When the Debt Bomb Explodes

Does deficit spending really matter? America—its citizens and government—seems to think not. But the debt bomb is ticking.
From the May 2004 Trumpet Print Edition

“The more you charge, the greater your savings! Whether you’re filling up the gas tank, dining out, making home improvements, or grabbing a few items at the store, using your card can increase your savings.” Believe it or not, that’s exactly what it says—the latest promotion I received in the mail for one of the credit cards I carry. Think about that. Just by using your card, you can spend more and save more. Wow, that sounds good.

You do it all the time, don’t you? For example, you “save” when you buy something on sale. If it costs $50 today, and you wait until tomorrow to buy it when it’s on sale for $40, you “saved” $10, did you not? We are told that all the time so we can feel good about ourselves when we “save.”

Well, in reality you really didn’t save anything. You spent$40 instead of $50. That should be plain to any clear-thinking person. Yet much of our Western society has fallen prey to such advertising gimmicks, which fuel our lust for what we cannot afford.

Living Beyond Our Means

Total credit-card debt in the U.S. is about $750 billion, which is an average of about $7,000 per household.

Unfortunately, the fastest-growing group of consumers in debt is senior citizens. Retirees are turning to credit cards to cover their rising costs. According to cbsnews.com, just during 2003 seniors in America had to cope with increases of 17 percent for prescription drugs, 15 to 25 percent for medical insurance, 10 to 20 percent for property taxes and 13 percent for homeowner’s insurance (Dec. 11, 2003).

Young retirees, ages 55 to 64, now hold an average of $6,900 in credit-card debt. Even among college students, credit-card debt is at an all-time high and rising, according to a study by student-loan provider Nellie Mae. Financial institutions report that more and more students are carrying credit card debt loads as high as $10,000. Every segment of U.S. society is becoming more infected with reliance on credit cards.

And the plastic comes with a price. According to Bankrate.com, income from credit card fees—most of which are assessed for late payments and other penalties—accounts for more than 30 percent of card issuers’ profits and as much as 40 percent for some of the top issuers. Clearly, many are living close to the edge, and even a minor setback could cause them to default on their debts.

But credit-card debt is just the tip of the iceberg.

The Federal Reserve Board says that total U.S. consumer debt, excluding mortgages, is a staggering $2.02 trillion—an average of about $19,000 per household!

In addition to credit-card debt, new car loans account for much of this figure. Notice this report from USA Today: “New car buyers are paying more, making the lowest down payments ever and taking increasingly longer loans. … [C]onsumers seem determined to drive the newest vehicles for the lowest possible monthly payment.

“‘The new car market has been driven more by want than need for several years now …’ says Paul Taylor, National Automotive Dealers Association chief economist. …

“The average loan today is for 63 months, with some going as high as 80 months, compared with an average of less than 48 months five years ago” (February 17; emphasis mine throughout).

Last year, banks financed an average of 101 percent of a new car’s cost because consumers sought loans not only to cover the cost of the new car, but also the thousands more they owed on the old one (ibid.).

Is it any wonder that 1.63 million people filed for personal bankruptcy last year—a 5.6 percent increase over 2002? “[This] underscores the continued hangover effect of high levels of consumer spending and debt acquired over the last decade,” said Samuel J. Gerdano, executive director of the American Bankruptcy Institute (Consumer Bankruptcy News, March 19).

It’s clear that Americans are beginning to feel the weight of their debt burden. In a recent poll conducted by the Cambridge Consumer Credit Index, for the first time in history more Americans said that getting out of debt was a higher priority than losing weight.

However, the $2 trillion American consumers owe apart from their mortgages—as staggering an amount as that is—pales in comparison to the federal debt.

Government Deficits

“Federal spending is growing at a faster pace now than at any time since [President Lyndon B. Johnson] was in the White House launching the Great Society welfare state” (Scripps Howard News Service, June 6, 2003). According to the Washington Post, discretionary spending rose 12.5 percent in 2003, “capping a two-year surge that saw the government grow by more than 27 percent” (January 23). Like much of the American public, Congress acts as if it has an unlimited line of credit.

