Friday, November 13, 2009

Excessive Debt: A Destroyer Of Great Nations

Moses Kim writes that news of an economic recovery is nothing more than propaganda to distract people from the government destroying the economy with debt. With a record budget deficit for the month of October that included a $17.93 billion payout for interest alone, the national debt continues to spiral out of control. See the following from Expected Returns.

Forget all the hoopla you hear from the mainstream media and focus on reality. We are far, far away from any sustainable recovery. With tax receipts collapsing, and American businesses and consumers on life support, there is really nothing our government can do to stop this economic collapse. Of course that won't stop our clueless officials from trying, and in the process of doing so, destroying the dollar. From the WSJ, U.S. posts $176.6 Billion Deficit for October:
The federal government kicked off fiscal year 2010 by posting its widest-ever October budget deficit, the Treasury Department said Thursday.

The $176.36 billion gap is more than $20 billion wider than the shortfall recorded in October 2008, driven up by lower tax receipts, stimulus-related revenue reductions and consistently high government outlays.

Treasury's monthly budget statement shows receipts were $135.33 billion in October, down 18% from a year earlier and at the lowest level since October 2002. Meanwhile, outlays were $311.69 billion, down 3% from a year earlier and at their second-highest monthly level on record.
So much for "green shoots"- our budget shortfall is already well-beyond crisis levels. The budget deficit in October would have been the equivalent of the annual budget deficit a mere decade ago. Even with all this government stimulus, is unemployment improving? Are new businesses opening? Sans government propaganda, does anyone really "feel" that this recession/depression is actually over?
Debt Reduces Productive Capacity

At the equivalent of 9.9% of gross domestic product, the figure is the widest U.S. deficit as a share of GDP since 1945.

The government paid $17.93 billion in net interest last month on the federal debt. Net interest on the federal debt excludes interest paid on nonmarketable government securities held by federal trust funds, such as Social Security.
The only ways to make up for shortfalls in tax receipts are through higher taxes, debt issuance, or inflation. Study your history books and see that excessive debt has always destroyed great nations. Governments throughout history have taken on the responsibility of trying to "fix" debt crises, and have succeeded only in making the problem worse.

We are experiencing a debt crisis in all sectors of the economy. Overleveraged individuals are being gouged by credit card companies, which means that there is no more money left to organically stimulate the economy and create real jobs. Banks are overleveraged, which means their primary focus will not be to lend to consumers, but to repair capital ratios. And then you have the U.S. government- the most overleveraged entity in the world. There is no doubt in my mind that the cascading effect of debt defaults- from states and municipalities, to individuals and the federal government itself- will wreak utter havoc on our economy.

All of our potential productive capacity is being wasted to service our exponentially growing debt. You just don't solve a debt problem by blindly throwing money here and there, and getting deeper and deeper into debt. It's been tried before in Japan, and that experiment has failed magnificently. It's a sad fact, but our country is being destroyed before your very eyes.

This post has been republished from Moses Kim's blog, Expected Returns.

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