I know there is a portion of the economic populace out there who thinks the government needs to spend its way and stimulate its way out of this recession (see Nobel Memorial Prize in Economics Sciences-winning economist Paul Krugman).
However, I do not think it is possible at the moment.
Let’s forget the writings of John Maynard Keynes and if spending by the government would even succeed. The fact of the matter is that I do not think the United States is even in a position to do this. Below, according to the International Monetary Fund, are the countries in the world that have debt-to-GDP ratios of over 100 percent, or larger debts than the size of their economies.
Source : IMF Via Wikipedia
As we can see, other than Singapore, these are mostly really weak economies. There are four of the five PIIGS (Portugal, Italy, Ireland, Greece and Spain) and some small Caribbean nations that have been hurt by the global slowdown as it hit the tourism industry. Most of these countries are experiencing near zero growth or in a recession. In the case of Greece, we have an out and out collapse of the economy, and Japan has basically been in a 20-year recession.
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My point is, even if we should stimulate the economy, we are not in a position to do so. With a debt-to-GDP ratio near 103 percent, and headed to more than 110 percent by next year, the debt is too high to spend more. Most studies show that when your debt gets over 100 percent of GDP, your economy slows and inflation rises.
When President Franklin D. Roosevelt started his New Deal in the early 1930s and Japan began its downturn in the early 1990s, both countries had debt-to-GDP ratios of less than 30 percent. They had room to spend.
Therefore, even if you believe in Keynesian economics, the United States has betrayed the belief that you should save during bad times to have money to spend during bad times. The United States for the last 40 years has mostly run deficits and failed to save for the rainy day that has now arrived. It’s not so much that austerity works. It’s that it is forced. It’s either you cut back or default or print money and go into hyperinflation.
Right now we need tough decisions to me made. A combination of defense cuts, streamlining of entitlements (e.g., raising the retirement age) and increasing taxes must be implemented. However, both President Barack Obama and Mitt Romney, the likely Republican Presidential nominee, are failing to address any of these real problems. We will probably see the so-called fiscal cliff pushed back another year no matter who gets elected.
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The way this will end is either in stagnation, with rates staying low and little to no economic growth; mediocrity for the next 10 years; or, more likely, sometime in the next three to five years, despite all of the Federal Reserve’s efforts, interest rates will begin to spike and it will cause a crisis that will force streamlining of the economy and real change to occur. My money is on the latter. I feel that the market will force the hands of politicians, not the other way around.
What does this mean? In the long run, it means the end of the American Empire. When cuts are made, it will be the closing of dozens if not hundreds of U.S. military bases and a change in the U.S. political system. It may seem unlikely because they have been open for so long.
However, remember that at one time the “Sun Never Set on the British Empire,” with Britain controlling one-fourth of the world’s land mass. The British Empire was far more powerful and greater than the American Empire has ever been. If it can collapse, so too can the United States.
The only way to really get out of this mess is by making tough decisions, raising taxes, cutting entitlements, cutting spending and ending the empire. The question is, does the United States have politicians with guts enough to make these changes or will the market force the government’s hand?
About the Author: David Skarica David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.
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