Could the last person to leave America please turn out the light.

By Paul Michael. Last updated 17 September 2008. 23 comments
Photo: Forever 27

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.

What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

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.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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Guest's picture
John H60

No financial Einstein here (HAH!), but you can lash yourself to the mast with this piece of truth that's surprisingly strong in virtually all situations:

None of this is permanent. None of it.

Now...what are you going to need (and I mean NEED) after it's over? Planning and acting toward what happens after gets you through a lot of ugly now, 'cause you're busy.

So get busy. Things will be different sooner than you think, and you'll want to be prepared.

Good luck to us all.

Paul Michael's picture

And I'm going to use that phrase "lash yourself to the mast with this piece of truth" in conversation tomorrow, if you don't mind. 

Guest's picture

The construction never ceases.

Guest's picture
Guest

Lessee now, the last time the word economy tanked, people starved, begged, got frustrated and started to get behind something you might be too young to remember called Communism. In response to that, some businessmen and politicians got behind something else called fascism, and started bankrolling this guy, Adolf Hitler. The result was the most destructive war in world history. Oh yes, no one had nukes until the war was almost over (and then it was only us).

Now, where did I put the key to my fallout shelter?

Guest's picture
Mia

As a non US citizen I have to say that I am deeply worried about the economic situation in your country. And not just because it affects the rest of the world so much.

I am worried for all the families who will be affected by the lack of government support. People in the US seem to have a horror of the thought of 'the government' getting too involved in their lives. Thus people have opted for lower taxes, less industry regulation and more privatisation. Anyone who realises that private enterprise is a for-profit venture could figure out that leaving your healthcare in the hands of private companies is...umm... maybe not such a good idea. Making money off the sick is sick. So what I say to Americans is that you shouldn't fear the idea of higher taxes or what you consider a 'nanny state' (which by the way you already have, what with the governments ability to tap your phones and control your bodies - sex ed, anyone?). What you should focus on instead is making your government, and your private industries ACCOUNTABLE. More taxes arent bad if they are used for the right purposes. But of course your government is too busy funding an illegal war to worry about whats best for the people.

Oh man, I am going to get shouted at for this.

But my ultimate point is that you guys are focusing on the symptoms, not the cause. If you have no faith in your government doing right by you, change it! You have the power! There are a lot more of you than them, dammit.

PS. As an non US citizen I also fear the fact that your country is in economic freefall and seems to be led by people with their fingers on the button, so to speak. You guys have more nukes than most other countries, and more than half an eye on foreign resources. Awesome.

I hope I am not offending anyone :( but thats how you are seen from an international standpoint.

Guest's picture
Ken

"I am worried for all the families who will be affected by the lack of government support. People in the US seem to have a horror of the thought of 'the government' getting too involved in their lives."

 

If we weren't paying for so many entitlements, our national debt wouldn't be so much of a problem. Some people learn personal and fiscal responsibility, the majority don't. Entitlement programs teach the exact opposite - why behave responibly when the government will bail you out anyway? Unfortunately, the cost of government bailouts may finally be coming home to roost. The problem is government making to many promises and taking personal responsibilty away from individuals.

 

Industry regulation is a seperate issue. 

 

Ken 

Guest's picture
Guest

The truth is that government is of, for and by the people. Not the corporations. If anyone should receive help from our government it is the very people who pay the taxes.
No one mentions that these companies have been allowed to become monopolies. If we did not allow these corporations to take over everything like a cancer they would be unable to pull our government over the edge with them. These facts are never pointed out because if you are a corporation you can afford all of the best PR money can buy. If you are an average Joe you just need to pull yourself up by your bootstraps. Even if you have a major illness, your home has been destroyed by some catastrophe or your company decides it will be buying goods from a communist country (CHINA) and so they no longer need your manufacturing job.
Just when is the government allowed to help the very people who pay the taxes, fight the wars, build the cities and raise the future tax payers?
We have allowed the wealthy few to control the conversation for too long. I can guarantee that if you take away the few safety nets we provide as a country this not so stable economy would indeed already be in a very deep depression.

Guest's picture
Mia

PPS... i admit that my understanding is probably quite general on this topic, as a foreigner.

Guest's picture
cavale

Hmm.. I can think of a few places.

How about... the trillion dollar war?
Or... giant corporations?

Guest's picture

It is scary times. The first priorities have simply to be:

- get food on the table.
- pay the bills.
- keep your job.

everything else is a luxury.

