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We Are Being Spent Into Oblivion

Politics / Government Spending Mar 02, 2010 - 09:32 AM GMT

As we continue to ponder and debate, with way too much focus, on the mundane and inane, the perfect storm grows and rapidly approaches. It brings with it a financial tsunami and a societal train wreck. October 2008 was the outer wall of the storm, we have been living in the eye since then. Now the inner wall approaches: the global debt crisis.

We know  about the recent and ongoing financial crisis on a micro basis. Our own finances, that of our towns, cities and state. That some states, Social Security, Medicare, Medicaid, the US Postal Service, Fannie Mae and Freddie Mac, The Pension Benefit Guarantee Corporation, the Federal Deposit Insurance Corporation , to name a few, are approaching insolvency or are already technically bankrupt. What is starting to appear is how close the U.S.A. may be to approaching insolvency. Let’s run some numbers.

We have to think in trillions, hard numbers  to put one’s head around. Let’s see:
If a million dollars were spent each day it would take about 2,740 years to spend a trillion. At a million dollars an hour, it takes 114 years. At a million dollars a minute, it takes 1.9 years. At a  million dollars a second, it takes 11 ½ days to spend the trillion. Or, a trillion dollars is about 3,250 dollars for each U.S. citizen.

Our projected Federal deficit (outlays minus receipts) for this year is \$ 1.6 Trillion. (T.) Our national debt, (cumulative  deficits, 1776 to present) is \$ 12.395T, and is growing 4 to 5 billion dollars per day due to the deficit. Our Gross Domestic Product (the market value of all goods and services that have been bought for final use, yearly), GDP, is \$14.463T. Therefore, our debt to GDP ratio (debt divided by GDP) is 85.70%. If we add this year’s projected deficit of \$1.6T to the current debt, and assume a 3.5% annual growth rate in GDP, (\$13.995T/\$14.969T) our debt to GDP ratio will climb to 93.5% by year’s end, and  will exceed 100% next year. Why is this relevant?

Once we go over about the 90% level we start to enter an economic “twilight zone” where economic growth becomes difficult to achieve. Over the 100% level, there is risk of no growth,  currency devaluation, default, hyperinflation, or a lowering of our credit rating, which would spike up interest rates on our debt. This in turn balloons the deficit, further exacerbating the problem. Our debt is growing more than two times faster than our GDP, so the ratio will continue to climb. Our debt is projected to be \$20T by 2018. Assuming interest rates climb  only to 5%, interest on the national debt would \$1T per year. 2002 was the year our entire federal budget crossed the \$2T threshold.

How did we get here? Profligate federal spending. Spending increases of 2 or 3 or 4 times the rate of inflation. Year after year after year. It has got to stop. Raise taxes now? Not on your life. That would kill this already weak economy. The era of “we will grow our way out of this” is over. Not when our debt grows faster than our GDP. No, this must stop now or we risk devaluation or default, or worse, oblivion.  Now let’s look macro. Let’s go global.

The growing debt time bomb just described has been occurring on a global basis for some time. Big trouble is brewing in the Eurozone countries. These countries are most all highly socialistic states. Their people rely on their governments to such an extent that just the talk of cutting spending, and therefore services and wages, elicits a widespread angered response, strikes by unions and chaos in general.

Greece, which may be the first to fail, has a debt to GDP ratio of 112% and is near default on its’ debt. There is talk of a bailout, or expulsion from the Eurozone alliance. But, Greece is just the canary in the fiscal coal mine. And that is the crux of the problem- it is global. Portugal, Italy, Ireland, Spain (unemployment rate 20%),The U.K., Belgium and France have all spent themselves towards oblivion and are teetering on the edge. Their ratios are at or in the “twilight zone”. The dominos are stacked up neatly in line.

The acronym P.I.G.S. ( Portugal, Italy, Greece, Spain) is used to describe the countries in the worst peril. Will the U.S.A. join them? Are we already there? Is it really PIGS are us? We can spend more than we take in for only so long before the Piper must be paid. There still may be time to correct this madness in the U.S.A. if we act now, but time is running out.

We can and we must make these cuts. We can. We are the U.S.A.. We are not a socialistic state. At least not yet.

By Roy F. Grieder

royonthehill@tds.net

Roy F. Grieder is a 58 year old retired airline captain and part time land developer and economic analyst.

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