Sunday, October 21, 2012

The Reality of the US debt

Disclaimer: Now I realize that people really feel that anytime you relate something to Nazi Germany, you have a weak argument.  When you think about someone like Glen Beck, who seems to have Nazi tourettes, I understand the concern.  This is not about Nazi Germany; it is not a comparison of the present administration to Nazi Germany.  It is a discussion of the results of excessive debt on a society.

I fear I must give a little history lesson so this is not taken out of context.  It is okay, since I tend to be long winded anyways.  In 1918 Germany lost World War One and in 1919 the Treaty of Versailles was signed.  A significant part of the treaty was that Germany had to pay reparations to the Allied Powers.  In short Germany had to pay the entire cost of the war to the winners.  This placed a very large burden upon the German people.  As long as times were good in the world, the burden was bearable.  Times were however not good and despite having the most modern democracy on the planet Germany needed the help of the USA to be able to prevent it from becoming a third world country (at least in concept, that term did not exist until after WW2).  Prior to the help of the USA runaway inflation existed and the middle class lost their entire savings just to feed themselves.  It was in this environment that the Nazi party was born.  It started as a handful of people that would just bitch about the government at their local beer hall.  My point is, when the economy is bad radical groups are born and they can thrive depending on the amount of time that such an environment exists.

The German people are dedicated to their country and take pride in their national heritage (sound familiar?).  So when the traditional parties were unable to provide relief for the masses, the people turned to different radical groups (Nazis and Communists being the main two) for relief.  When people are hungry, they are willing to give up their freedom to have bread on the table!  In 1923 (if I remember correctly) Hitler tried to start a revolution in Germany with his Beer Hall Putsch. It failed and he went to prison.  It was during this time that he wrote Mein Kampf.  It was also during this time that the USA got involved in Germany’s economy and helped to prop it up.  After Hitler got out of prison he became patient and was determined to conquer Germany through the ballot box.  1923 to 1929 was the time of plenty (thanks to loose credit), the Nazis had ups and downs, but never gained enough numbers to be a serious threat.  Then in 1929 the economy collapsed and Hitler became more and more powerful as the economy want further and further down the drain.  By the time 1934 came around Hitler was able to proclaim himself of Fuhrer (leader) of Germany.

End History Lesson...

So what does the rise of Hitler have to do with the German debt?  Those reparation payments placed a burden on Germany, one the people and government were not able to handle.  Taxes went to pay France, Belgium and the UK for the costs and damage of the Great War.  There was nothing left to support the infrastructure that gave the German people that lifestyle they had grown accustomed to.  When the economy was bad the government cannibalized the German monetary unit (the Mark).  Now that is a little simple, since Germany was on the gold standard, but when they shipped all the gold to France to pay the reparations there was none left to support the Mark.  That is what caused the runaway inflation, making imports expensive.  This also helped make Germany an attractive investment for US investors in the 20s, since that meant costs were cheap.  Germany was truly like China was years ago.  Germany was a place to get high returns, since it could manufacture items cheaply and flood markets because of this. 

Germany was able to bounce back during the early/mid 20s, because the economy in the rest of the world was good.  The Weimar Republic was able to survive and even prosper, but internally it suffered from gridlock.  No single party was ever strong enough to run the country without the support of one or many of the fringe parties.  Because of this the radicals were never able to be crushed by the government.  How could you crush them when you never knew if you might need them...

It was the reparation payments that Germany had to make that placed such a heavy burden upon the German government and thus the German people.  People can talk about how Hitler also played the shame card over the loss during World War One.  It is true he did do that, but during good economic times the audience for such an argument would be much smaller than during bad times.  The audience that Hitler had was larger because of the economy and other issues only helped to cement his control upon the people.

Germany suffered massive problems when the debt was 80% of the GDP and democracy collapsed when debt was 250% of the GDP.  Reparations during this time accounted for over half of the government budget.  Think about it, over half of the tax income of the government went outside the borders and supported foreign governments and some wonder how someone like Hitler was able to come to power? 

So how in the hell do I compare this to the USA’s debt?

First let me remind you that the USA’s credit rating has dropped twice during the Obama years.  The lower your credit rating the more interest you have to pay to finance your debt.  So it costs you more money just to carry your debt, even before you pay it back!  Do you realize that right now 50% of the US budget is financed not by tax revenues but is deficit?  The total taxes paid by all Americans, to all governments (Fed, State and local) is almost 33% of our GDP!  The US deficit is almost equal to the income of all State governments combined!  So if you double your state income tax, your state sales tax and state corporate taxes, then you can balance the budget.  The only problem with that idea is that it will kill the economy.  Corporations will run overseas and people will buy fewer goods, so tax income will drop.  This will force governments to raise taxes even further.  I say governments because states and local governments will not be able to make enough cuts to cover expenses, so they will also raise taxes.  Even if things stabilize, how strong will the economy be if you are paying combined taxes totaling 2/3 of your income?  