Guest's picture
Wilson

1. Recall all troops deployed abroad. 2. Execute most of the Executive and Legislative branches for treason. 3. Imprison the management of most financial firms and confiscate all of their assets. This economic "event" or "crisis" didn't just happen; it was the result of a huge Ponzi scheme involving the participation and collusion of thousands of bankers, politicians, and real estate speculators. The perpetrators will continue to transfer money from taxes and through the devaluation of the currency to themselves unless they are neutralized.

Guest's picture
Guest

YES!!!

Demand action. Death to traitors. Confiscate the bankers' loot.

Guest's picture

I read a book by Kotlikoff some time ago and was appalled to learn of the present value implications of our debt, continued deficit spending, and massively unfunded transfer payment programs. These are very scary issues, but then I heard another interesting perspective. I imagine the truth to lie somewhere in the middle of the two, but consider this:

Analyzing America's cash flows like a corporate balance sheet means we have to consider total equity worth, total debt, and total assets in the entire country. Capital (debt and equity) is used to acquire productive assets that earn income. In the case of a country we call this income, GDP (or GNP, whatever).

Businesses (or savvy individuals) seek to balance the equation:

cost of capital = return on capital

This means that when you can borrow for cheap and earn more of a return than the cost of borrowing, it makes sense to borrow until you reach that equilibrium condition above.

For the U.S. we borrow at ~ 3%-4% (treasury rates) and earn ~ 12% when you count GDP/total asset base. This perversely suggests we have a far higher debt capacity than is being utilized. I wrote about this in an article awhile back:

http://www.thefreedomfactory.us/do-countries-need-to-stick-to-a-budget/

Guest's picture

I just read an article (http://www.energybulletin.net/node/46564) that makes a good case for the fact that humanity will return to the hunter/gatherer phase of our existence and that the sooner we do so the easier it will be. I think that may go too far, I think that a limited agrarian society might be workable as well, but the issues the US is facing are not going to get better. Attempts to fix them will prolong the collapse of the western economy leaving things in a worse state than they would be if the collapse was just embraced.

Guest's picture
Richard

Buy U.S. and only U.S. products. With The Chinese not playing fair in the free markets, profit margins seen by U.S. retailers have continued to shrink while the Chinese profits, and the trade deficit, have continued to rise. The Chinese Government has artificially pegged the Dollar to a slightly changing Yuan. The Chinese, to facilitate this transaction, purchase U.S. debt. This keeps the Dollar from having an affect of placing pressure on their currency and at the same time increases the Chinese position as the largest holder of U.S. Dollars and debt in the world.
At the same time their markets are booming this places more pressure on the oil markets, directly affecting what we pay at the pump, and not to mention all the other pressures on commodities, such as metals they use in the manufacturing of goods they end up selling to us, which causes more price pressure on nearly everything, and so on....
The trick here is to know that the markets are fluid, unless someone tries to control the flow. China’s actions towards absorbing the trade imbalance by subsidizing their merchants has not hurt them as their sales have continued to increase, which gives the Chinese Govt. the revenues needed to continue these practices, and transfers world wealth to their population. But since this fluid must flow the markets around the world have to adjust to China’s greed.
The Chinese may be doing this on purpose. If the Fed is forced to cut interest rates, the interest bearing debt held by China goes up in value.
If Americans would Buy U.S. and only U.S. goods and services, as the largest purchasing power body in the world, the U.S. consumer can fix the markets, except for China, around the world, nearly overnight.
A book that touches on the subject is Peter Navarro’s The Coming China Wars. His book goes into some of the trade policies of China and the affects around the world but I wish he would have gone into better detail to explain the simple ramifications and solutions we as U.S. consumers, the largest purchasing power block in the world, control with our purchases.
Basically if you look at the money multiplier effect, and instead of purchasing U.S. or local goods and services, a person purchases foreign goods and services, the money multiplier, through fractional-reserve lending, ends. Therefore the ratio of actual dollars to commercial dollars, or demand deposits, M1, as reflected on liquidity, becomes extremely distorted and unstable, even though it can’t be seen. But if everyone were to stop buying foreign goods and services, such as Chinese products, and products that use Indian call centers to service the products, and instead buy U.S. products, or save their money, the liquidity in the market would not only be restored but thrive.
Please tell a friend.
I will be checking back for any feedback, and believe me if enough people did this, jobs, the environment, wealth, medicine, and medical benefits, insurance premiums, world peace, etc.... would all be improved, I am not kidding. Its the fix the government can’t talk about as China’s position as the largest holder of U.S. debt is so controlling of what they can say, as the Chinese can start dumping that debt anytime, which is another reason. But only you can control what you buy and where it was made.

