Is the US Bankrupt?
author: feldpolitik.de
 e-mail: mbatko@lycos.com
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"The old reputation of the US as an economic power and a safe haven cannot be justified any more. Since the revenues stagnate at best while the expenditures rise, bankruptcy occurs since an orderly debt service is no longer possible. The simplest solution is the devaluation of the dollar.. This will have the effect of throttling imports and promoting exports and thus improving the balance of trade." from the German
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Is the US Bankrupt?
An Analysis
[This December 2003 article is translated from the German on the World Wide Web,
 http://www.feldpolitik.de/go.php?link=13434.]
Summary:
A bankruptcy occurs when the debtor can no longer afford his debt service. In the US economy, spending increases strongly while revenues structurally fall. In the medium term, the US is unable to pay for its debt service!
This will lead to worldwide shortfalls, especially for countries whose revenues come from the US [for example, oil] or where the US is the second currency.
[This analysis consciously avoids technical terms and statistical material to increase its readability.]
Analysis:
Seen historically, the US in the last 200+ years gained the reputation of an economic power and a secure haven. This was based on its export power and geographic position.
A creeping erosion of its economic power and security has occurred unnoticed by the general public.
The reputation of the secure haven, particularly the reputation of a safe harbor for investments, has suffered enormously through the financial scandals of the last decades [BCCI, Savings and Loans, Enron]. Billions of dollars of foreign investors and of old-age pension schemes of US citizens [cf. lawsuits against the management of mutual funds] were destroyed. Its economic power has also fallen constantly for years. That this is not thematicized in published opinions is clear in the following points:
* The change in the trend occurred slowly and therefore was hard to notice for the striken [explained later in detail].
* Most economists were educated in the US [even European economists] and don't question the US as a model.
· A worldwide propaganda runs in which only the US economy is shown [for example, via CNN, CNBC]. That it is the largest economy of the world is repeated daily. This claim is questionable and untrue if one compares the US with the EU [European Union]. The gross domestic product of the US is artificially inflated. Expenditures for the military, inner security and prisons are counted here [the US has more prisoners per population than China (1)] which are not really productive
·
Therefore an objective accounting of the revenues and expenditures of the US economy is necessary.
Revenues:
Viewed historically, the US reputation as an economic power was founded on the follwing exports [trend: -falling/ =constant/ +rising]:
Wheat (-):
The US is one of the greatest agricultural exporters. However this is onlyh possible through high subsidies. After deducting these subsidies and considering the net value, the contribution to revenues is trifling.
The trend is more important. Lower revenues can be expected in the medium term through the over-exploitation of the soil [erosion] and water resources [for example, Ogala reservoir] and the change in climate.
Oil (-):
The US was one of the largest exporters of oil and oil products up to the middle of the 20th century. Since 1970 domestic energy production has stagnated. Imports have increased to 25% of energy consumption.
Industrial products (-):
The sales of industrial products [machines, trucks, consumer articles] have fallen for dccades. In the last years, around 1 million jobs per year have drifted away in this sector. This has led to the "worst unemployment since the depression [2]." The price relation of US products can be improved through a re-evaluation of other currencies, particularly the Chiinese Yuan or through a devaluation of the US dollar. However this will not change the core of the problem. US products have a quality problem. Nolt by chance, US consumers prefer foreign goods even when they are more expensive. In the long-term, the production know-how fades away.
Weapon exports (=):
The US has profited most in all the wars of the last 100 years [wars always occurred elsewhere]. In the last Iraq war, a considerable profit was gained through payments and subsequent weapon purchases by the Gulf states. This profit will hardly be rferalized in the current Iraq war. While financially sound customers fall away, other countries can only pay for the deliveries through US export credits [Turkey]. Whether these credits can be earned is unclear. The US also has a quality problem with the weapon systems as the test of the M1 tank clearly demonstrated.
In the last decades, the US has attempted to balance this deficit by developing modern services.
Entertainment industry (=):
The entertainment industry has been a true success story. Its export profits are greater than agricultural exports. Innovative management and market screening underlie this success. Foreign films may not be synchronized for the US market. Instead there are remakes of successful foreign films [3 Men and a Baby, Nightwatch... ].
The entertainment industry is attacked from many sides which will clearly reduce the financial success in the future:
transfer of production to low-cost locations [for example, Canada]
saturation of foreign markets and their counter-reaction through film promotion and taxation of US production as explicitly allowed in the UNESCO resolution
financing by foreign investors leading to the outflow of profits. Hollywood is already strongly dependent on these funds up to 50% A slight change of the tax law in the home countries of investors [for example, in Germany] could dry up this capital stream.
