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The Coming Economic Collapse Pt 2
Courtesy of Graham Summers of Gains, Pains, and Capital
Today’s essay is part two of our three part series detailing the ongoing collapse of the US economy with a focus on why this coming fall will prove the “worst is over” crowd wrong yet again. On Friday we detailed three major developments. They were:
If you missed that essay, you can read it here. Today, we’re addressing how the debt bubble encapsulated the US government as well as why Obama’s Stimulus Plan won’t fix anything.
To revisit the above three points, the US began outsourcing jobs in earnest soon after we re-opened trade with China in 1971. As outsourcing spread to higher and higher skilled jobs, this meant fewer jobs in the US market. This resulted in US consumers having to use credit to maintain their standard of living. It also meant more than one parent working to make ends meet.
On a national level, the US government began living beyond its means as well. Adjusted for inflation, gross tax receipts have only risen 40% in the last 39 years. However, over the same time period, total government spending increased 2,600%!!!
To fund this insanity, the US issued debt in the form of Treasuries. Foreign governments (most notably China) which were generally getting richer selling us stuff loaded up. The whole scheme is similar to buying a toy from the store, then having the store lend you money to buy another toy… ad infinitum: hardly a sensible long-term plan for financial solvency.
Now, everyone knows we run deficits. But not everyone knows that the deficits we publish are unbelievably understated. Corporations, in order to qualify for generally accepted accounting principles (GAAP) have to count their pension and healthcare expenses for retirees.
Uncle Sam doesn’t.
John Williams of www.shadowstats.com notes that official US deficit statistics do NOT include net present value of unfunded social security OR Medicare expenses. A lot of folks have made a big deal about the US running a $1 trillion deficit this year. Well, if you included the net value of those unfunded Social Security and Medicare expenses we cleared a $1 trillion deficit in 2007, a $5 TRILLION deficit in 2008 and are on course to clear a $9 TRILLION deficit this year.
To give you an idea of how big a problem these deficits are, consider that the US government could tax its citizens 100% of their earnings and NOT have a balanced budget.
In light of these issues, the government’s $787 billion stimulus package doesn’t exactly breed confidence in an economic turnaround. Incomes have lagged inflation in this country for 30+ years. Creating a bunch of temporary positions related to construction and the like is NOT going to alter this in any significant way.
Moreover, most of the job growth in the last 10 years has come from Bubbles: two out of five jobs created between 2002 and 2007 came from the housing industry. The irony here, of course, is that the Stimulus Plan is merely following this trend, creating jobs from our latest (relatively unreported) Bubble: the bubble in government spending and employment.
Bottomline: the US needs to create sustained job growth involving skilled professionals with high wage earning potential, NOT more guys laying concrete. We need fundamental structural changes to the US economy, NOT temporary positions resulting from one-time government projects.
And with a $9 trillion deficit in the works, $787 billion doesn’t really mean much in terms of increased tax receipts. Also, and this is bit of a personal aside, it’s hard to believe that throwing $787 billion towards creating jobs really shifts our economy away from financial services when we’ve thrown $2 trillion+ towards Wall Street and the banks (via direct loans and lending windows).
Tomorrow, I’ll address the likely outcome of today’s economic and financial woes. Until then…
Good Investing!
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