This weekend, I had a strange dream.
I was many years older than I am today. My graying beard was white; my hair, mostly gone. I even had two grandchildren — a 12-year-old girl and a 10-year old boy.
We were at home, and it seemed to be the holidays. I was sitting on the floor, trying to answer the children’s inquisitive questions. But there were too many people around and they were very loud.
So the remaining details of my dream are fuzzy. But after I awoke, I daydreamed to fill in the blanks …
WHY DID YOU DO THIS TO US?
My granddaughter of the future was especially gifted and demanding.
She wanted to know why the world had gone downhill so quickly. She insisted on hearing why all the adults of our time had done absolutely nothing to stop it.
“Why did you do this to us?†she asked. “Didn’t you guys realize that what you were doing was wrong? Didn’t you realize it would lead to big trouble someday? How could you have been so dumb?â€
She pouted. Then she continued, proudly displaying her knowledge of history:
“When Mount Vesuvius erupted in 79 AD, all the people of Pompeii died. But how could they have known? Could they blame the emperor in Rome? Of course not! The same for Krakatoa in 1883. It exploded. Then came a series of tidal waves. Thousands of people died. But it was no one’s fault. They had no way of knowing.â€
As I listened solemnly, she lifted her finger and began wagging it at me — and at any other adult in the nearby vicinity, declaring:
“But you guys were different. You knew you were screwing things up for us kids. All kinds of smart people told you that. Those smart people were making speeches all over the place. They were writing about it in the newspapers. They even sent their reports to all the presidents of all the big countries. And what did you guys do? Did you listen to them? No! You just kept on doing all the wrong things they told you to stop doing.â€
The room suddenly turned silent, as all the boisterous adults in the room stopped and turned, listening intently to her every word.
In response, she lowered her voice to a whisper. “They warned you. They warned you once. They warned you twice. They warned you three times. But you were all asleep. You were the masters of your house, but you let it burn down.â€
DIRE WARNING NUMBER ONE, SEPTEMBER 17, 2003.
The place was the National Press Club in Washington; the occasion, a monumental, landmark speech by David M. Walker, the Director of the U.S. General Accounting Office (GAO) and Comptroller General of the United States.
Its title: “Truth and Transparency: The Federal Government’s Financial Condition and Fiscal Outlook.â€
His words:
“Importantly, while we are starting off in a financial hole we don’t really have a very good picture of how deep it is.
“Specifically, there are a number of very significant items that are not currently included as liabilities in the federal government’s financial statements; for example, several trillion dollars in non-marketable government securities in so-called ‘Trust Funds.’
“In the case of the Social Security and Medicare Trust Funds, the federal government took in taxpayer money, spent it on other items and replaced it with an IOU. Given this fact, why aren’t the amounts attributed to such activities shown as a ‘liability’ of the U.S. Government? At the present time, they are not! Does this make sense, especially when the government continues to tell Social Security and Medicare beneficiaries that they can count on the bonds in these ‘Trust Funds’? …
“The current U.S. government liability figures also do not adequately consider veterans’ health care benefit costs provided through the Department of Veteran’s Affairs, nor do they include the difference between future promised and funded benefits in connection with the Social Security and Medicare programs.
“These additional amounts total tens of trillions of dollars in discounted present value terms. Stated differently, they are likely to exceed $100,000 in additional burden for every man, woman and child in America today, and these amounts are growing every day … The burden of paying for these is not a very nice present for a child born today!
“…[I]n my view, the federal government’s current financial statements and annual reports do not give policymakers and the American people an adequate picture of our government’s overall performance and true financial condition. This is a serious issue.
“As Thomas Jefferson once noted, an informed electorate is the basis for a sound democracy. But how can the American people and their elected officials make sound decisions if they aren’t given timely, accurate and useful information?
“The recent accountability failures in the private sector serve to re-enforce the importance of proper accounting and reporting practices. It is critically important that such failures not be allowed to occur in the public sector …
“In this regard, earlier this year GAO was unable to express an opinion as to whether the U.S. Government’s consolidated financial statements were fairly stated for a sixth consecutive year. I can assure you that the U.S. Government will not receive an opinion on its financial statements from the GAO until it earns one!
“… It’s true that deficits are understandable and sometimes necessary in times of recession and/or war. However, while it may not seem like it to those who are out of work or underemployed, we have not been in a recession for almost two years. In addition, the current and projected deficits far exceed the costs associated with Iraq, the global war against terrorism and any incremental homeland security costs.