One must remember that the credit rating will continue to drop and this will add to the cost of borrowing money, which will only add to the budget problems the government faces!  Think of Greece, Ireland, Spain, Portugal, Italy and even UK and France.

Now what will happen when an environment like this is happening or threatens to happen?  Extremist groups will become more normal.  People will cast blame on minorities for the ills that affect society.  The most likely targets will be Muslims, African Americans, Asian Americans, Latinos and Jews; most likely in that order.  Or maybe the Occupy Wall Street types will get their way and the ones that will be held to blame are bankers, bakers and candle stick makers.  I know, sarcasm, but you get my point.  People will not be thinking rationally and will just want to see someone burn to take responsibility for the position that they are in.  This is mob mentality, human psychology; it is a weakness that is in all of us!  It is NOT a rational thought process.  It is scapegoating.   

You may think I am insane to suggest that any dictatorship could take power in the USA.  You can even point to the fact that times were tougher during the 1930s, than they are today.  That is true, for now.  Franklin D Roosevelt had an advantage that our present government does not have; his debt was not over 100% of the GDP.  He had the room to spend money and run up the debt.  He only pushed the debt over 100% after the US entered World War Two!  The fact is that the USA has never run a debt over 100% during peacetime, until now.  Now you can say that the USA is at war, against terrorism, in Afghanistan; whatever.  The fact is that World War Two the entire country was mobilized to fight the Nazi war machine, which is not the case today.  Since we entered Afghanistan and Iraq the costs associated with these actions were put on credit cards, without even a plan put forth on how to pay the bill!

You may think I am insane, but I see two groups with competing visions for the USA.  One wants to create a utopia, which to me resembles Brave New World.  The other wants to use our own war machine to secure resources.  These are only the groups that are on the radar, can you imagine the ones that are waiting in the wings?  The fact is that Americans will not willingly accept a lower lifestyle.  We may even be willing to pay the cost in blood to maintain our lifestyle.  The problem is that the world cannot sustain growth at a pace that will enable us to be able to dig ourselves out of debt. That is unless we take something from our neighbors on this rock in space or we have to find another place to gather resources in space.  The only problem with the second half of that theory is that NASA has suffered from budget cuts.  If we do not push our future into space, we will run out of resources on the Earth.

Back on subject: The debt sky rockets and the economy tanks.  What do you think will happen when people have had enough?  We are connected less to the land than ever before and much more reliant upon the economic system that is in place.  We cannot just drop out of society and live off the land.  There are no unclaimed areas for us to run to and make a new life.  Fredrick Jackson Turner was a historian in the late 1800s who wrote a paper called: The Significance of the Frontier in American History.  His basic argument was that as long as there was free land in the USA it was able to siphon off anger that would have otherwise been directed at the government.  When pressure got too great in the states, people would overflow into the territories.  Before 1900 there was no more free land to be had, no way for the anger to be siphoned away from those in power. Today we can say one thing for sure, there is no place on this planet that you can just pack up and move to, hoping to survive anyways.  

Over the past 100 years population demographics have drifted from the south to the north, from the east to the west.  Even in our time areas that were considered safe now have the nation’s highest unemployment: Nevada 11.8%, Rhode Island 10.5%, California 10.2%, New Jersey 9.8%, North Carolina 9.6%, Michigan 9.3%, Mississippi 9.2%, South Carolina 9.1% and Georgia 9.0%.  These are just the states that are 9.0% or higher during August 2012.  Notice many of the states listed above would have been though boom areas a decade ago.  This also does not include the people who are under employed or just gave up looking for a job.  Some analysts say you can easily double the unemployment rate to include all groups.  The bureau of labor statistics said unemployment dropped to 7.8%, think about that.  That means 23 million Americans are unemployed.  If analysts are correct that means 46 million Americans are unemployed, under employed or have given up looking for work.  That means almost 1 in 6 Americans are just waiting to be so pissed off that they will accept anything that will improve their present situation!  That is a large force for someone to mobilize!

Now let me put my parable back into perspective.  What sort of inflation did Germany go through?  In 1921 the exchange rate was 64 Marks to the Dollar and near the end of 1923 it was 4,200,000,000,000 to the dollar. Unemployment in 1928 (when the German people were not interested in Hitler) was 8.4%, as Hitler gained power in 1930 it had grown to 15.3% and by the time he became chancellor it was over 30%.  “Yet the USA did not fall apart during the Great Depression!” you remind me.  The highest the unemployment rate has been in the USA was about 22% during the Great Depression.  It was also during this time that immigration came almost to a standstill because more people were emigrating, with one of the most popular locals being the USSR.  Now remember what I stated above, FDR did not have as heavy of a debt burden as the USA has today!  

