When Peter Schiff was making the rounds on U.S. cable news shows in 2007, warning about the collapse of the housing market, anchors and fellow guests literally laughed in his face when he launched into his gloomy predictions. That kind of meltdown could never happen, they said. The economy was on rock-solid ground. In those rosier economic days, Schiff, the president of Darien, Conn.’s Euro Pacific Capital, was repeatedly cast as a successful broker who’d gone off the deep end.
These days, a vindicated Schiff is back on the talk show circuit with an even darker message. The current recession, he argues, is only the beginning of a larger economic restructuring. The American economy has been destroyed by years of reckless spending and borrowing. And now, the U.S. government is so deeply in debt that at some point in the very near future, he says, its lenders—namely China—are going to come to their senses and cut America off. “We can’t have one country that just borrows and one country that just consumes that’s supported by the rest of the world. It doesn’t work.” When this system collapses—and it inevitably must, he insists—inflation will run wild as the U.S. prints money to support its spending habit. Interest rates will jump and everyone will suffer. The real day of reckoning is still to come.
This time around, nobody is laughing at Schiff. Anyone who has taken so much as a cursory glance at America’s financial books and seen the masses of red ink has come to a grim conclusion: not only is the situation no longer sustainable, it’s rapidly getting worse. The Congressional Budget Office estimates that the U.S. deficit this year will amount to $1.8 trillion (all figures in US$) and it sees the government spending about $1.2 trillion more than it brings in for each of the next several years. That’s one of the more optimistic forecasts. Others say that over the next few decades, revenues will remain relatively flat while spending soars as demand grows for benefits such as health care for an aging population. The U.S. debt now stands at over $10 trillion and will hit $17 trillion within the decade, according to the Congressional Budget Office—a number so large that it will nearly match the entire yearly output of the world’s most powerful country. In short, America is about to go broke and every Western country, including Canada, will pay the price.
What’s alarming about the situation in the U.S. is just how quickly and easily the country found itself buried under a mountain of debt. Back in 2001, the Congressional Budget Office was estimating that by now, the U.S. should be running a healthy annual surplus—in fact it figured that when added together, the surpluses between 2001 and 2011 would total $5.6 trillion. At the time, it seemed like a reasonable projection. After all, in 2001 the government recorded a surplus amounting to $128 billion. But two important things happened since then that launched the U.S. into a very different future: the dot-com bust and George W. Bush. The recession that followed in 2001 caused tax revenues to fall and spending on social services to rise, taking a good bite out of those estimated budget surpluses. At the same time, newly elected president George W. Bush—emboldened by the surplus he’d inherited when he came to office—proceeded to dole out steep and widespread tax cuts, which cut revenue by about five per cent. That was followed by a new $530-billion drug benefit program in 2003. To top it all off, the wars in Iraq and Afghanistan caused defence spending to explode. (The bill for those wars so far: $830 billion.) In just four years, America’s massive budget surplus was decimated and turned into a $400-billion annual deficit. Since then, it briefly showed signs of recovery, but when the recession hit in 2008, the deficit quickly plummeted back down to around $400 billion.
President Barack Obama hasn’t helped matters. Faced with a severe recession he has had little choice but to push policies that have piled debt on top of debt. Nearly $3 trillion has been spent rescuing banks and the automakers (that’s about as much as the entire government spent in all of 2008), and stimulus programs have added another $800 billion to the government’s tab. “It’s hard to overestimate the massive spending spree we’ve had in the United States over the past few years,” says Brian Riedl, a budget analyst at the Heritage Foundation, a Washington-based research organization. Under Obama’s budget, the debt-to-GDP ratio will double to 82 per cent by the end of the decade—a level not seen since the 1950s, when the U.S. was recovering from the Second World War.
But that’s not the worst of it. The biggest spending is still to come. With 75 million baby boomers retiring, there will be massive new strains on social services in the coming years. Three programs alone—Medicare, Medicaid and Social Security—will create a $43-trillion liability over the next 75 years, says Riedl. That kind of spending would push America’s debt-to-GDP ratio to levels that have only been touched by bankrupt Latin American nations. To cover these costs, the government would have to more than double income tax rates to more than 60 per cent—an option no lawmaker would dare consider.
