Unemployment, rising debt, financial collapse loom

14 February 2013 20:19  [Source: ICIS news]

CBO says US is facing financial collapseBy Joe Kamalick

WASHINGTON (ICIS)--US unemployment will remain above 7.5% this year and through 2014, federal deficits will balloon in later years, and as interest rates rise the nation will be unable to borrow at affordable rates, precipitating financial collapse.

That is the outlook for the US economy in the latest Congressional Budget Office (CBO) analysis, which forecasts federal revenues and spending over the next 10 years to 2023.

The CBO assists the House and Senate Budget Committees and Congress by preparing economic reports and analysis.  In keeping with its mandate to provide non-partisan, objective and impartial analysis, the office does not make policy recommendations.

In a nutshell, the CBO predicts that unless federal deficit spending changes pretty soon, the US will experience the same financial train wreck that has left Greece in fiscal shambles and its population in broadening poverty.

The analysis delivered to the House Budget Committee this week presents a much direr forecast than the CBO made as recently as August last year.

“The deficits projected in CBO’s current baseline [forecast] are significantly larger than the ones in CBO’s baseline of August 2012,” said CBO director Douglas Elmendorf in his testimony before the committee.

“At the time, CBO projected deficits totalling $2,300bn [€1,702bn] for the 2013-2022 period; in the current baseline, the total deficit for that period has risen by $4,600bn” to just shy of $7,000bn, he said.

That projection is based on existing law and current US federal revenues and spending. 

In round numbers, the US spends about $10bn every day but has revenue of only some $6bn daily, meaning that Uncle Sam must borrow $4bn every morning (mostly from China) to meet its budget obligations and service the nation’s continually growing debt.

The CBO’s forecast for the next 10 years starts out fairly low-key, noting that US economic growth will remain slow this year, with gross GDP expanding by only 1.4%.

“After this year, economic growth will speed up,” the CBO projects, “causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels.”

“Nevertheless, the unemployment rate is expected to remain above 7.5% through next year,” the analysis predicts. The US jobless rate now is 7.9%.

If that happens, said the CBO, “2014 will be the sixth consecutive year with unemployment exceeding 7.5% of the labour force – the longest such period in the past 70 years”.

Although the budget deficit will shrink this year to $845bn – in contrast to $1,000bn deficits and more each year for the last five – “deficits are projected to increase later in the coming decade because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance and growing interest payments on federal debt”.

“As a result, federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade,” the CBO said, adding: “By 2023, if current laws remain in place, debt will equal 77% of GDP and be on an upward path.”

A debt level equal to 77% of the nation’s GDP compares with the 39% average seen over the past four decades, the CBO noted, with the debt-to-GDP ratio as low as 36% as recently as 2007.

A national debt ratio of 77% of GDP would be the highest since 1950 when the US was still working off billions of dollars worth of loans acquired during World War II.

Such high and rising debt levels would have serious negative consequences, the CBO said.

When interest rates rise to more normal levels in the years ahead, federal spending on debt service payments will increase substantially, the analysis says.

“Moreover, because federal borrowing reduces national saving, the [nation’s] capital stock would be smaller and total wages would be lower than they would be if the debt was reduced,” the study said. “In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges.”

And, “finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates”.

At that point, the US government would be unable to pay its bills, the economy would collapse, and, like many Greeks of today, a lot of American households would be burning furniture and books to stay warm.

In opening the Budget Committee hearing for the CBO report, chairman Paul Ryan (Republican-Wisconsin) said that “things don’t look good, and further down the road they get worse”.

“We’re in a danger zone,” Ryan added. “Investors might begin to doubt our ability to pay our obligations.”

“They might demand higher interest rates. If they did, interest rates across the country would skyrocket – on mortgages, on credit cards, on car loans,” he said.

Businesses would be unable to borrow operating funds, the grease that keeps the machinery of production cranking. Layoffs inevitably would follow, further reducing consumer spending and demand for anything other than food and basic needs.

A recession would snowball as falling consumer demand triggers still more business contraction, more layoffs, further sharp declines in consumer spending – the inevitable downward spiral into full-scale, 1930s-style depression. 

“And the results would be catastrophic,” Ryan said, “because unlike during the financial crisis, government would be unable to borrow more money.”

“Instead, the only way out would be austerity: big tax hikes and big spending cuts,” he said.

The Grecian failure formula would be played out in the US on a vastly larger scale. The US population of 320m supports a $15,000bn national economy, compared with the Greek population of 11m and GDP of $300bn. A US meltdown would be nuclear in scope compared with Athens' bonfire – and likely would take the global economy down with it.

($1 = €0.74)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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