The Destruction of America

Articles

by futurist Richard Worzel, C.F.A.

‘America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.’
– Abraham Lincoln

Unless America and Americans force a drastic change in the country’s direction, the American dream is dead, and America’s place as the leader of the world is over. I find this intensely distressing and worrisome, and have hopes that the situation may yet be retrieved, but the time available is short. Americans have repeatedly overcome fearsome odds throughout their history to survive and thrive, but if there were ever a time when they needed true grit, self-sacrifice, and a willingness to cooperate with other Americans of different backgrounds, politics, and beliefs, it is now.

To put it bluntly, America is hurtling towards bankruptcy. This is not due only to the Obama administration, or the administration of George W. Bush, but to American presidents dating all the way back to FDR, and the Congresses that accompanied them. There are two major reasons for this coming disaster, one short-term, and the other longer-term.

A massive deficit at the worst possible time in history

The short-term cause is the massive federal deficit. George W. Bush inherited the biggest budget surplus in history and turned it into the biggest deficit in history, and at exactly the worst possible time because of the aging of the oversized population of baby boomers. The boomers selfishly expect their governments to give them more than they have contributed, and get downright nasty when told they can’t have what they want. Bush also inherited a trend towards greater deregulation from Bill Clinton, and accelerated that trend, believing, wrongly, that the financial industry, among others, could be trusted to regulate itself. This is like expecting a greedy kid to regulate himself in a candy store. The events of 2007 & 2008 proved this policy to be both stupid and irresponsible. The resulting financial catastrophe could have led to a complete collapse of the global financial system, and only the massive intervention by virtually all central banks, coupled with unprecedented fiscal stimulus, prevented a complete collapse that would have resulted in a new, world-wide, Great Depression.

The Obama administration inherited this unholy mess, and is not responsible for it, but has not dealt with it well either, leaving too much of a leadership role to a Democratic Congress that too often substituted ideology and partisan politics for sound economics. Obama hasn’t been helped by the Republicans in Congress either, who seem to think that the president is their enemy, and anything they can do to harm him is good, regardless of the consequences for the country.

Yet, my point here is not just the deficits themselves; they are unfortunate but necessary in the short term to stave off a much worse economic crisis. My concern is that the stimulus spending has been directed more towards lobbyist-inspired pork than creating a solid underpinning for recovery. This is a self-indulgent luxury America can no longer afford. It is, alas, far too early to restrain spending, no matter what Tea Party enthusiasts may say. There will come a time for this, but it is not yet.

The scale of borrowing threatens both American and global stability

However they occurred, these deficits will require massive borrowing by the federal government: the Obama administration estimates the U.S. government will need to borrow $10 trillion over the next 10 years. Most commentators say that assumes higher levels of economic growth than are likely, and higher tax increases and deeper spending cuts than Congress will accept, and so are unrealistically low. I’ve seen estimates that place the borrowing requirements (which are remarkably difficult to pin down) as high as $9 trillion over the next 5 years. For the moment, let’s assume that the administration’s figure is correct, and place it in perspective.

China is America’s biggest external lender, and holds almost $2 trillion in foreign reserves. Let’s assume, for the sake of simplicity, that all of China’s holdings are in U.S. dollars, and all of those are in U.S. treasury bonds and bills. This isn’t true, but let’s make that assumption anyway. China has already expressed concern over the amount that America has borrowed, and is borrowing, and is diversifying away from U.S. securities; so how willing will they be to buy that much and more in U.S. debt over the next decade? And who else in the world will have enough in investable funds to buy U.S. debt? Financing of this magnitude has never been done before, and there may simply not be enough investment money to do it. And even if there is, there’s very little certainty that lenders will continue to funnel money to an increasingly debt-heavy American government. The federal government already has proportionately more debt than at any time in its history outside of times of war, and Moody’s rating agency has publicly expressed its belief that America in danger of losing it’s AAA credit rating. (This, on its own, may have severe consequences, which I’ll come back to in a later blog.)

If America cannot borrow the money it needs, then it becomes insolvent. The checks it writes will bounce, which could lead to a financial panic even greater than that of 2008, and one that no central bank or group of central banks will be able to stem, leading to an economic nuclear winter. (I’ve dealt with this prospect in an earlier blog, “WILD CARD WARNING”, published June 3rd, 2009.)