These trends mean that even if Obama’s stimulus spending packages wind down as planned and the economy recovers this year and next, there is still no hope whatsoever that deficits can be eliminated in the short term. This is an unprecedented position. After the Second World War, when the U.S. had a debt-to-GDP ratio of more than 100 per cent, nobody expected deficit spending to continue, and it didn’t, says Alan Auerbach, an economist at the University of California, Berkeley, who has studied the debt problem. The deficits of the 1980s were also quickly erased. “The difference here is that things will continue to unravel because we’re going to have rapidly growing entitlement spending and no comparable growth in taxes under current policy.”
Add it all up and by the end of the decade, the interest payments alone on the debt will cost U.S. taxpayers $800 billion a year. That figure will rapidly worsen, as the money spent on interest payments is added to the deficits, which in turn are added to the debt, which leads to even higher interest payments. “The whole process can start to feed on itself,” says Isabel Sawhill, a senior fellow at the Brookings Institution and a former budget official in the Clinton administration. “You get into a vicious cycle which can become explosive at some point.” By 2040, those interest payments will eat up 30 per cent of government revenues, according to some estimates. Sooner or later, the U.S. will be handcuffed by its debt, with a diminishing ability to pay for basic services, from defence to infrastructure to education.
The dismal state of America’s finances, and the prospect of decades of ballooning deficits, have understandably started to make the country’s lenders a little nervous. The U.S. raises money by selling Treasury Securities, largely to foreign buyers. Lately, those investors have been increasingly wary of the stability of those treasuries, which were once considered the safest bet in the investing world. Demand at recent U.S. Treasury auctions has been weak, leading to slight rises in interest rates—a potentially troubling indicator. Late last month, well-known bond guru Bill Gross, founder of Pacific Investment Management Co., warned the U.S. could eventually lose its AAA investment grade ranking.
The largest buyer of U.S. debt is China, which held $768 billion worth of Treasury Securities as of March. Recently it has openly expressed concerns about America’s ability to repay the loans. “Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried,” said Chinese Premier Wen Jiabao at a news conference earlier this year. “I’d like to take this opportunity here to implore the United States to honour its words, stay a credible nation and ensure the safety of Chinese assets.”
Those are the kinds of politically loaded statements that keep Schiff up at night. What happens if lenders like China and Japan come to the conclusion that their investments in America have turned out to be bad ones? “The fact that we squandered all the money they loaned us, and the fact that by lending us money they’ve contributed to our economy being less efficient and less productive, they’re actually in a situation where the more money they lend us the less likely we are to pay them back,” he says.
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With all due respect, this article is way behind the curve.
The Chinese have already started cutting back. How? By reducing their total Treasury "investments", by pretty much restricting their Treasury buying to the short-term stuff, by drastically raising their gold and other commodity purchases, by spending more of their money on their own infrastructure, and by buying much more into our hedge funds(which are somewhat guaranteeed by our Treasury Dept., and for which they are using their T-bonds as collateral!).
They will also start demanding to be allowed to buy large equity interests in our corporations, and we will be ill advised to decline, as we did in 2005 in that Unocal deal.
BTW, they will also start more openly dictating our foreign policy on a behind-the-scenes basis, if they are not already so doing, especially in areas that concern them directly, such as Taiwan and the South Pacific.
Can the U.S. pay it back? You bet. First the money will be debased and the creditors will be repaid in worthless dollars. Savers will be wiped out as will all currencies tied to the greenback. The quickest path to recovery is the collapse of the Federal Reserve System and the U.S. government. The longer this rotted system tries to keep the life support plug from being pulled, the more painful this process is going to be for everyone.
The USA has painted itself into a corner, which debt spending always does eventually. We've played every delaying tactic, but the world is starting to wise up to our little game.
The Chinese have been our enabler. Of course, it's been good for them, too, up to a point, but now their biggest customer isn't buying so much, and tens of millions of Chinese are now unemployed as a result. They also realize they are WAY overinvested in our debt, and we are going to stiff them through inflation or default.
