Two years. That is how much time America has to fix its problems—or risk sudden collapse. This is the startling conclusion of Harvard historian Niall Ferguson. And that was six months ago.
The world has witnessed what happens when investors lose faith in a country’s fiscal policy, he says. Just look at Greece.
Is it possible that the richest, most powerful country in the world could realistically face sudden collapse? After all, America isn’t Greece. But that is just the problem. America is not some small country that has overspent a few tens of billions of dollars. America is the world’s largest debtor, and it is addicted to debt—borrowing trillions of dollars to maintain an unsustainable standard of living.
It is an empire in evident decline—like the Soviet Union in the late 1980s, or Rome just a few years before its fall.
Ask yourself: What exactly holds America together? Is it a common religion or ethnicity? A shared national purpose? The beliefs espoused by the principles of the Founding Fathers? If any of these things ever were the ingredients that bonded the republic together, they are no longer.
Today, just about the only common ground within America is materialism. That, and its most obvious manifestation—debt!
In 2010, according to the Congressional Budget Office, America added $1.5 trillion more to its national debt. And under President Obama’s proposed spending plan, America will run trillion-dollar deficits until 2019.
Annual trillion-dollar deficits! And that is if everything goes according to plan: the wars in Iraq and Afghanistan neatly wrap up; there is no double-dip recession; employers start hiring again; the too-big-to-fail banks don’t need more money; and the Fed avoids accounting for government-owned Fannie Mae and Freddie Mac on its balance sheets.
What if things don’t go according to plan? That is a question the experts either dismiss as unlikely or don’t like to think about.
The simple truth is that this once great nation is so addicted to debt that it would collapse if it could no longer borrow money. The addiction goes far beyond subprime mortgages and unaffordable vehicle loans. It starts with the fresh-faced college students bombarded with credit card offers, and universities profiting from every dollar those students spend. It progresses through America’s most prestigious corporations, which need to access debt markets on a monthly, weekly, even daily basis to function. It encompasses city, municipal and state governments willing to bankrupt public treasuries to placate greedy unions and to stuff unsustainable pension plans. It culminates with a federal government that has not balanced a budget since 1957!
Ultimately though, it both begins and ends with the typical consumer citizen so engrossed with satisfying the senses that he is blind to the looming catastrophe.
Yet the signs of collapse are not hard to spot.
Where America’s Money Comes From
In December, President Obama’s bipartisan Deficit Commission released its report on fixing America’s budget problems. The authors say they think America can be saved. But the reality is that few, if any, of their recommendations will be implemented.
America’s problem gets down to the fact that 40 cents out of every budget dollar spent is borrowed. At present, Social Security, Medicare and Medicaid take up all of federal revenue, reported the authors. The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it—the whole rest of the discretionary budget—is financed by borrowing.
Even a child could see that this is a disaster waiting to happen.
Yet before the report even hit the presses, leading members of Congress pronounced it dead on arrival. Cutting programs and handouts would cost too many votes. Too many special interests would be offended.
America’s national debt is already close to 90 percent of gross domestic product. By the end of 2011 it could exceed 100 percent of gdp, which is approaching European crisis levels.
And still America’s leaders pretend there is no problem.
Averting Cardiac Arrest
On November 30, the Federal Reserve was forced to release details surrounding its massive Wall Street bailout, corporate bailout and—as it turns out—foreign central bank bailout.
Twenty-one thousand loans—$3.3 trillion worth: That is what it took in terms of hard cold debt for the Federal Reserve to stop the financial meltdown of the United States. Yet where has this mountain of debt gotten America? Is the system fixed?
No. It is just more evidence that the economy is far more precarious than anyone will admit.
Much focus has been put on the scale of the bailouts. $3.3 trillion is a massive amount of money. More than double America’s budget deficit, it is incredibly significant in the U.S economy.
Most people seem to miss the fact that the Fed created the bailout money out of thin air. But maybe this fact is fitting, since much of what the Fed traded that $3.3 trillion for appears to be vastly overpriced junk. $1.5 trillion worth of collateral came with the “ratings unavailable” designation. Only 1 percent of the pledged collateral was highly rated government treasuries.
It was also revealed that the Federal Reserve not only lent $600 billion to foreign central banks, but also to foreign automakers like Toyota and bmw, and billions more to foreign private banks at very low interest rates (sometimes at 0.15 percent).
In other words, the Fed was so afraid at the height of the crisis that it was printing and lending money to anyone with a pulse, regardless of who they were and what collateral they pledged.
The Federal Reserve even lent cheap money to speculative hedge funds and pension plans—like the Major League Baseball Players Pension Plan—to “invest,” in an attempt to get money flowing through the economy again. The California Public Employees’ Retirement System, one of the most underwater retirement plans in the country, was among the most enthusiastic takers of Fed money: It borrowed $5.14 billion to speculate its way out of its massive underfunding.
Under one of its lending programs, the Federal Reserve cycled a mind-boggling $9 trillion worth of debt in and out of the economy.
Through this program, Citigroup alone borrowed an astounding $2.2 trillion in multiple revolving transactions to stay afloat. Merrill Lynch borrowed $2.1 trillion across 226 loans. Bank of America borrowed $1.1 trillion in emergency money to avoid failure. It asked the Fed for credit one thousand different times. Morgan Stanley took out 212 loans to stay in business. Even the venerable Goldman Sachs borrowed $620 billion across 84 loans.
