Healthcare Costs Could Overwhelm U.S. Economy

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The U.S. Supreme Court is expected to rule in June on the Constitutionality of the Affordable Care Act, also know as 'Obamacare'. The latter name is either used pejoratively by the President's adversaries or in complimentary fashion by his supporters.

For better or for worse (and since the law won't fully go into effect until 2014, it may be too soon to tell), crediting or discrediting the President for the law is misleading. After all, the 2,700-page law was crafted by Congress, in conjunction with the healthcare, insurance and pharmaceutical industries.

However, the final bill was passed with no Republican votes, which made it immediately controversial.

A reasonable argument can be made that the law is too long, too complex and had far too much input from the private industries that stand to benefit from the law's existence.

The one thing that most Americans — conservatives and progressives alike — seem to dislike about the law is the mandate requiring every American to carry health insurance coverage. Conservatives see it as a direct assault on their freedom and progressives see it as a generous gift to the private health insurance industry.

No matter how one views the law, there is no denying the litany of problems with the current U.S. health care system.

Health care spending now accounts for 18% of the US economy — the highest proportion ever, according to the government. As recently as 1980, health care expenditures were just 4.2% of gross domestic product.

By comparison, in 2009, industrialized nations spent an average of 8.9% of GDP for healthcare expenditures, according to the OECD. If the U.S. spent 9% instead of 18%, the annual savings to the nation would be roughly $1 trillion annually. That's stirring when your consider that Americans spent $2.6 trillion on health care in 2010.

The saddest thing is how little Americans get for their health care dollars.

The United States spends more on health care than any other country. But, at 78.2 years, American life expectancy is just 27th in the world. On the other hand, Japan spends $2,878 per person — about $5,000 less than the U.S. — and has the highest life expectancy among developed nations.

In most of the OECD countries, health care expenses come to more than $2,000 per person each year. In the 10 countries with the highest costs, expenses are roughly twice that.

However, in the U.S., spending on health care per capita comes to nearly $8,000 per person, approximately $2,600 more per person annually than Norway, the second-highest spender.

In four of the countries with the most expensive health care, pharmaceutical expenses come to at least $600 per person per year. In the U.S., those costs are more than $950 per capita, the highest in the world.

Even if the health care system ultimately saves lives, attempting to pay off all its associated debt is destroying many others.

From 1999-2009, health insurance premiums for families rose 131%, while the general rate of inflation increased 28% over that period. The increases in health insurance costs are not relative to anything else in the economy. They exist in a world of their own, driven by profit, high executive pay, advertising and marketing.

A recent study by the American Journal of Medicine found that 62 percent of all bankruptcies filed in 2007 were tied to medical expenses. The more striking thing is that three-quarters of those who filed for bankruptcies in 2007 had health insurance. This is further evidence of a truly broken system.

However, last year, roughly 50 million Americans were without health insurance, according to Census Bureau data. This amounted to 17% of the population in 2011. A report by the Kaiser Family Foundation found that three-quarters of the 50 million uninsured in the US are actually employed. Again, more evidence of just how broken the existing system is.

Sadly, things are moving in the wrong direction. Due to the struggling economy, more Americans lack healthcare today than just four years ago. In 2010, the total number of Americans with health insurance fell for the first time in decades.

Yet, the nature of many accidents and illnesses is that they are unpredictable and often unpreventable. Invariably, the uninsured end up in the emergency room with no means to pay the bill. Hospitals still treat them, but the ensuing costs are passed along to the Americans who are insured in the form of higher prices.

For this and other reasons, the unfortunate reality is that the U.S. has an exceptionally expensive healthcare system that doesn't deliver much value for all of its massive costs. As previously noted, this is largely attributable to the fact that the system is profit-driven and bloated by expensive marketing and advertising costs. The system is also inflated by generous executive compensation packages and the need to satisfy Wall St expectations.

For example, the U.S accounts for almost half of the global pharmaceutical market, with $289 billion in annual sales, followed by the EU and Japan. For years, the pharmaceutical industry has been the most profitable of all businesses in the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list of the most profitable industries, with a return of 17% on revenue.

The profit motive is clearly one of the primary drivers of costs. But perhaps the most worrisome issue is how little we get in return for what we spend.

According to a 2007 report issued by the Commonwealth Fund (a non-profit group that studies healthcare issues), America has the most expensive, least efficient healthcare system compared to five other industrialized nations.

The report found that — in order — Germany, Britain, Australia, New Zealand and Canada all provide better care for less money.

The reports’ issuers said, “The U.S. healthcare system ranks last compared with five other nations on measures of quality, access, efficiency, equity, and outcomes.”

