With all the demagoguery surrounding the discussions of the Deficit, people with different agendas bombard us all with information that is often conflicting with the facts. To gain some perspective, I propose putting this deficit debates/demagoguery/drama of the last decade or so on a scale with which we are all familiar-a football field! And here is what I have found…
To start with, let’s identify the two extremes of Deficit politics. These will be our End Zones. Once the ball has gone in here, the game has changed. On one side we have a balanced federal budget dependant on no external debt, an opportunity to return to the gold standard with gold reasonably priced and all the stability and transparency that the modern equivalent of the gold specie flow mechanism would supposedly bring. On the other side of the field, we have the dollar becoming worthless with bond markets around the world refusing to buy our T-bills and the dawn of severe (if not hyper) inflation!
So where are we on this scale? It is a very difficult question to give a clear unqualified answer to. And one of the problems regarding answering this question is confirmation bias. Everyone is guilty of it, myself included. All too easily, stats that agree with our pet schools of economic thought will be highlighted and contradicting information will be dismissed. We’re only human.
I think we can all agree that this nation is nowhere near the Balanced Budget End Zone! As a matter of fact, I don’t think it’s an exaggeration to say we’re in our own territory with a Government-Fed Defense that keeps giving up yardage! But where are we? Are we inches away from allowing that hyperinflation touchdown? Are we in the Red Zone with one screw up getting out of hand resulting in that touchdown? Does recent news from the IMF that they would rather replace the U.S. Dollar with the SDR-IMF currency count as being at the Red Zone? Or does that count as us scrambling to stay out of Field Goal Range? Were we really on the other side of the field during the Clinton years and able to kick in the balanced budget Field Goal?
I’m afraid that I have to stop my little thought experiment here for just a moment. Using a football field as a scale is problematic, as I’ll demonstrate shortly. And the problem with Football metaphors when it comes to an exercise like this is that they can be too easy to spin. I’m trying to use a Football Field to gain some idea of the scale that we are dealing with. It’s all too simplistic to answer those questions that fit whatever school of economics you back with a football metaphor. We run the risk of diverting our thought experiment if we indulge in that too much.
Some obviously absurd examples…
“Well, you obviously know nothing about economics if you don’t agree with what Lord John Maynard Mises said regarding this very issue, we punted the ball in ’72 when we gave up the gold standard!!!”
“Nonsense, Ludwig Von Keynes said we could intercept the Shotgun Pass at Fed induced inflation and thus there is no Liquidity Trap!”
“You’re both wrong, the Phillips curve combined with Barack W. Bush keeping the Iraq War off the books shows we could have guns and butter before Alan Bernanke fumbled the ball with the Housing Crisis!”
I don’t agree with any of what I just spouted…I just wanted to demonstrate that I can pull this nonsense out of my butt all day if I have to. Let’s agree to forgo it and get some scale of just where on the gridiron we are. We can go back to our teams when we are done!
Let’s try to define the Balanced Budget End Zone for starters. Per CNBC, the U.S. has 8,965.6 tons of gold in Fort Knox. It’s the biggest stash of gold in the world. Compare that to Germany (3,749.8 tons), the IMF (2814.1 tons), Italy (2,702.6), France (2,684.6), China (1,161.9 tons) and Switzerland (1,146.5). Further adding to our international strength in this regard, the U.S. is by far the largest member of the IMF. The SDR (Special Drawing Rights) currency that the IMF was advocating to replace the US dollar is weighted with U.S. Dollars. Every SDR is 41% U.S. dollars. So if we apply that ratio to the IMF’s gold supply, our gold reserves are 10,144.7 tons. Germany, France, Italy and China combined have 10,298.9 tons.
If we were to put a dollar value on our gold supply at the current market price, $1500 per ounce then each ton of gold is worth 48 million dollars at 32,000 oz per ton. That means our total gold reserves including what we have weighting the IMF’s SDR is $486,945,979,200.
