Greece, a nation of about 10.75 million people is a microcosm of many countries in today’s world, including The United States. In February when a second bailout package was agreed upon for the Greeks, debt amounting to 120% of GDP was considered sustainable. With (negative) growth of about -4.5%, the debt in Greece has risen to more than an unsustainable 150% in the 2Q.
Total debt of the 17 Euro zone countries has risen to 90% of their GDP, the highest level of debt since the euro was created in 1999. Italy’s outstanding debt is the second largest in the Euro zone at more than 126% of GDP. Germany, the most prosperous of the 17 countries has debt contained at 81% of GDP. The London Olympics brought the UK’s GDP growth up to 1% in the third quarter.
The relationship between GDP and debt now stands at 105% in the US (GDP=$15.4 trillion, national debt=16.2 trillion). Foreign countries hold about $5.6 trillion of our treasury securities.
Money owed to retirees and other creditors represent much of our debt. Politicians in their quest for votes have over-promised but under-delivered retirement and healthcare benefits for government workers. Those same employees are retiring after 20 or 25 years of employment while workers in the private sector were promised benefits at age 60 or 65.
The politicians and their minions computed returns on retirement investments at 7% and a life expectancy in the range of what it was many years ago. Now, men and women in both the USA and Greece can be expected to live 75 to 80 years. Return on retirement investments are in the range of 2% to 4%.
Another misjudgment has been the promise of defined benefits rather than defined contributions. Defined benefits assume constantly rising economic conditions, denying the reality of cyclical changes in local, national and world economies. The result is that the funds to support planned spending and activities disappear before the retiree dies
In addition to the US national debt of $16.2 trillion, state and local debt amounts to another $2.8 trillion. Total interest cost is almost $4 trillion (2012) and total unfunded liabilities totals $121 trillion. (Unfunded means payable in the future but not yet due; Social Security, Medicare and Prescription Drug Program.)
In 2000, the pensions in Illinois were considered ‘relatively sound,’ but by the time the 2008 crunch came, the condition was termed, ‘essentially insolvent.’ California reported a $9 billion budget shortfall in January 2012, an increase to $16 billion in June and according to one source, it will be more than $25 billion by year-end. Most other states are recording projected budget shortfalls at the end of this year.
Although the US is trying to avoid the pitfalls being experienced by the Euro zone, Arthur Brooks of the ‘American Enterprise Institute’ thinks, “We already are a European-style social democracy”. He goes on to explain that the US has a progressive tax code; a high percentage of GDP is devoted to government and an overwhelming regulatory burden on business exists. Add to that the slow growth in GDP of 2% in 3Q.
Consider the following metrics: There are approximately 20 million workers on local, state and federal government payrolls, more than 22 million people are ‘actually’ unemployed, 68 million citizens are retired on SS, SSI and Disability and there are 47 million citizens on food stamps (SNAP) for a total of about 147 million people receiving direct government benefits. Our workforce numbers about 150 million. Ponder those numbers a moment. They’re real.
The World watches and waits. Procrastination is political; fixing the problems will take consummate leadership. How long do we have?
by Dick Baynton