As the Medicare and Social Security trust fund trustees reminded us again on Monday, the U.S. economy is the most foreseeable catastrophe since the predictions of Nostradamus. “Unsustainable” is the word experts of all stripes most often used to describe our burgeoning welfare state.
At a time when, daily, 10,000 Americans retire, total U.S. debt now exceeds 100% of our GDP. The green- eyeshade boys will tell you that when a country reaches 90%, the country loses growth and their creditors lose sleep. As we get downgraded by the credit agencies and look at trillion dollar deficits as far as the eye can see, remember itâ€™s worse than you think.
Those dire fiscal projections coming out of Washington are â€“ the $15 trillion in debt, the tens of billions in debt service payments we must make, the reduced rate of the growth of government â€“ are actually rosy scenarios. These â€œupbeatâ€ predictions are based upon optimistic assumptions about such things as economic growth that are widely recognized as unrealistic.
We’ve gotten ourselves into a situation where are even good news is bad news. If the economy bounces back then our current extremely low interest rates will rise. Who is the biggest interest payer on the planet? Uncle Sam. Every 1% rise in interest rates will cost us another $100 billion in interest payments. And you wonder why the Fed is still printing money and keeping rates as low as low as possible for as long as possible.
The most mind numbing thing about all of this is that our European brethren have provided a blue print for what to do to avoid the fiscal economic disaster that befell them: do pretty much the opposite of what our European brethren did.
Recall that most European nations expanded their welfare state â€“ free health care, well-paid pensions, rich unemployment benefits seemingly in perpetuity Â¬â€“ on borrowed money that would be unsustainable in the face of economic adversity.
The European Union â€“ now faced with that adversity resulting from the global economic meltdown and the sovereign debt crisis of so many members â€“ came up with what they thought was a dandy idea. They would bail out the governments of Greece, Portugal and others in return for a pledge by the countries in trouble to institute austerity measures to bring down their debt. Not surprisingly, the people of Greece, Portugal as well as France, Spain, Ireland and Italy, to name a few, didn’t like the idea of austerity: Cut spending? Get a job? Work until age 62? The result of that was reflected in elections where incumbents and reformers were thrown out.
Nicolas Sarkozy may well become the first French president in 30 years to fail in his re-election bid. His Socialist opponent is promising the return of old goodies, plus some new goodies, as well. He’ll supposedly pay for it with a 75% tax rate on the millionaires. Sound familiar? The Dutch government, one of the more fiscally responsible in Europe, bit the dust this week, unable to agree on spending cuts. Every day brings new evidence that the bond markets are increasingly convinced that several of these countries are in a death spiral, as their cost of borrowing continues to increase.
Yet, instead of viewing all this as a cautionary tale, the U.S. has embraced European policies that will ultimately result in European results. Those who think â€œit canâ€™t happen hereâ€ should take note: France, Ireland, the Netherlands, Portugal and Spain have better (meaning lower) debt to GDP ratios than America, as do Germany and the UK.
The comparison between the EU and the U.S. may not be exact, but the underlying problems of the various EU countries are similar to ours, including a growing elderly population and excessive spending. While U.S. spending as a percentage of our economy is not quite as high as most troubled European countries, which average around 50%, it’s getting there. Itâ€™s close to 40% and almost twice as high as the U.S. average has been over the last 40 years. In other words, itâ€™s the direction weâ€™re going in thatâ€™s most troublesome.
Actually, the biggest difference of economic significance between the US and the EU is that the dollar is the worldâ€™s primary reserve currency. Former Treasury Sec. James Baker recently said that if it was not for the fact that people still want our dollars, compared to other currencies, the U.S. would already be Greece. Thatâ€™s a pretty low bar right now. It makes us the one eyed man in the land of the blind. While it is true that, unlike some EU countries, the U.S. is in no short-term danger of being unable to pay its bills, bad things could still happen.
For example, the dollar could lose its go-to status. The Chinese, who have been diversifying their holdings away from the dollar, are not the only ones urging this. Japan, Russia and some European leaders, as well as the International Monetary Fund, have all questioned the utility of the dollarâ€™s international dominance.
More likely, the U.S. government will try to inflate its way out of our economic crisis. We are the only country that can print dollars. Of course, our creditors will not sit idly by as this flood of new dollars devalues the ones they are already holding. One wonders if anybody still remembers the consequences of the inflation of the 1970s and the â€œmisery index.â€
Can we avoid a European scenario? It can not be done with one election, no matter how good the results. Our political institutions were not set up that way. Stamina will be more important than brilliance or even a pure heart. But so much could be done with just the reform of our entitlement programs and our tax code, along with bringing some certainty to the minds of U.S. business and entrepreneurs we depend on to create economic growth.
We don’t need European austerity, which invariably includes tax increases. We need growth â€“ the only means by which we can avoid devaluation, inflation, and all the problems that such a course would bring. Unfortunately, at a time when we need strong leadership and a consensus, we have a president who is a divider and a demagogue. He is uniquely positioned and qualified to lead us away from the abyss, but he will not do so unless he is persuaded that it will benefit him politically.
However, I believe that we have new leaders on the horizon who have the vision and courage to lead. We’ve always produced such people in times of crisis. But leaders â€“ as we have seen from our European friendsâ€™ experiences â€“ cannot save us from ourselves as a people, unless we are willing to follow. If we do â€œbuy inâ€ to such leadership, we can not only save our country, we can establish a proposition that the world needs to see and embrace: that powerful and prosperous democratic societies do not necessarily carry within themselves the seeds of their own demise.