CEO Q Magazine
Special Economic Report
The U.S. Economic Crisis and Economic Recovery Plans
The real US debt is
much larger than announced.
CEO Q >What about the recent increase in investors’ confidence?
Med Jones >Consumer, business or government confidence is fed by media cheerleading rather than fundamentals. Investors’ sentiments are volatile. Just watch and see the extreme swings in the stock markets.
CEO Q >What is your economic outlook for the next 2 to 3 years?
Med Jones >After the initial deflation due to high unemployment, the reduction in demand, and the continued depression of the real estate prices, we will more likely experience stagflation or higher inflation with no real economic growth due to lower dollar exchange rate causing higher prices of imported raw materials and foreign products. Most growth numbers will be driven by government debt-spending and inflation. The US economy will most likely suffer like the Japanese economy after their financial crisis.
In the next decade, the real challenge for the US and other countries is to find a way to grow without excessive credit and leverage.
CEO Q >What is your economic outlook for the next 3 to 5 years?
Med Jones >Unfortunately, the world could experience another crisis caused by accumulated debt, social security deﬁcit, the aging baby boomers and misdirection of bailout money to stock market and other risky assets.
Countries that have high Debt-to-GDP ratios and follow the same US economic policies will be hurt the most. Japan and some EU countries in particular Italy, Spain and Latvia could also suffer a lot.
Economic growth neither comes from bailing out failing businesses, nor from state-led infrastructure investments. It comes from technological innovations, hard work, and gains in productivity; these things come from the private sector and the entrepreneurs rather than state bureaucrats and private interest lobbies.
The current financial crisis, the bailout Ponzi scheme, the continued deficit spending, the misallocated stimulus funds, and the ballooning of the real uncalculated debt-to-GDP ratio of about 680% as opposed to the official number of 87%, could pose the greatest risk to the US economy.
CEO Q >Are you saying the government is lying and that the real debt-to GDP number is 680%?
Med Jones >This information is not new, most economists know about these numbers. It is just that the government uses different accounting standards for its agencies to make them look better.
The 11 trillion dollar debt figure does not take into consideration the unfunded 57 trillion dollar of entitlement liabilities for Medicare, Medicaid, Social Security and the Federal government and military pension funds, and that is how you arrive at the 680% figure. In addition to the federal debt, the individual states budget problems and debts are all over the news
The government spends 25% of its budget on these benefits. Up until 2007 the government collected more taxes than it paid. It is estimated that Social Security funds will turn into negative cash flow by 2015 or even earlier. The rate of workers-to-beneficiary has gone down from about 17 to 1 to 3 to1. People are living longer, birth rates are declining, and anti-immigration sentiments are increasing. These will lead to the reduction in social security or increasing of payroll taxes, reducing business profits and increasing inflation. The EU and Japan are facing even more troubles with their ageing demographics.
Regardless of the timing of these unfunded obligations, if you want to invest in any entity (a person, a company or a government), you have to look at the debt-to-equity ratio, revenues and cash flow to see the solvency and ability of the entity to pay its debt and invest in growth. These indicators are getting worse across the board.
The exact timing, the depth and the speed of the next crisis and the recovery from it depend on several factors. Current policies will delay the crisis but we will have to pay an even higher price later.
One of the main reasons the US has been able to prevent the economy from collapsing, despite all the bad policies and massive currency printing, is because the dollar is the de-facto standard for international trade and the largest international currency reserve.
The US is running on the goodwill of previous decades, once that is challenged or the dollar is replaced with a basket of international currencies, the US economy could crash, especially if the government does not stop spending or go back to healthy production-based growth and investments.
CEO Q >If the risk is so high, then how do you explain the demand for US government bonds and treasuries?
Med Jones >The logic of most investors is that in a global economic crisis, US treasuries and currency are a safer bet than other investments. Now, we all know that the US government has a straight debt obligation which is about $11 trillion. But that’s nothing compared to the $57 trillion Social Security and Medicare entitlement liabilities. If we add the entitlement "debts" to the Fed’s Z.1 definition of debt, then US Debt-To-GDP calculation becomes 680%. When social security drains its trust fund around 2015, how will they make up the shortfall of money?
The US economy runs on credit. Credit is based on trust. The US government is betting that regardless of the increase in debt numbers, the national and global creditors and investors will still trust us. This is the exact same mindset that led to the current financial crisis.
They ignored the warning and suddenly they woke up to a collapsing industry that is dragging along the entire economy.
In my mind the next crisis is inevitable. The time frame is subject to government policies and the resiliency of American industries. The increasing debt is the main driving force behind the next socioeconomic and political shock that we will experience. Connected to other forces, like ballooning investment and trade deﬁcits, and globally traded speculative asset instruments, the economy will not withstand a chance.
CEO Q> What could hinder the recovery of the U.S. economy?
Med Jones> There are several possible scenarios. The complex governmental (and banking) accounting rules hide the fact that many of the current investment papers (risky debt and derivatives) are overvalued and risky. This is very dangerous. National and global investors will sooner or later catch up with the fact that their investments are highly inflated and riskier than they thought. If reforms are not taken, the result could be the serious erosion of investors’ confidence. The confidence in U.S. economic policies is the single most important factor for recovery. The loss of confidence in the U.S. economy could lead to the significant loss of the dollar value and the migration of capital from the U.S. financial markets to alternative international investment destinations.
The best way to restart the economic engine is to invest
in innovation development and enterprise creation.
CEO Q> What are the risks to the recovery?
Med Jones> There are several risks including, but not limited to:
The combination of some of the counterproductive policies and bad news can further damage investors’ confidence, thus sending the economy in a downward spiral and resulting in another "great depression". Fortunately, the administration does have the tools to mitigate those risks and it is not too late to implement the economic reforms needed.
Forming North American Union
CEO Q> What is the best case scenario?
Med Jones> There are several positive forces:
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