The rapidly approaching Social Security disaster

But the longer-term reason is even more dangerous. Both the U.S. Federal Reserve, America’s central banker, and the Government Accounting Office (GAO), America’s financial watchdog, have publicly stated that the unfunded liabilities of the U.S. government for Social Security and all forms of medical insurance, including Medicare, Medicaid, and Veteran’s Administration coverage, amount to approximately $100 trillion and are unsupportable. To see this, America’s total economic output (GDP) is about $14 trillion per year, so this $100 trillion figure amounts to roughly 7 times the nation’s entire annual income – a horrendous and unmanageable amount. Yet, when George W. Bush attempted a modest (if somewhat misguided) reform of Social Security, all he got was nasty complaints from selfish boomers, violent rhetoric from Congress, and reams of bad press. And these ticking time bombs have much shorter fuses than most people realize.

If you look at the Social Security Online Actuarial Publications website, you will see an extraordinary statement in the second paragraph:

“The financial condition of the Social Security and Medicare programs remains challenging. Projected long run program costs are not sustainable under current program parameters. Social Security’s annual surpluses of tax income over expenditures are expected to fall sharply this year and to stay about constant in 2010 because of the economic recession, and to rise only briefly before declining and turning to cash flow deficits beginning in 2016 that grow as the baby boom generation retires. The deficits will be made up by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about three fourths of scheduled benefits through 2083.”

As bad as this sounds, it’s actually much worse. The ‘trust fund assets’ that the Social Security Administration is talking about redeeming are bonds and T-bills issued by the federal government. When 2016 rolls around, and Social Security starts ‘redeeming’ these ‘trust funds,’ it will be making demands on the government of the United States. In turn, the federal government can only redeem these securities in one of three ways:

• Raising taxes,


• Cutting spending, or


• Borrowing even more in the public markets.

Given the federal government’s current perilous financial position, any of these three choices will be painful at best, and potentially disastrous at worst.

As an aside, we could, and should, ask the obvious question: What happened to all the surpluses in the Social Security system in the decades that led to the build up of the so-called ‘trust assets’? Answer: Congress spent them and handed the Social Security Administration IOUs in return.

And Medicare is even worse

In the same paragraph, the Social Security Administration goes on to comment on the status of Medicare:

“Medicare’s financial status is much worse. As was true in 2008, Medicare’s Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up by redeeming trust fund assets. Growing annual deficits are projected to exhaust HI reserves in 2017, after which the percentage of scheduled benefits payable from tax income would decline from 81 percent in 2017 to about 50 percent in 2035 and 30 percent in 2080. In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow substantially faster than the economy and beneficiary incomes over time.”

Translating this into English, Medicare is bankrupt, but keeps operating by soaking up current tax revenues to fund it, increasing the effective size of the deficit that needs to be financed. It also means that the benefits people are expecting will have to be cut drastically – undoubtedly accompanied by much squawking, finger-pointing, and political posturing as president and Congress-critters all try to deflect the huge amount of blame.

Ironically, the new health care bill just signed into law may actually ease the situation slightly, because now government-funded insurance will fund the young and healthy as well as the old, poor, and sickly. That’s how insurance is intended to operate: by spreading the risks. But this change will be well short of what is necessary to avert disaster, and was so botched in the compromises necessary to get it passed that the benefits will be far less than they should be.

Now let’s be clear: the problems with Social Security and Medicare are not the failure of the Obama administration, nor of the Bush administration before it, but of all administrations and Congresses since the 1960s, and even before that. It was always politically easier to ignore the growing problems, and leave them to the next generation of politicians. Now the problems are arriving, and there will be hell to pay. To my mind, the last politician that had the courage to attempt to deal with these issues was New York’s Senator Daniel Patrick Moynihan, who raised the age when boomers could collect Social Security. He is, unfortunately, now dead, and no one else has had the guts to step forward and tackle these problems.

Are these problems too big to solve?

So are these problems solvable? Maybe, but only with immediate, Herculean efforts, unprecedented cooperation between Republicans and Democrats, and a willingness to sacrifice and accept less by the American people. I would think this makes solutions unlikely.

Indeed, I would say that America’s financial problems can only be solved if it solves two other, unrelated problems, one political, and the other societal.