The USD is about to lose its reserve currency status.
Canada, don't follow USA's lead into the economic and social abyss!
The idiot Keynesians and statists—and they infest the banking industry, the government, the media, and academia—have gotten the whole world into a gigantic mess.
The Austrian School economists like Schiff saw this train wreck coming long ago, but they were mostly ignored until now. On a political level, Ron Paul is one of the very few who has a clue, and he's been ostracized as some right-wing nutball.
We idiotic and apathetic Americans will have to suffer through a full-on systemic collapse to start to understand the truth about our debt spending, and our terrible government and Federal Reserve market meddling. Too bad Canada and much of the rest of the world will have to suffer some as well.
Good story but the numbers are all wrong. We're 12 trillion in debt. We've printed 8 trillion in two years. The Bailouts are over 12.8 trillion, the war was 3.2 trillion, and social security and medicare etc are 56 trillion. So… That's 92 trillion. How much is a Babe Ruth baseball card worth if you print 8 trillion of them? Nothing.
Economic depressions and recessions are inevitable whether in a free market or socialized / fascist hybrids seen across the world and specifically in the US. Mal-investment is the root cause and recessions purge the mal-investment liquidate the assets of the speculators who guessed wrong and reward those with the ability to buy up assets and put them to market supported uses. When governments intervene they protect and subsidize mal-investment there by rewarding failure (GM, jpmc, boa, aig, gs, etc [not lehman]) think bush giving paul bremmer and others the medal of freedom for their planning and "effectiveness" in Iraq. Without the liquidation of malinvestment, the inevitable recession/correction is only DELAYED.
Kuiu Island, Alaska. Approx 2000 sq km. Singapore approx 650 sq km. Hong Kong approx 1100 sq km. Rhode Island approx 2700 sq km.
America to China: "How about this…to settle some of our debt we give you Kuiu Island in Alaska to establish a great, new Chinese American city. It could be the biggest city north of Seattle and Vancouver on the Pacific northwest coast. Kuiu is located near Prince Rupert BC which has railway and port facilities to support a new city of a few million. We can negotiate economic considerations and political representation. Perhaps Kuiu could be a stand alone city state within America or maybe Kuiu could be part of Alaska jurisdictions/laws but independent as a city. Perhaps the million plus inhabitants of Kuiu might gain instant proportional voting rights within the House of Representatives…with future considerations regarding electoral college presidental votes and Senate seats. Perhaps the island might be listed as a fire-arm free province…yet there still might be great opportunities for hunting on the mainland with Native and American guides.
continued…
The Chinese who come to inhabit and build in Kuiu could make futuristic buildings worthy of settlement and tourists from China and mainland North America. While not exclusively a "white collar" city due to land constraints…."New Hong Kong"/Kuiu could showcase Chinese excellence in trades involving medicine, technology, tourism…yet be situated in a North American time zone and a short flight/boatride from Seattle/SanFran/Vancouver.
The Japanese buying Rockefeller Centre in the 80's as a "showcase" deal is not apt for the situation China and America finds itself in today. "Big deals" need to be thought of that are mutually beneficial for both China and America.
Did you know that Germany tried to buy Anticosti Island in the Gulf of St.Lawrence in 1937? Big island…almost 8000 sq km. Makes one wonder how history would have turned out if PM King would have allowed such a deal to go through. Also makes one wonder if Germany/Nazis/Hitler were thinking of inhabiting the island with Jews or "other" Germans. I've heard about the German "Madagascar plan", but only after researching Anticosti on wiki did i learn about the proposed deal in 1937.
YES..WANT TO KNOW JUST CLICK http://www.kliks.my/kamal/
Little Pudding—brilliant exposition! I wish everyone could read and copy it for later rereading. Tell me if there's a way I can do that, will you?
Patrick—-You're spot on. The gov'ts refuse to allow the market to correct, because they don't understand how the real world works, or because it would be very politically unwise in the short term to tell the sheeple, "Look, the gov't cannot fix this. We've got to let the economy fix itself over time. We'll do our best to get the heck out of the way, and there will be a LOT of pain while this is happening, but in the long run we'll all be much better for it. If we don't allow the market to self-correct, we'll have a total collapse."
