Frightening

Articles like "Risk Free Is Not Without Risk" at Rude Awakening scare the living hell out of me. I've included their image of the US government's outstanding liabilities, calculated using cash accounting and GAAP, to lead off this entry.

One paragraph from that column says it all:

The fiscal condition of the United Sates has deteriorated dramatically during the last several years. On the basis of current obligations, U.S. indebtedness totals “only” about $12 trillion. But when utilizing traditional GAAP accounting – the kind of accounting that every public company in the United States MUST use – U.S. indebtedness soars to $74 trillion. This astounding sum is more than six times U.S. GDP. (GAAP accounting includes things like the present value of the Social Security liability and the Medicare liability – i.e. real liabilities.)

The $12T figure is scary enough. It's the basis for all the rationalizations that our politicians are using for their monetary policies: "We can afford this deficit, because it's still a small percentage of our GDP. America is still the mightiest economy in the world." Our overall debt is roughly one year's GDP now.

But with a true debt that's six times our GDP it feels we're in an airplane that's nosediving and in gravity's grip. Pulling out will take all of our strength.

Does it bother anyone else that our government can hector industries about their poor practices - deservedly so - yet continue to use cash based accounting? Isn't that the style that one would use to run a small, cash-based business like a hot dog stand? I suppose that would be fine, as long as we were talking about the world's mightiest hot dog stand.

There's a fight going on between "fresh water" and "salt water" economists about the wisdom of continuing to run a large and growing deficit to stimulate the American economy. The Keynesian school says that massive deficits are the only way to restore our prosperity.

This argument is based on the kind of wishful thinking that brought about the recent collapse of the real estate market. It assumes that deficits are a temporary condition and that the economy will always grow. What politician has ever shut down a program once it was put in place? What if the economy collapses under the weight of all that debt?

The only time I can recall running a surplus was at the end of the Clinton years. Even that was suspect, because it was fueled by an unanticipated windfall from capital gains taxes that were based on "irrational exuberance". Remember Al Gore and his "Social Security lockbox"? How did that work out? How much of our debt was retired after that adventure in creative finance?

I fear that our situation has become so unmanageable that the economy will never be able to grow its way out of debt. Neither our people nor our government show any inclination to cut back on consumption and retire our debts. We continue to hear about new rights (e.g., good jobs, universal health care, retirement with dignity, etc.), but no one wants to pay for them or face up to the obligations we've already incurred.

The only alternative we have is inflation. If we continue to debase our currency, perhaps all those dollars that the Chinese and Japanese are sitting on will become worthless. That'll teach them a lesson! Too bad that the dollars in my 401(k) will be suffering the same fate. The joke will be on us.

I'm glad that the Republicans are out of office after an eight-year nightmare. I like Mr. Obama and wish him well.

But the Democrats have done nothing with their filibuster-proof majority to date. And neither political party is telling us the truth or doing anything significant about the real problems that we all face. Our news media would rather tell us about Jon and Kate and their unholy brood rather than let us know how dire our finances have become. We're encouraged to continue to spend, as if it was our patriotic duty.

I fret about how right-leaning religious nut cases who believe that our wealth and happiness are mandated by divine right will react if the tide turns.

We're all going to have to learn to live within our means; our means will be declining. If we can't do it ourselves, perhaps the Chinese and Japanese will force the lesson on us. If they decide to stop buying our bonds we're going to see interest rates rise whether we like it or not.

We won't be a great economy if we don't make things that the rest of the world wants to buy. Contrary to what a lot of people think, God didn't make the United States the greatest economic power of the 20th century.

I think it's misguided to think that a service-based economy can allow us to maintain our pre-eminent position in the world. If we continue to see industries collapse, without something new coming along to take their place, things could get very ugly here in the coming years.