Please do not tell me how much more civilized we are today and we as a people would never fall for a two bit want to be dictator. Do you really want me to start comparing the stability of the culture that “the greatest generation” lived in to our present time?  I am not saying that they had a perfect society, but I do think it is safe to say we are not as “civilized” as they were.

Now my favorite argument is, “well we can just default on the debt.”  Really?  The biggest holder of US debt is government related institutions, to the amount of 6.3 trillion!  China then has 1.1 trillion, other investors and savings bonds another 1.1 trillion (mostly in the USA), Japan another 1 trillion, pension funds 850 billion, mutual funds 650 billion, state and local governments 480 billion, UK 430 billion, insurance companies 250 billion.  Do you get the point?  If we default, not only will we hurt our own economy internally, but we will also alienate many strong allies.  Plus in 2012 interest on the debt is only 6% of the overall budget, so we would not save much money.  The 1.1 trillion that China holds is nothing but a drop in the bucket, well maybe a cup or two.  

The fact is that the cards have been dealt and one thing that we cannot afford to do Is try to bluff and win this hand!  If a real plan is not put forth bluffing would be pure suicide for us as a people and the majority of the world which relies on the strength of our economy.  It is the fact that the dollar is the world’s reserve currency which enables us to write blank checks and get away with carrying so much debt.

Let me take a short break and explain this concept so everyone understands.  Think of someone famous traveling through a country or state, this person stays at nice hotels, eats out every night.  When it comes time to pay for the services rendered they write a check.  On that check they draw something cute or put a positive comment on it about the service they received. Now so you will understand, the bank will not return the cleared check to you after deposit it.  So you do not deposit this check, instead you frame it, put it on your wall to show everyone that this person was here and what they thought of your business.  It is a blank check, since the amount on the check does not matter, it is never cashed!  As long as this can be kept up they will not have to pay for anything.  Eventually however this famous person will run out of places to stop at, they will return to places they have already visited and those checks will start to be cashed.  Even if they continue to find new locations to go to, the significance of their notes on the check will start to decline and the business will want the money over the bragging rights of the visit.  Basically this cannot be continued indefinitely without expecting people to start cashing these checks.

So what happens when another economy is strong enough to compete with the US Dollar?  Nations will drop the dollar like a hot potato!  Then all of a sudden the inflation that Germany went through becomes plausible.  This will increase the cost of imports, making many of the cheap products we have learned to rely on suddenly luxury goods.  Why do you think China is trying to strengthen its internal economy?  It knows if the dollar collapses the economy of China will suffer, but if they are not reliant on the US economy they can watch us self destruct.  Then we would become the source of cheap products for China.  Why do you think they continue to carry the US debt?  Why do you think they keep their own currency undervalued?   They know they are still addicted to the US economy and cannot afford to wean themselves off of it.  If we ever lose this position of power, they will be able to strike us where it hurts, in the wallet.

So what are we going to do?  What is going to happen?  I can only hope that my darkest fears are just that, my darkest fears.  I know what I will personally do if I am facing a potential dictatorship.  I will quote two famous Latin American revolutionaries, “I would rather die on my feet than live a lifetime on my knees.”  I am just not too good at taking orders from the kind of society we live in today, a totalitarian government will just make me go postal!
My apologies for drifting, we must realize the issues we face are very complex.  Any effort to explain what we are going through is easily destroyed if you do not accept the fact that there are many more factors that must be taken into account.  I accept the complexity of the issues we deal with.  I do not claim to understand them completely.  I only know that I understand them enough that it scares the shit out of me.  The most important thing to know and understand, where the point of no return is; at what point will the debt reach a breaking point that we cannot dig ourselves out of?  That I do not believe anyone truly knows the answer to.  I would like to think the American people are strong, intelligent and innovative enough to pull themselves out of anything, but I know that is not true.  There is a point where the momentum of the debt will continue to carry on and we will not be able to stop it.  It is at this point that my fears of a right, left or some new kind of dictatorship could pop up in the USA.  Already we see the Democrats attacking the Constitution, trying to turn us into subjects from citizens.  The GOP is not much better since they do not want to face the fact that society changes and they are stuck in first gear.  Do not even get me started on Libertarians and other third parties.

As I/we face the future, I can only think of the ancient Chinese proverb/curse, “May you live in interesting times.”  You know what, despite all the challenges we are going through as a people and the risk of falling short... I would not change this for the world, or all the tea in China :P

Thank you, I hope I did not bore anyone too much.  I did not realize exactly what I was biting off to chew until I started to bury myself in it. 

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