E-Newsletter No. 6
June 2014
If not us, who?_______If not now, when?
So, the question seems to be – – Does the annual deficit and the cumulative US debt really matter? It is apparent that many of our elected officials believe that the answer to this question is “No”. As we mentioned last month, President Obama has submitted his proposed budget, which shows a continuation of annual deficits for at least the next ten years. And as you recall, in February the members of the US Senate and the US House of Representatives decided to “write themselves a blank check” and suspend the country’s debt ceiling until after the 2014 elections. (More on Term Limits in next month’s newsletter).
One of the reasons why our elected officials can avoid addressing the growing debt problem is that most US citizens are not aware that our federal government has run up a + $17 trillion cumulative debt (an amount in excess of $55,000 per citizen). But the US economy continues to recover from the Great Recession, so the cumulative US government debt must not be an issue – – right??
One of the reasons why the growing debt problem has not yet affected the US economy is because the US dollar is (currently) the “world’s reserve currency” – – the US dollar is widely held around the world, and most international transactions are conducted and settled using the US dollar. Because of the dollar’s status as the world’s reserve currency, this has allowed the US government to simply print more dollars, and over the past several years, the Federal Reserve has purchased this new money (through “Quantitative Easing”) which has kept interest rates artificially low. The thinking seems to be that as long as inflation and interest rates can be successfully manipulated downward, there will never be a day of reckoning for the growing debt problem. Beside, the US dollar is backed by “the full faith and credit of the US government”.
But what happens if the rest of the world begins to lose faith in the creditworthiness of the US dollar? The British pound used to be the world’s reserve currency, but once the British pound lost that distinction, there were significant, severe effects on the British economy, which took many painful years to fix. History is full of examples where a government’s mis-handling of its economy and its currency has had dire consequences – – Germany in the 1920s, the United Kingdom in the 1970s, Argentina in the 1980s, Argentina from 1999 to 2002, Iceland in 2008, Greece in 2009 – – the list goes on and on.
Although the US economy / US dollar appropriately earned its position as being the world’s reserve currency, there is no guarantee that this will continue in the future. In fact, the process has already begun – – the Euro has replaced the US dollar for cross border transactions within Europe, and many other international transactions are now being conducted and settled using currencies other than the US dollar. In addition, the major credit rating agencies downgraded the US in 2011, primarily because the US government increased the debt ceiling (and the cumulative US debt has increased substantially since then).
So…. How long can the Federal Reserve and the US government print money and manipulate interest rates downward? Our Editorial Board members are not economists, and we do not possess a crystal ball that provides the answer to that question. However, we bring a business perspective to our analysis of the government’s fiscal policies, and we agree with David Walker (the former Comptroller General of the US government) that the trajectory of the cumulative US debt is on an unsustainable path. As a country, We The People cannot borrow and spend ourselves into prosperity. Once interest rates begin to rise again, for every 1% increase in interest rates, the US government’s annual interest cost will go up by $170 billion, and this amount would get layered on top of the existing annual deficit, which is budgeted to be another $564 billion for fiscal 2015. The question is not “if” the growing US debt is a problem – – the questions are “when will it become a severe problem” and “how severe”?
US Debt Clock – – May 1st – $55,069 per citizen / June 1st – $55,072 (a relatively “good” month)