Thursday, 11 March 2010

The US is broke

John Mangun
Outside the Box
Business Mirror

MANY people living in places like the Philippines or California or Japan have, in the back of their mind, “The Big One.” That refers, of course, to a major catastrophic earthquake not unlike those that recently occurred in Haiti and in Chile.

There is really nothing that can be done to mitigate that sort of disaster. You know it may come virtually anytime but that anytime could be now or in the very distant future. Any preparations that a single individual might make are actually insignificant since all personal preparedness would not counter the consequences of destroyed infrastructure and the prolonged loss of basic services.

Personal and public financial disasters often come the same way an earthquake does: unseen and unexpected. It is unlikely that many went home from work on Friday, June 6, 1997, expecting that the value of the peso would drop some 30 percent by the time they arrived back at work on the following Monday morning. But it did happen. Those who had stored US dollars for a rainy day were happy. Those who had borrowed in dollars were not.

However, the current global financial situation does not resemble an earthquake. It is more of a great storm that is building and building, ready to do more damage. Through the last 18 months we have seen this financial typhoon move with increasing intensity around the world, destroying the value of assets and consuming wealth. Yet with every new unleashing of its harm, whether from the housing market in the US to the sovereign-debt crisis in Europe, people are reacting as if this were a financial earthquake that came about by surprise.

Make no mistake: This financial tempest is far from over. The worst is yet to come. It is not an earthquake. It is an increasing, constant storm that is wearing away at the foundations of modern wealth and standards of living.

How significant is the US economy? The total world economic output in 2008 was $60.5 trillion. The euro zone accounted for $16 trillion. The US produced $14.2 trillion. Therefore, nearly half of the world’s economy rests with Europe and the US. But what about Asian countries? Minor players in the big picture. Japan ’s output was $5 trillion, followed by China with $4.8 trillion. India and Russia are far behind, each at $1.2 trillion. You get the point.

We know that the Great Global Meltdown is a result of nearly all the wealth created by the West in the last two decades being an illusion. Borrowing money, buying assets with that borrowed money and then falsely increasing the value of those assets can only lead to a bubble.

Imagine taking a million-peso cash advance on your credit card, using that money to buy a P3-million car with 30 percent down payment, and then valuing the car at P5 million. You go out and tell everyone you are richer by P5 million (the value of the car) when, in fact, you are poorer by the P1 million you originally borrowed. That is the way the West has operated for years.

How bad is the situation in the US?

According to the Federal Reserve’s most recent report on wealth in September 2009, America ’s private net worth was $53.4 trillion. But the US debt and unfunded liabilities totaled at least $120 trillion, or 225 percent of its citizens’ net worth. Even if the government confiscated every dollar of private wealth, every private asset in the nation, it would still have a deficit of $66.6 trillion, equal to $215,000 for every man, woman and child in the US, and roughly 500 percent of the US annual gross domestic product. The size of those numbers is almost beyond comprehension. But the reality of what those numbers mean is beyond terrifying.

Imagine a family so far in debt that they would have to sell everything they had, down to the clothes on their backs, and still have to work another five years using all their income to pay off their remaining debt.

The government in the US has been and continues to be so badly managed that it is spending $4.83 billion a day more than what it takes in through taxes and other revenues. The only way it can do this is by borrowing even more money from the world.

In the past year alone the US government has spent $20 trillion for bailouts, government subsidies and government-loan guarantees equal to roughly 40 percent of the total private wealth created since the US was founded more than 200 years ago. It is estimated that in order to keep the current level of spending for “normal” programs like defense, education and other social services, the US government will run a budget deficit for the next 70 years. And you thought the Philippine government had a budget-deficit problem.

The United States and its economy is bankrupt, insolvent, financially worthless. It is impossible and unrealistic to expect that the world, primarily China and Japan, can continue to fund this size of US debt repayment.

The US government’s only solutions are either formal bankruptcy and outright debt repudiation coupled with the dismantling of bankrupt government programs like Social Security, or unprecedented American monetary inflation and debt monetization by printing more and more dollars. If the government chooses to inflate its way out of this fiscal catastrophe, the United States dollar will essentially become worthless. If it stops paying its debts, the global banking system will fail and we return financially to the 19th century.

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