On Thursday November 26th, Dubai, a state of the United Arab Emirates, proposed delay of payment on $59 billion of debt it has accrued raising worldwide fears it could become the largest government to default on such payments in history. Like the United States and much of the world, Dubai spent at a frenzied pace during the real estate and economic boom years.
In the early 2000’s Dubai became something of a paradise playground for celebrities and the uber wealthy from around the world as the government spent big to bring in tourism and fashion itself a must stop destination. With money pouring in, Dubai established Dubai World, a holding company that further invested money into real estate ventures around the globe, including inside the United States. Dubai also became a place of excess, with millions spent to build artificial islands and wondrous attractions, it also became a hub for the world underground drug and sex trades.
With the global recession and collapse of real estate markets, Dubai’s announcement signaled it could face collapse without intervention. Dubai proposed a six month freeze of payments and world markets responded negatively. Seeking help from Abu Dhabi and others, Dubai World now faces restructuring and a future that will undoubtedly be less profitable than its past.
At $58 Billion, Dubai’s debt problems seem almost quaint in comparison to the United States; leaving me wondering about our own future and potential for collapse. At $12 Trillion and growing, our nation’s debt is astronomical and equates to $110,819 per worker. Considering the entire GDP of our nation stood at $14 Trillion plus in 2008. Repayment is almost implausible. The problem is only confounded by looking further into the numbers.
The United States carries an enormous hidden debt in what are called unfounded liabilities. These are Medicare, Medicaid, Social Security and other Congressional spending promises. This number is not factored into the astronomical national debt number because it is money we will owe, rather than money we already do.
Our unfunded liabilities are promises made by the government to provide money to people and programs. This is money we don’t have. The promises were made with the idea that in the future, the Congress would raise the funds necessary to provide. Just as you buy a home expecting to have a job over the life of a mortgage, Congress assumed it would raise money to keep up with demand. If these programs were in fact a house, our government would be facing the prospect of not only paying for the house with money it doesn’t have, but also furnishing, heating, cooling, and maintaining the structure with all the necessary spending to make it livable.
These programs, like a home, are used as shelter for the American people. Millions expect the government to take care of their medical bills through Medicaid. All American’s now make long-term life decisions expecting Social Security, Medicare and now a Prescription Drug benefit to be there. Just as children expect to live comfortably in their parents home, the American people expect government to provide in some small way. Every working American has made payments to these programs without the luxury of choosing. Every employer has made payments with good faith that the government will not simply destroy these entitlements and instead manage them soundly. They have instead been run into bankruptcy.
To put it as plainly as possible, Government does not have the money to pay for these entitlements. Worse, government cannot pay for its own annual budget and in addition to these future payments, has accrued an enormous amount of debt for things it wanted or needed immediately. If you look at the numbers, this is not the case of a family buying a TV when they cannot pay for the groceries, the house, the car and the electricity. It is far worse.
The level of debt both currently held and planned to be held, is so enormous, it is almost unfathomable in personal terms. According to the debt clock, each citizen’s share of the debt is $39,125 and growing every second. Each citizen’s share of the GDP is $41,934. To pay off the debt at this very moment, without interest, it would take 93% of all earnings in America paid to the government. This is only confounded by the fact that each WORKING citizen’s share is actually $110,844 while their share of the GDP is $93,395. The problem is, we don’t have enough people actually working to raise money in order to be taxed at OVER 100% to pay our debt off.
Worse still, the amount of private debt held by citizens works out to $54,177. Taxing all Americans at 93% leaves no money to live on, let alone pay down the debt that they personally owe. All of this should be enough to make you start thinking that what happened in Dubai might not be far off for us. The United States cannot pay for what it owes.
What makes our situation almost entirely different and far more horrific than Dubai is the amount of money owed in those unfunded liabilities. Private and public debt added together, each American is operating at about -$93,302. Our individual share of the unfunded liabilities puts us further in the hole owing an addition $345,162 per person. The amount of wealth needed to be generated to pay back our debt, fund all of the programs currently operating our government and then fund programs already promised by the government is astronomical. Just imagine what another major hurricane or a terrorist attack or a major war would do to our economy.
