The American 2016 elections can be looked at as sort of an illusion. Although it is going to cost over six billion dollars. No matter who had won, both these candidates would have had little effect on preventing the horrible economic impact that is coming: the massive wall into which America is speeding. It's international trade deficit is -$4 trillion, its accumulated federal government deficit is -$10 trillion (2008) -14 trillion (2012) -18 trillion (2014), it’s personal household debt (total outstanding private liability) is way over -$50 trillion and its exposure to unfunded Social Security Trust Fund is estimated above -$40 trillion *, making its total indebtedness well over -$115 trillion, (2015). Look at it this way: You and your family have a mortgage, (Federal Accumulated Debt), you owe your neighbor money, (Trade Deficit), you’ve agreed to pay for you and your spouse’s parents’ retirement, (Unfunded Social Security) and your credit cards have reached a breaking point (Outstanding Private Debt). Now divide that by a population figure of 325 million Americans and it equals a personal debt load over of -$315,000 per man, woman and child. Note that none of these pressing concerns were election issues in 2008 and only became so in 2012! Note also, this doesn’t include state and municipal debt; see, National Debt Clock, (current) which make my figures look conservative indeed. (The new expression for this in the media class is The Fiscal Cliff.)
Public government debt put into its simplest terms is the ability of any national state to meet its payment obligation; and that financial truism, true for even households, is on another level complex, multifarious and filled with treacherous ifs and buts. One thing is for certain: the inability for even the smallest nations to meet its debt-load could bring the whole global economy down and lead to another 2008-like crisis. On balance, the way to reduce these risks is as simple as reducing public and private debt.
Let’s compare this formula to Canada. It has a trade deficit of $4 billion, an accumulated federal government deficit of over $1 trillion, a personal household debt of nearly $2 trillion, a Canadian public pension (CPP+RRQ) surplus of some billions, making its total indebtedness over $7 trillion. Divided by the population of 35 million equals a debt load over -$200,000.00 ** per person. You can see the difference but both America and Canada are in for an economic shock. Our national debt load is unsustainable and it's alarming how fast it is increasing, for instance the Ontario province's alarming growth of debt.
As far as savings goes, both the Yanks and Canucks do poorly, (Canadians save at over two times the rate of Americans), but in regards to consumer versus production, America has become a complete consumer nation. Personal consumption has outstripped its production for the last 30 years. A nation must produce more than it consumes to have real savings, that’s a basic fact. Consequently, its debt and credit mess is no surprise. Well, the sheer amount of it is perhaps surprising.
Demographic reality is what is threatening to foil any attempt at a quick turnaround. The baby boom in America started in 1946. Now 62 years later that statistical curve with nearly 1/3 of the nation’s population is in the thick of retiring. In other words, it’s about to spend far more than the nation has conserved. Put another way, they’ve not saved enough to fend off a mathematical economic impossibility. Who will pay for the social security bills when the country is tackling a medical insurance crisis, a global environmental problem, an aging population, a sagging economy and massive infrastructure renewal needs? America is exceedingly wealthy, but what to do? Can the fish and loafs be multiplied fast enough?
The American government has limited basic choices. They can devalue the currency, water-down the dollar or withdraw military commitments from around the globe, (or all three). You might say, “Well, they could reduce consumption.” This is what the American people will do on their own, and we admire them for it, but what effect will it have? It’s not enough to fend off the economic reality coming their way even if it will go a long way to help. What they have to do in the long term is to be more productive and this will take massive sacrifices from the labor pool. Wages will have to fall, benefits decrease and pension expectations will have to be amply reduced. Military bases will have to be closed, government research will have to be cutback for some time and a federal freeze on hiring enacted. Not exactly what President Obama was hired to bring about and not anything the electorate was expecting. But that’s the thing about life; ever complicated, always a storm; Trump is proof of that. Well, let's see what he can do.
* Even the US Government Accountability Office’s, (Gene L. Dodaro, Acting Comptroller General of the United States, April 2008), latest estimate liabilities from underfunded Social Security and Medicare benefits is 34 trillion, though I didn’t use that figure, nor include Medicare or Medicaid unfunded liabilities. I define an unfunded liability as the difference between the benefits that have been promised to current and future retirees and what will be collected in dedicated taxes. If no other reform is enacted, this funding gap can only be closed in future years by substantial tax increases, large benefit cuts or a combination of both. I came to a figure from many estimates, all of them higher than 40 trillion.
** Quebec and other seriously indebted provinces may add on as much as $2-3000 more than a comparable American figure, which might include states like California with sizable debts–accurate baseball-park figures are difficult to verify and even more difficult for municipalities. (Inflated-adjusted public debt across both federal and provincial governments in Canada in 2013 was over a trillion dollars.)
Posted in the summer of 2008, updated in 2010 and reposted in 2012 after the election, and reviewed again in 2016 after the surprising Trump victory.
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Gross debt as percentage of GDP per country globally.
"In 2014, the US government had outstanding debt of around US$18 trillion. In addition, it needed around US$36 billion to ensure the ability of programs like Social Security and Medicare to meet its future obligations. This means that total federal government liabilities, debt as well as future commitments, were over three times the GDP. In addition, US state and local government had debt of around US$1 trillion and potential commitments to underfunded pension plans of around US$3 trillion." From: The Age of Stagnation, S Das
The explosive growth of debt—personal, corporate, and sovereign—over the course of the 1990s and early twenty-first century is unprecedented. In the 1990s, debt growth was driven by consumer credit, home equity loans, and corporate debt. From 2000 to 2007 the mix shifted toward developed economy sovereign debt and subprime mortgages. After 2007, growth in developed economy sovereign debt continued while student loans and emerging markets debt grew exponentially.
Since 2009, emerging markets dollar-denominated corporate debt expanded by $9 trillion. Total securities issued by energy exploration and development firms, much of it below investment grade, exceed $5 trillion. Growth in all forms of debt exceeded $60 trillion with no end in sight.
A standard gauge of debt sustainability is the debt-to-GDP ratio. From 2000 to 2013, the global debt-to-GDP ratio, excluding financial firms, rose from 163 percent to 212 percent. In the same period, the developed economy debt-to-GDP ratio rose from 310 percent to 385 percent. These trends show no pause or deleveraging as a result of the 2008 financial crisis. While private debt levels declined somewhat after 2008, growth in government debt more than made up the difference and kept total debt elevated. Total government debt in developed economies rose from 80 percent of GDP at the start of 2009 to 110 percent of GDP by 2014. Emerging markets debt, driven largely by China, excluding financial firms, went from 125 percent of GDP at the start of 2009 to 140 percent by 2014. The debt-to-GDP ratio for China alone, excluding financial firms, was over 200 percent by 2014.
In a definitive 2014 study (the “Geneva Report”), the influential International Center for Monetary and Banking Studies based in Geneva summarized the situation as follows The world is still leveraging up … the debt ratio is still rising to all-time highs. … Until 2008, the leveraging up was being led by developed markets, but since then emerging economics (especially China) have been the driving force. … The level of overall leverage in Japan is off the charts. …
Contrary to widely held beliefs, six years on from the beginning of the financial crisis in advanced economies, the global economy is not yet on a deleveraging path. Indeed, according to our assessment, the ratio of global total debt, excluding financials, over GDP … has kept increasing at an unabated pace and breaking new highs. …
These debt levels, while unprecedented, might be sustainable if there were global growth sufficient to support them. There is not. The stagnation of global growth in the past fifteen years is another facet of the failure of the elite consensus. Road to Ruin, James Rickards, author of Currency Wars.