Here are four commonly believed myths that I see frequently repeated on the pages of this site as if they were fact with no need of examination. I think that it is time to have a look at these with our critical thinking caps on.
Myth # 1 - The U.S. Federal government debt is just $14.3 trillion.
Mr. Bernanke has stated before a congressional committee that it is actually several times that. He should know, and I don't think that this is something he would lie about, especially in testimony in front of Congress. Like the U.S. banks, the federal government seems to carry a lot of its liabilities off the books.
The considerable liabilities of Fannie Mae (OTC:FNMA) and Freddie Mac (OTC:FMCC), which the federal government is responsible for, are an example of this. But the largest liability of the U.S. government is the cost of retiring the Baby Boomer generation. Completely unfunded entitlements in this regard are estimated to be some $60 trillion – an enormous sum almost equivalent to the GDP of the entire planet. Most other developed countries have a designated reserve fund, which collects interest on investments, to at least partially cover the retirement entitlements of its workers. The U.S. also has such a fund but its balance is currently zero.
To compound this problem, various states have also looted their retirement fund accounts. Although no one can really say at this time what these unfunded entitlements add up to, it will certainly be a liability of staggering maganitude.
Myth # 2 – The U.S. economy is still three times the size of China's
This really depends on how you measure. Although the above statement is true in terms of GDP, in terms of real outputs China is now roughly equal or slightly ahead of the U.S.
There are only a few ways to create real wealth; it has to be either dug out of the ground (farming and mining) or stuff has to be made from raw materials (manufacturing). Manufacturing in China now accounts for about a third of the country's GDP while in the U.S. it has fallen to a mere 13%. Even Canada, which is considered to have a resource-based economy, has a higher percentage of GDP (18%) devoted to manufacturing.
The fact is that the bulk of what is included as contributions to U.S. GDP does not create wealth; for example: the lawyering and litigation, the cost of wars, the cost of an inefficient medical system, the cost of keeping 1% of the adult population in prisons, the cost of the largely parasitic financial services. Then there is the whole part of the economy that is devoted to retailing foreign-made goods to consumers; this is also added to the plus side of the GDP ledger.
Myth # 3 – The U.S. economy is growing
To believe this would be akin to me going to my bank and trying to pretend that that money I borrowed on my credit card should somehow count as income for the purpose of my credit rating – and have the banker believe it. I understand the principle of deficit spending to create momentum in the economy, but after three years of more than 10% of GDP equivalent in deficit spending annually, where is the momentum? 1.8% growth for the first quarter? At the cost of having added trillions more dollars to the debt? How is that growth? It would be like me investing $14 and getting $1.80 back and then crowing about my return.
We can't see what is really going on with the economy while adding government spending to the plus side of the GDP ledger without ever accounting for deficit spending. I would argue that deficit spending should be accounted for in GDP figures the same way that balance of trade deficits are – it should be subtracted. If we did that we would see that real GDP growth, without artificial government pumping, would be about minus 8%.
Myth #4 – The U.S. economy in its present form is sustainable in the long run
The underlying fact that that has created all the financial problems in the last few years is that the U.S. consumes more than it produces. That is the simple truth. Financial engineering like QE and juggling of the books may boost the stock market and corporate profits for a while but will not solve this fundamental problem. The massive extension of credit by the banks that created the real estate bubble papered over this problem for a while but then led to a financial meltdown. Just as the dot com bubble crashed, and then the real estate bubble crashed, the government credit/debt bubble will crash. Tax breaks to consumers to encourage them to spend are just another extension of credit, this time by the government instead of the banks.
I have heard it said that the U.S. has moved beyond a manufacturing economy to a consumer economy. Does this mean we don't need real production any more but just need to spend? How many times have I heard that Americans just need to open their wallets and the economy will be all right? Is gluttony now considered to be America's highest social good? The balance of trade deficit should be a constant reality check in this regard.
Financial engineering alone will not solve the problems with the U.S. economy, any more than that sort of thing in the corporate sector (stock buy backs) has helped public companies when they are badly managed and unproductive. In both cases though it can make for huge bonuses for corporate executives.
There are some that believe that the U.S. government can keep running large deficits indefinitely. Mr. Bernanke, for one, disagrees strongly and has warned Congress more than once that the growing national debt is the gravest danger that the country faces. There are some others who believe that simply cutting government spending drastically will solve the deficit problem. But when the economy is so dependent on government spending I can't see how that would not create even more immediate problems.
Nevertheless it looks like the brakes on government spending are going to be applied, perhaps very hard. In light of this, further embracing of the government debt bubble, and the stock market bubble that it has lately engendered, seems very risky.
I am surprised that so many economists were surprised at the recent disappointing jobs numbers. Are they observing some parallel universe where U.S. government stimulus, including aid to cash strapped state governments, is not winding down? I believe that relatively soon we will see Thursday's jobless claims number pop above 500,000. Then watch out.