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It seems that the next bubble to burst is the good ol' U.S. of A. itself. The movie I.O.U.S.A. paints a clear, grim, and stark picture of the debt problems that face America. The country has bounced along a rapidly expanding debt bubble. If we do not regain control over it, the bursting of this bubble will surely put the country into insolvency.

On August 21, 2008, I attended the premiere of "I.O.U.S.A." Ironically, I "overpaid" for the movie, having spent a total of $73 for the ticket ($18!), service fee, gas, and babysitting. Nonetheless, I enjoyed the movie and highly recommend it. I will spend the rest of this piece providing a brief review and commentary about the movie (consider this your "spoiler" warning).

I.O.U.S.A. opens with a series of clever soundbites from American Presidents from Eisenhower to Bush, Jr. Each President talks about America's economic peril and/or the importance of getting the country's debts under control. The most ironic clip shows Ronald Reagan early in his term imploring Americans to join him in controlling the deficit so as to avoid burdening future generations. He speaks with his typical resolve, but we are shown later in the movie how the federal deficit ballooned in the 1980s anyway. The main message is that administration after administration since World War II has promised to get tough on deficits, but most have failed, whether Democrat or Republican.

Two key changes blemish the way America manages its money now:

  1. Since the founding of the Republic, big deficits tended to alarm the Federal government and, as soon as possible, the government worked to pay down its debt. After we paid down the enormous debts from World War II, we have yet to pay the debt down in any significant way. Big debts tended to come from wartime spending (the Civil War almost bankrupted the country).
  2. It was also after World War II that the Federal government began relying more and more on foreign countries to finance the debt. We used to owe this money to ourselves.

The general lack of fiscal discipline combined with an increasing reliance on "the kindness of strangers" has weakened the country and made it economically vulnerable.

Our protagonists - David Walker, former Comptroller General and now President and Chief Executive Officer of the Peter G. Peterson Foundation, and Robert Bixby, executive director of the Concord Coalition - use the Fiscal Wake-Up Tour as the thread weaving the fabric of the story together. We watch them as they travel the country trying to get out the alarming message about America's four key deficits:

  1. Federal budget - as of the time of this writing, the public debt has grown to $9.6 TRILLION, about 64% of GDP. Over the course of the movie, another $85B was piled on. Surpluses in social security have been used to fill budget gaps; otherwise the real number is even worse. That gambit will run out soon as more and more baby boomers retire.
  2. Savings - Americans are no longer net savers and now have few resources to help pay down this debt. (Last year, I explained how the bull market that began in 1982 seems to have been driven by a long-term downtrend in interest rates that has discouraged savings and encouraged debt-driven consumption).
  3. Trade - Warren Buffet narrates an animation showing how a nation that consumes more than it produces eventually runs out of assets to sell to support its spending habits. At that point, the consuming nation is forced to get back to work to earn its keep. The animation simplifies the story to two island nations: Squanderville and Thriftville.
  4. Leadership - our leaders lack the will to give us real solutions because they are not rewarded for making the required tough choices. Americans need to get educated on the problem, demand solutions, and vote for the politicians who are bold enough to deliver and stand against the toxic inertia.

Add in our unfunded liabilities and interest payments on the debt, and our TOTAL liability comes to a whopping $53 TRILLION! Wow! The numbers get so ridiculously large, you have to fight the glaze building over the eyes.

So what are the solutions? This is where the movie comes up a bit short. I think the movie focused so much on describing the problem and raising the alarm because the country is in a general state of denial at worst and inertia at best on this issue. The solutions were described by a rapid sequence of animations. It was so fast and flashy, that I cannot remember them all. As best as I can recall, the movie offered the following:

  1. Get our "money's worth" from healthcare spending
  2. Save more
  3. Register and vote
  4. Reduce oil consumption
  5. Only buy what you can afford

Since the movie also stated that we could not raise taxes high enough to pay off our debt, we can only assume that we are being told to significantly reduce spending.

The Town Hall discussion that followed was much more useful in terms of offering solutions. The discussion was moderated by CNBC's Becky Quick. (I THINK the price premium on the ticket went to "fund" this panel?)

The participants in the discussion were:

  1. Warren Buffett, CEO of Berkshire Hathaway
  2. Peter G. Peterson Chairman of the Peter G. Peterson Foundation and a Buffet buddy
  3. David Walker
  4. William Niskanen, Chairman of the CATO Institute
  5. Bill Novelli CEO of AARP

Given the backgrounds of this cast, there were naturally disagreements. But the discussion was very civil and well-conducted. The big surprise was Warren Buffet. His first comment was to introduce himself as the "token Pollyanna," and he proceeded to spend much of the night talking up America's strengths and advantages. He was steadfastly optimistic - to such an extent that it really sounded like he believed there is no big problem ("a democracy always has problems"). I started to wonder why he was on the panel! His comments seemed to contradict his role in the movie. Buffett droned on about America's economic pie growing bigger all the time and being big enough for everybody.

Walker had to remind him that all the dire statistics were presented as percentages of GDP (gross domestic product), and so they already took into account the growth of the "pie." Buffett even claimed that the unfunded liabilities of social security and Medicare are no different than the promises the government makes to defend the country. A "Buffett Watch" piece posted on CNBC tonight confirms that his comments caught the panelists and movie makers by surprise (see "Warren Buffett Goes Against the Script At "Inconvenient Debt" Premiere".

Additional solutions that came out of this panel:

  1. Increase the retirement age to 75 incrementally and with plenty of warning (note that the full retirement age is already increasing)
  2. A lot of emphasis on changing politics, particularly in promoting bi-partisanship in the Congress. Again, rewarding politicians who "do something" instead of nothing. Instituting campaign finance reform to reduce the influence of special interests. And redistricting to provide more real competition in Congressional elections. This last one was interesting. Walker claimed that only about 60 seats in Congress are truly competitive. He and Peterson complained that America's founders envisioned Congress as a part-time workplace where folks would do some public service and return home to their real jobs. Now that politics is a full-time job, politicians mainly worry about keeping their jobs. But if races are made more competitive, it seems to me that politicians will worry even more about their jobs. Anyway...
  3. Promote good health in your family. Each panelist agreed that healthcare costs are the #1 budgetary problem and greatest unfunded liability
  4. Control government spending
  5. Privatize social security or fix it with "tweaks" on the revenue side and changes to the obligations side - disagreements on this one of course
  6. Control health care costs
  7. Improve the nation's education system and increase financial literacy
  8. Hold our politician's accountable

There was a lot of additional colorful commentary from this panel, and I wish I had the time to note all of it. All of these guys are in their later years and had plenty of funny quips, stories, parables, and the like. Overall, the movie was well-done and informative, and the town hall discussion was a useful add-on. Go see "I.O.U.S.A."

Be careful out there!

Full disclosure: No related positions.

Source: I.O.U.S.A. Movie Is Well-Done and Informative