Wednesday, July 13, 2011

Wake-up call #4: Debt

Newsflash: According to, it is now mathematically impossible to pay off the U.S. national debt because it is greater than the number of dollars that exist, and increasing the number of dollars would actually increase the debt, due to the way the system works.

Okay, everyone exhale now.

In this series about the big problems besetting our planet, I have looked at the end of the Oil Age, the looming shortage of fresh water, and the gap between rich and poor.

I'll also examine climate change, but this week I'm looking at the huge debts of nations, provinces, states, and cities.

First, just a few points that might be helpful:
• A deficit is the annual shortfall between revenues and expenditures. In other words, the amount we borrowed last year and didn't pay off. A debt is the accumulated total of all those deficits.

• A trillion is 1,000,000,000,000. That's too large to comprehend, so try this: If you spent a million dollars per day, spending a trillion would take more than 2,700 years.

• Money is borrowed by nations by exchanging paper (bonds) for money. The level of interest demanded by the buyer of the paper (lender) reflects the perceived risk of default (not being paid back).

[Note: I'll mostly focus on North America, although the same problems prevail in Europe. For an excellent analysis of the U.S. situation, read How Much Does The National Debt Matter?, by Bruce Bartlett.]

What's the Problem?

When the iconic RCMP is required to tighten its belt, you know the beancounters are ascendant, even in Canada. This country's debt and deficit problems are less dramatic than those of our American neighbours or the basket cases of Europe. Nonetheless, we do have a substantial national debt of $562 billion, and your personal share is about $16,000. By comparison, The U.S. owes $14 trillion, and your American cousin's share is $46,000.

You think that's a scary number? Consider this: The U.S. is also obligated to pay $5 trillion in pensions to veterans and federal employees, and $46 trillion in benefits over the next 75 years under the Social Security and Medicare programs. Total of all the above: $65 trillion. And, oh yeah, that does not factor in the interest charges or the fact that the U.S. national debt is growing at more than $1 trillion annually.

The Americans will find it particularly difficult to find ways to balance the books given that 3/4 of federal government spending goes to defence, medicare, medicaid, social security, and interest payments.

States and provinces are also in the hole. My own province of Ontario owes $236 billion, and now spends more on interest payments than on post-secondary education. My share (and yours if you live here) is about $17,000, up by $2,100 in just the last year.

Then there are the cities. Toronto's debt is $4.4 billion, up by $721 million in 2010. Paying off principal and interest is now the city's third-highest expense. Each citizen's share is about $1800.

Why does it matter?

As debt increases, so do the interest payments on that debt. Some calculate that, by 2050, half of all federal taxes in the U.S. will be going to pay interest on the debt. If interest rates go up, as many analysts predict they will with rising inflation, paying the interest will starve spending on programs, and citizens will be very unhappy.

It appears that, in addition to restrained spending, higher taxes will be needed to reduce deficits (Some pols are still in denial about this). Higher taxes mean less money available to consumers for spending and to businesses for increased hiring and investment in projects for expansion, all needed to grow the economy.

As there is a finite amount of capital available for lending, the growing portion soaked up by government borrowing can push up interest rates (hugely so, if there are any concerns about possible default), and may also "crowd out" business borrowing, both of which depress economic growth.

About half of the U.S.national debt is held by foreigners. If they become concerned about inflation and devaluation of the currency, they will demand higher interest "yields" to buy more bonds (i.e. lend more). That will make interest costs and repayment even more difficult.

Default is not an option because government bonds are held by pension funds, mutual find investors, private investors, states, and cities. Imagine having them wake up to discover that hundreds of billions of their wealth had evaporated. In addition, interest rates would spike to unthinkable levels and future government borrowing would become almost impossible.

There is near panic in many national capitals as platitudes and procrastinating no longer cut it, and politicians confront the need to be honest about the pickle we're in. Portugal, Ireland, Greece, Spain, the so-called PIGS, are teetering on the edge of collapse. Deficit-cutting is now the dominant issue for the U.S. government.

