You live in Squanderville. Big house. Sparkly car. Lots of gizmos and gadgets. Life could hardly be better.
But what if Squanderville’s richest man told you that your finances were actually a shambles, you were going bankrupt, and that you would soon be homeless? To keep doing what you were doing would be financial self-destruction—a road to economic destitution.
Yet on a national scale, that is exactly what America is doing.
Way back in 2003, Warren Buffet, one of the world’s richest men, began calling America “Squanderville” for its proclivity for big spending. On a national level, he said that because the country was spending far more money importing foreign goods than it earned from exporting, the country’s wealth was being squandered for toys and trinkets. That year, America’s trade deficit was a record $489.4 billion.
On both a personal and a national level, it is impossible to live beyond your means forever. Thousands of people are being rudely awakened to find that their credit has been cut. The national credit card will be next. When you see national interest rates rising sharply, just like when you miss a card payment and all the credit card companies jack up your rates, you will know that America has reached its limit. But we continue to fixate on toys and trinkets. Consequently, a future of candlelit nights and empty cupboards is on the way.
“Both as an American and as an investor, I actually hope [I am wrong],” Buffet said. But in the meantime, prepare for the dollar to collapse, he warned.
Since then, the dollar has continued to devalue, and official unemployment has shot up from 6 to 9.8 percent. Real unemployment—calculated the way the government used to prior to President Clinton’s term—is in excess of 20 percent, according to John Williams at Shadowstats. But that hasn’t fazed Washington. How to fix the problem caused by too much borrowing and spending? Encourage people to go out and borrow and spend more, they say.
And the trade deficit, despite the worst recession since the 1930s, has only been knocked back to where it was when Buffet first began warning.
Now America may be reaching a crisis point. The national debt is shooting through the roof, and America’s lenders are getting skittish. The government says it will attempt to borrow $1 trillion more from foreigners over the coming year. The Congressional Budget Office estimates it will be closer to $1.4 trillion. In other words, the government will borrow an amount equal to the total amount of debt accumulated by the nation from its founding to 1983. And this is at a time when the government says the economic crisis is largely over.
The federal government says the national debt is now $13.5 trillion. But this is like General Motors pretending it doesn’t have union obligations. According to the Dallas Federal Reserve Bank, the real national debt—when calculated using generally accepted accounting principles that take Social Security, Medicare and Medicaid liabilities into consideration—is a practically incomprehensible $100 trillion!
Almost 1 million homes will have been foreclosed on this year—a number that “would be unprecedented,” says RealtyTrac’s senior vice president Rick Sharga. Americans lost close to a million homes last year too.
And even if by some fortunate, impossible turn of events America could find someone to lend it an amount equal to seven times the country’s gross domestic product, the bigger question would be: What do those lenders want in return? Any banker can tell you the answer: collateral.
And what happens when you can’t pay? The bank takes your house, and you are out on the street.
Millions more will lose their homes over the coming months. For years, America’s savings rate was negative. People were spending more than they were making. Where will those people go now that the economy has turned south and borrowing more money is no longer an option? An epidemic of homelessness is on its way.
Squanderville is about to become Squattertown.
Although America is more than three years beyond the start of the recession, the economy may be about to get worse.
“Three decades of massive [trade] deficits have converted the United States from the world’s banker—able to ‘pay any price and bear any burden in the cause of freedom’—to the world’s largest debtor, utterly dependent on … foreign interests,” said Charles McMillion, chief economist of Washington-based mbg Information Services.
America’s weakness is becoming blatantly obvious. Several times over the past few years the People’s Bank of China has warned the United States about its fiscal policies. It said that it was worried the U.S. might be tempted to use the printing presses to pay its way out of its debt hole. That’s how far America has fallen. Communist China is lecturing it on economic policy.
But America should listen. China is America’s most important lender.
“We are so deeply in debt … that it hamstrings our monetary, fiscal and trade policies,” warns McMillion. “We’ve really mortgaged our financial future.”
That national mortgage is coming due, and we don’t have the money to pay it. What happens next? Just ask the banks and all the foreclosed homeowners. America is about to become Squatternation. ▪