BUD CONRAD, THE DAILY RECKONING, JULY 21, 2006
Recently I had the pleasure of having lunch with the Comptroller General of the United States, David M. Walker. He heads up the US Government Accountability Office (GAO), the government’s internal watchdog. As he was about to give a talk on out-of-control government deficits, he had in his briefcase a chart on the size of the US government’s obligations over time. Our discussion about those obligations over lunch was followed by an email exchange, and Walker kindly helped me source additional GAO data, all of which allowed me to confirm my analysis of the budget with projections from the Congressional Budget Office (CBO).
I have also met with Douglas Holtz-Eakin, head of CBO, who can competently recite the situation of six different budget projections without notes. The combined scenarios of the GAO and CBO provided me with the basis to create the following projection of the US budget – as shown in the chart below:
A clear picture emerges of a government completely out of control. The blue line is the history of the US Federal Government debt. The green line shows the path we are now on, with debt soaring to impossible levels against projected GDP. Importantly, the source isn’t some crazy hand-waving blogger: these are the US government’s own projections—and we all know they have every incentive to accent the positive. If this is the best they can do at this point, then you know things are not just bad, they are calamitous.
This glimpse at the future clearly shows that the debt of the US will, in the foreseeable future, go from being a troubling yet manageable fraction of the economy to being several times the size of economy. That can’t happen without serious repercussions.
US debt: the consequences
The US government will be spending money they don’t have, which means creating more of it out of thin air and diluting the value of all the dollars that came before. It doesn’t take a Harvard MBA to know that the kind of deficits projected above guarantee a persistently weak dollar, higher inflation and higher interest rates going forward.
You may be right to criticise this analysis as only one of many scenarios being developed all the time and that there are other assumptions that lead to other estimates, and you would be right.
But I’ve looked at the assumptions, as has David Walker, and it is more likely that the assumptions have underestimated how serious the situation could become, maybe by a significant margin. For example, in the projections above, the interest rate paid by the US government stays flat. Interest rates fell for 23 years and have only just recently bounced off of 45-year lows.
The odds of interest rates staying at these low levels for decades into the future are, in my opinion, nil. I have analysed the scenario of the impact of higher interest rates. The problem can get out of hand because it feeds on itself: higher interest rates lead to higher interest on debt, which leads to higher debt, which leads to greater loss in confidence in the dollar, which leads to higher interest rates…and the loop makes itself worse.
US debt: who is to blame?
Who is responsible for this sin of profligate spending? You could start by pointing a finger at the House of Representatives as they are constitutionally charged with holding the purse strings of the US government. They voted for the spending and programs we are now saddled with, they pass tax programs, and vote in the big supplemental bills that fund the wars.
Entrusted with allocating the biggest sums of funding in the world, they clamour for more and, in the process, act like termites chewing away at the fiscal underpinnings of the economy, assuring the future bankruptcy of the nation. And it is not just the modern politicos that are responsible, but a failure to pursue sound monetary policies that extends back decades. Why do they do it? That answer is easy and reflective of human nature… they do it to curry favour with their constituents in order to get re-elected.
Which further points the finger at the American public, who instead of voting the bums out for wasting their money and handing a legacy of debt to their grandchildren’s grandchildren, happily pocket the pork belly doled out and reward the most prolific spenders with their votes.
The bottom line is that debt and deficits are baked into the cake, exacerbated by the demographics of retiring baby boomers and a government that not only shows no intention of slowing its spending, but quite the opposite. In fact, like a penniless smoker breaking a child’s piggy bank to buy a pack, the debt-addicted government has already spent the supposed “Trust Funds” of Social Security and Medicare.
US debt: government close to bankruptcy>
The US government is closer to bankruptcy than anyone who has not studied the situation can guess. You will hear government apologists claim that the government can’t go bankrupt because they are the government, and along with a complicit Federal Reserve, they can meet any debt obligation because they have the printing press. That is precisely the problem. They can print any amount of money they want. That has been theoretically possible since we went off the gold standard in 1971.
It is this loss of any constraint on US government spending that has let the genie out of the bottle. The track is now laid. The long-term future of the dollar is not in question. And to the extent that it is the basis of all other currencies, the reserve currency of the world’s central banks, all currencies are doomed.
Gold and the quality companies that produce or competently explore for it should no longer be viewed as entertaining speculations, but as portfolio requisites.
By Bud Conrad for The Daily Reckoning. You can read more from Bud and many others at www.dailyreckoning.co.uk
Bud Conrad holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl, and Tandem.
