One often hears the U.S. referred to as the richest nation in the world, but it is entirely possible that this is a delusion on the part of Americans and many foreign observers. A book titled The Millionaire Next Door illustrates the contrast between the wealthy and those who appear to be wealthy. The author reported that most of the millionaires that he interviewed were not extravagant spenders and generally had pretty pedestrian tastes. When asked by the marketing firm that had commissioned the study, on which the book was based, who the big spenders were, the author said “the guys with the big hats and no cattle.” Big hats and no cattle is a metaphor for lots of credit and debt but no wealth. The simple fact of the matter is that America creates an illusion of wealth through massive debt. The only question is when will our credit line max out and be withdrawn, plunging us into default and bankruptcy.
So how much debt do we owe? Recent reports put the U.S. government (USG) debt at 31 trillion dollars. One-third of that has been accumulated since 2008 and most of that since the COVID pandemic that began in 2019. Each year we average a 2-trillion dollar budget deficit, which means we spend an additional 2 trillion dollars that we don’t have. We pay out 965 million dollars a day in interest on the USG debt, which adds up to 349 billion dollars per year — assuming interest rates don’t go up, which are currently rising and adding to the size of the outlay for interest payments. To USG debt, add business debt estimated to be 19.5 trillion dollars and household debt put at 18.6 trillion dollars for a grand total of 69 trillion dollars. This does not include under funded future obligations to programs like Social Security and Medicare.
So, just how might one get a perspective on a number like a trillion. Here are some comparison that might help:
One million seconds is about 11 days ago.
One billion seconds ago was 1988.
One trillion seconds ago was 30,000 BC.
A trillion square miles would cover the surface of 5,000 planet Earths.
Suppose you had a job that paid you $1 per second, or $3,600 per hour.
That amounts to $86,400 per day and about $32 million per year.
With that job, it would take you nearly 31,700 years to earn a trillion dollars.
For someone earning $50,000 a year, it would take more than 20 million years to earn a trillion dollars – assuming they didn’t spend any of it and it wasn’t taxed.
A trillion is a staggering number by itself. Just think about multiplying it by 31 or, worse yet, the combined debt of 69 trillion dollars owed by the three sectors mentioned above.
Some pundits dismiss the USG debt on the grounds that the USG can create all the money that it wants. I’ll come back to this. First, I just want to point out that even were this claim literally true, it would not be true of businesses and households. The problem with creating massive amounts of money is that one risks creating an inflationary depression similar to the one experienced by Germany (a.k.a., the Weimar Republic) following the first World War. The Great Depression in the U.S. in the 1930s was a deflationary depression. In an inflationary depression, money becomes progressively less and less valuable. In short, its purchasing power is decimated. There is a lot of money around but it won’t buy much of anything. In deflationary depression, money is in short supply and therefore its value rises. In short, its purchasing power is enhanced. The problem is that while money will buy a great deal, there is very little money to be had. All of this is very complicated to explain and I’ll spare you the details, but I suggest interested readers make a study of the phenomena themselves.
The greatest risk at present, in my opinion, would be for the USD to lose its status as the reserve currency. The reason that the USG has been able to go so deeply into debt is because the U.S. Dollar (USD) is the currency of international trade. This creates a high demand for dollars, as everyone needs dollars to settle accounts for goods exchanged between countries. There is a considerable amount of unhappiness with this arrangement. Many countries are concerned by the massive debt build up in the U.S. and fear that it will undermine the USD and create instability in trading settlements. Such fears lead to anxiety about holding large USD reserves. Others are unhappy with the USD being the reserve currency of the world because the U.S. often uses its currency as a way to coerce other nations to dance to its tune. All in all, there are a number of countries both anxious about and tired of this arrangement. There are discussions going on among some of the discontents about how to replace the USD and put the U.S. in its place, financially speaking.
Should an alternative come about, and I think that it eventually will, the demand for the USD will collapse. When that collapse occurs, the ability of the USG to create money will be seriously compromised, because there will be few parties interested in buying U.S. bonds, which is how the USG borrows capital to finance its deficits and debt. If that happens, the USG will be faced with either meeting its obligations by “printing” large sums of money, which will create an imbalance between the amount of USDs in circulation relative to goods to be bought, producing a rapid rise in the price for those goods. In short, the purchasing power of the USD will be significantly diminished, creating an inflationary depression. The indebted will be able to pay off their debts for pennies on the dollar and thereby bankrupt the creditors who financed their loans. One result of this will be to dry up credit. Since businesses and households already are heavily dependent on credit, it will be a disaster for them. Economic chaos will ensue.
On the other hand, the USG could simply default on its obligations either in full or part, which is the equivalent of declaring bankruptcy. That will cause massive loses to those who are owed payments either for obligations such as pensions or investments such as USG bonds. This will cause a cascade of bankruptcies ripping through the economy. The result will be to destroy massive amounts of “virtual” money and thereby significantly reducing the availability of money to lend out to people and businesses that need to buy things but don’t have sufficient cash reserves to effect the transactions. While such an event will cause the price of things to fall significantly, as prices will be drastically cut in an attempt to attract any buyers who have scarce money to spend. The country will essentially hold a going-out-of-business sale and there will be economic chaos. If you happen to be one of the lucky few who have “cash” reserves, it will be a buyer’s market for virtually anything you might want to buy.
Caveat: If it makes you feel any better, I am not an economist, and you will not have much trouble finding “expert economists” or “financial authorities” who will assure you that this is nonsense and that my reasoning is faulty. I grant you that I may have presented a gross description that is lacking in the finer details, but I think it is still largely on target. Also, consider how many of these folks are likely to confirm any of this even if they know it to be true. I suggest that it is past time to adopt the Boy Scouts’ motto: “Be Prepared.” When a collapse will occur is difficult to predict. I could begin next week or it may be many years before the reckoning arrives.