With all the vile bitterness of the current presidential nomination campaign, people have a tendency to turn a deaf ear to the background noise but that background noise is growing louder and it’s time to listen. The role of the dollar as the global reserve currency is under threat.
Newly published data from the Treasury shows that the government has amassed $76.4 trillion in debts, liabilities, and unfunded Social Security and Medicaid obligations. In simple terms that means that every household in America is in debt for these obligations to the tune of $614,000, a burden that equals 90% of all the nation’s private wealth – private wealth that includes the combined value of every American’s assets in real estate, corporate stock, small businesses, bonds, savings, cash and personal goods such as your furniture, jewelry and automobile. Then throw in another $54,000 just to cover the $6.7 trillion the government owes federal employees and veterans for underfunded pensions, and lucrative benefit packages. Happen to have an extra $668,000 lying around?
The official current national debt stands at $19.2 trillion, or 105% of the gross domestic product, a figure that the General Accounting Office predicts will reach $24 trillion within four year. But let’s be honest – when has the government ever been 100% honest with us. The official national debt is measured on a cash basis [money in, money out] rather than an accrual basis which businesses are required to use [money earned, money due], so that $19.1 trillion does not include most of the obligations listed above. Scared yet? You should be!
Erskine Bowles, co-chair of Simpson-Bowles Deficit Reduction Committee calculated that service on interest for that debt alone, if rates remain near current levels of almost zero, will be $1 trillion a year which could well be one of the largest spending categories in the U.S. budget, well above military and welfare programs.
According to the GAO within the next few years we will owe more than our entire economy produces. The historical average post WWII of how much debt we held as a percentage of gross domestic product (GDP) was 43% on average – we’re currently at 74%. The highest history of debt held as a percentage of GDP was back in 1946, right after WWII and we’re on mark to hit or surpass that within the next 15 years – or maybe sooner. If you add in the soaring health care cost we could be as high as 200% to 300% of GDP, and no matter how you look at that – it is not sustainable.
With this level of present and future debt, we face far-reaching negative consequences – lower wages, weak economic growth, increased inflation, higher taxes, reduced government benefits, or combinations of all. The future of underfunded government pensions (both federal and state) is just as bleak. Some workers will end up with nothing to show for years of work and others will be taxed into oblivion in an attempt to clean up the mess.
Social Security and Medicare differ from pensions because as taxpayers, we do not have a contractual right to receive the benefits. Yep, you heard me correctly. In the original Social Security Act of 1935, Congress “reserved” the “right to alter, amend or repeal any provision” of the Act. The Supreme Court backed them up in 1960. In simple terms, Social Security is only an “implied” commitment that can be discontinued. When the economy deflates, so will your check.
When it happens, it will happen quickly. You will not have access to credit. Banks will close their doors. That means high demand and low supply of food, gas an other necessities of life. When local governments go down so does your water and electricity. As people begin to panic, self-defense becomes even more important. The entire economy will revert to a traditional economy where those who grow food barter for other services.
A U.S. economic collapse would create global panic. Demand for the dollar, and U.S. Treasuries, would plummet. Interest rates would skyrocket Investors would rush to other currencies, such as the yuan, euro, or even gold. It would create not just inflation, but hyperinflation as the dollar became dirt cheap.
Economist Albert Edwards warns that the tidal wave is coming. You had better be prepared and have an evacuation route because the Tsunami is inbound!