There is no way the dollar can mount any type of recovery at these debt levels. Adding to the demise of the dollar is the effect of America’s record trade deficit. During the economic boom of the ‘90s, the trade deficit averaged about 1.1 percent of GDP. Today it’s around6 percent. It should be no surprise that America’s record debt and trade deficits are the leading forces behind the dollar’s demise. 

America, Not as Strong as you Think
Each year since 1969, when you count off-balance items, Congress has spent more money than it’s received and has therefore generated a budget deficit. In order to keep government operations going, the U.S. Treasury Department has borrowed money (by selling U.S. Treasuries) to cover the deficit in order to meet Congress' budgetary appropriations. The total borrowed thus far is nearly $10 trillion and growing daily. The only reason China (and to some extent Japan) continues to hold U.S. Treasuries is because it’s been in their best interests. Financing Washington’s annual deficits keeps U.S. interest rates low so consumers can buy more imports, most of which are from Asia. Japan and the UK continue to support U.S. Treasuries mainly due to strong diplomatic ties. In contrast, U.S.-China ties are only economic. Once it realizes U.S. consumers are tapped out, China will have no further need to support America’s “Ponzi scheme” economy. And that could cause some huge problems. At the very least, China will use this threat to aide its many diplomatic conflicts that lie ahead.

Comparison of World Deficits
Of course debt is a burden for which interest payments must be made. The interest expense on the National Debt was $430 billion at the end of 2007, representing the third largest expense in the federal budget. Only Defense and social programs such as The Departments of Health and Human Services (Social Security and Medicare), HUD, and Agriculture (food stamps) were higher. By the end of 2008, the interest on the debt will most likely exceed $500 billion. 

Critics continue to insist that “deficits do not matter” and using “debt is good” because it fuels investments in programs that benefit the nation. Fair enough, but ask yourself whether the massive debt created by Bush has helped the average American. Leverage is a double-edged sword. And when you’ve borrowed money that ends up being wasted, you’ll be faced with losses that are magnified. This is exactly what we have seen. Ever since Bush has been in office, living standards for the average American have been in a tailspin. But the major consequence of Bush’s reckless spending spree will be felt down the road, as the nation struggles to pay for the massive expenditures that will continue for many years.

If you think other leading economies are run using annual deficits you’d be mistaken. In fact, no other member of the G-7, or any other first-tier world economy has a current account deficit trend. Only recently has the UK posted a deficit due current economic problems. In contrast, the U.S. has been generating annual deficits for nearly three decades - even when the economy was supposedly doing great. Although it has improved its position a few spots from the 2001-2003 period (formerly sixth), America’s current account deficit is still ninth from the highest among all developed nations. This statistic alone should raise the question whether the U.S. is really the world’s economic superpower. I too could claim to be an economic superpower if I was able to run up endless debt. Eventually, this debt has to be repaid…..with interest.

Off-Balance Financing
In order to fully assess the extent of Washington’s financial mismanagement, we must also consider the amount of funds classified as “off-budget” (off-balance) since this accounting trick is used to make the annual deficit appear smaller. When the Congressional Budget Office (CBO) releases annual budget data, off-balance items don’t show up. Therefore, they also don’t show up when the final deficit is calculated.The problem is these expenses don’t disappear. They are added to the federal debt which must be financed somehow. Hiding the deficit from taxpayers through off-balance financing is an attempt to hide the growth of America’s record-setting national debt, while creating the illusion of a strong economy.

By allocating a large amount of expenditures to the off-budget category, the annual deficit will appear smaller to taxpayers who might otherwise express criticism of the President’s spending habits. Some of the items treated as off-balance include Social Security and U.S. Postal Service trust funds, Iraq expenditures, and anything else Washington chooses to approve. There are many other programs in this category—all referred to as “special items.” You see, Washington can “borrow” money from these trust funds to cover other expenses because any shortfalls will not be reported on the deficit statement. But remember, even the deficit disappears each year and becomes a part of the growing national debt. The transient nature of the deficit might explain why most taxpayers fail to recognize it as a huge problem since the national debt is typically not mentioned by Washington.

