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There was a lot of back-patting in Washington this week after U.S. President Barack Obama signed a debt-ceiling deal that he and members of Congress claim will reduce the national debt.
But here's the truth: This deal does nothing to reduce America's debt burden. In fact, the $14 trillion we owe now could every easily exceed $23 trillion by 2021.
That's a 62% increase.
It only takes a little bit of number crunching to see what I mean.
The deal brokered by Congress cuts spending by just $917 billion over a 10-year period, with a special congressional committee assigned to find another $1.5 trillion in deficit savings by late November.
Even if you round up, that $2.5 trillion in "savings" over a 10-year period is inconsequential when you consider that President Obama added nearly $4 trillion to the national debt in just a few short years in office.
How can you make any progress on the debt front when you're adding $4 billion in new liabilities every day?
And the story is even worse than that: According to the Congressional Budget Office (CBO), even the $2.5 trillion the government claims to be saving is quickly vaporized by inflation and lost economic output.
CBO: Contrary to Barack Obama
The CBO projects the average growth rate from 2011 to 2016 will be 3.25%, and the non-partisan group has the average rate of inflation pegged at 1.55% over that same period.
However, growth in the first half of 2011was 0.8% and the personal consumption expenditures (PCE) inflation index - the type of inflation the CBO looks at - was 3.5%.
So let's do the math.
If growth and inflation statistics magically revert to CBO expectations - which would be a long shot considering how much they're already off - then the budget deficit over the next 10 years would rise by $928 billion. That alone is more than enough to wipe out the $917 billion of initial savings in the debt-ceiling bill.
Worse, if the U.S. economy's malaise continues to 2013, with lower growth and higher inflation than the CBO projects, then the deficit in 2012-21 will increase by $2.784 trillion.
You may argue that over three years the economy ought to do better than 0.8% growth. But with recent reports underscoring how much the economy has weakened in the past few months, I wouldn't gamble on a stronger recovery taking hold. And given the actions of the administration and the U.S. Federal Reserve over the past couple years, I'm fairly confident that we'll see inflation in excess of 3.5% during that same period.
If we're really out of luck, and 2011's first half represents a new long-term reality, then the deficit runs completely out of control.
Theoretically, it would surge by $9.17 trillion from 2012-21. But in practice, debt would spiral, the U.S. credit rating would go to hell, and an economic collapse would be inevitable.
Still, even that gloomy scenario doesn't account for a possible increase in interest rates.
What would that look like?
Well, the CBO says a 1% increase in average interest rates over the next decade would add another $1.3 trillion to the 10-year deficit.
Of course, there is a solution to all this, but it involves a lot of bitter medicine. We're talking about much higher interest rates, meaningful spending cuts and the closure of every available tax loophole. No more ethanol subsidies, no more mortgage interest tax deduction, and no more charitable deductions.
At this point, even this solution - unlikely as it is - would have to wait until 2013 at the earliest.
So the message is clear for investors: Invest in emerging Asia and the better-run countries of Latin America, and keep a decent chunk of your money in gold.
You're going to need it.
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For years we have been hearing relative stories of how good it was in the old days.
In the old days we had a degree of income, productivity and inflation which we adjust annually indefinitely. Of course every oldtimer chats about how cheap it was to live back then, how life was inexpensive etc
in lieu of quoting hepas of numbers and all variable against each other therein confusing everybody why dont the so called economists have a mark to market event whcih woulod bed all the indifferences.
Gee! I thought the US Government had 200 trillion in unfunded liabilities! A couple of extra trillion doesn't sound like much after that. Hang onto your hat once hyperinflation kicks into gear down the road. 1790's France will be a blip by comparison.
Interesting that Obama is apparently blamed for the deficit inherited from Bush for FY09, which began before the election in 2008, not to mention that the primary cause for the deficits has been the huge dropped in revenue as a result of the Bush tax cuts and an economy engineered by Bush and the GOP. Even more interesting is the implication that the solution is to put back in power the party that caused this crisis but has yet to acknowledge that and whose candidates have yet to put forth any credible measure that could reverse the effects of the last time they were in power.
As long as our government is unwilling to tackle the problems of trade deficits, unfair taxation (due to loopholes to big business and millionaires), and exportation of American jobs to cheaper labor markets overseas the American economy will continue to decline. It is time we started protecting American jobs so we have a broader tax base and we don't have to support so many unemployed workers. It is time we make the tax system fairer so everyone pays his or her fair share. It is time we closed our markets to countries who "dump" their products into the U.S. (the once richest market in the world). If we are going to have the rates of inflation caused by budget deficits, we might as well inflate the price of goods from these cheaper labor markets by imposing tariffs that can be used to decrease the budget and will discourage our manufacturing business from exporting jobs overseas.
