CBSMarketWatch: 10 deficits to topple U.S. economy

By Paul B. Farrell,
Last Update: 8:28 PM ET April 12, 2004

ARROYO GRANDE, Calif. (CBS.MW) -- Deficits, deficits, deficits. We hear a lot about "connecting the dots" in the intelligence arena. But nobody's connecting the deficit dots.

Vice president Dick Cheney reminded critics that "Reagan proved deficits don't matter." Maybe he's right. We've dug our way out many times before. But Cheney is only talking about the federal deficit. What about all the many other mounting deficits throughout the American economy? Like Warren Buffett's recent warning about the trade deficit: "We're selling the nation out from under us."

I see at least 10 deficits accumulating. Maybe one or two aren't worth the pessimism Buffett expresses. But taken together, when all the dots are connected, we may be watching a critical mass of multiple domestic deficits, one that will implode and do more damage than any external terrorist threats.

1. Trade deficit

As a result of huge annual trade imbalances, foreigners now own $2.5 trillion of America. And it'll get worse. Buffett using a folksy analogy in Fortune: America is acting like a rich farmer that's consuming more than they produce. To cover the shortfall they sell off big chunks of their land every year and increase the mortgage on what's left. Coincidently, the value of our currency continues dropping in the global market; eventually that'll backfire, triggering trade wars.

2. Federal deficit

Maybe deficits don't matter. But out-of-control spending does. The budget's growing at an annual rate of nine percent, and that's with the party historically against big government in power. Yet neither Congress nor the President has any desire to control spending. Instead, America acts like obese teenage drug addicts with stolen credit cards. Today's $500 billion annual deficits have reversed a one-time projected surplus of $5.6 trillion and will drive America $7.8 trillion in debt by 2011.

A Brookings Institution study warns that if we do nothing for the next 10 years, problems will get so bad that "balancing the budget would require a 41 percent cut in spending on Social Security and Medicare, a 47 percent cut in discretionary spending, or a 17 percent cut in all non-interest spending." The study also predicts that politically nothing will be done until the crisis explodes.

3. Medicare deficit

The Medicare reform bill passed with inadequate prescription drug freebies for voting seniors. The drug cartel got huge benefits including an absurd no-price negotiation clause. Within weeks the White House had to admit the price tag was underestimated; it is $500 billion not $400 billion. Boston University economist Larry Kotlikoff estimates long-term net Medicare debt at $36.6 trillion, and climbing. Politicians will want to give seniors even more, negating any chance of serious reform.

4. Social Security deficit

Social Security will be bankrupt by 2016. Or 2046. Or maybe never, depending on which politicians are jiggling the numbers. Critics blame the tax cuts, warning of $7 trillion shortfalls. But Wharton Economist Jeremy Siegel says a one-percent change in productivity estimates and the problem disappears. Still, the administration promised to privatize Social Security, giving Wall Street access to trillions of new fee-generating assets. Unfortunately, privatization will not take care of the system's underlying structural problems and America's declining savings rate.

5. Savings deficit

We have become a financially obese consumer nation, with little set aside for the future. Since 1980 the savings rate of American citizens has dropped from eight percent to about one percent. Only one in three Americans is saving enough to retire comfortably. The net worth of the average American, exclusive of home equity, is only $15,000. Without Social Security the average person over 65 would be living below the poverty level.

6. Consumer-credit deficit

Easy credit encourages ever increasing consumption. Today consumer debt is about $2 trillion and increasing. That doesn't include home mortgages. Meanwhile, more than one million Americans declare personal bankruptcy annually. We are a nation living beyond its means, mortgaging the future excessively.

7. Energy-oil deficit

Economist Paul Erdman recently wrote: "One of the great geopolitical clichés of our time is that he who controls the supply, and thus also the price, of crude petroleum, is Master of the Universe," but that's no longer true. So far the Iraqi war has produced the opposite result intended. We've driven allies away and hardened alliances among Islamic nations, many of which control the supply and price of oil. More and more we see deficits in our access to oil. The rising price of domestic gasoline is just one consequence.

8. War deficit

We are now engaged in World War III, euphemistically calling it a war on terror. It will continue indefinitely. Unfortunately, the federal budget omits long-term estimates of maintaining 100,000 military in Iraq, another deficit exceeding $1 trillion over the next decade.

9. Credibility deficit

America's international credibility is near zero due to our failure to find the weapons of mass destruction in Iraq. Even our allies don't trust us. And a billion Muslims worldwide now see America as the neo-Christian crusaders attacking their culture. Moreover, the internal political forces that pushed the administration into war with Iraq are now working behind the scenes to escalate this WW III to a new level, by attacking Iran.

10. Humility deficit

Humility? We've lost it. That's lethal. Political historian Kevin Phillips warned us: "Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out." And the cost of our arrogance may compound America's multiple deficits for generations to come.

If you're bearish and pessimistic, Buffett offers a tip, he has $31 billion in cash sitting in his Berkshire Hathaway Fund (BRKA: news, chart, profile) because he says there's nothing worth buying. If you're a bullish investor, do nothing -- assuming you have a well-diversified portfolio.
To Rich Gibson's Home Page