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Why We are not yet Greece
Robert R. Odle, Ph.D.
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… do we have a moral obligation to address our debt ....
Like Greece, we have spent far beyond our means for decades. We do not honor our debt or try to restructure our spending, or admit what we cannot afford. We have borrowed against the future, not adapting our education to our new digital world, not building and repairing our infrastructure, or adapting well to a global economy. We have built a country that caters to the rich while destroying the middle class on which the rich stand and must ascend through. We have deserted the weak in our society as we still try to impose our will on a world that is rapidly leaving us behind because we have deserted the principle that all men deserve an opportunity to at least a decent life with food on the table, clothes on their back, a roof above their heads and hope that their children’s future will be brighter than their own.
Greek Debt and the Power of Compound Interest
What happened in Greece is relatively simple. They ignored their debt until it compounded to the point that they can no longer even pay the interest on their debt. If you look at their size of the debt, $330 billion and growing, and compare it to their GNP (gross national product) it doesn't seem that bad. With a debt at only 110% of their GNP they were forced to tighten their belts by IMF and the European Union, which reduced the GNP and suddenly it all snowballed. In being part of the European Union, they could not print money and devalue their currency (and effectively their debt). It came obvious to many Greeks that it was hopeless and hence the recent revolt.
With Greek it will not end well. Like a homeowner kicked out on the street, Greeks will wander around and start their life over with the their old currency, the drachma. Germany believes in rules and the Greeks have broken them in not dealing with their debt and the reasons behind their escalating debt. If German and the other European countries bail out Greek, what message will it send to Portugal, Spain, etc. that are not dealing with their debt. What message will it send to them: Managing your debt is not important, we will bail you out when you get in trouble. Instead, they are sending the message, if you screw up managing your debt we are going to let you drown. Tough shit.
The United States is committing the same sin as the Greeks
We are spending beyond on means in this country. Our public debt is now at 71% of our GNP, still well below Japan’s at 110% of GNP. Of course, that number does not capture the entire story since we have private debt of the same order of magnitude as our public debt. See U.S. Debt Clock Real Time to see a more comprehensive story on our debt. If this does not scare the shit out of you, I want you beside me when the world goes to hell in a basket … that or you’re really slow. Credit card debt, school debt, IOU’s in our social security reserve, and hidden debt like quantitative easing (our government buying bonds to keep the private debt from collapsing) hide the true extent of our debt load.
The Real Problem is that We are not Dealing with It
I hope our problem is not yet unmanageable. But, every single day that goes by we are less able to hold back the impact of compounding interest and a big change that is coming, see below… We are being irresponsible with our debt. We are not spending money that improves our earning power like education or infrastructure but instead we are spending much of it ($600 billion/yr) on military policing of the world that has historically been a huge waste of money. I’m guessing about $200 billion per year is needed to protect the U.S. and about $400 billion is needed to protect U.S. interests abroad, which increasingly means the interests of our wealthy elite. Of course, many would argue that we must exert our power abroad to protect our own borders. I would ask for some evidence that this strategy is working or even logical since we are the only country still committing serious resources to such a strategy.
Why are We Getting Away So Much Debt
One has to ask how is it that we are getting away with so much debt without suffering the consequences? Have you ever heard of a reserve currency? Well the united states has the world's largest and safest reserve currency in the world.
Most importantly energy, especially oil, is bought and sold with American dollars. The Saudis, of course, are the ones that set the price of their oil in dollars and they are also the ones that could change it to another currency at a whim. For awhile people thought that this currency would be the Euro but Greece is showing that there are some flaws in the concept of the Eurozone. So when it gets right down to it, for now, America can print more dollars slightly devaluing the world currency and their debt and everyone else has to just suck it up - we are the best game in town.
Ironically, one country is made this all possible. China. They buy our debt and use by US dollars to buy energy and fund their global projects. With the size of their economy they really had no choice … only the use has enough currency to fill their wallets. Their economy it's going to pass our economy in terms of gross national product in the very near future. their manufacturing sector is already larger than our manufacturing, their global trade is already larger than the US’s. Their entire economy will soon sail past our slow moving ship.
Something big is going down
Many believe that in October that the IMF, the International Monetary Fund, will grant reserve currency status to the chinese yuan. At this point the world will have a choice. Yuan or dollar.
Up to now we thought the competition from the Chinese was bad, but we haven't seen anything. The playing field was not level, people had to use our US dollar and we could print it with impunity. Now they can use the yuan and get more for their buck, actually more for their yuan. China has already been pumping trillions of dollars into projects all over the world ensuring they have both materials and energy for their future, while we have been supporting the military that was supposed to give us some magical advantage across the entire globe. We can see how well that has worked out if we can let go of our fear installed by the hawks.
Guess who buys more oil from the Saudis? China or the US? Well you got it, China. So why would the Saudis keep pricing oil in US dollars? They won't. From this point forward we will be playing in a world dominated by the Chinese with their currency and a purchasing power larger than ours and the ability and willingness to plan decades into the future compared to the US that can’t even raise the gasoline tax (or any other approach) to salvage our crumbling infrastructure. We are still acting like we are our world unto ourselves and only what is happening in the US matters.
This brings us back to our debt
Remember who supports us with our debt and buys our US bonds? The Chinese of course. But up until now they had no real choice because they have more of our dollars than we do. They had to be careful to support our currency because most of their wealth is kept in US dollars in banks around the world. But once they become a reserve currency what will be their motivation to keep the US dollar and the US economy afloat? With their own currency they will be free to manage their affairs without having to use US dollars. When oil is priced in yuan instead of dollars life will become very simple for the Chinese and very difficult for us.
US debt payments are a function of the interest rate and the amount of money we owe. The Chinese have kept the interest rate low for us to protect their wealth. It's very easy to imagine in the space of a few years most of the world will be using the yuan backed by assets instead of the dollar backed by our debt and our declining ability to honor it. What do you suppose will happen to the interest rate on our bonds, the amount of money we have to pay to borrow more money, after China pulls out. There is no other country in the world large enough to shoulder our debt.
Even Bernie Sanders is not going to touch this one
There is no Ross Perot to save us this time and make us step up to the plate and face our national debt. Neither Republican or Democrats are going to address this very painful subject. Bernie Sanders at least sees the military has to become a military DEFENSE instead of a national police force, but his progressive ideology will cost a lot of money and investment in our people and our country which we may not be able to do in any meaningful way until our debt is addressed. My guess is that we are going to keep our head in the sand like the Greeks did for a decade and suffer a fate much worse. We are like a drowning fat man that pulls down the half dozen young men that swim out to save him. Our sinking will create a huge vortex in the world economy. Don’t we have a moral obligation to our children to address the $18 trillion in debt that we have left them to pay?
what value guides your opinion
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