Debt Crisis

I was taught by my father that I should lead a life without any debt when I was young. Somehow, I have managed my life without any major debt throughout my life. As I became a corporate executive, my practical experience in managing corporate ratios and interaction with other senior executives taught me that as long as debts were manageable and well within the limit, it is smarter to borrow funds at a competitive rate. One of the executives told me Debt/Equity ratio has to be managed 1:1 and anything lower than that is equivalent of blocking the growth of the company. However liberal I consider myself with reference to various welfare laws, I still in my heart live as a very conservative person with ideas of small government, zero deficit and much less and manageable debt.

The United States is holding a coveted position of the world’s largest economy at $ 18 Trillion followed by China at $11.38 Trillion (it is actually difficult to measure China’s GDP because of their currency not being market driven and hence should be calculated by PPP). However as of February 19, 2016, the US has a national debt of $ 19.1 Trillion (1.06 X of GDP), out of which approximately 34% is due to international investors. The major investor countries are China and Japan. The national debt is equivalent to $ 59,196 per US Citizen or $153,511 per household in the US. In other words, it is equivalent to 548% of the annual federal revenues.
Federal Government is not obligated to account for explicit and implicit future financial obligations such as employees’ pension and retirement benefits as in case of public companies. These debts, if included, would add another $63.5 Trillion to the national debt. Social Security and Medicate liabilities are calculated based on how much money needs to be deposited to generate interest required to pay the shortfall between revenues and expenditure in those accounts for all current participants.

Based on 2014 allocation of expenditure, approximately 61% is spent for welfare, 19% is spent for defense, 14% for general government and debt service, 4% for economic affairs and infrastructure and 2% for public order and safety. The last two presidents who managed government spending better was Presidents Jimmy Carter and Bill Clinton in whose Presidency, the national debt came down when compared to the period prior to that. The two Presidents who have considerably increased the national debt are Presidents George W. Bush and Barrack H. Obama. While the former increased the national debt because of the wars he conducted worldwide, the later increased the national debt because of introduction of various welfare measures in addition to significant spending on bail out of the Wall Street.

Some progress has been made in changing Washington's irresponsible spending habits. Earlier in 2015, Congress passed a budget that reduces federal spending by $7 trillion over the next 10 years. But much more is needed. From a business perspective, the U.S. needs to stop looking at Washington's income statement, as it only provides a snapshot of the situation, and look at the entire balance sheet. By doing so, the country will see a much more complete picture of what can be done to solve this debt crisis now and in the future. Going forward, the US federal government must cut wasteful spending by eliminating redundant government agencies and duplicate programs. They should return to the regular appropriations process and allow Congress to debate any new spending requests that differ from the approved budget.

In my view, the problem the government is facing is managing cash flow badly as they plan expenditure over income year over year without making an attempt to balance the budget and derive surplus cash. This problem is exactly the opposite of subprime market crisis the economies faced last decade where most banks only looked at the value of the properties (Balance Sheet) and lent money without looking into the potential income stream (Income Statement) to pay back the debt. There is no one magic bullet to solve this problem.

It is time to think not to get indulged in wars directly as it is not the duty of the United States to be policing the entire world. Even if it has to be done on a humanitarian basis, it should be done in collaboration with other nations. There has to be effort to build infrastructure that is actually crumbling fueling growth. There has to be a bold effort made to talk openly about the welfare and a conscious bipartisan effort to restructure the welfare so that it self-funds itself instead of borrowing non-available funds. Other than national defense, non-discretionary government expenditure should be cut down and every successful government should shrink the size of the government. Governance is essential for every nation but should be at a manageable cost. It is time to look at the trade deficit and balance the trade with every major country in the world including China. The loopholes in tax laws will have to be plugged and the tax codes will have to be simplified as much as possible. The taxes will have to be reduced to the level of the rest of the world to fuel more economic growth. The import of oil should be considerably reduced by tapping alternative energy sources. The US economy needs to rebuild the factories, increase jobs, pay fair share of taxes here in the US, keep cash reserves in the US and boost exports. It is time to retrain the working Americans and change the educational system commensurate to the new job opportunities for the young Americans.

The fundamental reasons for the growth of this economy over the last two centuries is a) excellent infrastructure, b) pursuit of research and development, c) vibrant immigration policy, d) small government and balancing of the budget, e) manageable public debt, f) market-driven economy with minimum regulation but people running corporations not with greed but with righteousness, and g) well-structured justice system. In my view, many of the social issues would disappear if the economy becomes vibrant.

