Friday, October 31, 2008

The Amero and The Economist According to Scott

I was simply going to add a comment to Ben's entries, but I decided there was a bit too much for a simple comment. First off, let me say that Ben is really surprising me with the depth of his research into these blog entries and the skill of his argumentation. I'm glad he's on board with us. But I have one pressing question for him: why in the world are you an accountant? Despite this formidable performance, however, I will have to disagree. That's some temerity on my part, isn't it? Would you go up against an article like that? Let me begin by noting that The Economist is a right-leaning British magazine, and a fine publication at that, but that is a far different thing from having a right-leaning perspective here in the States. I think The Economist is about as conservative as Bill Clinton, to put it in better perspective. It is not communist, but it is far from lasseiz-fair. It is consistently greener, anti-gun, and pro-government interventionism than most any American conservative I can think of. As I recall, it called McCain a fine candidate and the best choice among the contestants in the Republican primary only a few months ago. That should serve to strike any American conservative as a blow to The Economists supposedly "right-leaning" credentials, as many on the right consider McCain a RINO at best or an outright traitor to the cause at worst. I know of almost no conservatives here who are happy with their candidate. Like the liberal American media, it doesn't surprise me that The Economist treats McCain as the best Republican around, but given its druthers, it chooses an Obama over him. Concerning the Amero: It is true that the US dollar is doomed. Let's do a few back-of-the-envelope calculations, shall we? First, the US GDP is about $14 trillion, and on budget debt is about $10 trillion. Currently, the fraction of GDP consumed by government (govt spending) is about 20%, putting the federal budget at about $2.8 trillion, give or take. The budget deficit over the last few years has been about $300 billion /yr (and rising), giving tax revenues at about $2.5 trillion. None of the deficit counts, of course, social security and medicare, as it is "off the book" debt, since the money has not yet been spent, even though it is just as much an obligation as true debt. (Note: I'm doing this off the top of my head. I've been searching for solid numbers, but they seem to be scattered about the internet so randomly I'm having a hard time locating what I need. If anybody has good links, please send them to me!) Now, that is the current status of things. The important thing determining bankruptcy is loss of cash flow. Presently, interest rates are low. Extremely low. Downright suppressed. Which is one of the reasons the US govt has taken on new debt the past few years with little reservation. The interest rate on the debt is in the ballpark of 3% or so. 3% of $10 trillion is about $300 billion, or about 10% of federal outlays, which we had at $2.8 trillion. This jibes well with the 8% figure I just saw on the 2006 1040 Tax schedule, so I must be doing this right! This is ok, actually. Not that bad. But we need to remember a few things:
  • We just had a massive commitment of new funds towards the Wall Street bailout.
  • Tax revenues are going to take it in the crotch over the next few years, as companies take enormous losses. No income, no income tax. It doesn't matter if the Democrats raise rates. 90% of $0 is $0. Ask Ben.
  • Interest rates are insanely low and likely to rise with the ballooning deficit and falling dollar.
Let's be conservative and say the rate doubles - to a measly 6%. This extremely low-ball, virtually certain event will raise the interest to 20% of the federal budget. Yes 20%. Now, with falling tax receipts, the government will be forced to take on, yes, more debt to pay its bills. GDP might grow, but not by much in the next year or two as the recession depresses growth. If federal outlays stay the same (they will not, they will grow - remember: bailout) and tax receipts fall by, say 20%, you are looking at $2 trillion in revenues, a $3 trillion budget (remember the increase in interest rates) and a guaranteed $1 trillion deficit. Increasing the total budget deficit by 10% in a single year. And we're looking at several of these years going forward. I used an interest rate of 6%. In 1990 rates on treasuries were at 8%, double today's 4%. In 1982, they were about twice that. That's what we're looking at. Bare minimum, the budget deficit increases at 10% per year for 2-3 years. This is unsustainable. At 6% interest, this looks like 25% of tax revenues in no short order. At best, GDP grows at 4% per year. We are not going to "grow our way out of this." This is a best case scenario. I think it will be much, much worse. As deficits build up and interest rates rise, the effect snowballs on itself quite quickly, as you can see. It doesn't take much when deficits are this large coupled with interest rates this low and a federal budget this large a fraction of GDP. That's really the key here: the relationship between these three numbers. I expect interest rates in the low teens within 5-6 years. I expect the dollar not to last much longer as a respected currency, if at all. But notice that this does not happen "by next February." This schedule is far and away to fast for a dollar collapse. Secondly, do not expect rapid unification of our governments. If anything, I expect the opposite. In his comparison to the EU, Ben fails to call attention to the repeated rejection of a EU constitution in multiple national referendums across the continent. The fact is, people are tribal creatures. They don't like coming together. The great empires of history were consolidated through military conquest, not mutual consent. The EU is an aberration, not the norm, and certainly not a trend. In fact, many trends point to a dissolution of the EU. Note the grumbling over the Euro in Italy and Poland, and the refusal of the Brits to give up their Pound or the Swiss their Franc. If an American Union and the Amero is to be a reality, it is far more likely to be realized through force of arms, not treaty. Furthermore, no unification is likely during recession. With unemployment increasing, wage competition will begin in earnest, and that does not bode well for the perception of foreigners. Bad times tend to touch off rashes of xenophobia. Witness mass deportation of Mexicans in the 1930's. If anything, this is going to create social fissures, not harmony. Any attempt by the Congress to "pull us all together" is likely to be met with a gallows set up on the steps of the capitol building. Americans are increasingly passive towards government, but they are not yet the "sheeple" that populate Europe. They would not tolerate such a move by Washington. My prediction would be quite the opposite. I see a rejection of the wave of "globalization" over the next quarter to half century. I see increasing social fissures and increasing tribalism as the government grows more powerful, more intrusive, and has a larger share in the outcomes of people's lives and endeavors. We are simply too different to tolerate a larger government. We do not want to live the same way. I see violence, civil unrest, and the distinct possibility of the "parting of ways" of certain demographics. I think it might not take much for a state like California to part company with the rest of us, getting a "good riddance" from the rest of the union, if worst came to worst. But that, of course, is an extreme case. What is more certain is this: the Federal Government is likely to go bankrupt, either honestly through outright default, or dishonestly through massive inflation. The economy will be awful, government will grow, and civil unrest is likely. North American unification is out of the question. We will hate one another too much, squabbling amongst ourselves over the ruins of our once great nation to invite anyone else into the family. Not that anyone would want to join us. The next twenty years do not look good for America's standing in the world. We will slip from superpower status, and we will have to answer a lot of very hard questions at a time when expectations are far detached from reality. Better to adjust our expectations early.

1 comment:

  1. Excellent points, Scott. I have much to learn of your knowledge of economics. Why am I an accountant? Because it pays. If I could make money blogging or think-tanking, I would do it in a heartbeat.