Renowned economic historian Niall Ferguson is usually even-keeled with his predictions. That was not the case about a month ago when he warned that the United States could be nearing a sudden collapse:
“I think this is a problem that is going to go live really soon. In that sense, I mean within the next two years. Because the whole thing, fiscally and other ways, is very near the edge of chaos. And we’ve seen already in Greece what happens when the bond market loses faith in your fiscal policy.
…By combating our crisis of private debt with an extraordinary expansion of public debt, we inevitably are going to reduce the resources available for national security in the years ahead. Because as a debt grows, so the interest payments you have to make on it grow, even if interest rates stay low. And on current projections, the federal debt is going to be absorbing around 20 percent — a fifth of all the taxes you pay — within just a few years.
…I’ve just come back from China — a two-week trip there — and the thing I heard most often was, ‘You can’t lecture us about the superiority of your system anymore. We don’t need to learn anything from you about financial institutions and forget about democracy. We see where it has got you.’”
If the United States goes the way of Greece, there’s no one big enough to bail us out. Ferguson did at least say he thinks the situation isn’t inevitable and I would hesitate to predict a Soviet Union-style collapse. What I do see on the horizon is a long Japanese-like malaise, or very possibly a prolonged 70’s style stagflation and a slow downward spiral of a Britain-esque imperial decline. Unfortunately, I almost hope for that since an all out Rome-like implosion is within the realm of possibility.
And as the West fades and the East ascends, it is worth noting what they are saying about us and our long term outlook. Guan Jianzhong, the chairman of Dagong Global Credit Rating, the largest credit rating agency in China, had the following to say:
“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards. China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged… The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings. Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.”
Indeed Professor Ferguson, the former lecturer is getting a nice talking to. Still, we shouldn’t get carried away, even Dagong Global Credit Rating concluded the United States’ debt was the 13th safest investment in the world. But U.S. debt had been considered far and away the safest investment for my entire life and probably everyone else out there reading this blog. And even Moody’s has warned of downgrading the U.S. from a triple-A rating.
The long term outlook is even more problematic. While the $1.5 trillion dollar deficit in 2010 is clearly unsustainable, the $107 trillion in unfunded liabilities puts the United States on even shakier ground. While that number sounds huge, it doesn’t mean anything until you actually break down what kind of growth and tax revenue we’d need to pay for it. Former comptroller general of the GAO, David Walker, estimates it will require over 10% growth from now until the end of time; something that has never happened, will never happen and is little more than a pipe dream.
This all means that the United States will have to raise taxes and cut entitlements (while we’re in the midst of increasing them) during a drawn out recession that very well could linger in a decade-long malaise or disco itself into a decade-long stagflation. Whatever we do (and we have to do something) it will simply compound our economic problems.
Even before the financial crisis shrank tax receipts and national productivity, close analysis showed the United States was on an unsustainable fiscal path. In August of 2006, Laurence Kotlikoff, writing in the Federal Reserve Bank of St. Louis Review came to the conclusion that the United States was, for all intents and purposes, broke. He did so with a lot of fancy math, using equations such as the following:
Yay for math. Anyways, the conclusion is certainly nothing to laugh at, especially since it preceded the meltdown:
“Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.”
He goes on to recommend privatizing social security while simultaneously installing universal healthcare; a very interesting recommendation likely to garner support from absolutely no one. But the paper is sound and quite disturbing. Take this paragraph, updated and elaborated upon by yours truly:
“The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion [now around $107 trillion]! This figure is more than five times [seven times] U.S. GDP and almost twice [thrice] the size of national wealth. One way to wrap one’s head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes [that kind of economy-wrecking increase would actually lower tax receipts, see the Laffer curve]. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits [I’d bet the AARP opposes this option]. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent [a guy can dream can’t he?].”
So are we nearing the end of Pax Americana? Is the sun setting on the American Empire? Have we crossed the Rubicon? While I would like to see our quasi-imperial presence come to an end, I hope we can do so in a peaceful, non-collapsing fashion. Nonetheless, it is unmistakable that the long term fundamentals of our economy look awful.