 

Dear Smt. Jayasala:

You are right. There is a lot more that had resulted in subprime market crisis and I can't list all of the reasons in a short thread. The primary reason is greed as most financial market executives were given incentive to increase lending, something called "derivative" played havoc in the market place, corporate governance went haywire and government had to intervene with a lot of regulation to bring it back to ratio based lending practices. Average Americans were on a spending spree without worrying about their income stream as lending was available at an attractive economic model based on overvalued real estate assets instead of thinking about how they were going to pay back. When this happened, so many average Americans have lost their houses (now famously known as foreclosure of debt) as the banks proceeded against them. All small banks were closed by the FDIC declaring bankruptcy while those who are too big to fail were saved by investing the tax money.

Every country has political parties which have good and bad policies. What is considered strength for one party becomes the weakness of the other. If one political party is welfare oriented to make the lower and middle class successful and lack determination to grow the economy faster, the other is worried about cutting taxes for the top 1% of the wealthy Americans under the pretext of growth of the economy. If one is interested in increasing the defense spending and indulge in wars under the pretext of national security, the other is reducing the defense spending and withdraw from wars leaving the country vulnerable to terrorist attacks. There has to be a balance between liberal and conservative policies. Conservatism is like working with the head and liberalism is working with heart.

Even in India, when the same BJP party was in power earlier, they were no different than the congress government that ruled India for many years. It is Modi who makes the difference now in the BJP. Manmohan Singh who was most respected as the Finance Minister in the world after India became an open market economy, turned out to be a bad PM by tolerating all corrupt practices.

I am not sure whether IMF and World Bank have their acts together either. They taught how to run the economies for under developed and developing nations for decades and when the big economies made major economic mistakes, these autonomous bodies neither had foresight to warn these big economies nor condemned their unsustainable economic principles. After all, these organizations rely upon these big economics to manage their budget.

Can you believe, the world's leading economies such as the United States, China, Japan, UK, France, Italy, Canada and Australia are not balancing their income with expenditure? India still carries a deficit of -36.2% because the government spends more than the revenues. I am glad Modi is now bringing some awareness about welfare and why is it important to increase the GDP and reduce spending including welfare. Raghuram Rajan is a great economist and he is an asset to the Indian government. He regulates the Reserve Bank of India well and he speaks very boldly to the financial institutions about their failed business policies.

Transparency should be the principle as far as financial institutions are concerned. There is a recent request here in the US that even Federal Reserve should be audited and their decisions reviewed by an independent body. Larger economies have greater social responsibility to behave well as any impact in their economy has worldwide repercussions.

Viswa

 

Dear Balajee,

You said it perfect. The corporate greed is driving them to do business whichever way they want to drive profits. The justification made by both Republican President Bush and Democratic President Obama is there are corporation if allowed to fail would create havoc to the common man because they are too big to fail. If that is the case, they should have either been split into smaller organizations or better regulated earlier. The Corporations want freedom to do business without government interference. For that, the corporations should behave responsibly and righteously.

Only consolation is bail outs are loans and they were all paid back with interest by the corporations and the Treasury made some good income with no tax burden. In my view, those who committed the crime of mismanaging corporations should be prosecuted and the corporations who were bankrupt should have been allowed to fail. But both parties were afraid that people may be furious with them for not doing a good job of regulating them well. Even people who borrowed funds because it is available at a competitive valuation without thinking about how to pay back the debt should face the consequences of not being responsible.

Viswa

 

Dear Shobamma,

The World Bank and IMF offer free advice to the economies to promote the business philosophies of greedy Western countries. They subsidize loans to such poor countries in order to promote the products and services of the funding Western countries. They are supposed to be autonomous but work to the dictate of the Western countries. They have no guts to tell the Western civilization about their poor handling of their respective economies.

Thank God, countries like India & China have intelligent economists at the helm to do what is right for their respective countries instead of blindly following the IMF directives. Despite so much pressure from the Western civilization to make the currencies market-driven, these two economies are still regulating their currencies until they reach a certain size. If the economies or governments succumb, the people are the sufferers.

Viswa

 

Dear Inboxsweetie,

Thank you for taking the time to read and appreciate this thread.

Viswa