The projected federal budget deficit—the amount by which payments exceed revenues in the current fiscal year—is $521 billion. The cumulative amount of yearly budget deficits is the total federal debt. Earlier this year, the federal debt exceeded $7 trillion. In more meaningful terms, that’s roughly $66,000 per American household. Added to consumer debt (excluding mortgages) of $19,000 per household, we end up with $85,000 of non-mortgage-related debt per household!

This year, the amount of taxes wasted on paying interest on the federal debt is expected to be $156 billion. That’s $40 billion more than the amount needed to fund the entire departments of education and veterans affairs combined.

Now what about the budget submitted to Congress for fiscal year 2005? It includes expenditures of almost $2.4 trillion with anticipated revenues of just over $2 trillion—and that assumes an increase of 13.2 percent in revenues next year. With that assumption, the planned deficit is about $364 billion.

But wait. The budget does not include money needed to keep troops in Iraq and Afghanistan after the current $87.5 billion supplemental amount runs out. According to FoxNews.com, a new supplemental budget will not be requested until after the November elections.

And there’s more. The Center on Budget and Policy Priorities states, “By showing deficit numbers for only a five-year period, the budget conceals the marked worsening of the deficit expected under administration policies in the second half of the coming decade. The bulk of the cost of making the 2001 and 2003 tax cuts permanent would occur after 2010 …” (www.cbpp.org). On top of that, “The bulk of the costs from the beginning of the baby boomers’ retirement also occurs after 2009” (ibid.). In other words, as quickly as the government’s debt is increasing, it will only get worse in a few years.

Social Security’s Impact

How does Social Security impact the debt levels? The Washington Times says, “When Social Security began, there were 42 workers paying into Social Security for each retiree collecting benefits. By the time Medicare was put into effect in the 1960s, the ratio had fallen to 16-to-1. Today, the ratio is 3-to-1. Between now and mid-century, after retirement of the 77 million baby boomers, the ratio will decline to 2-to-1” (March 24).

This is a vital statistic because all the money that American workers and corporations have paid in payroll taxes to fund Social Security has not been set aside. It has been used to pay benefits to today’s retirees—but the surpluses, rather than being saved for the future, have been spent for the general budget and replaced with special-issue Treasury bonds (government ious). If Social Security surpluses were actually set aside, the federal deficits would be even larger. This pay-as-you-go system will create an inconceivable burden for tomorrow’s workers.

Moreover, the new Medicare prescription drug bill passed last year has wiped out the surpluses. “The addition of the prescription drug bill has changed … projections so radically that Social Security and Medicare will now … drain about $60 billion from the general budget this year alone. … Medicare will spend all it collects in payroll taxes, drain all of Social Security’s surplus for next year and require $60 billion from the general fund to pay all its bills” (ibid.).

In February, Federal Reserve Chairman Alan Greenspan warned Congress that the U.S. cannot afford the retirement benefits promised to baby boomers. He said that “the current deficit situation, with projected record red ink of $521 billion this year, will worsen dramatically once the 77 million members of the baby boom generation start becoming eligible for Social Security benefits in just four years” (Associated Press, February 25).

Both political parties distanced themselves from Greenspan’s comments. This is one hot potato no one wants to handle, for obvious political reasons. So as deficits continue to pile up around us, what we have to look forward to, in Greenspan’s words, could well be a “very debilitating” rise in interest rates. When that happens, it will be the catalyst that will put multiple millions of Americans, already drowning in debt, completely under.

Interest Rates to Soar?

Then there are the trade deficits. In the latter part of the 1990s, the U.S. trade deficit really started to worsen until last year the U.S. imported $489 billion more in goods and services than it sold to other countries.

In the address to Congress mentioned earlier, Chairman Greenspan warned that the need to take action on the budget deficit was critical in light of the soaring trade deficits requiring the U.S. to borrow even more from foreigners. “Given the already substantial accumulation of dollar-denominated debt, foreign investors, both private and official, may become less willing to absorb ever-growing claims on U.S. residents,” Greenspan said (International Herald Tribune, February 13).

