Who’s Paying The Bills

Today I read that over 40% of all Americans are now receiving some sort of government aid. If we assume that’s roughly accurate, and add to that all of the Americans who are employed by government (about 7.5% excluding schools & post office staff), or who are being supporting by them (assume 2x, based on the fact that now less than 50% of all Americans are officially employed), we already get 55%.

This comes close to the figure of 58% estimated by Gary Shilling in 2009.

If we add in all those working indirectly for the government, such as school teachers, government military contractors and those countless businesses dependent on the government tap, that must bring us close to 70% of the workforce. Since government doesn’t tend to produce very much in terms of useful goods and services, this means that probably less than 15% of Americans are supposedly “producing” enough to cover the needs of the rest.

But are they? Is this humanly possible?

The answer is probably not. And in fact, that’s not at all what’s going on. What’s going on is that foreigners are taking up the slack: mostly Chinese, Japanese, Germans, Dutch plus the oil-exporting Saudis, Norwegians, Russians and Iranians.

Here are the current account balance stats from Wikipedia, in billions of USD:

China + 296b
Japan +131b
Germany +110b
Saudi Arabia +96b
Russia +76b
Iran +60b
Netherlands +53b […]
USA -380b

Even more revealing is the following chart showing current account surpluses and deficits as a percentage of world GDP. [Even if we admit that GDP numbers always contain a fair portion of fantasy, still they can serve as an effective “deflator” to keep multi-year comparisons in perspective.]

Current Account Balances 1970-2010, in % of World GDP

(Thanks to Luiz de Mello & Pier Carlo Padoan)

It is hard to believe that this massive long-term transfer of resources can continue indefinitely. Even if one were to argue that these transfers essentially amount to a type of regular tribute paid to the world’s leading military power, the ever-mounting influx of “unpaid” goods to the United States has resulted in a hollowing out of US industry – and an increasingly widespread poverty throughout the country. The scenario is reminiscent of that of post-1492 Spain, which brought in so much tribute from the Americas that first all industry, then finally the entire country essentially went out of business. Put simply, history shows that such a tribute-centric model is not sustainable.

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2 Responses to Who’s Paying The Bills

  1. two_worlder says:

    If shutting down this system of IOU’s from the USA will cripple them too, does the rest of the world have the guts to call their bluff? Or will they shut their mouths for as long as possible and tell the people that all is well. It seems that all attempts to float a new money system based on gold or other tangibles get shut down before they can start.

    The enemy here appears to be logic, checks and balances, and nobody really knows the value of THINGS.

    • Ponderer says:

      Indeed. Incessant printing of fiat money does just that: By distorting the price mechanism it undermines the ability of the public to accurately assess the real value of things.

      That said, I think that history shows the incredible resiliency of markets – if they are only allowed to operate! The fact is that in REAL terms it makes no sense to give away your goods in return for IOUs which can never be repaid. The only way for the Chinese, Japanese & German governments to prolong this fraud is to make their peoples believe that they are getting something valuable in return for the yuan, yen and euro which are being generated in the trillions to buy up worthless US dollars. By creating all sorts of asset bubbles that works for a while – but certainly not forever.

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