How Will the United States Finance the Biggest Deficit of All Time?

When Ronald Reagan moved into the White House, total U.S. debt equaled 168% of GDP. The next 27 years took the total to 370%; it was heralded as a triumph of the Anglo-Saxon free enterprise system, but it left people with an additional $27 trillion of debt. And now, the economic system that created so many heavy balls and such long chains is in the recovery room – looked after by quacks and prayed for by most of the world.

You can explain the model in a few simple sentences: Encourage people to spend. When they run out of money, encourage them to borrow. When they tire of borrowing and spending, lend them more at lower rates.

As a way for people to build wealth, this economic model of the Bubble Period was as ineffective as a bad banker. It was a ‘have your cake and eat it too’ school of financial success with an obvious flaw. People noticed it when the correction began. They went to their cupboards and found there was nothing there. Homeowners – who had borrowed heavily against their houses – found their equity had disappeared. Capitalists found they had no capital. Workers lost their work.

And this year, governments’ tax receipts are collapsing too. In the United States, they’re down 14% in the first half of this fiscal year. Expenses, on the other hand, are exploding. This leads to a question: governments must borrow on a Herculean scale – but from whom? The United States is expected to float a record $2 trillion in I.O.Us. for 2009 – about 15% of GDP. If the downturn persists, as it has in Japan, we could see the U.S. national debt rise to Japanese levels – close to 200% of GDP.

In London, the numbers are smaller, but the math is the similar. The government has projected $175 billion deficits over the next two years. But this might be just the beginning. If deficits continue at this rate, Britain too could find itself back in the 1950s’ – after two world wars, with public debt at two times GDP.

What justifies such sacrifices? In time of war, citizens collect scrap iron…sell their jewelry…and buy bonds – anything to help pay for bullets and keep the Huns East of the Rhine. But what now? People clamp even bigger balls and longer chains on themselves…and for what? Taking flowers to the recovery room, they look in on the bubble model as though on a weary friend. “He supported us all,” says an anxious relative… “We must do all we can to save him.”

“Pull the plug,” is our advice.

Of course, when he was in his prime the bubble was fun – laughing, singing, spending…a grasshopper on stilts! And there were all those friendly ants in Asia ready to lend him money. At the peak, the U.S.A. had net borrowing of some $2 billion per day (trade deficit/365).

But now, take America’s anticipated budget deficit and divide it by 365. You get a figure of nearly $6 billion per day. Even at his peak, the old bug didn’t bring in that kind of money. And now, the foreigners are in recession too. They’ve got their own aches and pains to cure. So, how will the United States finance the biggest deficit of all time? How has Japan done it?

Japan’s economy has been locked up for 19 long years. It financed its confinement itself – drawing on the savings of a remarkably long- suffering population. Stimulus packages came and went. On average, they cost about 3% of GDP per year. The biggest came in 1998 – with a price of 6% of GDP. Financing this house arrest was easy – Japan began the period with a savings rate of 14% of GDP.

America, on the other hand, began with a savings rate of zero. More recently, the savings rate has been reported as high as 5% – as middle- aged squirrels desperately hide a few nuts for a long winter retirement. But the gods can add it up. Even if every dollar of U.S. savings is tossed down the public hole, it will still be two thirds empty.

Anticipating the problem, the Fed has already leapt into the hole itself. It offers to buy the government’s bonds itself. Of course, the Fed has no real money. It must ‘create’ money to make the purchase. It’s the latest miracle treatment, say the quacks in charge. If the Fed creates enough new money, it will offset the losses caused by the downturn. Then, happy days will be here again. The whole world seems to believe it. Stocks are rising. Ben Bernanke, this week, said the U.S. economy would recover before Christmas. The convalescence may be long, he continued, with his vision apparently restored; but it will be steady.

How the gods must howl! “In the Bubble Epoque people tried to get something for nothing… Imagine, they thought they could get rich by borrowing money and spending it. Have you ever heard of something so ridiculous? Ha ha! Now, they think they can get rich by spending money that doesn’t even exist.”

“But that’s not the half of it,” one of them is sure to notice. “They’re digging themselves deeper into debt – trying to revive the very oaf who pushed them down in the hole in the first place. Ha ha. Ha ha.”

Until next time,

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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2 Comments on "How Will the United States Finance the Biggest Deficit of All Time?"

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Cristi Sparlu
I read almost every day your articles even I am geographically very far away from you (Romania). It is very interesting, your ideas and thoughts are almost the same here in Romania even between us are several oceans and thousands of kilometers. Your question at the beginning of the article is very good may be I would cut “how” and to remain the rest of your title. It would be a miracle to see the “light” at the end of this year in America (which I hope it might give the trend for rest of the world) using the formula… Read more »
Linda Ojeda

Hi, My name is Linda Ojeda and I would like to make the following question. Is that truth that the real state in United States will go up again in the next 2 years as it was the defici? Thank you.

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