Bye, Bye American Pie

Spending our lives away.

The United States is a large, powerful and diverse country and really the only nation on Earth that is not being forced to submit to the International Monetary Fund because countries like China and Japan keep buying our debt.  In fact, current U.S. debt stands at a staggering $11 trillion dollars.  To put that into perspective, in an entire year the United States creates about $14.58 trillion dollars (GDP) for 2008.  For the fiscal year 2008, the interest payments alone on our nation’s debt were $451 billion!  The recent “stimulus” bill signed into law by President Obama added $787 billion worth of debt in the stroke of a pen!  Using the most optimistic numbers from the non-partisan Congressional Budget Office, almost 80% of the “stimulus” will not even begin take effect until the end of 2009 (by which time the crisis could well be nearing an end)!

According to the CBO’s full cost estimate of the bill, 11.2 percent of the $816 billion bill would be spent in the first seven-and-a-half months after the bill is enacted, and, when including the bill’s tax cut provisions, $169 billion — or 20.7 percent of the bill’s total cost — would take effect in the first seven-and-a-half months.

Not only has a great deal of debt been created but entitlement programs (things that U.S. citizens “automatically” become eligible for once they meet the criteria) are growing at an alarming rate:

Just wait until expenditures exceed income!

Even though this data is almost 3 years old now just look by how much spending had increased and we are not even halfway through the “Baby Boomer” times.  Not only that but because of the post-WWII population boom and the Vietnam-era decrease in births, there will soon be more people collecting monies than there are people paying into the system.  Up until this point, all of the Social Security monies streaming into the Federal Government have been used to make the debt of America look smaller on paper.  The real effect of this strategy, adopted by Republican and Democrat alike, is that all of that money which should have been invested and grown over the decades doesn’t exist.  This is what Al Gore was talking about when he brought up the “Social Security lock box” when he ran for president.

Although the U.S. economy is diverse consumer spending makes up 70% of the economy.  When consumers pull back, as they have now, everything in the country takes a nosedive.  As has been reported here before, the savings rate for U.S. consumers is somewhere between 0% and 1% versus 18% in 1981… that does not allow for much of a cushion should times turn tough as they have now!  Compare this to the nearly 12% savings rate enjoyed by Germans and nearly the same for the French.

With so little money on-hand not only is the U.S. consumer strapped but runaway spending by the U.S. government and the oncoming entitlement boom will bankrupt this nation.  Chinese Communist Premier Wen Jiabao recently said publically that he was concerned at the amount of debt the United States was generating.

So what does the Internation Monetary Fund I mentioned earlier have to do with the United States?

What Mr. Wen is really saying is that even the U.S. national balance sheet has limits. The dollar is the world’s reserve currency, so the U.S. has the rare privilege among nations of being able to borrow (and then repay its debts) in its own currency. America also remains the world’s main safe haven in a crisis, as the flight to the dollar and T-bills in recent months underscores.

What our economy may look like.

Well, the IMF takes charge of countries that, essentially, can’t borrow any more money and are nearing bankruptcy.  Austerity programs are forced onto those nations that accept IMF funds.  The irony in all of this is that because the U.S. is such a powerful nation we don’t fall into the category of a country that can’t borrow anymore… yet.  In essense, China has become our IMF although, like a parent warning their child for the first time, they have not forced any changes in our behavior… yet:

Wen also said he was closely monitoring the U.S. economy and was concerned about the safety of Chinese assets there, which he called on Washington to protect.

But he also sent a stark message to the United States, with most of Chinese FX reserves held in dollar-denominated assets and China the biggest holder of U.S. government debt. He noted that China is the biggest foreign creditor to the United States and appealed to Washington to make sure its response to the financial crisis does not damage the value of Beijing’s holdings.

The irony, of course, is that a centrally planned, Communist economy owns every 1 in $10.00 of U.S. debt and now, because of Washington’s inability to rein in spending, they are lecturing us on how to be fiscally responsible.

It is unknown how long this pattern of U.S. debt and Chinese purchases of debt can continue but it cannot go on forever.  Eventually the jig will be up and how will the United States pay?  Perhaps, as some have said, our “bankers” will carve up America in an effort to secure tangible assets to cover monies we cannot pay.  If it does come to that, and the trend says it likely will, you could see a scenario such as was covered here.

If that happens, bye, bye American pie.