Currently, he serves as a local board member of the National Association of Business Economics and teaches graduate courses in investing at Golden Gate University. Mr Conrad, a futures investor for 25 years and a full- time investor for a decade, is also a regular lecturer for American Association of Individual Investors. As a senior researcher for Casey Research, LLC., he produces original research and analysis for the International Speculator.
For more information about Casey Research, click here: http://www.caseyresearch.com/
AND MORE FROM “THE DAILY RECKONING”
BILL BONNER, THE DAILY RECKONING, JULY 28, 2006
The American lifestyle and the concept of Empire…Americans dont like to think of our country as an Empire. Instead, they imagine it as a kind of proto-democracy…
“Vancouver is a great city, largely because it has so few native-born Canadians in it.”
We were sitting in a Japanese restaurant named Tojo’s overlooking the city, when we made this observation. The sky was so clear you could almost read the license tag numbers on cars driving up the distant mountains. Then, as the sun went down, the whole city sparkled with lights, like Hong Kong.
And the fireworks began. Rockets, booms, shimmers…
We wondered what the occasion for the bash was.
“Nor-ing spe-al,” said our charming waitress. Dressed in traditional Japanese dress, she could have been an extra from a WWII movie.
Our cab driver was from India, the staff all Japanese. They were operating an expensive samurai sushi restaurant with a large outside terrace.
“Excuse me,” said another friend to a waiter. “I ordered yellow tuna.”
“Dis, yella tuna,” replied the samurai.
“No, it’s bluefin,” our friend persisted.
“Bluefin…yella..mix togerer. Good. You eat.”
Doug and your author, both products of the Irish diaspora, were surrounded by foreigners. One of our dinner companions was from Italy. Another was from Pakistan. The busboy was from Sri Lanka.
“Yes, this is a great city, I’m moving back here,” Doug announced. “Not to stay here all year. I like Asia too much for that. But this is almost like being in Asia, and with snow-capped mountains all around you.
“You know, we’re so lucky. We can live anywhere we want. I feel sorry for the average guy in America. He’s stuck. Like you, the older I get, the less I know for sure, but it certainly looks to me as though we’re in the early years of a great bull market in commodities. And that will be just fine with me. But then, I don’t live out in the suburbs and drive a huge land-barge fifty miles to work every day and I don’t have a mortgage being adjusted upwards.”
America of the land-barges is the place where, in theory, every man is created equal. But each equal man is dealt an unequal hand at birth. He plays it the best he can. For the last two centuries, Americans have picked up their cards and found aces high. By 1900, they had the largest economy in the world. They were on the winning side in the two biggest wars in history – without suffering a single casualty on their own soil. And they walked away from each conflict with a bigger slice of world commerce.
Still, all institutions age and decay. In the 1950s, the US was already on top of the world. By the late ’80s, its only military competition had thrown in the towel. But the starch of the early 1900s was slowly replaced by the elastic of the late 1900s. Everything began to stretch and bulge – the constitution, the dollar, public and private finances; everything from the behaviour of teenagers to the girth of their parents.
And then the deck was shuffled and the cards dealt out again. They don’t realize it yet, but it looks as though this time around, Americans will be on the losing side of history.
“The whole world can’t live at the standard that we Americans have come to expect,” Byron King explained yesterday. “There’s not enough cheap energy.”
Americans have a lifestyle that many in the world envy and few can afford – not even Americans themselves. Faced with rising oil prices, rising housing payments and stiff competition from Asia, standards of living for the bottom two-thirds of US society are probably going to slip.
And finally, we come to the last of the Big E trends – the Empire. Americans don’t like to think of our country as an Empire. Instead, they imagine it as a kind of proto-democracy; they picture it as Norman Rockwell painted it, with honest, thoughtful people coming together in local schoolhouses in town meetings where important issues are discussed. We are too modest for empire, they say to themselves. Besides, empires need emperors. They don’t have an emperor; they have an elected president, meant to do the will of the people. And they have a society that believes in individual liberty, not collective glory.
And don’t empires need people in funny hats? We Americans don’t wear hats, except maybe baseball caps that advertise where we went on our summer vacations. What’s more, America is a democracy of, by, and for the people. We don’t remember anyone every running for high office on an Empire platform, so it stands to reason we couldn’t have an empire. We never voted for it.
