by David Reavill
As you no doubt know, if you read or watch the financial press, there is some constant drumbeat that a complete meltdown in our economic system lies ahead—the reason: our $34 trillion in national debt. Look at usdebtclock.org to get a feel for how fast we add to our country’s obligations.
Undoubtedly, this is a staggering amount of debt, something that no one should argue is in any way desirable. I’m not here to tell you that we’re in a good place financially. I wish that this country would bring its spending under control. However, the question that we’re looking at today is whether complete financial collapse, as some are saying, is in our immediate future. I don’t think so, but there are some specific examples that we can look at that point to a more harmonious future.
Case Study: Japan
Economists consider Japan an analogous case study of the evolving American Financial Condition. Like the United States, Japan has an aging population, with those citizens of retirement age representing an out-size portion of the economy.
Like the “Baby Boom,” the Japanese have a substantial portion of their population who are retired and no longer pursuing a productive career. Yet they require significant social, health, and other services. It causes governments to spend money on these services, for which there is little or no tax revenue.
Look at the US’s top two expenditures: Medicare/Medicaid and Social Security. These funds should have been accumulated earlier when the Boomers earned good salaries. But as you know, we didn’t do that. Instead, we must borrow the money now to pay the Boomers’ benefits, and our national debt rises.
Just how dangerous are these higher debt levels? The US Debt level currently exceeds our economy by 12% (112% of GDP). While that’s certainly not a good thing, if Japan were our example, that level of debt to the economy would be manageable.
Japan surpassed the 12% debt over the economy 21 years ago. And no one is talking about a significant meltdown for Japan. Today, Japan’s debt stands at a whopping 146% above its economy (264% of GDP). In other words, Japan’s debt has more than doubled in the past 21 years.
I’m not suggesting we follow Japan’s example and continue adding to our debt pile—far from it! My only point is that using Japan as our model, there is no absolute magic level of debt at which economies collapse.
Bringing our discussion closer to home, using several measures, the United States Debt Level is currently about the same as it was during the last days of World War II. Like in World War II, an outside enemy drove the country to these high debt levels. This time, that enemy was the COVID-19 pandemic.
In 2020, the first year of the Pandemic, Federal Spending skyrocketed; strategies like the Stimulus Programs, combined with the reduced Government Revenue from the “Lock-Down” caused the government deficit to balloon to the highest level ever in one year, over $3 Trillion.
Today, the United States maintains a credit rating of AA+ by Moody’s and Aaa—by Standard and Poors, with an overall credit score of 97. It is not tremendous and indeed not a good comparison when, for years, the United States had a credit rating of AAA and a score of 100. But no rating agencies see anything like a default or crash in our immediate future.
What Would Cause a Financial Crash?
So, if no magic debt level causes financial meltdowns, what does cause an economic crisis? The answer for the nation is the same as for any business or individual: Do you have spending under control, and do you have a plan for paying off and reducing debt?
Wall Street is very good at assessing whether someone is creditworthy. It’s what we do. When evaluating any investment, the very first thing we look at is their financial reports.
Does management have firm control over their expenditures? Do they only spend what they need and purchase goods and services at a reasonable price? Or are they spending like the proverbial “drunken sailor,” throwing money around on personal luxuries or other unneeded items?
In my prior life, I was responsible for developing a credit report for certain brokerage firms we wanted to deal with. Many of these were small firms just getting started. I remember walking into one new firm’s office, which was the very height of luxury, with plush carpets, wing-backed chairs, and original artwork on the walls. Anyone would be impressed just walking into the reception room.
I voted against doing business with that firm. Why? Because I knew they had little income (their financial reports are public). Yet they had spent extravagantly, far beyond normal, on office decoration. To me, they appeared to be poor financial managers. Indeed, within two years of my visit, they filed for bankruptcy.
The United States is like any company or individual in financial difficulty today. The caution flags are out. However, there is nothing to date to indicate that the US is in immediate danger, and thus, any fear of a financial crash is not currently warranted. On the other hand, there can be no doubt that we are headed in the wrong direction.
The reality is that we are the number one debtor in the world. It’s no time to arrogantly demand that the rest of the world support our spending. Instead, it’s time for us to work within the global community and seek their financial support. Like any borrower, we are dependent upon our lenders.
