In Niall Ferguson’s comprehensive history of the Rothschild Family, the author describes how that family created their legendary fortune and changed the world. Two centuries ago, when Jews were the only money lenders on the planet, they financed European governments. Somewhere in the last 200 years, the non-Jews have also learned about lending money and debt, and in a big way indeed. Now the world wallows in debt so overwhelming that it threatens to capsize the global economy.
Greece, a relatively small country of about 11 million people, may trigger a financial crisis throughout the European Union (500 million people) because her budget deficits and enormous debt have brought the country to its knees. The country’s national debt – 300 billion Euros – is roughly equal to their annual gross domestic product. That is over 27,000 Euros of debt for every Greek -- including children. They have 27 billion Euros of debt coming due in April and May. And how are they are planning on paying that off by? Yep, by borrowing more money.
As this crisis has unfolded, nobody has stopped to ask how a country like this has accumulated so much debt. One might think that if the government was short on money, they might learn to say no. Yet, no one ever asked how this debt-ridden country managed to fund the 10 billion Euros it cost them to run the 2004 Summer Olympics. Not one responsible individual ever said that while it would be nice to have this event, we quite frankly cannot afford it. This is the way it has been in America for a while. We had periods of extensive borrowing in the 19th century (particularly during the Civil War), but America’s debt really started exploding in the 1930s during the Great Depression. The Roosevelt administration borrowed extensively to fund economic initiatives; initiatives, incidentally, that never worked. Our national debt continued to grow during World War II, but began to subside in the postwar era until the 1980s.
Liberals blame the bipartisan tax cuts passed under Ronald Reagan; but, in reality, revenues exploded during that era. It was expenditures, which escalated even more rapidly, that fueled the debt growth. Reagan tried to confront the spiraling growth of Social Security, but the plan failed because Congress could not summon the political courage to say no. The leaders of the time never even attempted to address the ever-increasing costs of a newer entitlement – Medicare.
For the last fifty years, we have instituted program after program on a municipal, state and federal level that has left us with staggering debt. Elected officials continue to expand the sphere of government without matching the costs to future revenue streams.
A perfect example of the lack of will to say no and confront persistent deficits comes from the Postal Service. The Postal Service has been an independent entity for years, but let’s compare it to Blockbuster. Both sell a product that has become significantly less needed in the internet era. Blockbuster has responded by closing locations and reorienting its business plan. The Postal Service, on the other hand, has repeatedly raised its prices – which just accelerates the decline of its customer base. Because members of Congress are unwilling to say no to constituents, very few post offices have been shut down even though mail volume has plummeted.
Instead of improving service, the Postal Service now proposes to terminate Saturday delivery to confront its projected $238 billion 10-year shortfall. That might be a sensible proposal, but the same analysis also brought to light the fact that Postal Service employees retire at the age of 55. That retirement age may have worked in the 1940s, but today it means an average of about 25 years of pension payments to a retired employee who worked for 30 years. Instead of saying no to the employees, the leaders’ solution says no the customers. The cutback in service, coupled with increased costs, will undoubtedly cause a greater reduction in mail volume and revenue.
This is just one glaring example of the lack of will by our leadership to say no and control expenditures. While most folks have focused on the ridiculous budget deficits and debt at the federal level, city and state debt has grown unwatched. Encouraged by attractive tax benefits, municipal debt has increased almost 8-fold since 1981 and now sits at a staggering $2.8 trillion. And just like hapless Greece, this debt is typically repaid by -- issuing new debt.
Many of these bonds are approved by taxpayers who realize their city or state is broke, but vote for the bonds anyway because they are influenced by promotional campaigns. Elected officials cannot say no to placing the bonds on the ballot, and their constituents cannot say no to more borrowing for schools, golf courses or whatever worthy cause is being sold that year.
With the passage of the new Health Care scheme, our Federal government has added another huge obligation, piling it onto a budget completely out of whack, principally because Social Security and Medicare costs are out of control. Liberal Democrats saw yet another perceived need and attempted to satisfy their supporters, but without a sound fiscal plan.
And what do our elected officials do? They attend soirees. Talk about Nero fiddling while Rome burns. A perfect example is Arnold Schwarzenegger, governor of the financial basket case California. While the state is spending $2 billion a month more than it is taking in, he can be found at the NBA All-Star game and the Academy Awards. Is it any wonder there is a rage building throughout the country?
The debt grows on and on and on with no end in sight. The only question is for how long can this be sustained, and when – not if – it will all come crashing down.