Could the last person to leave America please turn out the light.
I don’t know about you, but I’m more than a little worried by recent economic events. First Freddie Mac and Fannie Mae, then Lehman Brothers, and now an $85 billion loan to AIG. Some people would have us believe that despite all of this, the foundations of our economy are strong. But with trillions of dollars in debt now on the table, how long can this country keep racking up the red ink?
Laurence J. Kotlikoff, professor of economics at Boston University, outlined a story today that sent a chill down my spine. The big, bad fact that had my heart thumping was the staggering $70 trillion liability facing our government. As Professor Kotlikoff explains:
This represents the present value difference between all the government's projected future spending obligations and all its projected future tax receipts. This fiscal gap takes into account Uncle Sam's need to service official debt--outstanding U.S. government bonds. But it also recognizes all our government's unofficial debts, including its obligation to the soon-to-be-retired baby boomers to pay their Social Security and Medicare benefits.
Given current policies, each of the 78 million boomers can expect, on average, to receive $50,000, in today's dollars, from these programs in each and every year of retirement. Multiply 78 million boomers by a $50,000 annual payment and you get close to $4 trillion per year. This helps you see why our nation's true indebtedness is so extraordinarily high.
There are other obligations, too, that aren't calculated into the national debt, or even in the $70 trillion, but for which the government remains at risk. House prices haven't stopped falling. They are down 20% from their peak two years ago. But they remain 70% above their value in early 2000. That was the year prices started going crazy. If the price pendulum swings back to 2000, we'll see the mortgage default rate, currently at a record 9%, soar.
Now, I’m no economic genius (I'm sure many of you will point this out later) but I do know that a $70 trillion liability is not going to go away overnight. In fact, whether you vote for John McCain or Barack Obama, this vast economic problem will be inherited by the next President. And when he’s sworn in next year, he’s taking on a burden that will only get worse before it gets better, if it ever does.
As this crisis (and it is a crisis, as far as my understating of the word goes) deepens, there will be no end to the bankruptcies in our nation, despite those laws being tougher now than in the past. And not just that, but the aftermath for the rest of us will be cataclysmic.
Banks and financial insitutions will be running scared. Try getting a car loan or a mortgage that has a decent APR, if you can get one at all. You may have perfect credit, but that just means you’ll be approved for a slightly less offensive loan than the guy sat next to you. If you have any equity left in your home, which is diminishing more rapidly with every passing day, you’ll be very lucky to get a home equity loan or line of credit.
As of August 2008, we’ve had almost 450,000 new jobless claims this year . That doesn’t include the massive layoffs coming from the fallout of corporations like Lehman Brothers and, potentially, AIG. And Analysts are saying that the full-scale damage caused by these losses will not be fully understood for months. That means there is even more bad news on the horizon.
This, readers, is a very scary time. A time when the Dow Jones can drop 500 points in one day. A time when the value of the dollar is in freefall. And a time when the price of everything from gasoline to milk and eggs is rising.
Then there’s healthcare. Both Obama and McCain have a plan for it , and neither one looks good to me. Healthcare is broken, and no-one seems to know how to fix it without leaving casualties. I’m more scared by McCain’s plan to be honest, because it eliminates tax benefits for employers. And when that happens, employers will most likely dump healthcare coverage for employees as it becomes too costly to subsidize. McCain’s tax credit to families will offset the blow, but not by much. $2000 doesn’t buy you much coverage these days, if you can actually get coverage.
But from what I understand, Obama’s plan will cost an absolute fortune to implement, and it’s not like the U.S. can just conjure that money from thin air. It has to come from somewhere. But where?
As the U.S. is such a lynchpin in the global economy, we can already see the effect our economy is having on the rest of the world. Tourism is down because of, among other things, the rotten exchange rate (try turning in your Dollars for Euros and see what kind of chump-change you’re left with). Not just that, but the import/export situation is getting dire. I know of companies in the UK that are going out of business because American firms can no longer afford to import their products.
From what I’ve been told, there’s not much you or I can do to stop this freight train, so ultimately it’s not something to worry about (really?) What will happen will happen, and we’ll just have to ride it out with everyone else. However you look at it, these are dark times. But if someone, an economic Einstein, can shine a ray of hope on all of this horrible news, please share before I start looking into life on Mars.