Is The U.S. Government Too Big To Fail?

Is The U.S. Government Too Big To Fail?

by Marv Dumon


When considering whether the U.S. government is too big to fail, it's helpful to look at historical precursors and ask yourself: Was the Roman Empire too big to fail? How about Genghis Khan and his Mongolian Empire, or Alexander the Great and the Macedonians? Can we find an everlasting civilization in the ancient Egyptians or the early Chinese? History not only teaches, but shows, that civilizations and species are only as fragile as one non-adaptive and careless generation.

Most people believe that incomprehensibly large systems are simply beyond demise, or are somehow invincible. Compared to other nation states and empires that once dotted the globe, America is a fairly young country, at a little over 200 years old. The U.S. boasts the world's biggest economy, which helps to fund and support its gargantuan bureaucracy. Massive amounts of liabilities on the government balance sheet, however, threaten significant cuts on important programs that are aimed at keeping the country strong.

Programs such as education, defense and homeland security, and technological research are reliant on adequate funding (along with effective implementation and execution) for the continuing long-term prosperity of the U.S. Significant fiscal pressures placed on the U.S. government may well reduce future funding of these critical programs - especially if belt tightening becomes the only option for fiscal responsibility. Lack of funding, along with lack of effectiveness of the funded programs, heightens the country's economic, geo-political and defense risks. (Learn more in our Credit Crisis Tutorial.)

Financial Metrics
The U.S. economy is the world's largest, with a gross domestic product (GDP) of approximately $14.5 trillion as of the end of 2008. This economy supports a massive governmental bureaucracy with a budget of $2.9 trillion for 2008. This budget represents annual expenditures spent on defense, homeland security, education, health services, infrastructure and other programs. The latter half of the 2000s saw severe economic pressures on ordinary citizens, the federal government, as well as state and local governments. (Mutual funds devoted to keeping roads, structures and communities safe can make you money, read Build Your Portfolio With Infrastructure Investments.)

A Decade of Missteps
As of the latter half of the decade ending 2010, the federal government and markets underwent the following:
The war on terror cost hundreds of billions of dollars in 2008, and was projected to rise in 2009. Since 2001, the total cost of the war has exceeded $2 trillion.

The years from 2000-2008 brought in the five biggest budget deficits in America's history. In 2008, the federal budget deficit exceeded $450 billion – an all-time high at the time. In 2009, the budget deficit is expected to exceed $700 billion. That deficit figure was highly unforeseeable (if not unimaginable) merely a decade earlier.

2008 saw the U.S. hit a 53-year high for national debt as a percentage of GDP. In the fourth quarter of 2008, the national debt clock in Times Square ran out of space, and had to eliminate the dollar sign in order to add another zero to the government's debt. As of October 2008, the national debt exceeded $10 trillion for the first time. Merely three months later, the national debt exceed $10.6 trillion, and at the time, some were expecting the national debt to increase by $1 trillion within the next year. (Learn more in The Treasury And The Federal Reserve.)

To facilitate the national debt, the federal government had to borrow more money, much of which came from foreign sources including the Middle East, Europe, China and others. Additional liabilities on the balance sheet means that the government has to set aside interest payments that could otherwise be spent on education, healthcare, infrastructure and military programs. Interest payments are essentially a zero sum expenditure with high opportunity costs. (Find out more about these debt obligations in Buy Treasuries Directly From The Fed and Where can I buy government bonds?)

U.S. taxpayers, with their periodic payroll checks, have been funding Social Security and Medicare in anticipation of benefits as they get older and retire. Congress had been spending hundreds of billions of dollars of trust fund money on various spending programs, as opposed to setting it aside for the taxpayers' retirement benefits. In 2008, Congress "borrowed" $674 billion in Social Security trust funds. Social Security and Medicare have been regarded as unfunded liabilities. That is because only a portion of the monies provided by taxpayers are actually set aside. They are also regarded as generational liabilities, which is when a current generation borrows money, and when they die, the bill is handed off to future generations – while the current generation benefits from the current spending. As the U.S. approaches the end of the 2000s, some economists and government accountants estimate that these unfunded liabilities would exceed $80 trillion. (For more, check out Introduction To Social Security.)

A U.S. and global economic recession not seen since World War II was placing financial stress on citizens, affecting the lower, middle, and upper classes. Wall Street's poorest performance since the Great Depression of the 1930s saw stock market wealth worth $6.9 trillion wiped out during 2008.

Over one million jobs were eliminated in the U.S. in 2008, which contributed to the unemployment rate approaching 8%. With U.S. per capita earnings of $48,000, one million layoffs translate to approximately $48 billion in eliminated payroll and earnings for working families. These statistics do not include under-employment figures in the country – it is estimated that one out of nine Americans are underemployed. As of 2007, approximately 12.5% of Americans lived below the poverty line. (From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone in Macroeconomic Analysis and Economic Indicators To Know.)

The housing collapse was expected to require government intervention and action on mortgages that require over $1 trillion. American homeowners saw over $1.9 trillion in home values wiped out in 2008. A frozen credit market forced the government to spend several hundred billion dollars through a stimulus package. Continued frozen credit facilities through 2009 made the economic downturn of 2008-2009 more protracted and more costly for the government.

Future Opportunities
The U.S. continues to be the most technologically advanced nation in the world, with the best research universities. New developments and advances can bring a wave of economic stimulus simultaneously ushering in a new age in commerce activity.

These areas could become the economic rallying cry to uplift the economy and refill government coffers:

•clean / alternative energy and fuel efficiency
•infrastructure building and repair
•nanotechnology
•robotics
•healthcare advances

Parting Thoughts
The ruins of ancient Rome, and numerous other civilizations centuries ago, serve as warning to national leaders against taking rash actions on behalf of their people or on behalf of future generations. Such gambles can spell disaster, and risk the very existence of the state. Fiscal irresponsibility may not bring about such a rapid decline as that of Napoleon's charge on Russia, or Germany's multi-front wars, but it can lead to a longer-term protracted decline similar to ancient Rome's nagging and continued multi-front wars and internal discord.

Fiscal decline is a slower process of reduction in flexibility, which forces leaders to make choices in proportional constriction. Affected citizens encounter reduction in economic wealth and quality of living. The philosophy of monetary and resource conservatism has endured over the millennia, from agricultural to hunter-gatherer societies, for a reason. There is a time when corrective measures in the form of resource conservatism, temperament and an urgency in common sense, are the clarion call of the times. (Learn about the series of events that triggered the Great Depression and other crashes in The Crash Of 1929 - Could It Happen Again? and our Market Crashes Tutorial.)

by Marv Dumon, (Contact Author | Biography)

Marv Dumon serves as a mergers and acquisitions advisor for a middle-market financial services firm specializing in industrial and energy companies. He maintains established relationships with more than 500 mid-market private equity firms. He also serves as a national business and finance columnist for Examiner.com. Dumon's background includes experience in consulting, finance and operations with several organizations including two S&P 500 companies. He received a Bachelor of Arts, a Bachelor of Business Administration and a Master of Accounting from the University of Texas at Austin.

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