“The bottom line is, there is little question that deficits do matter, especially if they are large, structural and recurring in nature. In addition, our projected budget deficits are not ‘manageable’ without significant changes in ‘status quo’ programs, policies, processes and operations …
“In less than 10 years, due primarily to the retirement of the baby boom generation, the United States will be hit by a huge demographic tidal wave that is not expected to ever recede! This is unprecedented in the history of our nation …
“We cannot simply grow our way out of this problem … The ultimate alternatives to definitive and timely action are not only unattractive, they are arguably infeasible.
“Specifically, raising taxes to levels far in excess of what the American people have ever supported before, cutting total federal spending by unthinkable amounts, or further mortgaging the future of our children and grandchildren to an extent that our economy, our competitive posture and the quality of life for Americans would be seriously threatened …
“While many members of Congress and other key policymakers and opinion leaders agree that we have a major fiscal challenge that must be dealt with, many do not want to talk about it publicly. Many believe that we will ultimately act to address this imbalance, but when will we start? Other nations have already started to address their long-range imbalances. When will we?â€
This first warning was largely ignored. It was posted on the GAO’s website, at www.gao.gov. It was broadcast on C-SPAN. But beyond that, no one talked about it. There were no editorials in the Wall Street Journal. No op-ed pieces in the New York Times.
DIRE WARNING NUMBER TWO, JANUARY 4, 2004
The occasion — a joint session of the American Economic Foundation (AEF) and the North American Economics and Finance Association (NEAFA). The presenters — Robert E. Rubin, former secretary of the Treasury; Peter R. Orszag, senior fellow at Brookings Institution; and Allen Sinai, Chief Global Economist at Decision Economics, Inc.
Their topic: “Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray.†Their own words:
“The U.S. federal budget is on an unsustainable path. In the absence of significant policy changes, federal government deficits are expected to total around $5 trillion over the next decade. Such deficits will cause U.S. government debt, relative to GDP, to rise significantly.
“Thereafter, as the baby boomers increasingly reach retirement age and claim Social Security and Medicare benefits, government deficits and debt are likely to grow even more sharply. The scale of the nation’s projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur …
“The adverse consequences of sustained large budget deficits may well be far larger and occur more suddenly than traditional analysis suggests, however. Substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad. The unfavorable dynamic effects that could ensue are largely if not entirely excluded from the conventional analysis of budget deficits.
“This omission is understandable and appropriate in the context of deficits that are small and temporary; it is increasingly untenable, however, in an environment with deficits that are large and permanent.
“Substantial ongoing deficits may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy:
“ * As traders, investors, and creditors become increasingly concerned that the government would resort to high inflation to reduce the real value of government debt or that a fiscal deadlock with unpredictable consequences would arise, investor confidence may be severely undermined;
“ * The fiscal and current account imbalances may also cause a loss of confidence among participants in foreign exchange markets and in international credit markets, as participants in those markets become alarmed not only by the ongoing budget deficits but also by related large current account deficits;
“ * The loss of investor and creditor confidence, both at home and abroad, may cause investors and creditors to reallocate funds away from dollar-based investments, causing a depreciation of the exchange rate, and to demand sharply higher interest rates on U.S. government debt;
“ * The increase of interest rates, depreciation of the exchange rate, and decline in confidence can reduce stock prices and household wealth, raise the costs of financing to business, and reduce private-sector domestic spending;
“ * The disruptions to financial markets may impede the intermediation between lenders and borrowers that is vital to modern economies, as long-maturity credit markets witness potentially substantial increases in interest rates and become relatively illiquid, and the reduction in asset prices adversely affects the balance sheets of banks and other financial intermediaries;
“ * The inability of the federal government to restore fiscal balance may directly reduce business and consumer confidence, as the view of the ongoing deficits as a symbol of the nation’s inability to address its economic problems permeates society, and the reduction in confidence can discourage investment and real economic activity;
“ * These various effects can feed on each other to create a mutually reinforcing cycle; for example, increased interest rates and diminished economic activity may further worsen the fiscal imbalance, which can then cause a further loss of confidence and potentially spark another round of negative feedback effects.
