May 25, 2019

Think It Can Never Happen Here?

Well, my friends I have got some bad news for you. Yes it can. And I am referring to the sad and horrible events in Greece. After the 2008 financial crises, every country in Europe entered a recession, but because Greece was one of the poorest and most indebted countries, it suffered the most. Unemployment reached 28%. Because Greece was in the euro, it couldn’t boost its sagging economy by printing more drachmas. Greece entered a deep depression. The debt burden was 177% of their GDP and the deep depression made it difficult to raise the money the Greeks needed to make its debt payments.

For the last 5 years, Greece has been negotiating with the European Commission, the European Central Bank, and the International Monetary Fund for financial assistance. Since 2010, the three funds called the “troika” have been providing Greece with loans in exchange for tax hikes and spending cuts. The austere terms of the bailouts have caused resentment among Greeks. Greek debt is widely held by their private banks so a Greek default could trigger a financial crises if Greece defaults. So Greece faces a hard choice. It can either accept the terms of the Troika’s demands for further austerity or defy the Troika and default on the Greek debt and possibly exit from the euro.

On June 30, 2015, the debt held by the public in the United States was $13.08 trillion dollars and intra governmental debt stood at $5.07 trillion dollars for a combined public debt of $18.15 trillion dollars or 102% of GDP. However, here is where it gets more complicated. The debt incurred by Congress to salvage the bankrupt Fannie Mae and Freddie Mac is not included in the financial records of the U.S. accounting. The off balance obligations of these two quote “independent” agencies is just over $5 trillion dollars!

The United States government is obligated under current law to make mandatory payments for programs such as Medicare, Medicaid, and Social Security. The Medicare Part A payouts exceed program tax revenues and Social Security payouts exceed payroll taxes. Approximately $7.7 trillion dollars relates to Social Security shortfalls and $39.7 trillion dollars relates to Medicare and Medicaid shortages in the current and prior years. The present value of these unfunded obligations is estimated to be around $47.4 trillion dollars. This unfunded debt is not calculated as part of the national debt.

If I have not got your attention yet, consider that the Social Security trust fund should have $2.6 trillion dollars in it but actually contains only IOU’s by the Federal Government. The money has been spent! The United States Postal system ended fiscal 2013 with a net loss of $5 billion dollars marking the 7th year in a row of consecutive losses. First Class mail continues to drop each year being substituted by what is called mass mailings or “junk” mail. At the end of the fiscal year 2012, the United States Postal Service reached its statutory debt ceiling of $15 billion dollars. Liabilities for the Postal Service exceed assets by about $40 billion dollars. Presently, the United States Postal Service will lose roughly between $5 and $10 billion dollars every year going forward. Adding to our debt woes, we keep developing a budget each year where spending exceeds revenue by a trillion dollars which keeps adding to the public debt.

During the peak of the financial crisis of 2008, the United States Federal Reserve expanded its balance sheet by adding new assets and new liabilities using a program called quantitative easing which was the purchasing of bonds and other financial assets from private financial institutions. The goal of this policy was to facilitate an expansion of private bank lending. If private banks increase lending, it would increase the money supply. However, there are risks associated with quantitative easing. QE can cause higher inflation than anticipated if the amount of easing required is over estimated and too much money is created by the purchase of liquid assets. Also, quantitative easing can fail to spur demand if banks remain reluctant to lend money. Purchases as part of this program were halted on October 29, 2014 after the Federal Reserve accumulated $4.5 trillion dollars in assets. Only time will tell if the program will be successful.

Our country is in the midst of a financial crisis. We have not managed our money well. We face constant budget deficits where revenue does not match spending. We have 46 million people on food stamps and over 2.1 million of our workers have been out of the labor market for more than two years. States like Illinois and Kansas are facing budget shortfalls that have to be addressed. Currently the United States is operating on a Temporary Debt Limit Extension Act that will expire at the end of the current fiscal year on September 30th. The United States Congress will have to act to either raise the statutory borrowing limit or cut spending. Could Greece happen here? Yes it can and will if our government continues to ignore the warning signs.

Print Friendly, PDF & Email
Written by
Donald Wittmer

DONALD WITTMER is a retired business executive who held key roles in the automotive and banking sectors. For a time, he also served as a Fiscal Agency Manager for the Detroit branch of the Federal Reserve Bank of Chicago. He received his undergraduate degree from Cincinnati's Xavier University, an M.A. in business management from Central Michigan University, and earned certification in bank operations from the School of Banking at the University of Wisconsin-Madison. A husband, father, and grandfather, he teaches part-time at the Kent Place School for Girls in Summit, New Jersey.

View all articles
Written by Donald Wittmer