Is the USA about to step on a financial landmine?

Posted By on March 13, 2017

Unlike most other countries, the USA government does not have to balance it’s spending every financial year. Instead, they have a debt ceiling that they are not supposed to exceed. During the Obama administration, the government crashed into that debt ceiling and needed the backing of Congress and the president to raise the amount of that debt ceiling.

Shamefully, US politicians placed party politics before civil responsibility and this was demonstrated in 2011 when the US government came alarmingly close to running out of funds to pay their employees. This culminated in the Budget Control Act of 2011, which limited the amount the government could borrow and required the government to justify the spending against trade-offs in budget cuts. This was supposed to fix this issue and slow down the exploding deficit the USA was creating. It didn’t and the same problem arose again in 2013. The Obama administration created a debt holiday, to expire on the 15th March 2017.

Beware the ides of March, when Obama’s debt holiday expires!

Of course there were all the economics experts extolling buzz phrases and complex economic theories but it all boiled down to a simple problem: the manufacturing sector, that used to be the mainstay of the US economy, was dead – sent to third world countries with cheaper wages. The resulting unemployment meant, not only less tax revenue coming into treasury but also cost the US dearly in welfare payments. It caused a real drop in take home pay (and therefore tax) or at best prevented pay (and tax) rises that had been forecast. So, on one side of the economy they had less money flowing into the coffers and on the other side they were haemorrhaging funds in welfare.

Now if this was the 1900’s there would be a crash but after the second world war, the system changed. Credit was introduced. It was originally debt offset against the ability to repay that debt. However, since then we have extended that repayment time to several decades, creating personal as well as economic debt that may not be paid in the foreseeable future.

Now add technological advances into this mix, making the foreseeable future even more unpredictable. The US manufacturing powerhouse was good for credit in the 1970s. But in the 1980s computerisation made whole industries redundant. The manufacturing businesses that still required labour, were sent offshore, reducing employment even further. The cheap goods coming back into the USA killed any manufacturing left. The result is an economy with a serious balance of payments problem.

The general feeling is that the USA cannot go broke, no matter how high the debt rises, because it is the largest economy in the world. The US dollar is the world’s benchmark currency. Many countries around the world owe the USA money. If they collected those debts, the problem would be solved right?

Wrong!

Firstly most of those countries do not have the ability to repay those debts. Many of those debts are the result of war aid. They are now battered and still recovering from civil war (aside from the fact the USA seems to have an uncanny knack of funding the losing side).

Secondly the debt was created, in many cases, by funding the side that didn’t win. That’s not the side running those countries now, so it’s not really their debt any more. As far as they are concerned, the USA should get their money from those who borrowed it.

For example, in Cambodia, the USA funded the Lol Nol government that was toppled in 1975 by the Khmer Rouge. Although the money was tagged officially as agricultural aid, it was really used to supply arms to the Lol Nol regime and to bomb large tracts of Cambodia to prevent supplies from Communist supporters reaching South Vietnam. The debt has accrued interest and is now at $500US Million. Why should Cambodia repay it at all?

Similar arguments apply to El Salvador, Columbia, Iraq and a host of other countries.

So added to this imbalance of revenue equation, is the fact that the debts owed to the USA, claimed as assets on the balance sheet, are not really assets at all. They are write-offs, if not wholly, then at least in part.

Put it all together and you have:

  1. An income that is less than the government of the country spends.
  2. A government that doesn’t have to balance the books and believes it’s too big to crash, so has amassed colossal debts ever since the Regan presidency.
  3. Claimed Assets (loans to foreign countries) used to offset debt, can never be liquidated and are growing larger due to interest charges. Trying to call in these loans will bankrupt the countries, create an economic domino effect and destroy financial confidence, causing a financial collapse throughout the Western World.
  4. A new president that wants to spend up large to kick start manufacturing and create a rival to the Great Wall of China, and unlike his predecessors, has Congress on his side.
  5. A fiscal time bomb waiting to blow the whole thing wide open on the 15th of March, when Obama’s debt holiday ends.
  6. And for the first time in history, another huge economy in China that could replace the USA as the world benchmark (India is out of the contest because she just killed off part of her currency).

It doesn’t matter who is president, the problem is beyond politics. The USA economy is like a long train racing towards a broken bridge and Donald Trump thinks he’s the train driver in control.

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Mimenta.com is the online voice of a collection of consumer advocates working independently to represent people who would otherwise be unheard. We speak for those who are bullied by corporations and don’t realise they can have a say.

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