More than anywhere else, the current Administration has failed here. Cutting Russia from the SWIFT International Settlement System was a significant step in fracturing the global world when we needed international support. China and Saudi Arabia, in particular, reacted negatively to this move. China opened up its Trading System, and Saudi Arabia abandoned the PetroDollar.
There is a persistent rumor that the Administration is behind a scheme to seize $300 Billion (US) in Russian deposits held by European and US Banks. This would drive yet another nail in the Global Financial System, a System we need to support our burgeoning debt. Although Russia holds only a tiny amount of US Debt (Treasury Bonds and Notes), it is clear that America’s policies against Russia affect China, and China has over a trillion dollars of US Debt.
As CNBC and others are reporting, the Administration, which is far from controlling spending, continues to use its free-spending methods, building our deficit by $1 trillion every 100 days. It’s not sustainable. And the Global Markets have noticed.
When the bond markets see something they don’t like, they raise the rates they’re willing to pay. With the United States over-spending by about $3 ½ Trillion annually, we have seen the yield on our bonds rise. Currently, the US 10-year Treasury yield is over 4%, a rate higher than England, Germany, France, and Spain, 177 basis points higher than China, and almost triple the rate of Japan.
And remember, this is not exclusively the result of the Federal Reserve Interest Rate Policy, although that’s undoubtedly involved. These higher US rates are also the result of the Global Financial Markets’ reaction to our profligate spending.
Summary
So, that’s a long answer: Are we headed toward an imminent Financial Crash? No. But I wanted to make a couple of points.
The United States is not in danger of a financial crash, so panic is unnecessary. Panic is the last thing we want to do, but it can create just the sort of behavior that creates a crisis.
The two major financial rating agencies, S&P and Moody’s, still rank the US number 13 in the world, ahead of over 180 other countries.
Annual Government Receipts (taxes and levies) for the US Government are nearly $5 Trillion. We can still pay our bills.
If we control our spending (are you listening, Biden Administration?), we could turn this around rather quickly.
The final point is this: the World Community is watching. We must pay one of the highest rates on our long-term obligations (US Bonds and Notes of 10-year maturity and more) because our spending is reckless. Bond investors cannot predict how much new debt we will add over the next several years. More supply of US Debt (bonds and notes) equates to lower prices. Something that investors want to avoid.
We can afford all the necessities: defense, social security, Medicare, and high-interest rates. But we need to put all that crazy new spending on hold. Several times, it has been suggested that the US Government freeze its spending at current levels. Now would be an excellent time to implement a freeze.
Full Article Here: Will Our Debt Cause a Crash
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Of course debt will not cause a collapse. Who remembers a five cent newspaper?
-a 10 cent bottle of cok-15 cent slice of pizza
-$35 flight from NYC to DC
-$2,500 tuition at NYU
-35 cent a gallon gas
Now recall the Weimar Republic and hyperinflation that brought you Adolf Hitler and WW2.
-15 years ago Venezuela, before the communists, 4 million Bolivars were worth 1 million dollars. Today due to inflation you can’t buy a cup of coffee.
-In Zimbabwe, after the Amish took power within five years their currency was so inflated it was issued in trillions and stores issued warnings not to use it as toilet paper.
After the revolution, the USG paper money was so valued the phrase in common use was , “not worth a continental.” In the Civil War Lincoln started issuing paper money, hence the term “greenbacks” general worth 20% of their value in gold or silver.
American currency used to be backed by gold and silver reserves. It hasn’t been for decades. No one trusts anything the government says or does nor any agency of the government. Yet you trust its currency? Tell me the difference between it and monopoly money or Weimar currency.
Does anyone realize that if the US government started to pay a million dollars a second, every hour of every day how thousands of years it would take to pay off 35 trillion dollars?
Of course debt can cause a collapse. The Weimar currency collapsed. There was massive poverty and hunger, 35% unemployment. Our Great Depression was in the low 20s. How is that not a collapse?
The author of this article certainly trusts government. He has been making excuses for it on this site for years.
He uses the vague term collapse, does not define it, then gratuitously says it will not occur. Thus, all is OK.