Republicans and Democrats conspire together against democracy

The first problem is the polarization of the American political system because of gerrymandering. (See related blog post.) Gerrymandering is a term we all learned in high school social studies, but which most of us have forgotten. But Congress has not forgotten it. Gerrymandering is the re-drawing of the boundaries of electoral districts to create as many safe seats as possible – that is, where the same party will almost invariably be elected. Republicans and Democrats have connived together to do just this, and the Supreme Court has given them a limited seal of approval. The result is that in normal times, the vast majority of incumbent members of the House of Representatives cannot be defeated in a general election. The Economist newsmagazine once commented that America’s record of re-electing incumbents to the House would do credit to the dictatorship of North Korea.

This means that a Republican in a safe seat cannot be defeated by a Democrat, so his political spectrum goes from the center to the extreme right wing. And a Democrat in a safe seat cannot be defeated by a Republican, so her political spectrum goes from the center to the extreme left wing. This has two unsavory results: First, it means that the majority of voters in the center are not represented at all. And second, it pushes the two parties further and further apart, so that they cannot agree on anything, and gridlock results. That’s where we are today.

What is necessary is for the drawing of electoral district boundaries to be taken away from politicians eager to protect their own seats, and given to non-partisan committees that draw boundaries based on geography and similar needs rather than voting patterns. This has been done successfully in a number of jurisdictions, such as Washington state, and defeated by political machines elsewhere, as in California. But without this kind of non-partisan protection of the American people, the country as a whole is being stage-managed for the benefit and security of the politicians and the political party machines, and not in the best interests of the country. If the Tea Party movement wants a real and important target, this should be it.

The dumbing of America

The second fundamental issue is America’s education system, which has many problems. These include those teachers’ unions that block progress to protect their prerogatives and power (but not necessarily the interests of their members); helicopter parents that verbally and even physically assault and intimidate teachers; students who are more dedicated to fun than learning; violence and drugs, which turn schools into armed camps, forcing students to worry more about their own safety than what they learn; and a culture that now glorifies winning at any cost, including cheating, and elevates sports and entertainment success over academics. Most school systems are such a mess that it’s hard to know where to start to improve them, but the result is that America is producing generations of citizens who neither know nor care about their own history; who believe that America will always be right, and will always be #1 without thought, effort, or sacrifice; and who are uninterested in the common welfare of anyone other than themselves, and have no concept of civic duty. Unfortunately, the odds of a widespread improvement in American education are, if anything, even less likely than a balanced budget, and even if such a miracle were to occur, it would take years to change America’s direction. Yet, even so, if America wants to continue to prosper, it must both improve its education systems, and its citizens must rediscover their dedication to education excellence. Without this, in the long run, nothing else will matter.

Does America still have what it takes?

The financial problems America faces are severe, potentially the worst in its history. To solve them will require higher taxes and cuts to the military to be sponsored by Republicans, and spending cuts and reductions in entitlements to be sponsored by Democrats. It will take the postponement of eligibility for Social Security and Medicare benefits for boomers as well as a reduction in benefits provided, plus the end of ‘gimme-gimme’ pork-barrel politics. It calls, in short, for sacrifice. The alternative is disaster, and the end of America.

America’s problems threaten the stability of the world’s financial system, and the global economy. They also threaten America’s leadership of the world, which has, in the main, been remarkable for its enlightenment and goodness. There are other countries waiting in the wings, notably America’s chief banker, China, who are eager to replace America as the dominant force in the world. If Americans do not immediately begin to grapple with its problems, then both the idea that is America, and the country that is the fact of America will crash with such force and violence that it may lead to the end of America as a coherent society, as well as precipitating a second global depression. The stakes are high. The time is short. And the critical question is: Does America still have the will to be the best?

© Copyright, Richard Worzel, March 2010.

Comments on this entry are closed.

  • Dan Reid Mar 30, 2010

    Richard,

    I’ve enjoyed your articles over the years. Your most recent article parallels a book I recently read and in the process of re-reading – Aftershock by David and Robert Wiedemer.

    Like you, they see both U.S. public and private debt as the next critical bubble that will pop and dramatically change America’s role and direction as a world leader. Yet, in casual conversations with friends and business associates, most scoff at the thought that what you describe could be remotely true or even possible. In the minds of many this is a typical recession that will lead to some type of recovery. All will be well and life as we know it will go on as we know it.