Current trends show increasing levels of off-budget financing and annual deficits.  In early 2005 you might recall President Bush approved another $82 billion off-budget for defense mainly for Iraq and Afghanistan. This amount alone was more than spent for NASA and the Department of Education combined. He added another $70 billion in off-budget for Iraq in mid-2006, with more in 2007, and around $160 billion recently. Already, over $500 billion has been spent, but this is just the beginning. It’s estimated that the total cost of America’s occupation in Iraq could easily exceed $3 trillion over the next few years – most of it off-balance, but all of it adding to America’s record debt.

 

 

The evolution of off-budget financing regulations is complex, but Social Security was finalized as an off-budget item in 1992. Since the trust fund has been yielding net surpluses for several years, its off-budget treatment hasn’t yet distorted budget expenditures. In other words, the current annual surpluses from Social Security are masking America’s overall annual debt growth. Although revenues for Social Security (via payroll taxes) will be larger than expenditures over the next decade (yielding a Social Security surplus), this trend will reverse in 2017. Until that time, Washington will continue to use these surplus funds for many other programs, such as Iraq.

Mandatory Spending on the Rise
Okay, so the federal debt is spinning out of control, but what’s the big picture impact of this? Well, first of all, since foreigners have financed over half of this debt, they are legal owners of the United States. Already, America is no longer able to do as it pleases because of foreign clout, and this is affecting economic and trade policies. Longer-term, this enormous debt will squeeze the annual budget further, promising a continued decline in living standards. Over the next decade, you should expect massive cuts to education, transportation, defense, and of course Social Security, Medicaid and Medicare.

Over the past few decades, the percentage of mandatory spending from the annual budget has increased dramatically. These spending hikes reflect the growing income gap between America’s wealthy and poor. Mandatory spending encompasses all programs Washington has promised – the entitlements - Social Security, Medicaid, and Medicare, as well as debt service payments on U.S. Treasury securities to our overseas bankers.

Starting in 2018, Social Security will begin a long series of annual deficits that will grow rapidly thereafter. Sure, this mounting expense will be hidden from annual budget deficits since it’s treated as an off-balance item, but it will add to the federal debt. And it’s going to create a devastating liability down the road. As America’s baby boomers reach retirement age, mandatory expenditures are going to balloon, leaving less for discretionary spending (education, transportation, R&D, defense, etc.).Beginning in 2011, the first wave of baby boomers will reach full retirement age. Shortly thereafter, government benefits for these programs will mushroom to unthinkable levels, pushing the deficit and debt much higher.

And don’t forget Bush’s Part D Medicare, which alone is expected to cost taxpayers another $9 trillion over the next several years. Even worse, total expenditures for Medicare and Medicaid (after adjusting for expected payroll tax revenues) will add to the national debt to a much larger extent than Social Security. Combined, these entitlement programs position America with what David Walker (former Comptroller General of the GOA) has labeled a “financial Tsunami” over the next 2 to 3 decades.

Since military spending and homeland security comprise a significant portion of discretionary spending, this is going to put an additional squeeze on mandatory expenditures, resulting in further pressure to cut Medicare, Medicaid, and Social Security benefits. Therefore, some combination of significant tax hikes and benefit cuts is certain after 2008 regardless who is elected. 

The national debt will continue to surpass record levels for many years to come, causing further risk to the U.S. economy. As mandatory expenditures continue to increase due to demographics alone, you can decide for yourself which programs will be cut. The only expenditures that will continue to increase with certainty are those due interest payments on the national debt. Any improvements in the annual deficit and total debt outstanding will be a matter of subjective debate, since they will most likely involve cuts to critical domestic programs even after significant tax hikes (which are all but certain) appear. Within the next few years there’s a very good chance the annual budget deficit (relative to GDP) could surpass the WWII–era record. 

Of course most Americans have no idea about the extent of these problems. The U.S. media establishment has aided Washington’s cause by distracting voters from the real problems. Instead, news anchors focus on the daily body count in Iraq, Britney Spears, Paris Hilton, Hannah Montana, the back and forth trivia between the presidential candidates, and whatever other useless distractions they can find. In the end, American voters are to blame for being coned and lied to without demanding answers, accountability, and real solutions.

So the next time you see Washington approve another $100 billion for Iraq, you should think of this as $100 billion that will be cut from the entitlement programs. And the next time you see some trivia about a Hollywood celebrity, sports figure or any other entertainment “star” remember the real problems faced by America and simply turn the channel.