A Picture Worth a Thousand Words: U.S. Debt and the Greece Analogy

When talking about economic/financial matters, it’s always good to use a visual as that usually allows for an easier understanding of the situation at hand.  I don’t want to sound like a broken record, but debt is the biggest and most pressing issue our nation faces on the economic front, whether we’re talking about individuals, businesses, states—or even the federal government. 

Today, former federal reserve chairman, Alan Greenspan offered an op-ed in the Wall Street Journal that basically sounds the alarm. (It’s funny how all of these guys knew this day was coming,but never bothered to sound the alarm earlier).  The article was in somewhat technical language and you can read it in its entirety here, but I’ve excerpted the most relevant portions below:

The current federal debt explosion is being driven by an inability to stem new spending initiatives. Having appropriated hundreds of billions of dollars on new programs in the last year and a half, it is very difficult for Congress to deny an additional one or two billion dollars for programs that significant constituencies perceive as urgent. The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms. This is not new. For at least a quarter century analysts have been aware of the pending surge in baby boomer retirees.

We cannot grow out of these fiscal pressures. The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the real resources necessary to meet existing commitments. (We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficit indefinitely.)

Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.

With huge deficits currently having no evident effect on either inflation or long-term interest rates, the budget constraints of the past are missing. It is little comfort that the dollar is still the least worst of the major fiat currencies. But the inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat currencies.

The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate. In the past decade the U.S. has been unable to cut any federal spending programs of significance.

What Greenspan is really suggesting here is that the federal reserve will not be able to print money as he did to paper over our fiscal imbalances.  They didn’t call this guy “Easy Al” for nothing as at the first hint of any problem, Greenspan’s solution was always to print more money.  What he doesn’t say is that if he wasn’t so easy on the monetary spigots, we would have been forced to address the our fiscal imbalances earlier and while the adjustment would have been painful, it would have been much easier than what we face now.  As it is, owing in part to his monetary policies, the problem is much bigger and likely unrecoverable except for scraping the entire system and starting all over again.  A key point he mentions here, with which I agree, is that the movement of investors to gold is telling mainly because it’s a vote against the current monetary systems.  They’re moving to gold and other precious metals for only one reason—they don’t believe that the current economic system will survive and to get them to continue to even play with it will require “mo money”.  For the US, that will mean higher interest rates on US Treasuries, the main way we finance everything the government does.  That will be a budget killer and an imposer of austerity.  I was debating with someone the other day about foreign aid and military spending, but all points are now moot on this one, as this stuff will automatically stop along with a host of other things once the bond vigilantes demand their pound of flesh.  That day may be coming sooner than most think.

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Comments
2 Responses to “A Picture Worth a Thousand Words: U.S. Debt and the Greece Analogy”
  1. Ask your friend Black Diaspora if he believes that this US debt crisis stands alone from the past fiscal policies of George W. Bush and instead our present and future leaders had better change course lest all of us fall?

    This week’s edition of Time Magazine shows the tale of the tape at the state level. The various states are hemorrhaging cash. They have lived at a level that was unsustainable, largely because of hyper-inflated housing prices. Now that reality has set in they have multi-hundred million dollar holes in their budgets. For California, New Jersey and Illinois – the most PROGRESSIVE places – the dollar totals are worse than other places.

    It is clear to me that certain individuals are not going to change until there is a fatal collapse that take away all that they hand staked their claim upon.

  2. Flights Rhodes says:

    ahhhhhh very good, bookmarked 🙂 keep it up, JusyKassy.

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