Global Economic Crisis

Canada’s Budgetary Officer, known as the PBO, recently  released a report that stated that unless major fiscal consolidation occurs in government spending, deficits at a high level are projected to continue until at least 2070. That is, high deficit spending is baked into the cake for the next half-century. That projection excluded likely future scenarios such as more pandemics, natural disasters and military conflict, not to mention internal issues. It is a dystopian prediction for government spending, and it is unsustainable.

The PBO projection for government spending is a mirror image that can be applied to every economy on the glove, in particular all the G7 countries.

No nation is as entrapped in high deficit spending to as a high degree as the United States. When the U.S. briefly went into budgetary surpluses in the latter years of the Clinton administration, the incoming George W. Bush presidency swiftly headed back into deficit spending due to the enactment of major tax reductions , particularly those affecting higher income earners. The rationale? The Vice President , Dick Cheney, told the GOP, supposedly the party of fiscal conservatism, that former president Ronald Reagan had “proved” that fiscal deficits “don’t matter.”

However, the low to mid single digit proportion of GDP reflected by the size of deficits has now morphed into  high single digits and even double digit fractions of national GDP since politicians throughout the world opened the spigot of sovereign debt spending, abetted by the near-zero interest policies of central banks, such as the U.S. Federal Reserve.

In the current fiscal year, the United States  federal government has generated  $3.1 trillion dollars in revenue and $5.3 trillion in spending, resulting in  a deficit of $2.2 trillion.  The current national debt has skyrocketed past $28 trillion. This figure represents  130 % of America’s GDP. By way of comparison, in 2001, only twenty years ago, the U.S. national debt was $5.8 trillion, and represented 55 % of GDP.

The trajectory regarding America’s-and many other nation’s-government spending  patterns are clearly and inalterably headed in the wrong direction. This cannot be sustained indefinitely. Already, inflation is raising its ugly head as a form of stealth taxation. At some point, probably when central bank are compelled by inflationary pressures to significantly raise interest rates, the whole illusory edifice will implode.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

In the New York Times the oracle of Omaha, billionaire investor Warrent Buffet, has written a powerful piece warning about the growing danger of America’s expanding debt to GDP ratio. While defending massive deficits in the short run as necessary to save the financial system from collapse and economy from imploding, Buffet warns that in the long term an answer must be found for America’s fiscal imbalance.

“Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress,” concludes Buffet in his piece.

If the fate of fiscal sanity lies with the same Congress that is spending money like a fleet of drunken sailors, what are the odds that America will avoid hyperinflation?