Wednesday, December 21, 2016
Living on Borrowed Time
Debt has become its own pernicious currency. We’ve watched a perennial march of inflation decimate Latin American populist governments as demagogues routinely over-promise social benefits, trigger massive inflation as underlying taxes and resources simply cannot keep up with spending programs. Massive debt to foreign lenders eventually collapses entire nations in a cacophony of meaningless local money through hyper-inflation, wage-price controls, black markets, severe shortages and empty shelves. Present-day Venezuela is the current post-child for this form of economic malaise as the picture above suggests.
Where currencies are not local, where they embrace large accumulations of nations like the European Union, the ability to inflate a single local denomination is no longer possible. The underperforming EU countries have thus watched their banks collapse, their governments run out of money, and austerity programs – mandated by regional bailouts – casting lifestyles into mean-spirited burdens avoided only by the richest segments of local society.
Here in the United States, with politicians failing to understand the difference between spending (where there is no rate of return that improves our economy, e.g., most of our military budget) and investment (spurs to economic growth, e.g. education, infrastructure and scientific research), we owe a lot of money: “On November 7, 2016, debt held by the public was $14.3 trillion or about 76% of the previous 12 months of GDP. Intragovernmental holdings stood at $5.4 trillion, giving a combined total gross national debt of $19.8 trillion or about 106% of the previous 12 months of GDP. $6.2 trillion or approximately 45% of the debt held by the public was owned by foreign investors, the largest of which were China and Japan at about $1.25 trillion for China and $1.15 trillion for Japan as of May 2016.” Wikipedia
For us, as long as the world has faith in our government and our economy, the only huge negative to that massive debt is the cost (interest) of servicing that debt. The world believes that we are solid and unbreakable, able to sustain and service that debt-load. But there are new signals from the incoming Trump administration that we are going pull inwards and redefine our global economic position and participation in international trade. Trump has also pledged to implement massive tax cuts, 96% of which would impact the highest income brackets. Deficits are predicted to skyrocket as a result. How will the world react to such changes?
Should the rest of the planet lose faith in our sustainability, political stability or the value of the dollar as the mainstay as the major global reserve currency (the basis for international pricing and trade), our outstanding federal deficit would rise to become a deep and serious international concern. The United States would join the litany of “those nations” mired in unsustainable debt, experience inflation and be forced into an era of unprecedented austerity… like everybody else.
We do keep kicking the budget can down the road, including the Congressionally-approved federal deficit. In 2013, Congress implemented a budget sequestration measure to attempt to set limits to governmental spending. “The cuts were split evenly (by dollar amounts, not by percentages) between the defense and non-defense categories. Some major programs like Social Security, Medicaid, federal pensions and veteran's benefits [were/are] exempt. By a special provision in the [Budget Control Act, of 2011,] Medicare spending rates were reduced by a fixed 2% per year versus the other, domestic [percentages] planned for the sequester. Federal pay rates (including military) were unaffected but the sequestration did result in involuntary unpaid time off, also known as furloughs.” Wikipedia. The federal deficit continues to rise, with investment allocations perpetually on the chopping block, even as pledges for pure military spending measures expand.
We’re not alone in our budgetary struggles, seeking limitations on federal spending. But most measures call for short-term measures on government spending, almost never a decades-long commitment. Enter Brazil, facing plunged oil prices, inflation and an impeachment of their “removed” president (Dilma Rousseff), with a caretaker administration under new President Michel Temer now in place during this political turmoil. The world has lost faith in Brazil and its economy.
“Imagine setting [a governmental] budget today for every year through 2036. [The] world’s ninth-largest economy made just such a decision… The Brazilian Senate on [December 13th] approved a constitutional amendment to freeze social spending by the Brazilian government for 20 years — allowing it to rise only in tandem with inflation. The government says such a dramatic measure is necessary to get the country’s recession-bound economy back on track and gain control over public debt, which has grown sharply in recent years.
“With tough fiscal measures such as the amendment, ‘everyone will be able to project the numbers,’ Finance Minister Henrique Meirelles said in an interview in June with the Financial Times. ‘A lot of the uncertainty is coming down.’… Critics call the amendment draconian.
“Many countries around the world, from Greece to Singapore, have adopted strict austerity measures and fixed budgets for short periods, but it’s hard to think of another nation that has imposed such a long freeze. Philip Alston, the U.N. special rapporteur on extreme poverty and human rights, told a Brazilian newspaper this week that if the amendment is passed, ‘an entire future generation is condemned.’ It was approved 53 to 16.
“The amendment, called PEC 55, caps public spending on health care, education and social security, which had been priorities of the Workers Party that governed for the past 13 years. It limits government social spending to current levels adjusted for inflation over the next two decades, with a presidential revision available after 10 years. The country’s inflation rate currently hovers around 8 percent.” Washington Post, December 16th. We can sit smugly and look at these events and the efforts to curtail a rising deficit from our lofty perch on the greatest economy on earth. But if the world loses faith in our economic or political stability, there but for the grace of God…
I’m Peter Dekom, and massive changes in political and economic basics in any country mandate a global reevaluation that could prove disastrous for the unprepared.