Monday, July 28, 2008

Global Debt Is a US Issue - It's That Simple!

25 July 2008, updated 28 July & 10 August 2008

I have previously referred to the work of the very dedicated independent researcher Michael W. Hodges.

I noticed today that Mr. Hodges has produced a single chart on his website that reveals exactly why the United States is now in such serious economic trouble.

Here it is.

What is the above chart telling us?

In brief, the US economy represents about 25% of world GDP.

In a world economy now impacted by the surging and emerging commodity, manufacturing and service-based economies of China, India, Russia, Brazil and others, as well as with the established economic powers in Europe, and also considering such powers as Japan, Australia, Canada and Mexico - that is truly impressive!

No wonder the US has been called the engine of the global economy....

Here is the problem.

The US has reached this place of ascendancy through debt accumulation rather than through savings and investment. This is the opposite position of the US at the beginning of the 20th century, and it spells big trouble for the US economy going forward.

What is the problem?

The United States, representing an incredible 25% of the world economy, also shoulders roughly 79% of all the world's government debt.

That's right.

The US population of 304.7 million people, representing only 4.5% of the world's population of 6 billion-712 million people, must now pay up on roughly 80% of all the world's government debts.

And the US government is growing its debt at a frightening clip, exceeding $4 trillion (or $45,000 per family) per year. (The accelerating rate of increase of the US debt position is driven in large part by escalating interest payments, which are now growing like Topsy!)

At this point, each individual American on average is going to have to cough up $207,000 to pay off this accumulated government debt.

Also keep in mind that Mr. Hodges' most comprehensive calculations of US debt and obligations at all levels, including state, district, municipal and individual debt, adds up to a figure of about $120 trillion, or $400,000 for every man, woman and child in the United States.

That is just too difficult for a mere 305 million people to pay.

In fact, it isn't going to happen - at least not without radical inflation (read devaluation) of the US dollar.

With the help of Michael Hodges, you saw it here.

The US cannot pay its bills except with a greatly devalued currency. And that is going to spell disorder for the world economy for many years to come.

Look our below!

By the way, the combined Republicans and Democrats are presently muscling some horrible legislation through the US Congress. The housing bailout bill, in a flamboyant display of group-think and responsibility-aversion, has just passed the House of Representatives by a vote of 272-152. This piece of pork will throw another estimated $41.7 billion taxpayer dollars at the reckless denizens of Wall Street who paid themselves millions of dollars per year as they packaged liar loans and negative equity mortgages to sell to global investors. The actual cost of this single piece of bailout legislation is estimated to exceed $100 billion. Whoever has been left holding these hot potatoes has lost roughly half their investment at this point, and the markdowns aren't done yet. Unfortunately the banks and the GSEs hold a large portfolio of this financial toxic waste. Once again, the Wall Street Journal has emerged as an honest voice, stating publicly how bad this wasteful legislation is. The editorial concludes: "The rescue will only delay a housing market bottom, and it may or may not help bank stocks. The one certainty is that taxpayers are assuming a huge new risk." Read all about it - here.

For more thoughtful WSJ opinion about Fannie, Freddie and bailout mania, click here.

28 July 2008:
More bad news for US taxpayers. The so-called "housing bill" has already been rushed heedlessly though Congress. And George Bush, the biggest-spending president in 30 years, isn't going to veto this turkey. Mr. Obama and Mr. McCain are both cheering the bill, indicating that neither candidate has really thought through the problematic issue of robbing the responsible in order to rescue the reckless (this issue is actually at the heart of the problem in its present state). Let's just tack another $300 billion to $1 trillion onto that taxpayer bill, shall we? I hope it is clear to you that these mounting bills are not going to be paid back with "real money." Devaluation of the currency is now the only way out for America's foundering ship of state. And this will clearly occur whether a Republican or a Democrat is elected.

Let me add a further note regarding Ron Paul. Mr. Paul is probably not right on every issue, but he is right on the biggest issue. The US has to stop its big spending now, because it simply lacks the means to pay the bills. I suspect that Mr. Paul's program will eventually be proven out. When America's international partners begin refusing to accept any more US debt issues (remember, these run at a net $700 billion per year), the nominal value of the US dollar will fall further, Americans' international purchasing power will take another big hit, and interest rates on treasury bills and bonds will climb to much higher levels (they are presently astonishingly low!). When America's international partners stop accepting its debts, the US government will then launch an austerity budget. It will have no choice!

A currency crisis looks to be in store for the United States, though it is always difficult to predict when it will take place. While "later" has so far proven to be the most accurate descriptor of the pace of unwinding of America's long emergency, "sooner" is at some point going to happen.

August 10, 2009: The feature film, I.O.U.S.A., is already showing at the film festivals, and is due for gradually wider release this month. It is an Agora Financial project, and aims to inform Americans how serious their debt crisis is. I'm looking forward to seeing this one. The film has been compared to Al Gore's "An Inconvenient Truth." The distinction? If the US doesn't rein in its free-spending ways, there will be no funds to bankroll new conservation measures. Economics in Greek basically means "household law." If we don't keep our own house in order, then new ideas in all areas will go neglected. The real question is if it is already too late. There will certainly be a crisis. The question is if we will be able to avert it when it breaks into the foreground.


  1. If a individual's household budget couldn't survive that situation, why on earth would anyone think that a county can??

    They need to pull their head out and look at the chart!

  2. If this were Brazil, Argentina, Mexico or Ghana, they'd be into international debt restructuring and the global equivalent of third party management. Scary when the world's richest nation is also its most financially irresponsible!