Anybody can see that we need to decrease our government spending, and any sane person can KNOWS that we need to increase revenues in order to decrease the budget deficits. Bailouts to large banks and auto industry have brought us to the brink of disaster, and yet two years later those same businesses are giving huge bonuses to their executives, yet they can't make loans to refinance homeowners who are struggling to keep their homes. They would rather foreclose on those homes and put families out on the street while those foreclosed homes sit empty for lack of buyers. What is wrong with this picture? Did we really need to bail out the banks in the first place or was it just another way for the banks to grab government money instead of acting responsibly? Why didn't we bail out the homeowners instead? Oh, they didn't have a lobby. That just shows Congress's priorities are on big business, not on the American people.
I'm not an economist, and I'm probably not the smartest person in the U.S., but anybody can see that the way our government has been run for the last 15 to 20 years has not been good for the American people. President Clinton left office with a balanced budget AND a declining deficit. Since then, we have not had a balanced budget and deficits have increased enormously. And our economy has declined and the American worker has suffered. It is time our Congress started putting the interests of the American worker first and gets back to the task of rebuilding the American economy. That won't happen by shipping American jobs overseas, nor will it happen by allowing big business and millionaires to escape paying their fair share of taxes. It is time that Congress got back to looking out for the interests of the American people instead of the large corporations who are exporting our jobs overseas.
In most of your articles, I see you recommending to investors to keep a good chunk of their investment in Gold. Gold is a good investment, but right now I would say that Silver is a much better investment! While Gold is a good investment and should continue to out perform stocks and bonds, there is much more room for a downturn and greater loss of money in Gold than there is in Silver. I strongly advise anyone to purchase silver, at anywhere near today's prices, while you still can. The fundamentals indicate rising prices for decades to come, and a major price spike can happen at any time!
Good article overall, and a sobering one. However, whatever Obama's degree of responsibility going forward, it is misleading to criticize him without also pointing out that most of the huge US debt was run up during Republican administrations, through a combination of unfunded wars and tax cuts for the upper brackets. I am extremely unhappy with Obama's decisions on the economy over the last few months, but a little historical perspective as to how we got here is only fair.
Not sure about higher interest rates, but what about a sales tax and a gas tax. Its fast, its easy. Every other country in the world has done it. I agree that it does not get rid of the problem of an incompetent government – but one thing at a time.
I agree, but would the american public accept the Value Added Tax which have helped fund some European and Latin American countries' governemtns for decades. Does the US have anything similar?
Really Mike??? Ever since his inauguration, President Obama has said that he "inherited" the federal budget deficit from his predecessor. But immediately upon taking office, Obama signed two new bills, the $787B stimulus and the $410B omnibus, that together about equal the $1.2T deficit he "inherited." The feds ran a $1.58T deficit for FY 2009, the all-time record and the first deficit over a trillion bucks. This deficit is 3.4 times the $459B deficit of 2008, and 10 times the $160B deficit of 2007, which began when Republicans were still in control of Congress.
LOOK WHERE WE ARE AT IN 2011
Precious metals are a must in these uncertain times. Follow the mantra, "Silver for speculation and Gold for wealth preservation."
We're headed for a debt wall. Pretty soon there will not be any available funds for us to borrow. America must get its economy in order before its really too late.
Really Larry…You can just read my comment to Mike!!!
Blaming people never solves anything. Listening to people who blame others does nothing.
Borrowing does not reduce debt. Giving money to banks to lend does not reduce debt.
Paying down debt reduces debt.
The Clinton and Kennedy economic booms were funded by tax cuts which are essentially giving people THEIR OWN MONEY and letting them stay out of debt.
The real problem was that the money was not given to the people but to the banks to loan to the people.
Keeping them honest: They said they would break it and they did! And Mr. Boehner, Tea Partiers and Cantor, McCarthy and Ryan and Senator McConnell and his 43 obstructionists, own it! They kidnapped our US credit and succeed to hold it hostage. Now since their “manufactured” Crisis, the Dow Jones Industrials have fallen 1142 points or 10.6%and a repeat lost in our 401K retirements! Now as a direct result of the political “brinksmanship” by tea party’s game, S& P has downgraded our credit rating! However, republicans did succeed to protect that NO taxes pledge for Billionaires and Millionaires to not pay their fair share of our bills! The result is an increased in US debt without spending!
Bring our country to the brink of economic catastrophe, the damage to our creditability in the financial markets has been done! The international markets are falling and sending a clear message to AMERICA because of these irresponsible idiots! Standard and Poor’s clearly stated 3 times in its message that the downgrade was about Political posturing by the House and Senator McConnell’s political extortion games with his 43 sign-up-ed obstructionists! These hypocritical republicans never held hostage a debt ceiling before! Never voted against past Republican Presidents to keep him from paying “congress” approved bills! Remember, 82 % of us disapprove of your fiscal stupidity! Stop your meaningless political talking points! See you extortionists in November when debt will be repay! It's about of Jobs, not War on the Middle Class, dummies!
OBAMA IN 2012!