So far, every solution by the government has involved spending more money and printing more money. This has resulted in further losses of jobs and the devaluation of the dollar. Those two outcomes only further our nation’s difficulties. A weak dollar means the purchasing power for citizens and holders of American currency cannot put back into the system the same wealth that has been taken out. Meanwhile, the loss of jobs means there are less people producing, less people paying taxes in, more people taking government money out, and even less money going to buy goods and services that would result in new wealth creation or the creation of new jobs.
The sobering reality is that the government must tax more individuals in order to pay for its programs but it cannot tax people enough to actually pay for what it is spending or has promised to spend. Cost cutting will not result in easing our debt, let alone revive the dollar or fund the programs already promised by the government. This doesn’t mean cost cutting should not be the very first thing adapted, it should. The problem is that if we froze all new spending and began taking away from the entitlement programs and cut all non-essential programs, we would still be unable to raise enough revenue, even with astronomical new taxes, to fund what is left.
We have all heard that government spending is unsustainable. It isn’t just unsustainable, it is impossible. We simply have no means available in the foreseeable future to avoid financial collapse. Sooner or later the world will simply stop accepting the money we are printing. Nations like China know they will not continue lending us credit forever and at some point will simply turn the spending spigot off and start demanding we repay.
Over the last few decades China has done almost the opposite of our nation. They took the money we gave them and began purchasing massive quantities of resources that had value. Steel, copper, magnesium, palladium, zinc, you name it. They now sit upon massive reserves of resources that are actually worth something. The United States printed money and stopped producing the raw materials China was buying at any price.
If you want to really understand the trade deficit, think of it this way. We keep buying from China, nearly everything we consume (especially those things of little real value) while they buy very little from us. Instead of purchasing from the United States, China takes the money we pay them and purchases things of value from countries who hate us. They then loan us back the money we used to purchase things from them, so we can purchase more things of little value and oil which also comes from people who hate us . This is our trade deficit and it is the reason Americans are out of work and will be the reason we eventually have nothing to pay China with.
Finally, with all of this in mind, each American actually owes even more money because they are on the hook for state and local government spending, each of which are at or near a billion dollars and follow the same trends of mismanagement, waste and trade deficit as the federal government. Taxpayers must pay back their own debt, their local governments debt, their states debt and the federal governments debt all while making less money from the job they have or worse, being laid off and collecting unemployment money that keeps adding to the debt they are paying off.
Our country needs to generate more and tax more to pay down the debt. It also needs to promise less and provide less. Without generating massive new wealth, taxation would strain the American citizen even further, leading to more bankruptcy, more foreclosures, a lessoning of the standard of living, and a decrease in the incentive to work. Worse, new taxation on the few who have wealth and on business both large and small, will lead to the loss of more jobs and move us further away from generating new wealth.
The reality is that, like it or not, Americans have to start understanding that they must soon give up government programs and begin paying more of their income in taxes while their employers pay less. The working class must begin working more for less money in order to produce goods sellable to the rest of the world in order to generate money so they can employ more people in order to pay off the nation’s debt and avoid national catastrophe. They then need to sit down and come up with a good idea for a product to sell the world or our nation will be squeezed by the world into oblivion.
Any politician, Republican or Democrat, who tells you otherwise is lying. Taxation must go up, wages must go down, services must be eradicated and innovation must occur all in a very short amount of time or we face collapse. The last remaining ounces of security we had in the bowels of the Treasury were robbed by George W. Bush, Barack Obama and the Congress from late 2008 through early 2009. This money was given, unrestricted, to massive financial institutions who took the money and invested it in Chinese banks, golden parachutes and who knows what else.
Every action taken by politicians has actually made the situation worse and handed more money to China and resulted in more job loss. Dubai will ultimately be fine. It will find other Arab investors and restructure itself. The United States has no one to bail us out. We have only two other implausible alternatives. One China simply forgives massive quantities of our debt or we refuse to pay and enter into War. The first won’t happen and the second would cost untold lives and could also lead to our destruction.
There is only one way to lose weight, you have to eat less and work out. Likewise there is only one way to pay off debt, spend less and make more money. Politicians are selling snake oil and infomercial diet pills to an American people unwilling to deal with reality… We have no money and face financial ruin, welcome to reality.