Worse this moronic author compares our economy to Japan’s. Japan has a huge personal savings rate compared to the USA. The Japanese are not burdened with huge credit card or personal debt a fact the author omits. This cretin also omits that when the Japanese economy was on overdrive prior to 1986, it was due to the fact that the Japanese government allowed people to accumulate up to 50,000 in saving’s interest tax free. This powered their economy, under US pressure the Japanese government ended this policy and economic stagnation followed along with a massive debt increase.
The Great Depression was caused by a credit collapse, when the government debt was a small per centage of what it is today. The Depression officially saw 25% unemployment yet the government today claims only 64% of the workforce is participating or 36% isn’t employed.
Something isn’t right. The author also neglects to show that social security, a massive burden, isn’t part of the nation debt but is an obligation. Yet the SCOTUS has stated on eight separate occasions that the government has the right to end the program at any time for any reason without reimbursing those involved.
There’s a sucker born every minute. Everything is fine. Just remember how dull the average guy is, and 49% of the population is duller than he is.
These are without doubt where they draw today’s economists and politicians.
To add; (smile) Jane I remember buying gas for 8 cents a gallon. Movie, including popcorn, snickers bar, and a coke all for 25 cents. Blue plate special 49 cents which included, meat, potatoes, vegetables, bread with real butter and all the coffee you could drink. 49 cent breakfast included eggs, bacon, hash browns, toast with real butter and home made jam plus all the coffee you could drink. Living in boonies after electricity in house; monthly trip to town for groceries, five large grocery carts full, $50. A huge deep chest freezer had put my mom in heaven. One room school with 12 grades with pot belly stove in center. Recess girls stayed inside to straighten, boys went out to chop wood for stove. When I was six, woke at six breakfast at 0630. It was my responsibility before breakfast no matter how cold, to feed the pigs and chickens plus break the ice so they could drink. I remember taking my mitts off so I could mix the malt for the pigs. My little fingers were ooh so cold. It was considered my contribution to the family unit. I wouldn’t change it for the world.
Back then it was called, “good training”, today it would be called “child abuse”
Inflation seemed nearly non existent till the Central Banks were created. The Five Thousand Year Leap is a great read! Blessings!
Biden has taken us way beyond the point of no return.
Our border invasion will end it for all of us.
HOW can someone who calls themselves a pro, not take into account TWO of the most damaging factors to our economy today?? The 20+ million illegals who have invaded our shores with an invitation, free everything {PLUS cash card) s AND the fact that there is another world alliance forming against our dollar. Did the author ever hear of BRICS??
The author writes through rose colored glasses, never challenging the corrupt establishment. His students were fed nonsense.
I see that you are back again spreading more tinsel coated nonsense.
Firstly, one of your main precepts is just plain silly. No one says there is a magic level for a collapse. Such discontinuous events are never predictable. That hardly proves there will be no crash, although you pretend to have shown that. This alone nullifies your “argument”.
As always, you seem to try to prove something which has no point. We get it, you do not like debt, blah blah blah, but spend the entire article trying to say it really is OK. Then you switch to spending, as if that is separate from debt. That is deceptive. The crash is underway, it does not have to be sudden, and you missed it.
The debt is very destructive, in many ways, which should have been discussed. But you are too busy with trivia, personal anecdotes, and trying to “prove” something which is meaningless.
You are, and always will be, an establishment apologist. Go form a fed fan club.
David, I have appreciated your previous articles, and I have probabl6 2% of your economic knowledge and understanding.
When I was earning my Bachelor’s degree at the University of Michigan in the 60’s took Econ 101 as an elective. They tried to sell the concept of deficit spending. I didn’t buy it then and I don’t buy it now. During WW II deficit spending was caused by the costs of war. However, I question your statement: Like in World War II, an outside enemy drove the country to these high debt levels. This time, that enemy was the COVID-19 pandemic. The necessity to rapidly build a war machine, is not the same a fighting Covid. The response to Covid was mismanagement and greed. The response was wrong, and lying politicians used fear to coerce funds from the people.
It is not the just the debt/GNP figure that matters but the ability to service he debt. Interests rates are a big factor and the Dems have driven inflation.
If the rates get to high the debt can’t be serviced. My mother witnessed people taking a wheelbarrow full of money to get groceries in Nazi Germany in the later ’30’s. No wheelbarrow full of money=no food.