Revenue losses through pirate copies and the Internet will increase and not decrease and already amount to several billion dollars per year.
Software (-):
The license revenues from software, particularly for Microsoft, constantly increasing over decades are past.
The worldwide competition in the software area [India, eastern block] leads to lower market shares and margins.
As an operating system, Windows is under the increasing pressure of Linux which is less expensive, more extensive and more stable. This stability prompts many industrial users to change. Microsoft's license fee policy was the last straw for many authorities [Germany, Asian Linux initiative with Japan, China... ]
Patents + biotechnology (=)
The successful effort of the US to enforce genetic engineering patents worldwide could lead to new license revenues. The judgment that these revenues will stagnate is based on the following points:
the largest US seed producer has its headquarters in Bermuda. The revenues hardly benefit the US economy.
Patents were issued on very old varieties [for example, Basma rice]. US seed firms are now demanding license fees from indigenous Indian farmers. This process leads to massive tensions, damages the reputation of the US and ultimately leads to the annulment of all patents in these countries.
Genetically-engineered seed is dominant and spreads even in the old varieties through pollination. The Monsanto firm is presently suing farmers in Canada whose neighboring fiedlds were contaminated to pay license fees. These farmers had cultivated eco-seed [eco-raps] and now sue Monsanto for compensation. If the court follows the causal agent principle, this will be a huge loss for genetic agricultural technology. The wave of compensation suits could be the ruin of genetic engineering firms. [3] British studies already show that genetic food is dangerous to health. A wave of litigation could flood the genetic food industry as happened to tobacco companies.
This list is not complete and could easily be extended and verified with data. However the conclusion that the revenues of the US will stagnate or even fall in the medium term is more important.
This is significant because the trade deficit of the US has been enormously great for years and can only be paid through the constant influx of capital from abroad.
Expenditures:
Foreign expenditures should be considered after our analysis of revenues [trend: -falling/ =constant/ +rising]:
Import goods (=):
A clear reduction of imports can be expected with a strong devaluation of the US dollar. However this will not change the problems discussed under 1.3.
Energy imports (+):
The dependence of the US on energy imports will increase very strongly in the next years. On one hand, energy consumption incrfeases [climate technology, SUVs]. On the other hand, US production of oil and natural gas decreases. [4] Considerable price increases for oil and gas can be expected in addition to the quantitative growth. [5] Besides these direct costs, the indirect costs for the military security of the oil supply will rise... [6]
Military costs (+):
Even without Iraq, the costs of stationing abroad [in >150 countries] will increase, partly because the troop strength will grow and partly because the stationing countries are less and less ready to share the costs. [7] The costs of Iraq's occupation cannot be estimated.
Debt service (+):
The US imports $1.5 billion per day since the domestic savings rate is much toolow. The annual debt service increases $100 million per day. "If the US were a Third World country, the US would long ago have been on a watch list" [8]; its creditworthiness would have been downgraded!
Even if this list could be more exact, the conclusion is crucial that expenditures will increase!
Conclusion
The old reputation of the US as an economic power and a safe haven cannot be justified any more. Since the revenues stagnate at best while expenditures rise, bankruptcy occurs since an orderly debt service is no longer possible. The simplest solution is the devaluation of the dollar as already approached several times by the Bush administration. This will have the effect of throttling imports and promoting exports and thus improving the balance of trade. The implicit effect that is more important is dispossessing foreign creditors through the value loss and thus being free of the debts! $9 trillion is held by foreigners, half of all US bonds.
The US consumer is largely responsible for slowly carrying out this solution. The US consumer uses the falling interests, the rising real estate prices and the released mortgages for consumption. With a faster devaluation of the US dollar, interests would rise and consumption on credit would be stifled. If interests rose very strongly, many consumers could no longer use the credits. Real estate would flood rthe market and result in a dramatic drop in prices. This will reduce the security of further credits, an intensifying effect that will shake the US market.
This circumstance gives enough time to the informed foreign investor to withdraw from US bonds and shares before the gullible remnant notice their misjudgment.
Published sources:
Amnesty International
Zandi, Chief economist,
www.economy.com
DLF
DoE, EIO,
www.doe.gov
www.energiekrise.de
US Congress
Chalmers Johnson, Blowback
Paul Krugman, New York Times + Lehman Brothers, damocles software
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