Do you understand that the ever-burgeoning deficits represent claims that foreigners have against each and every U.S. citizen? This magazine has been warning for years that the threat of foreign capital flight will indeed materialize—ever more quickly now as America’s twin budget and trade deficits both spiral out of control. When foreign capital flight becomes a reality, we are going to have to make good on our debts and obligations or face the consequences!

Note this analysis posted on Middle East business resource website ameinfo

.com on February 19: “Both the U.S. current account [mostly trade deficits] and budget deficits have been partially financed by foreign investment in U.S. fixed-income securities [primarily government bonds—ious]. ….

“The combination of dollar depreciation [falling value of the U.S. dollar relative to other currencies] and rising long-term U.S. interest rates is strong incentive for foreign investors to sell their U.S. fixed-income assets [call in their ious]. This process, known as foreign capital flight, could feed continued dollar depreciation and rising long-term interest rates”—due largely to a decreasing money supply. Less money available means that the cost of borrowing money—the interest rate—will rise.

Is it realistic to expect interest rates to rise? Paul Krugman is a prominent economist who foresaw the 1997 Asian financial crisis. In an October 2003 New York Times column, he said that the U.S. economy was close to taking a dive that would involve a sharp fall in the dollar and a sharp rise in interest rates. Since then, the dollar has plunged. And the strong indication is he’s right on interest rates too. “In the worst-case scenario, the government’s access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos,” he wrote (Oct. 14, 2003). Bible prophecy reveals that the worst-case scenario will indeed occur! These prophecies are detailed in our book The United States and Britain in Prophecy.

According to textbook economics, the rising deficits should have caused higher interest rates already. The government makes up for deficits by selling Treasury bonds (long-term, interest-bearing ious). Normally this lowers the demand for bonds; thus, in order to attract more bond buyers, interest rates must rise. However, Japan and China are buying enormous amounts of U.S. Treasury bonds, keeping the demand high, which in turn helps keep interest rates low.

China and Japan continue to finance our deficits in order to keep the value of the dollar propped up as much as possible—so Americans will continue buying their exports. The more the dollar falls, the more expensive goods from China and Japan become. Yet, in spite of staggering bond purchases, especially by Japan, the dollar has continued to decline in value relative to other currencies in recent months. According to the Daily Reckoning (UK edition), Japan spent $250 billion in 2003 and another $70 billion just in January of this year to finance U.S. deficits (March 8).

In essence, because of ballooning deficits, there’s just too much pressure on the dollar for it to retain its value relative to currencies of other countries that are producing and selling the goods Americans consume. A Wall Street Journal column on January 12 said the weaker dollar will inevitably lead to inflationary pressures, and “higher interest rates [are] rather a foregone conclusion.” Although the Federal Reserve is doing all it can to forestall that event until after the November elections, even Mr. Greenspan has said that interest rates “cannot stay low indefinitely.”

Once interest rates start going up, it’s going to be disastrous for those who carry high levels of household debt. Many, as we’ve seen, are already “living on the edge” with interest rates at historically low levels. What’s going to happen when they have to pay more to service their debt burden?

The American consumer accounts for more than 70 percent of the gross domestic product (gdp) of the U.S. economy. That simply cannot continue, because it is a debt-fed consumption and some have estimated that America has already amassed 80 percent of the world’s savings in order to feed its voracious appetite!

The Trouble With Economics

Some economists will be quick to point out that the deficits as a percentage of gdp are not all that high—that deficits as a ratio of total output have not changed that much since President Ronald Reagan was in office. The theory is that we can live with humongous deficits if the economy keeps “growing.” But remember, 70 percent of the U.S. economy’s “output” is due to consumer spending—largely aided by the inflow of overseas funds to the U.S. government! Without foreign capital inflows, the government would have to cut benefits, and the standard of living would fall—ultimately leading to unemployment and recession. The problem with the gdp model is that it measures quantitative flow of dollar output only, regardless of the source of wealth. There’s no qualitative measurement. It is an incomplete and dangerously deceptive analysis of the situation.

