total or a portion of the debts. The United States already did it once when in 1971 it unilaterally abandoned the Gold Standard due to the impossibility of fulfilling its obligation to deliver gold in exchange for dollars at the value agreed upon when the Gold Standard was established at Bretton Woods, at the end of World War II ( US $ 35 per ounce of gold). Did anyone demand that the United States fulfill its commitment? At the end of the day, who will dare to exercise with the United States the rights that every creditor has to collect from his debtor? The Argentine recipe already has a sophisticated name that sounds good to the sensitive ears of the imperial bureaucracy: "The Great Reset". This is the title of one of his articles by John Mauldin that for years he is more than worried about the looming catastrophe. In it he quotes William Dudley, former President of the Federal Reserve Bank of New York: "This leaves the U.S. two paths: higher nominal growth –higher inflation– or trying to get out of bad debts by restructuring or punishing them." The eventual Quita is complicated by the role that the dollar plays as the world's great reserve currency and that could be affected by a unilateral decision by the United States to punish its debts.
(The Great Reset is also the name used by the World Economic Forum for the plan that its members assume will solve once and for all, the problems of human beings and their societies. An unknown plan except for the initiated).
The path of inflation that devalues debts is always available and is a temptation for the authorities. It is a path, however, from which the entrance is known but not the exit, and it usually ends in terrible social and political crises. The economic and financial authorities of the United States manipulate this concept very lightly, convinced that once they release the Genie of Evil, it can be controlled and disciplined. As a citizen of a country that experienced one hundred years of inflation that ended in a very serious political crisis (the fall of President Allende and the arrival of a Military Government headed by General Pinochet) an instinctive recommendation is to make any effort to avoid the arrival of inflation. It is the same apprehension of the Germans who have not yet forgotten the tragedy that was the hyperinflation of the Twenties of the last century. Perhaps that is why the chief economist of the Deutsche Bank warns about the danger that looms over the United States.
But there is another solution for the United States, the formula that some poker players in the Far West used in the face of the impossibility of paying the bets: "Kick the table", start a conflict to create a new reality that makes a "clean slate" of debts. The problem with this formula is that to be effective it must create a "major conflict", a war with all the laws, not a hybrid war as it is used in the 21st century. Difficult solution: It can end in the death of the debtor!