George Bush Goes For Broke

A banana republic is one of those places where 1 in 5 of the dollars spent by the government is borrowed, the trade deficit exceeds 6% of GNP, and the president funds the state with a printing press in the basement.

What brings things to a head is usually a sudden loss of confidence; some big debtor doesn’t get paid and the currency is suddenly dumped. Next, import prices skyrocket, inflation destroys the citizens’ savings, and finally, when no one can get gasoline and spares, the ruler is overthrown.

The IMF is called in, a slightly more responsible leader is installed, and a new currency introduced. Citizens slowly pick up the pieces, but they never trust their rulers again and henceforth keep money offshore or in gold, buried in the backyard.

The U.S. printed to fund the revolutionary war, hence the phrase, “Not worth a continental,” but generally, throughout the years, the U.S. has had a currency backed by gold and been the world’s biggest creditor. In fact, the dollar was trusted and the economy so strong that it became the world’s reserve currency, replacing the British pound.

LBJ spent big on the War and his “Great Society” and so the French got so worried they asked for gold, instead. To stop the drain, Nixon ended gold convertibility and, as the dollars multiplied, their individual value declined. Gold hit $850.

Volker, by targeting the money supply and paying 18% for dollar deposits, restored confidence.

In the 1980s, America slowly slipped from international credit to debit and the debt went up, and up. The U.S. had a lucky break when crisis in Russia and Asia and the Internet boom sent money flowing in. During the Clinton administration it looked for a moment as if the U.S. might not only stop adding to the debt, but pay some off.

But George W. Bush was elected and today the U.S. fiscal position is vastly worse than it was in 1977.

The U.S. just raised the debt limit to $8.2 trillion, that is, the total amount of dollars the U.S. owes can owe holders of U.S. government debt instruments. Well, 7.9 trillion is what the U.S. owes bondholders, but it has promised much more to its citizens. U.S. Comptroller General David Walker reports “the federal government’s fiscal exposures now total more than $46 trillion, up from $20 trillion in 2000.” So, amazingly, most of that debt was incurred by the current administration.

Federal revenue peaked at $2.03 trillion in 2000 and then fell. Expenditures were $2.47 trillion in 2005, an alarming 38.2% above the federal government’s expenditures in 2000. Even in constant 2000 dollars this was a 21.8% increase over the five years from 2000 to 2005. The administration supported both massive outlays and tax cuts, both Guns and Butter.

As a consequence of this loss of revenue and uncontrolled spending, the U.S. government relies on debt to cover the difference. In 2000, 1.1% of the U.S. government’s cash flow came from new debt, but this grew to 20.4% in 2005.

For every $100 spent by the U.S. government in 2005, $20.40 came from borrowed money, whereas in 2000, it was 1.1%.

This new debt has been easy to service due to declining interest rates; the interest bill was $361.9 billion in 2000, but it fell to $352.3 billion in
2005.

Low interest rates also meant a boom in housing prices, a flood of re-finances, and more spending allowing the U.S. government to evade the political repercussions as the federal debt climbed 40.5% from $5.63 trillion to $7.91 trillion in the same period.

Now, as rates rise, the U.S. will either have to massively cut spending so as to continue to meet its interest expense obligations, or just borrow more, creating a vicious circle where the government borrows more and more money to meet both current expenditures and the climbing interest bill.

Today, the United States is so broke the “structural adjustment team” would have long ago been called in, but for its privilege of being able to pay for imports with its own currency.

Over the last three years, all Federal Reserve Board members have either resigned or retired with replacements appointed by this administration, an unprecedented turnover. The Treasury stops reporting M3 this month and Ben Bernake, a chairman who believed the great depression could have been avoided by monetary accommodation is in the chair.

And people wonder why the price of gold is rising.

[tags]economy,united states recession,great depression,fiscal trouble,imf,national debt[/tags]