There’s a lot of talk out there about green shoots, economic recovery and stabilization. Most people aren’t predicting giant leaps in GDP anytime soon, but some are predicting modest global GDP growth between 2-4 percent in 2010. As Greece goes bankrupt and looks to its EU compatriots for help, remember they’re not the only nation on the belly up path. And from a United States perspective, here are the numbers you should be hearing on a daily basis, but aren’t. It isn’t just a matter of restoring economic growth and reducing unemployment. Surprise, surprise: debt, unfulfillable promises and easy money have consequences. Unfortunately, we have plenty of all three:
Current US Debt Ceiling: $14.3 trillion (1)
This figure is supposed to get US finances through 2010.
Current Unfunded Liabilities: Estimated $60 trillion
These are the promises of the federal government made through Social Security, Medicare and government pensions. There is much fanfare made of the legitimacy of unfunded liability estimates (some have surfaced at over $100 trillion), or even the concept of a liability being “unfunded” in general. One thing is for sure: people are paying into these systems, and they are unsustainable; barreling on a path toward bankruptcy.
David Walker, former Comptroller General of the United States and head of the U.S. Government Accountability Office (GAO), testified in November 2009:
Clearly, escalating federal deficits and debt levels, combined with our growing dependency on foreign lenders and the deepening federal financial hole represent challenges that must be addressed…A commission could make recommendations in connection with needed statutory budget controls, social insurance programs reform, tax reforms, additional health care reforms, and other appropriate areas… Its efforts should involve various citizen education and engagement efforts and result in a range of recommendations that will be guaranteed a vote in the Congress.
Importantly, everything must be on the table for any commission to be credible and to have a real chance of success. This includes acknowledging the need to modernize the current social insurance programs, constrain federal spending, including defense spending, and raise additional revenues.
In the final analysis, this special process should be designed to facilitate achieving a significant reduction in the over $60 trillion in federal liabilities and unfunded promises, and to create a climate and momentum to do more over time. This process could also enable achievement of the so-called “grand bargain” that President Obama has spoken of. (2)
The on- or off-balance sheet obligations of Fannie Mae and Freddie Mac: $5 trillion (3)
As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of the U.S.’s $12 trillion mortgage market. (4)
Budget for military expenditures for 2010: $685.1 billion, or $1.87 billion/day (5)
As of September 2009, China owned 23.35% of US Treasury Debt held by foreigners; Japan 21.13%. The two Asian countries are far and away the largest foreign holders of US debt. (6)
Obama’s recently released budget projections:
Fiscal 2011 budgeted deficit: $1.56 trillion
Fiscal 2012 budgeted deficit: $1.27 trillion
Fiscal 2013 budgeted deficit: $727 billion
Fiscal 2014 budgeted deficit: $706 billion
Fiscal 2015 budgeted deficit: $752 billion
Fiscal 2016 budgeted deficit: $778 billion
Fiscal 2017 budgeted deficit: $778 billion
Fiscal 2018 budgeted deficit: $785 billion
Fiscal 2019 budgeted deficit: $908 billion
Fiscal 2020 budgeted deficit: $1.003 trillion (7)
Remember, these numbers are assuming economic recovery in the coming years, where tax revenues will begin increasing again. Somebody is going to get taxed to the hilt to cover the spending and, at some point, tax revenues decline as a result of increased tax rates. See the Laffer curve:
Reasonable minds can disagree as to where that tax rate figure lies in a given economic climate. President Obama better hope that employment is way up, incomes are rising and inflation is in check for these budget projections to hit the mark. However, the federal government is notorious for mis-calculating income and expenses.
As of the end of fiscal year 2009, every 1% increase in interest rates on federal debt will add an additional $147 billion to annual interest charges.
So what are the possible consequences of these staggering numbers? If the United States thinks it can continue to run three quarters of a trillion dollars, to a trillion dollar deficit for the next 10 years, on top of the obligations listed above, we may be in for a rude awakening. President Obama, his administration and the White House website preach fiscal responsibility as the cornerstone of their budget; but I just don’t see it. I understand they want to spend to prop up the economy, but fiscal responsibility? In a world of failing and floundering state and national governments, people are just trying to survive. Meanwhile, China’s GDP grew an astounding 8.7% in 2009. As previously mentioned, they are the principal holders of US Treasury debt. China has proven to be buyers when virtually everyone else in the world are sellers. The United States would be wise to stop spending, or we might wake up at the end of this ten-year budget forecast no longer the world economic power.
(1) Owe No! Debt Ceiling Soars as Dow Sinks – NewYorkPost.com, retrieved February 12th, 2010, http://www.nypost.com/p/news/national/owe_no_debt_ceiling_soars_as_dow_
(2) David Walker, Peter G. Peterson Foundation President & CEO, Testifies Before Senate Budget Committee on Need for Bipartisan Fiscal Commission – pgpf.org, retrieved February 12th, 2010, http://www.pgpf.org/newsroom/MainFeature/senate-budget-committee/
(3) Paulson readies the ‘bazooka’ – CNNMoney.com, retrieved February 12th, 2010, http://money.cnn.com/2008/09/06/news/economy/fannie_freddie_paulson.fortune/
(4) Loan-Agency Woes Swell From a Trickle to a Torrent – NewYorkTimes.com, retrieved February 15th, 2010, http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink
(5) Historical Tables – WhiteHouse.gov, retrieved February 12th, 2010, http://www.whitehouse.gov/omb/budget/Historicals/
(6) MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES – tres.gov, retrieved February 12th, 2010, http://www.treas.gov/tic/mfh.txt
(7) Budget Summary Tables – WhiteHouse.gov, retrieved February 12th, 2010, http://www.whitehouse.gov/omb/budget/fy2011/assets/tables.pdf