Monday, July 18, 2005

Review: Bankruptcy 1995

This book Bankruptcy 1995; the Coming Collapse of America and how to stop it is about an event that never happened. Namely, the numbers presented in the book formed a prediction, that in 1995 America's income and expenditures would become unbalanced and head into an exponential debt spiral.

That didn't happen, but the scenario described in the book appears to be well founded, and highly alarming. And, the scenario is even more apropos for consideration today with the tremendous debt GW Bush has saddled America with.

The author of Bankruptcy 1995 is Harry Figge (with ghostwriting assistance, no doubt). He's an engineer turned CEO of a fortune 500 company. One claim to fame beyond that is that in the early 1980's he was co-chairman of President Reagan's Private Sector on Cost Control, also known as the Grace Commission. The Grace Commission is the ones who infamously found the $500 toilet seats and other forms of "waste" in defense spending.

He explains in the book that his motivation for writing the book was to explore an alarming scenario he saw forming in the U.S. At the time several countries, primarily in Latin America, went through throes of hyper-inflation driven by huge debt loads. He witnessed the runup of debt brought on us by Presidents Reagan and GHW Bush and wanted to determine whether the same hyper-inflation scenarios were possible in the U.S. And, if they were possible, how to deal with them in the best way.

He begins by laying the blame at the feet of President Johnson. He claims that before Johnson the country operated on a "pay-as-you-go" basis, that generally meant a balanced budget and little debt. The only time debt would build up is in war-time (a.k.a. "War Bonds") and would be quickly paid off.

From my perspective of having grown up with a country always in debt, that seems a little foreign. However it is an ideal to which I would love for this country to follow. It makes too much sense, because debt involves spending extra $$'s on interest. As I explained in my personal finance recommendations, that extra money spent on interest directly corresponds with our life force.

Johnson's failing was to try and fight two wars at once. The first being Vietnam, and the second being a "war on poverty" that apparently involved lots of aid to poor folk.

But let me remind the reader that the contributions by Presidents Reagan, GHW Bush and GW Bush to our national debt eclipses President Johnson's debt by several orders of magnitude. Where Johnson ran up a few billion in debt, Reagan and both Bushes have added Trillions in debt.

BTW, if you want to view information about the U.S. Public Debt, here's a few web sites: - primarily shows information about the how to buy U.S. bonds and treasury notes. - Office of Public Debt - and - the current debt to the penny. Note that the debt is broken down into two figures, that held by the public and intragovernmental debt. The latter is when a government agency (e.g. Social Security) buys U.S. bonds.

Back to the book ... His charts show that Reagan ran a total deficit in his 8 years of $1.34 trillion. GHW Bush ran a total deficit of $1.04 trillion, in only 4 years in office. His prediction was that the "next president" would run a total deficit of $3.17 trillion in four years. Oofda!

As I said, fortunately Bill Clinton's term did not run that much of a deficit. But, to be fair, we probably can't give Clinton all the credit for not running that much of a debt, just like we can't place all the blame on specific Presidents in the past. The President is only one piece of this game, because it is Congress who creates the budget, and it is the people who create the economic activity from which the government siphons off dollars (taxation).

For example, the debt saddling GW Bush's reign is partly due to the economic downturn that shrank tax receipts. Of course all the stupid tax cuts and the stupid war have a lot to do with it, but if the economy had remained strong then the tax cuts and war would have been more easily handled. See? It's not all GW's fault, much as I like to complain about him.

The part of this book that's alarming is, what does the debt mean in practical terms? To understand that we have to consider a bigger picture than the debt, namely the income and expense structure of the U.S. Government.

Basically when we run a debt it's because income didn't cover the expenses in some year. This is true for a government just as it is for individuals. It's just that the debt a government can run is enourmous, and any problems the government runs into in debt repayment eventually effect us all.

Income comes from taxation and fees the government collects. When the economy does well, there's more money flowing around that can be taxed, and when it's doing badly there's less. Hence income fluctuates with the health of the economy.

It's the expense side of this which was very alarming. The expenses can be divided into three groupings: a) interest on the debt, b) required expenses, and c) semi-optional expenses.

Groups (a) and (b) are really the same thing, because if you don't pay the debt payments then the worlds lenders will get highly pissed off at the U.S. The U.S. debt is highly rated as the safest debt in the world, because it's always paid off. We can't afford to lose that status, can we?

In any case I split them into two groups for a reason. The stuff that falls into (b) are things like defense spending and "entitlement programs". The entitlement programs are (?were?) things like "welfare", and involved government payments that are required by law to be made, and whose amounts are tied to the rate of inflation. There are several other things that fall into required payments but the essential characteristic is that the government must make those expenditures.

The point made in the book is that if the sum of (a) and (b) remain less than the income then it remains possible to run the game simply through raising more debt. But if (a) and (b) were to exceed the income, then that means you're having to raise more debt to pay the required expenses. If the budget were to ever get into that configuration, then it becomes a vicious loop. By borrowing money to pay required expenses, that just expands the debt even more, which then increases the interest payments, making the required expenses even larger the next year. The technical term is "debt spiral".

Let's look at some current debt expense figures:

As we can see, the interest payments have been in the $300-400 billion per year range for a decade. That's a lot of money, and it's our tax money that pays for it. - This site shows the budget split out by department, and how the total budget is swamped by expenditures through the Defense Department, Health and Human Services, and the Interest on the National Debt. Obviously the proprietor of that site has an axe to grind (e.g. "want to kill the IRS") but the information is useful nonetheless.

What would happen if the U.S. were to enter the debt spiral? There's approximately two choices: hyper-inflation, and reneging on the debt. Since the U.S. would never renege on the debt, then it would be hyper-inflation, and the stories I've heard about living in hyper-inflating countries are not pretty.

While this book is hopelessly out of date, the scenario it paints can still happen. This book is worth reading if only to understand the scenario.

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