Financial condition of United States of America

There has been much discussion surrounding the financial condition of the U.S. Government recently.  The recent fiscal turmoil in Greece and other Eurozone countries has led to some comparisons with the U.S. condition.  The April issue of The Sentinel Economic and Financial Newsletter discussed the state of U.S. Government finances.  Here is an excerpt from that issue,

"The U.S. Treasury Department publishes a report highlighting the financial condition of the United States. The 2009 fiscal year report noted how the present economic crisis weakened the country’s financial position with tax revenues declining $400 billion. Also noted were the increased expenditures in mandatory programs like Unemployment Insurance, Medicare, Medicaid, and Social Security. The combination of the declining tax revenues and the spending in the mandatory programs act, in the words of the Treasury document, as “automatic stabilizers” requiring no changes in legislative policy. Unlike your own household budget that would mandate reduced spending, the U.S. budget does not. To quote the report, “Most of the deficit increase was due to the economic downturn and the automatic stabilizer features of the U.S. fiscal system, not to policy changes.”

One of the most astounding revelations in the document centers on what happens to the U.S. budget in ten years (2020). Spending on the major entitlement programs plus interest on the national debt will absorb 100% of federal revenue by 2020. That means that for every dollar the government takes in, 100% is earmarked for mandatory obligations – nothing else remains. The document was written BEFORE the recent health care legislation was signed into law.

A former director of the Congressional Budget Office (CBO) provided further clarity on the new health care legislation’s effect on the budget. The CBO is expected to take at face value, the financial projections handed to them regarding this piece of legislation. In an article in moneynews.com, former CBO director Douglas Holtz-Eakin says “Removing the unrealistic annual Medicare savings ($463 billion) and the stolen annual revenues from Social Security and long-term care insurance ($123 billion), and adding in the annual spending that so far is not accounted for ($114 billion) quickly generates additional deficits of $562 billion in the first 10 years.” He estimates that by 2020 the government’s annual deficit will be $1.2 trillion with $900 billion necessary just to pay interest on the debt. Imagine if interest rates rise. His comments were made before the new health care costs are considered.

Again, we can debate the merits of the recently signed health care legislation. Undoubtedly, more people will receive health insurance benefits and it will be unlawful to deny coverage to someone for a preexisting condition. To sell the plan as one that is deficit favorable, however, stretches even the broadest imagination. It is inconceivable that millions more can receive benefit without additional cost. I hope the preceding paragraphs added some clarity to the fiscal position of the United States. To consider another automatic spending plan with the country’s current financial health will only accelerate the probability of government debt default/restructuring in the future.

Many economists like to cite the figure of public debt relative to GDP (the size of an economy). Many claim that the United States need not worry about our public debt since our economy is large enough to handle it. A great book on the subject of debt to GDP is “This Time Is Different”. In the book, the authors go to great lengths to provide a history of debt crises throughout the world. Government debt default or restructuring can occur at many levels of debt to GDP. The mistake often made by policymakers is to assume that this time is different, it can’t happen now.

There are those that recognize that this time is NOT different and those that assume it is. The present climate will continue to pit one group against another and catalyze the social disharmony written about so frequently in this newsletter."

Here is something else to consider from the aforementioned book reference.  The authors of the text state than on average, countries going into default typically have debt to GDP ratios of 73%.  The comparable ratio in the U.S. is nearing 100%.  For those that hope the U.S. can export its way out of its debt, country defaults occur on average at 239% debt/export ratio.  The comparable U.S. figure is about 750%.The cavalier attitude Washington legislators and bureaucrats have regarding the budget and debt condition will have serious implications for investment and wealth preservation programs.

Jim Mosquera publishes The Sentinel Economic and Financial Newsletter.