By Paul B. Farrell, CBS.MarketWatch.com
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