America closer to bankruptcy

Addison Wiggin - Mon 27 Feb, 2006

...In his bestseller, 'Running on Empty', former US Republican Pete Peterson attempted to gauge the difficulty of even determining the burden we Americans are now placed on future generations...

- In his bestseller, 'Running on Empty', former US Republican Pete Peterson attempted to gauge the difficulty of even determining the burden we Americans are now placed on future generations. British readers will understand the problems. For even though "estimates vary," Peterson points out, "depending on methodology...the numbers are all vast."

- The future obligations of the US Social Security and Medicare trust fund alone are staggering. In 2003, the American Enterprise Institute projected a $45 trillion shortfall; $47 trillion countered the International Monetary Fund in 2004; the National Centre for Policy Analysis and the Brookings Institution came up with $50 trillion and $60 trillion respectively in their own research reports published in 2003.
 
- Those are all incomprehensibly large numbers, of course, but the biggest of the projections came in 2004 from the US Social Security and Medicare trustees themselves. They estimated the unfunded benefit liabilities to have a current value of $74 trillion dollars. As an empire matures, the imperial citizens believe more and more extravagant things.
 
- By the opening of the twenty-first century, Americans were already spending more than they earned. Each day brought more new debt than real new wealth. Yet, between 2002 and 2005, every quarter showed growth in GDP.

America closer to bankruptcy: progress

- Americans mistook this growth for progress. They knew they had the world's best economy, its best system of government, and its finest culture. They could not imagine that they were growing poorer.
 
- But here we turn again to the living and the dead for elucidation. Supply-sider Jude Wanniski admits that real growth has come almost to a halt:
 
"In the United States, my own work shows that between 1945 and 1971, when the dollar was fixed to gold at $35 oz under the 1944 Bretton Woods arrangement, the real economy in the US grew by 4 percent per year. From 1971 when the dollar was floated to 2004, real growth of the US economy has only a pitiful 0.3 percent per year."
 
- The growth, such as it is, in the American economy, has come about by virtue of increased emphasis on the present tense. Americans came to despise the past and neglect the future. The lessons of the dead and the desires of the unborn were both ignored. Instead, all that seemed to matter was consumption in the here and now.

America closer to bankruptcy: the consequences

- A dead man, F. A. Hayek, explains the consequences:
 
"The economy in its entirety must continue to decline so long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock."
 
- Without a theory, F. A. Hayek might have said, the facts are as mute. But by now, both facts and theories had become blabbermouths. The trouble is that the facts had been corrupted so they no longer told the truth. And the old theories that might have been used to interpret the facts had been abandoned in favour of new, more convenient delusions. Americans could now run up as much debt as they wanted, said the new theorists.

- The American economy may or may not have "grown" in 2005. But if traditional, time-tested theories about how wealth and poverty are correct, thank God it is not growing more. Every step it takes, it moves deeper into debt and closer to bankruptcy.

Regards,

Addison Wiggin
for The Daily Reckoning