We are Swimming in an Ocean of Debt

By Mike Marsh

 

What is the public debt of the US government, a/k/a “you and me”? According to our Treasury, who should know, on December 9, the day I write this, we owe $10,656,119,227,403.05. (This is exactly precise. Note the nickel on the end of the very, very long series of numbers.) Let’s call it $10.7 “T” (T for trillion. T sounds much less daunting than “trillion”, at least to my ears).

 

When the current president took control, the treasury debt was about $5.7 T. Under Bush’s watch, we increased our national debt by almost $5 T. Pretty remarkable, when you think of it. That is $1.7 billion dollars of additional debt per day for every day of Bush’s 8 year presidency. Put another way, it’s about $65,000 for every family of four in America. Including all the illegal immigrant families, too.

 

To see how our obligations got so big, it’s worth looking at a chart. This one shows the yearly change in our public debt, during the Clinton years and the Bush years, using data from the US Treasury.

 

 

 

Now this pile, big as it is, does not include the social security deficit ($7 T), the much larger and more looming Medicare deficit (more than $30T), or gawd-help-us more than 90% of the bailout money we have shoveled out the past couple of months in the form of guarantees. Depending on how you project the chances of those guarantees being exercised, and what we will eventually get when the loans that we have guaranteed are sold, this alone could add another $6 T to our debt.

 

The situation wouldn’t be so bad if our collective personal savings were offsetting this enormous expansion in public debt. But unfortunately and also unsurprisingly, it is not. According to OECD data, the US household savings rate (what percent of our income goes into savings) dropped from about 11% in 1984 to 2% in 2001, to negative territory in 2005 and roughly zero savings today.. So there is no help here from our personal savings.

 

What does this all mean? Here are a few ideas, in no particular order:

 

1. The American consumer is not going to lead us out of the current recession. Fuggediboutit. Our personal net worth has dropped by more than $7 T in the past year. We have less wealth and are unable to take on more debt. We are tapped out.

 

2. Business is also not going to lead us out of the recession. Companies are always reluctant to spend in a recession, for good reason. They know they need to conserve cash on hand. Company after company after company is announcing cut backs in capital spending.

 

3. Exports are not likely to be the path to financial happiness either. This is a global recession, and all countries are cutting imports. Chinese imports fell 17% last month. Global trade is expected to decrease next year for the first time in 27 years. The US will be especially hard hit because of the recent strength of the dollar.

 

4. That leaves the government to create demand, or more accurately the federal government, because state and local governments are constrained by the requirement that they must balance their books. When I was in college, this was called Keynesian economics and we looked down on it as something from the past that was no longer relevant. It sure seems relevant now. Expect more federal deficits, at least until our international creditors cry “No mas!”

 

5. Folks who are looking for bold new initiatives from the Obama administration are not going to be pleased. The economic situation is so dire and there is so little spare cash, that he will have few options available for new projects other than rebuilding the economy. If he can right the ship in the next 3 years, we will be fortunate.

 

6. In the short run, we have to fear deflation. Really fear it, because it has the power to turn a bad recession into something awful. But eventually it will end (even the Great Depression was only 4 years long, although the recovery sure took a while) and when that happens, watch out for inflation!

 

Here is a hope, rather than a prediction. When times are hard, we have to make tough choices. One that I would like to see us make is to decide that we can no longer afford the $150 billion or so a year we spend to occupy Iraq and Afghanistan, plus the other billions in aid and support costs. So we accelerate the process of getting out of these countries.