    You and the Wiedemer’s are in the same camp. They see rampant inflation and devaluation of the U.S. dollar based on the same assumptions you are making. It’s an interesting read if you haven’t already reviewed the book.

    Enjoy your columns. Will just have to prepare myself and my family for high interest rates, increased taxes, high unemployment, debased U.S. dollar, and a crashing stock market within the next 2 to 5 years (if it even takes that long.)

    Regards,
    Dan Reid

  • Lindsay Edwards Mar 30, 2010

    Any number of EU country’s names could be substituted for Americas’ in this article, and many more around the world are in the same mess. While it may be great fun spending our next generations money, with a few greedy ones benefiting, the price to pay will be prohibitive! When you criticize and advise Greece and the likes, do not forget to look in the mirror. As I near retirement I worry that the funds I have set aside to live will be gobbled up by health care costs, or should I give those funds to my children now and simply be part of the global problem that appears to be inevitable?

    • Richard Worzel Apr 1, 2010

      Hi Lindsay,

      You’re right, of course, All countries with aging populations (meaning largely the developed countries from North America, Europe, and Japan) will face similar problems, and most of them have not prepared adequately. Indeed, one of the most common reactions I’ve had to this piece is frank disbelief. What I’m suggesting is so far from today’s “business as usual”, and so unpleasant that people flatly refuse to accept it as a possibility. That, of course, is one of the reasons it’s happening.

      Thanks,
      Richard

  • Ted Yeates Mar 30, 2010

    Hi Richard, Great article. Would like to use it on my website as a monthly article. Would you consider looking at Canada under the same microscope. I realize that CPP is funded but do we not have the same problem financing health care especially with a population that is aging faster than the US. Our federal debt is relatively much smaller than the US but how does it look when you pile on all the provincial debt and I know you’re not a great fan of our educational system. Your thoughts, as always, are appreciated. Cheers, Ted

    • Richard Worzel Apr 1, 2010

      Hi Ted,

      See my earlier reply to Dale. However, I will comment specifically on Canada a bit later in the month.

      Thanks for the comment.

      Richard

  • Dale Martel Mar 31, 2010

    Very imformative and enlightened. I tend to agree with you sitting back from the comfort of Canada but like you stated it will affect everyone in the World and even Canadians. I really don’t know how we can help because if there is one thing I know about americans is they do not like to be told their wrong or given advise. And I agree with your comments on education. It is paramount that Americans and Canadians for that matter take education more seriously. I am on the end of my life’s journey and have concern for the US and the World.

    • Richard Worzel Apr 1, 2010

      Hi Dale,

      America is not the only country that has financial and educational problems, and while the Canada Pension Plan (counterpart to the Social Security System) has been cited as an example of “best practices” in a government-sponsored pension plan, the Canadian health care system and the much more rapid aging of the Canadian population (due to the much lower birth rate than America’s) will lead to similar severe financial problems for Canadian governments as well, possibly bankrupting the country. However, there is, perhaps, more time available for Canada because of the surpluses its federal government ran until very recently, and the significant reduction in indebtedness that resulted. Canada could, conceivably, avoid insolvency if it acts decisively – but could it survive the insolvency of its major trading partner and customer?

      Likewise, all of the developed (and aging) countries in the world are facing massive financial problems – America is not alone in this. How these problems will affect the global economy is beyond my simple abilities. But it does keep me awake nights.

      Richard

  • Todd Sepulveda Mar 31, 2010

    I appreciate this post. I’ve had a nasty feeling in my heart and at the bottom of my gut that I’ve never had before concerning the future. On one hand I try to think positive, think that most people in our nation our good and that things will get better. On the other hand, I look around at what is happening, see nothing really changing and worry.

    I think there are a lot of people who feel this way. But I also think there are a lot of other people who are happy to come home and see the next episode of whatever is on TV.

    I would be curious to know your thoughts on what it would look like on a state/local…family unit level if America continues down this same route.

    Sometimes I think that it might take “America will crash with such force and violence” to get everyone’s attention. But then is it too late?

    I’m reminded of the last scene from Escape from LA (Yes, I know it didn’t win any awards – LOL). I found an edited version on Youtube. http://13gen.wordpress.com/2010/02/15/just-emp-the-world/

    Would that solve all our problems? ;-)

    Thanks again for the post.