More ominously, it wasn’t just the banks and failing hedge funds that the Fed propped up—it directly propped up many of the biggest, most famous names in corporate America. Credit card companies, insurance companies and vehicle manufacturers all got loans. Some of this was known. But did you know that Caterpillar took government money? That Verizon Communications needed $1.5 billion? That Harley-Davidson received bailout money 33 times, for a total of $2.3 billion? General Electric Co. needed funding 12 times for a total of $16 billion? Even McDonald’s needed to borrow money from the Fed.
Corporate America is so addicted to debt that it needs to borrow money each and every day. It needs credit just to keep up business as usual. During the economic crisis surrounding Sept. 11, 2008, the debt markets froze. No one would lend money—at all. Banks were failing. The government was nationalizing trillion-dollar corporations. The whole system was balanced on a razor’s edge.
Just imagine what would have happened if Caterpillar, Verizon or McDonald’s had a failed debt auction and couldn’t borrow money. Contagion could have gone national, even international. A massive domino effect might have swept the business world. The Fed had to step in to provide the money—or it risked total shutdown of corporate America.
That is how addicted to debt America is. Stop the debt and the whole system goes into cardiac arrest. Not convinced?
The Fed needed 21,000 loans at near-zero percent interest to jump-start the system.
How long can America continue its debt addiction? We use debt to purchase things to make us feel better and to finance our standard of living. We use it for business as usual. And when all the debt gets us into trouble, we use even more of it to stimulate the economy and to bail us out.
But now, America’s debt addiction appears to have reached the point where it is threatening our ability to borrow. The addiction is so great that the Federal Reserve is now actually printing money to finance federal government spending.
Federal Reserve Chairman Ben Bernanke announced in November that the Fed would create $900 billion out of thin air to purchase government treasuries. Fiat money creation has historically led to massive currency depreciation.
Foreign nations, not wanting to be paid back in devalued dollars, are understandably angry at this announcement. This means it is going to become tougher and tougher for America to attract foreign creditors.
It could easily devolve into a Catch-22 where the Federal Reserve is forced to supply more and more money to finance government spending—which would only act to drive even more foreign lenders away. The U.S. government can only issue debt as long as people will take that debt, and the increasing chances of the U.S. defaulting makes that less and less likely.
According to Li Daokui, an academic member of the Chinese central bank’s monetary policy committee, the U.S. dollar will only be a safe investment for the next 6 to 12 months. “For now, market attention is still on Europe and for the coming 6 to 12 months, it will not shift to the United States,” said Li on December 8. “But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. Treasury bonds and the dollar will experience considerable declines.”
As international investor Jim Rogers noted December 7, “There comes a time when people say ‘I’m not going to lend you any more money.’” When that day arrives, America will not be a place many people recognize.
Prepare for This Scenario
One day, America will wake up to the news of a failed U.S. government debt auction. Lenders will have had enough. Though many people will be oblivious for a short time, those in the know will rush to the stores to buy everything they can get their hands on—diapers, alcohol, beans, bullets. They will be the lucky ones. Some will turn to gold and silver, but that will only help for so long. Shortages will soon be reported and become endemic.
Attempting to calm markets, the Federal Reserve will announce another round of “money printing,” but this time it will have the opposite effect. The dollar will plunge in value, the Dow Jones will plummet and officials will lock down stock markets.
Without access to debt, Wall Street will experience a chain of unstoppable domino failures. Consumer spending will sharply contract. Import prices will soar. Sales will dry up, and indebted corporations will stop sending out paychecks. America will grind to a halt.
That is when the anger will surface.
Debt-financed materialism will have transformed from the glue precariously sticking the system together to the agent of its sudden death.
What then will hold society together?
The End of Republics
“History says we’re not going to make it,” said Oklahoma Sen. Tom Coburn in a speech at President Obama’s debt commission meeting in December. Democratic republics only last about 200 years before they “rot from within” and then are conquered militarily, he said. “And we’re rotting. We’re rotting as we sit here and speak today.”
Coburn, however, holds out hope. There is a way to “cheat history,” he said. “The way we cheat history is for all of us to give up something: everybody … and then say, ‘The way forward for America is for everyone to start sacrificing so we create a future that is honoring the tremendous sacrifices that came before us.’”
Take a look around you. Take a look at Congress. What are the odds that America will embrace sacrifice on a national scale?
The sad reality is that America will not “cheat history.” That’s prophecy!
In a 1997 article, Trumpet writer Tim Thompson compared America’s debt-dependent society to the whitewashed tomb of Matthew 23:27: “It is beautiful on the outside—it has the appearance of wealth and wellbeing—but inside it is ‘full of dead men’s bones, and all uncleanness’—it is a financial nightmare built by hypocrites and filled with all rottenness!”
As Mr. Thompson pointed out, borrowed money may make America appear prosperous, but appearances don’t mean much. The American republic is rotting on the inside, and time is running out.
Last July, historian Niall Ferguson told business leaders and academics at the Aspen Ideas Festival that America’s window to reverse course was closing. “Fiscally and other ways,” America is “very near the edge of chaos,” he warned. “I think this is a problem that is going to go live really soon.”
“In that sense,” he said, “I mean within the next two years.”
The last days of the republic as we know it are here. ▪