But it’s a strange and wonderful world we live in. Sometimes we get what we did not intend and what no one in particular ever wanted. If you watch the next presidential press conference, you will see the American eagle on the lectern. A symbol of empire, it comes from the Roman era, when the eagle was on all the Roman standards. And if you listen to the president’s remarks, you will find that he spends a lot of time talking about war in exactly the same places where the Romans did their fighting – the edge of the empire, Mesopotamia, where Roman soldiers died by the thousands taking and retaking ancient Babylon. And it is Mesopotamia too, where the soldiers of the British Empire washed up again, on the same river banks, done to death by the same desert tribes.
Then, at the end of the press conference, especially when some new offensive has been announced, you will hear how liberty and modesty die – to the sound of thunderous applause.
America began as Rome did, humbly. It began as an idea – that anyone who wanted to could come to this New World and make do as best he could. You needed no passport, no visa, no blood test, no police record. You just showed up and you were on your own.
The rot set in almost immediately. Before long, it led to a war between the states to determine who got to tell whom what to do. Then, the country tried to turn itself into the kind of nation-state that had proved so successful in Germany and France. A pledge of allegiance to the flag was composed. Social security and other collectivist programs were put in place. They were no different from Bismark’s social welfare programs in Germany.
Yet, even while dumbly imitating the Old Country, people out on the plains were trying to convince themselves that they were a race apart – 100% New World. They squinted suspiciously at foreign-sounding names and customs. A congressional candidate even tried to smear his opponent by reading from the menu of the fancy restaurant at which the man dined. “Cuisse de grenouille,” he would say out loud, stretching the words out like a corpse, to let listeners get a good look and be appropriately appalled. “Do you know what that is? Frogs’ legs. My opponent eats frog legs!” He did not have to say anything more, not in a country where the only foreign language taught in the schools was English.
But side by side with America-the-nation, America-the-empire was developing rapidly too. As WWI progressed and the British found themselves exhausted by the expense, they looked across the Atlantic for help. Woodrow Wilson foolishly took the bait – a lead role in the imperial theatre in exchange for war-time aid.
Naturally, the world-weary Europeans stabbed the naïve Princeton professor in the back as soon as he landed at Le Havre. And the stage was set post-haste for an even more calamitous war. In that one – and then the Cold War – America played yet bigger and more spectacular roles in the world theatre, until, with the fall of the Soviet Union, there was no one left to up-stage her. America was now the sole hegemon, the world’s unique superpower, a country, with such an overwhelming military advantage over the rest of the world that it was compelled to play an imperial role, like it or not.
And soon it seemed to be liking it. But, a taste for empire is, of necessity, a transient one, for we have to ask ourselves – what happens to them? The list of defunct empires is about as long as the list of defunct currencies. Tout passe. Tout casse. They all go away, in other words; they all breakdown.
The Roman Empire itself lasted for nearly a millennium, it is true. But it did so only by reinventing itself, by becoming almost an entirely new empire from time to time. There were civil wars, mass murders, coups d’etat, rebellions, insurrections, revolutions. Blood ran in the streets of Rome often – and long before the city was sacked by barbarians. When Octavian took over from his great uncle Julius Caesar in 43 BC, for example, he had 130 senators put to death. The idea sounds appealing still to many of us today.
In ancient Rome, it was almost de rigeur. Octavian had as many as 3,000 leading citizens bumped off. Old Cicero, who once mocked him, tried to make his getaway in a litter, when he was overtaken by a centurion on the 7th of December, 43 BC. He was reading the ‘Medea’ of Euripides. He put down the book, it is said, stuck his head out of the window and volunteered: “Here, veteran, if you think it is right, strike.” The centurion cut his head off.
But eventually, it is the Empire itself which loses its head. It rots, just like everything else in life, and dies. And it dies in entirely predictable ways, becoming too expensive to operate, or attracting too many parasites, hangers-on, and hustlers. The costs rise, while what you get for your money goes down. The Empire weakens and collapses from the inside…if it is not first defeated from the outside.
Americans don’t see any external enemies fit to bring their empire down. But on the inside, they are not so sure. Each year, the internal rot seems to get worse. Rome may have lasted nearly a thousand years, but Rome wasn’t thrice crippled with the Federal Reserve System, the dollar, and the US Congress. Between the three, the country is probably broke already. The measure of our indebtedness – $65.9 trillion – far surpasses any ability Americans have to pay. It amounts to more than $200,000 for every man, woman and child in the country.
That means revolution, or more likely, inflation. Debt and life-style both will erode simultaneously while millions of households go broke. Of course, we can also imagine much worse, for superpowers do not normally go so gently into that good night.
Either gracefully, or clumsily, one way or another, the trend has to run its course. So you see, dear reader, everything is predictable. We just don’t know how it will turn out.
The Daily Reckoning