It's Time to Get Responsible

I've decided to get a little ambitious with this one. As anyone, if there is anyone, who reads this blog may note, I have been very critical of the way the media has been portraying the current crisis. To be redundant, to say this is a subprime crisis misses the point. This is a debt crisis caused by an unsustainable amount of debt in the economy. Underlying this problem, however, is a massive $800 billion annual current account deficit. That means that every year, the US consumes $800 billion more dollars than it produces. To fund this the US relies on artificially low taxes, essentially a government subsidy, paid for with government debt, and private debt from banks and financial intermediaries. In the course of the past year, this debt load became unsustainable, resulting in the current crisis. However, attacking Wall St., derivatives, the mortgage brokers, etc. completely is purely an act of scapegoating and does not address the real culprits or causes. Collectively as a society Americans are to blame for being irresponsible and buying what they can't pay for.

Over the past two decades, since the end of the Cold War, the US has been guilty of nothing short of hubris. Americans hold the belief that their nation is an indestructible fortress and it should be. And while America is undoubtedly an unparalleled military power in the world, she is currently facing an enormous and silent threat to our way of life, an economic one. If left unchecked the nation's habits will result in a massive decline in world standing and way of life, leaving America a shell of its former self.

As I outlined in a previous post, in the past how in the past 20 years a culture of entitlement has developed in America. Defining the laws of economics and nature, Americans have come to believe that the should never die, suffer or be denied. The United States' GDP stood somewhere around $13.8 trillion in 2007, while our current account deficit was $800 billion. This means that we took out debt to finance roughly 5.8% of all our purchases. That year, the US national deficit ran at $162 Billion, meaning the US government took out that much debt to subsidize taxpayers in 2007. However, the deficit grew by about $500 billion due to interest payments. The remainder of the deficit was financed through the private sector. Quite naturally, a nation cannot just take out debt to the tune of 5.8% of GDP ad infinitum and not expect a crash to occur.

America has had a mixed relationship with globalization. On the one hand, the US citizens have been able to buy foreign-produced goods at far cheaper prices than had they been produced domestically. This increase in trade has in turn created many direct and indirect jobs. As Americans have spent more money on clothing, electronics and other consumer discretionary items produced overseas, jobs have been created in the service sector. On the other hand, as companies try to cut costs and remain competitive, many have been forced to shift production overseas. As a result, the American manufacturing sector has been decimated, leading to our massive current account deficit. Over the past few decades in America there has been a gradual shift away from the manufacturing sector into the services sector, which does not produce any exportable goods. At the same time, if the US were simply to decrease imports, many of these jobs in ther service sector would simply be lost, resulting in decreased GDP and in turn consumption of domestic goods. Ultimately, there are no easy solutions to this problem, as Americans in the manufacturing sector would have to take a signficant pay cut to once again make the sector competitive, and any decrease in domestic trade, even of imported goods, would likewise have a negative effect on the economy. Ultimately, a severe recession seems to be the only way for the US to correct its trade imbalance.

There has been much talk in the media of late about energy independence in the United States. Given that the US imports approximately 5 billion barrels of oil per year, and with oil averaging around $65 a barrel in 2007, this resulted in a about $320 billion contribution to our trade imbalance. Yet over the same period, the US imported approximately $2 trillion in good over the same period, and the US consumed $14.3 trillion over the course of the year. Even if the US had been independent from foreign oil in 2007, the nation would've still consumed about $140 billion more than it produced or about 3.5% of GDP, and would have still imported $480 billion more than it exported. While America's dependency on foreign energy is a problem, and will become a growing problem as energy becomes scarcer and scarcer in the coming century, the United State's dependence on foreign oil alone is not the problem. Foreign oil accounted only for 2.2% of total consumption in the US. Over the past few decades Americans have simply spent too much on cars, houses, televisions, etc. and saved too little.

In particular, the United States has spent too much on defense over the past two decades. In 2007, defense spending totalled $700 billion or 5% of total GDP, not including the war in Iraq, which has cost an estimated $800 billion since it began. Americans are in love with their military and hold it as a great source of pride. However, at the end of the day, much of the nation's military spending is purely useless. Even though the Cold War is over, America continues to purchase defense systems designed to fight a war against a major foe with a strong Air Force. As is, no nation in the world would be able to stand up to America's defense systems from 20 years ago, so why continue to invest in weaponry that will never be needed to fire a shot in anger? For instance, congress has allocated $62 billion for the F-22 fighter program. Even though there is no air force in the world that can stand up to the USAF's aging and "outdated" fleet of F-15s. Additionally, the F-22 would only be useful in a war against a major power like Russia, which would go nuclear in about 30 minutes, or China, which would turn into a very long, protracted and bloody struggle. However, these wars are not likely to come about, as they would certainly be a disaster for every country involved and the world at large. Since the end of the Cold War, the US has found itself in low-intensity conflicts against insurgencies, like the ones in Iraq and Afghanistan, fought primarily by infantry on the ground. There is no need to continue acquiring high tech fighter planes that can shoot anything out of the sky, nuclear submarines, stealth bombers and the latest guided missle cruisers for use against these opponents. While Americans may be proud of the fact that we can strike any country on the face of the earth on their home turf with little impunity, this pride is ultimately hurting America. Every year, the US invests hundreds of billions of dollars in defense systems that offer no long term return at a time, when the government needs to be thinking about fiscal responsibility and growth. Being the world's police man and pursuing interventionist policies has provided no economic benefit for America over the past two decades and never will, especially when considering the $800 billion the US has already shelled out for Iraq. These funds would be better off being directed towards projects that have economic benefit. Ultimately, the US military is there to protect the nation, but right now it is making the country less secure, not more.

While the bubble of private debt is currently bursting in America, resulting in a massive recession, there is still a far more scarier bubble growing right now, partially to help salvage the nation's banking system. In 2008, America's sovereign debt currently stands at around $10 trillion or 70% of GDP, and it continues to grow at an astounding pace. The last time the national debt reached this level was in the aftermath of World War II and the Great Depression, yet we are just coming out of a period of unparralleld prosperity. If left unchecked, it is only a matter of time before investors begin to turn away from the US and the dollar experiences a steep devaluation, creating a crisis of unimaginable proportions. Although it may be painful and politically unpopular, it's time the government stopped subsidizing taxpayers excessive spending habits and began addressing it's own wasteful and inefficient use of funds.

As Americans wake up to the fact that they are not as indestructible as they once thought, some serious questions need to be asked. Rather than pointing fingers and blaming everyone but themselves, it's time Americans took a look in the mirror. America has been living beyond its means for some time and now it's paying the price. However, more than anything else, it's time Americans got responsible.