Combining double-digit unemployment rates, low GDP growth levels and high levels of government spending, experts predict that the US deficit is in danger of reaching levels that could put the country's future in peril. With the Congressional Budget Office predicting weak growth rates for 2010 and 2011, experts believe that it is important for the government to focus on encouraging companies to expand and create new jobs in the US. See the following article from Money Morning for more on this.
The most important fundamental development of the week was not any of a slew of economic reports at all but the new federal budget proposal released by the White House. And it was a doozy: The Obama Administration proposed to spend $3.8 trillion, with $1.6 trillion on the equivalent of the national credit card.
Investors did not overtly seem to mind today, but they will. It is almost mind-numbing to think we've gone from the surplus that President Clinton left President Bush to the trillion-dollar hole we're in now. There is nothing good about the scenario of bone-crushing debt, as we have seen repeatedly throughout the world recently in places like Dubai, Greece, the United Kingdom and Japan. The fact that the U.S. dollar has managed to hold its own despite representing a country deeply in hock is only testament to the weakness of every other major developed-world government.
It's ironic in fact that plenty of emerging-market countries are managing their books far better than the United States and Europe. They include Chile, Azerbaijan, Angola, Ukraine and Romania -- all with debt at less than 15% of national GDP, while we are knocking on 60%!
Why does this matter? My friend Chris Helton, director of research at Paragon Investment Management in Seattle, points out that sovereign debt can only be resolved by growth in the economy, as taxes on higher levels of income pay off borrowings. At this point, he points out, the United States will be lucky to grow GDP at 4% this year and next without new federal stimulus. Without much more growth than that for a sustained amount of time, it will be virtually impossible to service the debt load that we've already racked up, much less have the wherewithal to add more.
We can carry on at being blase about this so long as our lenders will humor us. But the country has put itself in the untenable position of dependency on its creditors like China and Japan. It's almost worse than having a dependence on foreign sources of crude oil because there are alternatives to fossil fuels such as our abundant natural gas, coal, sunshine and wind. There is no alternative to debt repayment except the one that the Federal Reserve is desperately attempting at the moment, much like Zimbabwe, and that is printing more money through a variety of methods, including the mundane issuance of Treasury bonds and the much more mysterious "quantitative easing."
For now we are locked in miserable embrace with China, as they cannot halt their lending to us without harming their own economy, which is already fraying at the edges, as you can see in major telecoms like China Unicom Ltd. (NYSE ADR: CHU), down 30% since August. If they force the United States into default, who will buy their poisoned toys and jewelry?
Seriously, at this point in their lifecycle as a growing economy, Beijing leaders cannot afford to cut off our borrowing. But 10 or 15 years down the road, when their domestic economy is stronger, it may not be such a tough decision. And that is why, in part, investors are soon going to demand that U.S. lawmakers get their spending under control. When that happens, as it must, the economy will inevitably slow down. This could happen a lot sooner than most believe possible.
In fact, it may happen next year. The Congressional Budget Office's latest forecast for the next two years, which has not garnered much attention, concluded that economic growth will not be enough to bring the national unemployment rate under 10% through at least September 2011. CBO chief Douglas W. Elmendorf said the economy will grow by a scant 1.6% this year and 1.8% in 2011, and that the jobless rate will stabilize at 9.8% to 10.2%
Slow growth of this nature ensures deficits of $1 trillion through 2011. In an appearance before Congress last week, Elmendorf called the debt bomb a dangerous level that puts the country's future into peril. "It is true that as we push [public debt] to 60% of GDP at the end of this year and beyond that over the next few years, we're moving into [debt] territory that most developed countries stay out of,'' he said.
This is serious stuff, and it is why voters appear to feel in their gut that the government has veered off in the wrong direction by tackling health-care reform and vilifying bankers when it should be focused 100% every day on seeking ways to encourage companies to expand and create new jobs.
This article has been republished from Money Morning. You can view the full article at Money Morning, an investment news and analysis site.
