IS A TRILLION DOLLAR DEFICIT SERIOUS?
How much is a trillion? Think of 1,000 square feet as being the size of an average high-rise condominium apartment. A hundred thousand square feet would be the size of a city block in Manhattan. A million square feet is the size of Amazon's new fulfillment centre in Baltimore. A billion square feet of floor space would hold all the people in the whole world. A trillion square feet is the size of Hungary and slightly larger than Ireland.
In terms of time, as everyone knows, there are 60 seconds in a minute and 60 minutes, or 3,600 seconds in an hour. That makes 86,400 seconds in a day. A million seconds would equal 11 1/2 days. A billion seconds would equal 31 1/2 years, and a trillion seconds would bring us back to 29,000 B.C., to the first human settlements discovered (the Australian Aboriginals).
In terms of money, a trillion is a thousand billion dollars. It is two and one half times the amount that Americans, the most generous people in the world, give away to churches and charities each year. It is nearly four times (3.83) more money than the value of all the gold in Ft. Knox. It is seven times more than the whole world annually spends on the environmental and social costs of greenhouse gases. And it is nearly eleven times (10.8) as much as the net worth of the richest person in the world (Bill Gates).
Almost all big American businesses operate globally. A tremendous portion of their wealth is held abroad, largely for tax purposes (although President Donald Trump is trying, with limited success, to change that). A trillion dollars is the value of all their corporate wealth held outside the USA (not counting fixed assets such as offices, factories and equipment). It is also the estimated cumulative value of all American intellectual property stolen by China, the total value of all corporate debt in China (with a population 30 times bigger than that of the USA) and half the value of all the oil annually traded throughout the world.
In the USA, the Federal Reserve strives to control inflation by setting the basic interest rate at which credit is made available to the economy. After the financial crisis of 2008, the central bank rate in America and abroad was too low to have any effect on inflation and another policy tool was invented in its place, called “quantitative easing” (or QE). In a nutshell, QE means printing new money in order to buy assets. The total value of all such acquired assets, upon which the Federal Reserve is sitting, is four trillion dollars. In other words, the American government plans on a deficit in 2020 that will equal one fourth of the Federal Reserve’s assets.
And that is not all. Fannie Mae and Freddie Mac have also been spending as if there were no tomorrow since their 2008 bailout. They have now loaned out six trillion dollars more than they can cover, no doubt with the expectation that America’s taxpayers will cover the shortfall if needs be.
The American government has already incurred thirteen trillion dollars by way of the national debt. By 2028 that number is expected to rise to 16 trillion dollars, which is 100% of America’s gross national product (or GDP), i.e., the total value of every product and service produced throughout the country in a whole year (other than government transfer payments).
When I studied economics at BYU (in the early 1970s), I was taught that the national debt was not a real problem because “we owed it to ourselves.” We can no longer say that, because American households can no longer afford to loan money to the government. China, America's ideological adversary, has become America’s bank.
Economist Herb Stein famously said “if something cannot go on forever, it will stop.” And stopping will not be fun. In the 1980s, Canada went through a retrenchment process in order to eliminate its budget deficits and start paying down the national debt (which paled in comparison to America’s). It's austerity measures resulted in double-digit interest rates, inflation, large tax increases, and major lay-offs. To say it was unpleasant would be an understatement. But at least the pain was manageable.
America now faces a far more serious debt problem than Canada did in the 1980s. It has three options: a) Follow the Canadian example and either cut way back on spending or significantly increase taxes, or both. "Today's pain for tomorrow's gain"; b) Print enough extra money to pay off the debt like Germany did between the world wars (and suffer hyperinflation); or c) stand idly by and watch the stock market crash when the game of smoke and mirrors comes to an end.
SOURCES
"Mass deduction", The Economist, February 17, 2018, p. 64; "Living on borrowed time", The Economist, February 17, 2018, p. 68; "Tackling Fannie and Freddie", The Economist, February 24, 2018, p. 10; "Plastic surgery", The Economist, March 3, 2018, p. 11; “Green-back", The Economist, March 3, 2018, p. 66; “Can’t hardly wait”, The Economist, March 24, 2018, p. 70; "Ringing the bell", The Economist, April 7, 2018, p. 60; "The battle for digital supremacy", The Economist, March 17, 2018, p. 11; "Electric Dreams", The Economist, March 17, 2017, p. 14; Annie Wu, "Chinese regime tries to solve debt problem by issuing more debt", The Epoch Times, May 25, 2018, p. A4.
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