Home > Deficit > The Biggest Risk to U.S. Recovery is the U.S. Government

The Biggest Risk to U.S. Recovery is the U.S. Government

May 18th, 2010
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05.18.2010
08-23-2012 Replaced moved or removed link with original PDF
10-10-2014 Replaced moved or removed link with original PDF

The Biggest Risk to U.S. Recovery is the U.S. Government

follow up report from Economic Crack. Risk to The U.S. Economy

original article written by Net Advisor

WASHINGTON DC. What is not getting enough attention is the risk that all this deficit spending and stimulus (really more deficit spending) will have on the U.S. economy. It is possible that the U.S. economy can recover for a short period of time, maybe mid to late 2012 or so, before falling to a potentially worse level than we had in 2008.

Part of the time-line is due to that the Treasury is financing much of its new deficit short term (2 years). At that time, the debt will have to be refinanced, and the government better hope interest rates don’t go up by then, because then the Treasury will have to finance at a higher interest cost. This is a lot like the government signing up for a low rate teaser mortgage loan, only to realize later when interest rates go higher, they can’t finance.

The potential decline or “double dip” recession is likely to be long and prolonged in my view. I’ve held this view, and have publicly stated concerns repeatedly in late (Oct/Nov) 2007 to 2008 and to date (post 1, post 2, post 3, post 4, post 5, post 6, post 7, post 8, post 9, post 10).

[Note: The aforementioned post numbers are not in order by date as the original host (Yahoo) does not print details on the exact date of the post. They only update how long ago by day, week, month, and then year of when the original post was published. Thus, a post written on a particular date in October 2007, won’t show “3 years ago” until whatever exact October 2007 date that post was written. I’ve kept some records, and later began inserting exact dates on some subjects. Linked posts (#1-10 above) were written from 2007-2008. There are many more, just pulled random 10 of them from my archives.]

Others have been catching on to future U.S. economic issues.
The International Monetary Fund (IMF), stated in a report last month (April 21, 2010) that the United States is making a V-Shape recovery, but they also stated that the ‘medium-term’ fiscal outlook is “daunting,” forecasting that the (U.S.) budget deficit will be around 8 percent of GDP (Gross Domestic Product) in 2020, and federal debt will exceed 100 percent of GDP, up from its current level of 85 percent (Source: Bloomberg-Businessweek, 05-16-2010).

The U.S. federal debt will exceed 100% of GDP, up from its current level of 85% by 2020.

— Source: Bloomberg-Businessweek

However, also according to the IMF as reported by Marketwatch:

“Debt to GDP ratios in the world’s advanced economies will top 100% in 2014, 35 percentage points higher than where they stood before the financial crisis…”

What is Gross Domestic Product (GDP)?
Basically GDP is “the the output of goods and services produced by labor and property located in the United States.” (Source: U.S. Dept of Commerce, Bureau of Economic Analysis). The GDP of the United States for 2009 has been estimated at $14.26 Trillion, down from $14.61 Trillion in 2008. (Source: CIA World Fact Book, Economy: United States)

What is also disconcerting is that the U.S. reportedly has 1.2 out of 10 people (12% of the population) below the poverty line.

— Source: CIA World Fact Book, Economy: United States, last report date 2004

Other countries have a lower poverty rate such as China (2.08%, in 2007) and even Taiwan (1.08%, 2008 estimate). And one may start to wonder why the U.S. is increasing its risk (economically) as if it was a 3rd world nation (Source: CIA World fact Book, Poverty Report).

Billionaire Investor Warren Buffett cited concern for future value of international (including) U.S. currencies due to the massive stimulus (debt borrowing) that the modern world has been doing, except China. He also said the U.S. is not likely to default as longs as we can borrow and print out own currency. We just need to make sure China, Japan, and OPEC nations holding our debt is ready to give (or loan) the U.S. more money to support its out of control budget deficits that Washington continues to create at record pace.

Reporting journalist Alistair Barr at MarketWatch is one of a few people I have found who seems to understand the risks the U.S. government is creating for them self. In her 05-14-2010 article, she supports the same theory that I have been developing since 2007. I had been tracking news articles and government data and noticed that most of the articles in 2007-2008 were covered under my banking and finance folder.

Then in 2009-2010 the amount of articles located in my government folder has outpaced the banking and finance folder. Without going into the 1000′s of documents collected, and after reading the headlines for articles in the folders, I saw what looked like a transition of debt and issues from the corporate level being moved to the government’s balance sheet.

As simple as this collection of news and reports seems to be, it also mirrors comments by Mr. Daniel Arbess, manager of Xerion Investment Strategy at Perella Weinberg Partners who said:

“The problem of the western world is that we have too much debt…Rather than reducing our debt, we’ve been moving it from one balance sheet to another…All we’re doing is shifting chairs on the deck of the Titanic.”

— Source: Marketwatch (PDF) May 14, 2010

U.S. government won’t count its true financial obligations or include its own off-balance sheet accounting blamed corporations such as Lehman Brothers, Citigroup, Merrill Lynch, Enron, and many others for doing the exact same thing the government is doing.

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