And at this point, we need to return to the first day of class in Economics 101 and answer the question “Are Assets Money?” And we need to do that because there is an obvious discrepancy between the $486.9 Billion figure representing our gold assets and the $14.72 Trillion figure that is our GDP. It affects the size of our theoretical Football Field. If our attempt to go back to the gold standard merely raises the price of gold to the point where everything has gold backing and we don’t care what the price of gold rises to, do we go with representing everything in our $14.72 Trillion economy with Fort Knox gold? Or do we merely cover the current Federal budget expenditures subtracted from our budget outlays (about $1.3 Trillion)?
Well, if everything in our economy is going to be represented by gold in Ft. Knox, then one ounce of gold is worth $45,343.87. If we’re only going to cover the outstanding Federal budget expenditures when we do this and afterwards behave ourselves then the price of gold is $4,004.50 per ounce.
In June 2000, when the price of gold was $290 per ounce and Bill Clinton was in office, each ton of that same amount of gold would have been worth $9,280,000 per ton for a total of $10,942,121,312. Adjusting for inflation brings the number up to $14.29 Billion. That’s $486 Billion worth of gold now that would only be worth $14.29 Billion if we returned to the gold standard when it was cheap back in the Clinton years and had not messed with the markets at all no matter what our needs are. That’s a factor of over 34 between 2000 and now.
It illustrates a very important point about this gridiron, it is elastic where as a real gridiron is not. If this were a real football team playing, don’t you think the Offense would have noticed the field stretching and said something if the Defense kept giving up enough ground to score 34 touchdowns and yet they only remain just outside Field Goal range?
The game could have changed if we had gone back to the gold standard when gold was $290 an ounce in 2000. The opportunity was blown (by a conservative House and President at the time) and probably won’t come around for another generation. Part of the reason this is advocated is that you lose the ability to stretch the field if we return to the gold specie flow mechanism. The equilibrium would be automatic in that case.
Are assets and wealth considered money? Not the way things are right now. Land, gold, silver, and other commodities are very problematic for pure barter. Money is the mental contract we all indulge in for easier barter of not only these commodities, but also finished goods and services. Gold backed currency can indeed fit the definition of money. But so can fiat currency, so can casino chips in the casino they represent, and so can electronic ink on a hard drive in the Federal Reserve building.
There are problems with fiat currency as well. Which brings us to our other End Zone the point at which the Bond markets quit supporting the fiat U.S. dollar. Our current GDP is $14.72 Trillion per CIA World Factbook. If we add up public debt (the debt held by the public only) and the gross debt (the intergovernmental debt owed to ourselves) we arrive at a figure that is approximately 88.9% of GDP. We are actually in good company of other countries who have large gold reserves. France has public debt that’s 83.5% of GDP, Germany has public debt that’s 78.8% of GDP. The U.K has 76.5% and China has 75%.
As a matter if fact, you can see how unrelated public debt and quality of life in a country are by scrolling down to the bottom of the list and seeing a country with 3.3% GDP worth of public debt and a quality of life so good that they are currently in the middle of a Civil War-Libya!
But to be fair, let’s establish a number that uses external debt as the tipping point for the U.S. dollar. If we go to the list of external debts (not public debts), the US is the leader at 13.98 Trillion followed by the other countries/Central Banks with high gold reserves, the E.U., U.K., Germany and France. When it comes to this ratio-External debt to GDP, other high gold reserve countries are not as close as we are.
Country External Debt GDP
USA 13.98 Tr 14.72 Tr
France 2.16 Tr 4.69 Tr
Germany 2.96 Tr 4.71 Tr
U.K. 2.19 Tr 8.98 Tr
China 406.6 Bl 9.87 Tr
Italy 2.22 Tr 1.7 Tr
Greece 532.9 Bl 321.7 Bl
So let’s give a generous benefit of the doubt and call the point at which Bond investors get tired of playing on an expanding Football Field and lose confidence in the currency of the country with the largest gold reserves in the world as when we become like Italy (a country with high gold reserves) with approximately external debt 130% of GDP and public debt 118.1% of GDP. The reason for that is that Italy is a high gold reserve country with a Central Bank (like us) and there have been calls recently to question Italy’s ability to service their external debt. The point where our external debt has reached $19.136 Trillion will be our Insolvency End Zone. Incidentally, there is currently no run on Italy’s debts just rumors, but we are bigger than Italy.
