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U. S. Federal Budget Deficit January 27, 2010

Posted by hslu in Economics, Politics.
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If you make $50,000 a year but spend $80,000 year in and year out, should you be concerned? Not to mention that you already owed $260,000 from previous spending sprees!

Well, you did say that the interest rates on your loans are very low though. It will remain low for the next year or so.

That’s what the U.S. government is doing now.


The Fall of the United States July 5, 2009

Posted by hslu in Economics.
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I believe that the United States has reached its peak on the world stage because of several reasons:

  1. US energy needs; especially the relentless demand in crude oil, come mostly from foreign countries. At current price of $70 per barrel for West Texas Intermediate, the US will fork out $450 billion a year on the crude oil import alone. This translates into about $40 billion a month. Unfortunately, this trend will continue in the foreseeable future and will not be easily reversed any time soon. The current administration is proposing to spend billions of dollar to increase its green energy supply. But the pace is painfully slow and it requires a lot of money. To put this effort in perspective: the renewal energy, less hydropower, accounts for about 2.5 percent of the current energy supply in the US.
  1. US dollar as the world reserve currency is in question. China has openly questioned the worthiness of using a single currency as the world reserve. Brazil has also privately expressed its doubt as well because Brazil has a more open capital account. Commodity exporting countries such as Russian, Canada and Australia are also concern. This issue has been brought to the fore front as IMF is scheduled to re-balance its Special Drawing Right (SDR) at the end of 2010. The Great Britain was the power house in the world and its British pound sterling used to be the dominant currency in the 19th century. It lost its world reserve status as Great Britain became a net debtor nation after World War II. The United States is facing the same fate and, in my opinion, is on a everlasting decline of its leadership position
  1. Depreciation of US dollar will lower our living standard. Import will be more expensive which is inflationary. The purchasing powder of our dollar will decrease and travel to foreign countries will be more expensive. The condo in Taiwan or China will be more expensive to buy and commodity prices such as crude oil, copper and gold will soar because they are traded in US dollar.
  1. The national debt of the United States is increasing at $3.86 billion per day since September 28, 2007 and currently stands at $11.5 trillion. This figure is rising at an ever alarming rate and could easily reach $15 trillion or higher in two years and the interest alone on this debt could reach $600 billion a year by then. The reason of the higher national debt is in the faulty assumptions of current administration’s estimate of its budget and extensive spending programs. For instance, it projected that our economy will grow at an average rate of 2.9% per year to 2019, slightly higher than the average annual growth rate of 2.8% from 1980 – 2008. This assumption is simply not realistic going forward not to mention the crushing weight of current recession. During the past 28 years, the growth in GDP was mostly financed by consumers going all out with money from home equity loans and negative savings rate. The shift in consumers’ mind set to less consumption and a higher savings rate will undoubtedly result in a slower GDP growth rate.
  1. The federal deficit shows no sign of decreasing and the United States has running out of willing partners to finance this deficit year in and year out. China is reducing its purchase of US dollar and has diversified its foreign allocation in gold and hard assets such as mineral right all over the world and commodity. This will slowly pushes up interest rates in order to attract foreign buyers which translate into higher interest payments for the US.
  1. The US is facing an even larger un-funded obligation: social security and Medicare benefits. Some estimates put the future social security benefit at $6.6 trillion and future promises beyond revenues on Medicare are $33 trillion. It is however reasonable to assume that the Congress may change the benefit in the future which will have an impact on this number.
  1. The loss of human capital. The rise of other economies in the world, for instance, India, Brazil, Russia, China and natural resource exporters, in the world has resulted in an on-going brain drain from the US to these countries.
  1. The socialization of the United States. With democrats in total control of two Chambers in the Congress and the White House, the United States will in the next four, or even worse, eight years move decisively to the left and become a socialized society. The republicans is powerless to reverse the trend because of insurmountable disadvantage in numbers: the divide in the Senator is 60/40 Democrats and 255/178 Democrats in the House of Representatives. The direct result is a less competitive and less productive nation mired in ever increasing debts. The suppressing of entrepreneurship because of mounting government regulations will further weaken US’s standing in the world and relinquish its leadership position in even more industries. Socialization of medical insurance, to be passed in one form or the other in the Congress, will eventually result in low quality service, 9 months wait on a MRI, waste of national funds, abuse of the system and higher fees in the future.
  1. The possibility of a higher inflation in a few years. Two reasons: the enormous money supply in the economy and depreciating US dollar. Another factor which can not be ruled out is that the United States will use double digit inflation to depreciate its national debt. The net result is people in the United States will be poorer compared to people in other countries because of depreciating purchasing power of the US dollar. The interest you earn on your CD and savings account less inflation will be near zero or negative.

As you can see, I am very negative on the prospect of the US economy. It is still not too late to plan for this though.

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