In 1492, Chemor, chief Rabbi of Spain, wrote to the Grand Sanhedrin, which had its seat in Constantinople, for advice, when a Spanish law threatened expulsion.2 This was the reply:
” Beloved brethren in Moses, we have received your letter in which you tell us of the anxieties and misfortunes which you are enduring. We are pierced by as great pain to hear it as yourselves.
The advice of the Grand Satraps and Rabbis is the following:
1. As for what you say that the King of Spain obliges you to become Christians: do it, since you cannot do otherwise.
2. As for what you say about the command to despoil you of your property: make your sons merchants that they may despoil, little by little, the Christians of theirs.
3. As for what you say about making attempts on your lives: make your sons doctors and apothecaries, that they may take away Christians’ lives.
4. As for what you say of their destroying your synagogues: make your sons canons and clerics in order that they may destroy their churches. [Emphasis mine]
5. As for the many other vexations you complain of: arrange that your sons become advocates and lawyers, and see that they always mix in affairs of State, that by putting Christians under your yoke you may dominate the world and be avenged on them.
6. Do not swerve from this order that we give you, because you will find by experience that, humiliated as you are, you will reach the actuality of power.
(Signed) PRINCE OF THE JEWS OF CONSTANTINOPLE.”
2. The reply is found in the sixteenth century Spanish book, La Silva Curiosa, by Julio-Iniguez de Medrano (Paris, Orry, 1608), on pages 156 and 157, with the following explanation: “This letter following was found in the archives of Toledo by the Hermit of Salamanca, (while) searching the ancient records of the kingdoms of Spain; and, as it is expressive and remarkable, I wish to write it here.” — vide, photostat facing page 80.
~ The above was quoted from Waters Flowing Eastward by Paquita de Shishmareff, pp. 73-74 YOU ASSISTED THE CONVERTED KHAZARS JEWS TO DO THIS TO AMERICA.JEWS HAVE ADOPTED JUDAISM IN 740 KINGDOM OF KHAZARIA,BIBLE,REVELATION 2:9,,3:9…ZECHARIAH 2:1,,2:2,,2:3,,2:4 USA=NEW ISRAEL.
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[...] I highly recommend this if you want to get a little bit of a grasp of what is affecting the economy and future economic [...]
I thought I was reading the Washinton Times for few moments…
When did MacLean's morph into a wildly right wing rag? Y'all do realize this Schiff fellow was an adviser to Ron Paul, don't you, and that he's an advocate of the bat sh*t crazy Austrian School? What's next, articles about how Obama is a Muslim?
[...] Can they pay it back? When Peter Schiff was making the rounds on U.S. cable news shows in 2007, warning about the collapse of the housing [...] [...]
[...] Can they pay it back? The U.S. is about to go broke and they’ll take us down with them [MacLeans - Canada] [...]
[...] Economy–Debt Doom: “Can they pay it back?” by Colin Campbell at www2.macleans.ca, via lewrockwell.com today, sports this sub-line, “The [...]
America needs Canadian oil, gas, hydroelectric, lumber… Canada needs, uh, uh, the NFL?
The story smells like a fraud. Jews have contributed far more to Western Civ than they have received. Don't buy the propaganda.
[...] http://www2.macleans.ca/2009/06/22/can-they-pay-it-back/ [...]
That is an excellent article that that everyone should read. As an investor, an ordinary person, one of the working class I think I have to keep the points for the article in mind and that will help me manage my life better to prepare for the worst.
[...] is the article that is questioning the United States’ ability to pay back its national debt, “Can they … The following is a quote from it which is originally from Peter Schiff. The current recession, is [...]
YES! when you start 'manufacturing paper' instead of things it is the beginning of the end. it applies to Canada as well. we also have little control of major industries due to foreign ownership. we may have to join USA more than we may like to. and we will go down with them as well, in unison!
I very much agree with PolJunkie that around 80 % of our export market is tied to the US.