Guest's picture
Gary Chin

Not to worry. Get a one way ticket to China. They will house you in a guarded,gated community with your very own bunk. They will pay you 50 cents an hour for a 12 hour work day 6 days a week and give you three square meals a day laced with melamine and lead. Welcome to globalization and the New World Order.

Guest's picture
Guest

Mia,

If you wish to understand our aversion to government support, I recommend reading up on US history and the writings of Adam Smith, Thomas Jefferson, and others who had a profound influence on what this country stands for.

Perhaps then you will understand why so many of us do not want a Nanny State.

Guest's picture

First I have to say I love the title of this post...

I think there was a lot of people who kept beleiving that it csouldn't get any worse and it does...over and over. Once gas and oil prices began to rise and there was no longer a way for people to avoid how bad things were turning, people got scared.

Seeing the numbers as you have printed them in black and white certainly does make one wonder about life on Mars.

Nice post.

Guest's picture

A long time ago, there was a billboard in Seattle that said essentially the same thing. Boeing was in trouble and jobs were being lost left and right. Then Microsoft came in and resurrected Seattle. That was when Microsoft was an up and coming company but now it is stable and actually shrinking in some areas.

I think it will take some innovation to bring stability back the US and unfortunately the social climate is against progress. This just does not bode well for our futures IMO.

Oh, and I am an American who agrees with Maia. That is why I am looking at emigrating. Give me higher taxes and a nanny state any day over corporate bailouts for rich people.

Guest's picture
Guest

I have to tell you nice people that the one thing that will save our infastructure is the people you love to race....TRUCKERS...There is a reason why many have costs beyond mortgage payments, are still feeding you folks. It is because, the American Trucker is not greed driving out here. We pay for everything up front, including fuel. We tried to warn Americans a few months back of a fuel crisis...Markets hurting...we stormed Washington DC and no one listened. Just alone my truck payment is 1800.00 (Just the truck mind you)...and I am still here. I am not bragging, as it isn't the rates on loads that are keeping me here feeding you wonderful folks. I can compare trucking to government. It also has no accountability, no transparency, runs on a good faith system to even be paid, and pretty much free labor. As the shippers out here are the emperors to this whole game, the thieving brokers are Congress, the truckers are the low wage laborers, and the consumers are the lobbyists.
If we break Trucking....and mind you ......We asked for no fuel crisis bailout.....and it is very vulnerable at this time, everyone is wondering how long......HOW LONG WE CAN KEEP GOING TO GIVE OUR LABOR FOR FREE TO KEEP AMERICAN STRONG WITH FOOD AT LEAST.......
So the next time anyone wants to race a trucker, run them off the road, or slam them......Think about this.....They create every job. They are still going. They are more patriotic than most on our economy surviving, and they give graciously their time and labor with no greed. They truly have no recource to anyone to even be paid.

AIG spent time at a Regis Spa....freight brokers do the same, Landstar is able to Vacation in Marcos Island, and give away 2 trucks at their sales rally, while these guys are out here trying to hang onto one truck. Trucking is very corrupt.....take that to your business class!!

In the meantime......I am a hot female trucker, and I'm waiting for a kiss........LOL or at least a THANK YOU.......I am also educated, but the highway calls my name.......although I cannot stand the corruptness....go see if you can help us truckers get Congress to get the TRUCC BILL OFF THE HOUSE FLOOR......

It isn't going to happen, as how can we ask for Transparency, when Congress can't even provide that??

I see so many correlations....Lets hope that we all can keep going, as GM is shutting down a plant in Ohio....come Dec 23...there goes another 1,100 jobs....and also this plant shutting down already has trucking companies shutting down.

Grow some food. You may need it, as we are all suffering, and really trying hard to stay in business FOR THE PEOPLE. WE ARE NOT ABOUT GREED........AT ALL!!!

Guest's picture
Brent

Hey Hope fiends
How much writing do you need on your walls? If you wait until it is too late,..It's too late!
Everything that is happening in America is Biblical, and you're running out of pages. By the time you figure out who's write or wrong, a gun will be pointed at you and your family.
I pray that as many people as possible leave the US.

Guest's picture
Brent

Forgot to mention,
Once Martial Law is declared in the US, (and it will)
There's no leaving, going to the bank, getting your money and flying out of the country. You are a number, nothing more.
Check this link:http://www.freedomfiles.org/war/fema.htm
600 fully operational concentration camps in the US. Staffed, armed and ready.
But they're empty!
We don't put on condoms unless we're going to do it.
Please get out now. The strong won't survive, the smart ones will.

Guest's picture
Guest

Actually, you don't have to go quite that far! :-) But eMail me if you want to know the secret. You might find it very interesting.

Don