Here in Canada, having gone through our own mid-1990s belt tightening, we are in better shape. Canadians, not wanting to relive those days, want balanced budgets and elect federal, provincial and city governments that promise to produce them. Unfortunately, there has been more talk than action on this in recent years.

On the other hand, any cuts to programs like healthcare, will trigger howls of protest, so Canadian pols, like their counterparts elsewhere, face a dilemma. By the way, in Ontario, healthcare is 46% of the provincial budget and, if present trends continue, it will represent 80% of the province's spending by 2030.

What does the future hold?

First, it must be said that there are no easy choices. Both higher taxes and spending cuts will be needed.

We are already seeing moves to slow growth in the public service, to reduce future pension benefits for public servants, and to restrain their wage increases. This is almost certain to erode the quality and accessibility of the services they provide, so be prepared to wait longer in queues for drivers licenses, passports, and airport security screening, and expect poorer service from government departments.

All levels of government will reduce their support of the charities and other nonprofit organizations that deliver many of Canada's social services. They include our universities, our hospitals, our food banks, our amateur sports, our museums, our arts groups, our substance abuse clinics, our refuges for abused women, our animal shelters, our environmental watchdog agencies, our poverty safety nets, and much more. Inevitably, Canada will be a less kind and less civilized place in which to live as the screws tighten.

We can also expect an end to the well entrenched principle of universality, which ensures that many government programs deliver services to everyone, regardless of individual need or ability to pay. I benefit from this policy. Despite being quite able to pay for my own drugs, as a senior citizen I pay only a dispensing fee thanks to the Ontario Drug Benefit Program.

Cuts to universal programs will be quite unpopular. A recent Pew Research poll found that regular folk in the U.S. have little interest in cuts to "entitlements" such as Medicare and Social Security benefits.

We can expect an increase in wait times for hospital beds, MRI's, cancer treatment, and the like as a growing and aging population collides with spending cuts. User fees and private sector healthcare providers are inevitable, in my view.

Our infrastructure is in terrible shape. In 2007, it was estimated that $123 billion was needed to rehabilitate the infrastructure in our cities and towns. It is much higher today.

Politicians love to announce new highways, bridges, and so on, but maintenance contains no excitement, so it has been largely ignored for decades. As a result, our sewer systems flush pollution into our lakes and rivers during storms. Our bridges are rusting. Our water mains are leaking. Our sewage plants are often over capacity. Our streets and highways are full of potholes. Our public buildings are deteriorating. Our parks are overgrown with weeds. Our beaches are sometimes unfit for swimming.

And you ain't seen nuthin' yet. Expect all of this to get worse in the future.

A sampling of the many programs that will likely take a hit includes welfare, policing, daycare, street-cleaning, snow removal, regulation of air and water pollution, inspection of abbatoirs and other food handling, student loans, expansion of public transit, public housing, daycare support, assistance for research and so on.

Also, expect user fees for almost every government service that is now "free," including use of public highways.

In summary, we'll be receiving less and paying more, for as far out as we can see, as the services and protections we designed in the second half of the 20th century become unaffordable. Means testing for government-run programs will be standard procedure.

Life will be harder, and our cities dirtier. There will be more weeds in our parks, and more homeless people on our streets. There will be fewer places to turn to for help if we are old, sick, unemployed, lonely, abused, or addicted. There will be less music and art in our lives. It will be harder to become educated.

We will feel less secure. Nothing will be free. Epidemics and pandemics will overwhelm our healthcare resources. Responsive, high quality healthcare will be reserved for the wealthy. We will be made ill by food that should never have made it to our tables. Our lakes, rivers and air will be more polluted.

Heard enough?

Next: Climate Change


  1. Sounds very much like life just before and during the industrial revolution.

  2. Yes it does, Francie. The difference is that we are going to watch our 20th century progress go into reverse.

  3. My hopes that you are going to end this series with a 'we can fix things if we just do this' are fading.