On one end we have where we were in 2000 with $14.29 Billion worth of gold in Fort Knox, gold at $290 an ounce and a projected budget surplus. On the other end we have $486.9 Billion worth of gold in Fort Knox with gold at $1500 an ounce and external debt of 19.136 Trillion. And we’ve just stretched the Field again by raising the debt ceiling. So, where are we?
Contrary to popular belief we never had a budget surplus in 2000. We had a projected surplus. It would be as fair to call the projected 2000 Clinton surplus Field Goal range as it would be to call where we are now Field Goal Range. A misstep dealing with the debt ceiling would cause a crisis of confidence in the Bond markets, but that won’t happen if we stretch the Football Field again (which we will)!
I think it’s safe to say that we are playing Defense just outside of Field Goal Range. And it is important to remember how we got here. Because if we can reverse it, we can regain ground we lost.
We are not at 1st and inches on our own goal line no matter what the pundits repeat ad nauseum. There is a difference of $5.156 Trillion before we get to that point. And that’s assuming that Bond markets would react negatively to us. Let us not forget that the Italian Euros are not the world’s default currency and default petro-currency, so we might have more leeway than Italy if things come to that.
So what was just outside Field Goal Range on the other side of the Field when we could have kicked that ball and achieved a balanced budget? Let’s start with 2003, the Iraq war had started and we had some of the current deficit hawks saying very clearly that they welcomed more debt. Rick Santorum let it slip that he did not consider himself a deficit hawk and he loved being able to use a lack of funds as an excuse to say no! (There is something very revealing in the way Washington elitist hypocrites absolutely loath tax money being spent to directly improve the lives of the people who pay those taxes.)
In 2003, with the war machine spending money like a coked up spoiled rich boy whose daddy was the local Congressman, our GDP was 10.918 Trillion dollars. Adjusted for inflation that’s 13.345 Trillion in 2011 dollars. Our external debt was 6.57 Trillion. Adjusted for inflation that’s 8.03 Trillion in 2011 dollars. That’s external debt that’s a little over 60% of GDP. That’s the 30 yard line on the Balanced Budget Side.
So the difference between that 30 yard line and the 30 yard line on the Fiscal Insolvency side is the difference between 60% and 95% of GDP in 2011 dollars on a Football Field we can stretch and distort as much as we may need to.
The reason we can not possibly be at the 1st and inches point is because of the behavior of the House Republicans so far. Since riding into office on promises of fiscal responsibility, they have spent $7.5 billion in extra defense spending which offsets them using deficit concerns to cut $4.4 Billion from programs they have always hated anyway. If this really was a 1st and inches deficit situation, they wouldn’t propose going $3 Billion closer towards fiscal insolvency and hyperinflation. They can’t advocate repeal of the meager Health Care reform at a cost of $23 Billion per year and have the claim that “we are out of money” be taken seriously! If we are truly on the verge of losing confidence of the Bond markets, why not lose the useless and counterproductive oil and ethanol subsidies, worth $99 Billion total?
Oh, and by the way, am I the only one who noticed that we opened up a new third military front at the exact same time we “ran out of money” last April?
The things that moved us down to this position on the field faster than anything, the Bush tax cuts and the Iraq/Afghan war, could move us safely back to better field position if we went back to 1990’s tax rates (worth $3 Trillion) and brought our soldiers home now that bin Laden is fish food (worth $159 Billion).
If anyone in Washington really cared about its unemployed citizens, it would stop the financial bleeding of the States who have to cut jobs right and left. The cost would be the equivalent of giving up a yard or two in the direction towards fiscal insolvency, true! But Police, Fire and Education would be strengthened instead of weakened and thus those states would be more attractive for investment. Consumption would increase as would the tax base and we’d find ourselves moving the other direction down this Football Field FAST!
And just in case you thought that China buying our T-Bills during the Iraq War and enabling this situation to come about was done out as a kind byproduct of “Free Trade”, take a good look at their external debt to GDP ratio. Their external debt is 4.12% of GDP. They are in a 1st and inches position to score a game changing touchdown and Obama, the GOP, Bush, and conservatives nationwide helped them do it!