For example, if we take a look at the government deficits as a percentage of gross savings instead of gdp, we find that the deficits were about 11 percent of savings in the 1970s, about 20 percent of savings as late as 2002 and now are projected to be almost 30 percent of savings this year. So if we compare the deficits relative to the funds available for borrowing, it reveals a very dangerous trend.

Government borrowing on such a massive scale crowds out what is available for productive business investment, so the long-term ability of the economy to create capital and produce wealth is jeopardized more and more. In addition, the huge amount of foreign funds now flowing into the U.S. Treasury to buy bonds, in order to finance the deficits, is money not available to buy U.S. exports and is one reason the U.S. trade deficit is growing so quickly. In essence, we are digging ourselves deeper and deeper into a gigantic hole.

There was a time when America made things that the rest of the world purchased—when manufacturers were the biggest U.S. employers and the balance of trade was in America’s favor. There was a time when the U.S.’s creditors were those in America who saved and had money to invest back into the economy—resulting in real growth, not phony growth that economic models do not distinguish very well.

In the words of the Daily Reckoning, America has “switched from making things to buying things, from saving money to spending it, and from lending money to the rest of the world to borrowing from it. The economy gradually changed from production to consumption, from manufacturing to retailing, from gm [General Motors] to Wal-Mart. …

“There’s the kind of economy that makes people wealthy—in which people make things and sell them at a profit. And there’s the economy that helps rich people get rid of their money … a consumption-led economy, with few factories, but plenty of credit and shopping malls.

“Unfortunately, most economists can’t tell the difference. And the gdp numbers make no distinction between a productive, wealth-creating economy and a declining, wealth-consuming one. gdp only measures activity” (UK edition, March 9).

A More Sure Word

The American economy is more precarious than most people think. The burgeoning consumer debt, the ballooning federal and state government deficits, the Social Security shortfalls and the gaping trade deficits are all leading to a day of reckoning in the not-too-distant future.

The U.S. economy has witnessed enormous changes in financial institutions, and financial markets have become more and more globally interdependent. This has complicated economic models and the analytical process considerably.

Since the U.S. relies on foreign capital flows so extensively, geopolitical ramifications can further obscure sound analysis. As a result, the variables that sustain today’s U.S. economy are intricate and delicate. As the Wall Street Journal put it, “one little misplaced, or misunderstood, word could trigger a panic” (op. cit.).

In today’s complex world, one can find “expert” opinions to suit whatever one’s belief system happens to be. Some consider themselves to be “realists” and don’t have much hope in what the future portends. Others consider themselves “optimists” and refuse to accept any sort of negative reality. They are comfortable with their heads in the sand.

Peggy Noonan, a former speech writer for President Reagan, observed the following regarding the 9/11 Commission hearings held this spring: “Why did the government [for the past decade] fail to see 9/11 coming? …

“It was a failure of imagination, a failure to envision that a terrible thing could happen, that a particular terrorist group meant to do what it said it would do. There was a sunny and empty-headed assumption that America would stay lucky …” (Wall Street Opinion Journal, March 25).

So it is with the economy. Most people do not want to accept reality. They don’t want to deal with negatives. They’d rather assume that somehow things will work out—that America will stay lucky.

But the Trumpet can state with certainty that the American economy will collapse—and collapse hard—bringing on a global crisis of unrivaled proportions!

How can we be so sure? There is only one Master Economist, who knows all the intricate equations, all the delicate variables and all the laws that govern our modern economy. He has revealed some of the most fundamental principles of economics in His Instruction Manual for mankind. For example, “the borrower is servant to the lender” (Prov. 22:7). That’s a law of life, as sure as the law of gravity, that we are going to have to face up to sooner or later.

If you want to know “the rest of the story,” then request our free book The United States and Britain in Prophecy. Over 5 million people have requested this book over the years. It will prove to you where the U.S. economy is headed, which in turn will affect the world economy. Are you willing to face reality, or will you keep your head in the sand? That decision is yours.