Global Economic Crisis

In a previous post on this website and the Huffington Post, I warned that the current Obama strategy for conducting the war in Afghanistan is doomed to failure (see http://www.huffingtonpost.com/…/can-the-us-win-the-war-in_b_212831.html ). Of course, President Barack Obama did not consult me when he decided to vastly increase the U.S. investment in lives and treasure in pursuit of achieving what the Soviet Union and British Empire had failed at; subduing Afghanistan.

With all this focus on U.S. options for Afghanistan, little has been said about Al-Qaeda’s goal. Even official U.S. sources admit that Washington is spending over $5 billion a month to support 100,000 U.S. troops confronting as few as fifty (yes, 50) Al-Qaeda members presently situated in Afghanistan. Perhaps Al-Qaeda’s goal is to achieve a maximum return on investment; 50 of its members stationed in Afghanistan, in the process further eroding the U.S. fiscal imbalance at a time of acute economic crisis in America. The leadership of Al-Qaeda has stated on several occasions that they seek to draw the United States into an Afghan quagmire, inflicting upon it the same empire-shattering blow incurred by the once powerful but no longer existing Soviet Union.

The leader of Al-Qaeda, Osama bin Laden, has stated that his objective is to drain the U.S. financially, bringing about its fiscal collapse and ultimate insolvency. If that is in fact Al-Qaeda’s objective, it appears that not only Obama, but almost the entire political leadership in the United States which currently supports the war, both Democrats and Republicans, have become unwitting allies of Osama bin Laden. This is a policy that is bankrupt both figuratively and literally, especially with America currently gripped by a ruinous economic crisis.

How long will Washington be able to borrow vast sums of money in the global bond market, solely to pursue 50 followers of Osama bin Laden in Afghanistan? Perhaps only as long as the Federal Reserve can hold off the next stage of the American banking crisis and real estate meltdown. Once the United States is engulfed by a full-fledged sovereign debt crisis, it will be exceptionally difficult, to say the least, for a financially bankrupt U.S. government to justify throwing away nearly $100 billion a year on a war that has become increasingly devoid of rational purpose.

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In  the last 100 years, encountering a year in which the U.S. federal government has achieved a balanced  budget has been as rare as the chance that Vladimir and Estragon will actually meet Godot. As with most Western economies as well as Japan, fiscal deficits by sovereign governments have become so normative that a term has long been in vogue to describe this phenomenon, the co-called “structural deficit.” But all that was prior to the onset  of the global financial and economic crisis, which erupted in 2008 with the collapse of Lehman Brothers. We are all now in new territory, never before encountered  by sovereign governments on such a prolific scale. Welcome to the era of the structural mega-deficit.

In compiling data for my new book, “Global Economic Forecast 2010-2015: Recession Into Depression” (http://www.createspace.com/3403422), I recognized that the size of current and projected fiscal deficits for the United States and other advanced and major economies was so much greater than typical structural deficits, a new terminology was required. The term I have adopted  in my report, “structural mega-deficit,” implies a whole new and unprecedented reality for public financing. In essence, a deficit which approaches or exceeds 10% of a national economy’s GDP, and has an aspect of permanence similar to previously tolerated structural deficits, has entered the fiscally turbulent terrain of structural mega-deficits.

As with private consumers, sovereign economic policymakers have become addicted to debt, nowhere more so than in the United States, Western Europe and Japan. For example, when the Eurozone was established with a single currency, participants were expected to show “prudent” fiscal management of the public finances, by ensuring that their national deficits did not exceed 3% of national GDP. Heaven forbid a balanced budget had even been suggested as an ideal target. Now, however, even the Eurozone’s supposedly responsible 3% cap on annual deficit to GDP ratios is coming apart at the seams, witnessed most recently by the  fiscal crisis in Greece, where the current  budget deficit is expected to reach 12.7% of that nation’s GDP.

It is the United States, however, where the emergence of the structural mega-deficit reaps the most tangible dangers for the global economy. In the past, key economic policymakers throughout the world maintained that a structural deficit of around 3% of GDP could be easily sustained  as long as the national economy produced a modest level of growth. However, there exists no mathematical models that demonstrate how any nation’s economy, including that of the U.S., can sustain structural mega-deficits. With the official U.S. deficit for  the 2009 fiscal year having reached 10% of GDP and the 2010 federal budget likely to produce a deficit in the range of $1.5 trillion, America’s public finances are clearly in a debt trap that is unsustainable by any logical measure. The Congressional Budget Office projects a cumulative deficit of $9 trillion over the next decade; based on the CBO’s track record, the actual deficit is likely to be much worse.

One of the strange paradoxes for the U.S. economy is that in 2009, even with a tripling of the national deficit, the annual payment by the federal government for interest on the national debt was actually lower than the prior year. This was due to the unique and anomalous conjunction of much of America’s national debt being financed by short-term Treasuries with historically low interest rates established by the Federal Reserve. However, with growing doubts on the part of foreign lenders as to the long-term credit worthiness of the United States, it is inevitable that the days when much of America’s growing debt load could be financed at almost zero interest rates will soon end. With  the public debt of the United States  based on an average turnover for refinancing  of four years, the shortest timeframe of any large indebted economy, a spike in bond yields will add potentially hundreds of billions of dollars to the annual U.S. deficit. A time may not be far off when current taxes and other federal government revenue will cover less than half of the annual expenditures of the federal government. All this will be occurring as outlays for Social Security and Medicare begin to exceed revenues, adding further to the structural mega-deficit, and at a rate that will become increasingly voracious.

The ultimate tragedy about the present and future danger of structural mega-deficits in the United States and other major economies is that this is an impending train wreck that can be viewed  from a great distance before its catastrophic impact. Yet, in spite of the clear and obvious unsustainability of structural mega-deficits, with very few exceptions the political leadership in the United States, in both the Democratic and Republican parties, is conspicuously silent.

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