“Although it is impossible to know at what point market expectations about the nation’s large projected fiscal imbalance could trigger these types of dynamics, the harmful impacts on the economy, once these effects were in motion, would substantially magnify the costs associated with any given underlying budget deficit and depress economic activity much more than the conventional analysis would suggest …â€
This warning, like the GAO’s warning in September, was also posted on the Web (at http://www.brook.edu/views/papers/orszag/20040105.htm).
But unlike the previous warning, it WAS picked up by the press, in an op-ed column in the New York Times, by Paul Krugman, on January 6, entitled “Rubin Gets Shrill.â€
Krugman writes: “Argentina retained the confidence of international investors almost to the end of the 1990’s. Analysts shrugged off its large budget and trade deficits; business-friendly, free-market policies would, they insisted, allow the country to grow out of all that. But when confidence collapsed, that optimism proved foolish. Argentina, once a showpiece for the new world order, quickly became a byword for economic catastrophe.
“So what? Those of us who have suggested that the irresponsibility of recent American policy may produce a similar disaster have been dismissed as shrill, even hysterical. (Hey, the market’s up, isn’t it?)
“But few would describe Robert Rubin, the legendary former Treasury secretary, as hysterical: His ability to stay calm in the face of crises, and reassure the markets, was his greatest asset. And Mr. Rubin has formally joined the coalition of the shrill …
“The point made by Mr. Rubin … is that the traditional immunity of advanced countries like America to third-world-style financial crises isn’t a birthright.
“Financial markets give us the benefit of the doubt only because they believe in our political maturity – in the willingness of our leaders to do what is necessary to rein in deficits, paying a political cost if necessary. And in the past that belief has been justified. Even Ronald Reagan raised taxes when the budget deficit soared …
“If this kind of fecklessness goes on, investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won’t be pretty.â€
DIRE WARNING NUMBER THREE, JANUARY 7, 2004
Until January 6, some might accuse the authors of these dire warnings of political partisanship. Although they profess neutrality, this IS, after all, a political election year. So almost everything and anything that comes out of the mouths of any opinion-maker in this environment is naturally suspect.
But no one, not even in his wildest of dreams could raise such questions regarding the International Monetary Fund — the IMF.
The IMF is not partisan. And even if it were, it would tend to be partisan in FAVOR of the United States, its government, and its current political leaders — not against them.
But the IMF’s words and data confirm and reconfirm the earlier warnings, almost verbatim:
“U.S. government finances have experienced a remarkable turnaround in recent years. Within only a few years, hard-won gains of the previous decade have been lost and, instead of budget surpluses, deficits are again projected as far as the eye can see. The deterioration has not been restricted to the federal budget but has also taken place at the state and local government levels. As a result, the U.S. general government deficit is now among the highest in the industrialized world …
“[T]he return to large deficits raises two interrelated concerns. First, with budget projections showing large federal fiscal deficits over the next decade, the recent emphasis on cutting taxes, boosting defense and security outlays, and spurring an economic recovery may come at the eventual cost of upward pressure on interest rates, a crowding out of private investment, and an erosion of longer-term U.S. productivity growth.
“Second, the evaporation of fiscal surpluses has left the budget even less well prepared to cope with the retirement of the baby boom generation, which will begin later this decade and place massive pressure on the Social Security and Medicare systems. Without the cushion provided by earlier surpluses, there is less time to address these programs’ underlying insolvency before government deficits and debt begin to increase unsustainably …â€
Again, the information was picked up by the media, this time appearing on the FRONT page of the New York Times of January 8, under the glaring headline “IMF SAYS U.S. DEBT A THREAT TO THE WORLD.â€
No one could ignore the warnings any more. No one could say “they didn’t know.â€
CAKE OR CRUMBS?
In my dream, I had no excuse to give my grandchildren. We sacrificed their future for our present. We got fat and never wanted to diet. We were indeed masters of our house, but we were fast asleep.
We thought debt was wealth. But we were wrong.
We thought we could defy the laws of nature and get away with it. We were wrong.
Even the market tried to teach us a lesson, slapping us down in 2000, 2001 and 2002. But we thought the market was “just kidding,†and we were wrong again.
We thought we could have our cake and eat it, too. But in the end, all we got was crumbs.
Like December of 2003, when each of the 50 states in the Union produced an average total of just 20 new jobs. Not thousands! Not hundreds! Just twenty.
“I’m sorry.†I said to my granddaughter at last, with as much empathy as I possibly could muster.
Her response was not exactly heartwarming: “I’ll never forgive you for this. Not for the rest of my life.â€
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
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