The report also studied convenience, such as waiting more than four months for elective, non-emergency surgery. The U.S. didn’t fare as well as Germany, but was better than the other countries.

The Commonwealth Fund has consistently found that the U.S. — the only one of the six nations surveyed that does not provide universal healthcare — is inferior to the other nations in many measures of healthcare.

Though the Affordable Health Care Act has yet to be fully implemented, things haven't improved in recent years.

If the US wants to continue thinking of itself as a world leader, then it has to be able to do better than other industrialized nations. Like education, the health of the nation's citizens is not just critical, but fundamental.

Unquestionably, the U.S. has a highly advanced, highly technological healthcare system. If you are in crisis and in need of intensive care, or some form of life-saving surgery, the U.S. is among the very best. The problem is that the U.S. system focuses very little on prevention and health maintenance, both of which mitigate future costs.

As of 2008, 80 percent of all healthcare dollars were spent on chronic conditions. As the old saying goes, an ounce of prevention is worth a pound of cure — and it could also be worth billions in savings. Quite simply, prevention is a lot cheaper than treatment.

However, cost will not be part of the equation in the Supreme Court's decision-making. The Justices will simply determine whether or not it is Constitutional for the government to mandate that the American people purchase health insurance.

If the Court rules that it is not Constitutional, it could call onto question the government's ability to mandate many things. After all, laws are supposed to be compulsory, not optional.

Would the overturning of the mandate invalidate the Massachusetts healthcare law signed by Mitt Romney in 2006?

While conservatives now vehemently oppose the Affordable Care Act, the concept of an individual health insurance mandate originated at the Heritage Foundation, a conservative think tank, in 1989. Republicans also introduced health care bills that contained an individual health insurance mandate twice in 1993. And of course Republican Mitt Romney championed and signed such a mandate into law as Massachusetts' governor.

The conservative approach has been to create a truly national health insurance market, allowing people to purchase insurance from any of the 50 states. This seems logical. The larger and more competitive a market is, the lower prices tend to be.

However, the U.S. problem is a matter of high costs, which ultimately drive end-prices for consumers.

The other long-time conservative solution to soaring costs is tort reform. However, the 15 leading insurance companies had a 5.7% increase in malpractice payouts from 2000 to 2004, while increasing premiums by 120% during that period. Since malpractice lawsuits don't appear to be the problem, tort reform is not the solution.

That said, a solution must be arrived at soon because health care spending will eventually strangle the economy.

The U.S. healthcare system encourages hospitals and doctors to perform unnecessary medical procedures on people who don't need them, while denying procedures to those who do.

According to a 2005 report by researchers at the Boston University School of Public Health, about 10% of the U.S. population is responsible for 70% of its health care costs. That group consists primarily of the elderly and the chronically sick.

While we can’t stop the aging process, we can do more to avoid lifestyle diseases such as heart disease, hypertension, and diabetes. We can also stop spending so much on end-of-life care, which simply prolongs the inevitability of death.

The health care costs related to our aging population are poised to worsen. The health care system is on a collision course with reality.

The U.S. is on the threshold of becoming the first-ever mass-geriatric society. For the first time in history, people 85 and older are the fastest growing segment of the population. Over the next 20 years, the number of people over the age of 65 will double to more than 70 million, or 20% of the population.

Ultimately, America needs to spend more money preventing disease than treating it. In order to regain control of spiraling costs, the focus must shift to prevention. It's the chronic conditions that people ignore for so long — usually because they don't have insurance — that are so expensive to treat.

However, the government, doctors, hospitals, and insurance companies can only do so much. Ultimately, we need to do a better job of taking care of ourselves.

Two-thirds of Americans are overweight or obese, and this is the public health issue of this generation. The CDC has reported that obesity is now overtaking smoking as the leading cause of preventable deaths.

Additionally, diabetes is now viewed as an American epidemic and it is projected to become this nation's most costly disease. Incredibly, 90% of diabetes cases are Type II, meaning they are almost entirely preventable.

Yet, Americans refuse to change their behaviors and their lifestyles.

Our physical well being is largely in our own hands. Until we start taking better care of ourselves, the personal and economic costs will become increasingly burdensome to our nation as a whole.

Will U.S. Follow Europe Back Into Recession?

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While the news that Europe is back in recession is not surprising, it is still troubling.

This week, Britain's Office for National Statistics reported that in the first quarter of this year Britain's economy shrank 0.2 percent, after having contracted 0.3 percent in the fourth quarter of 2011. That makes this Britain's first double-dip recession since the 1970s.

Officially, two consecutive quarters of shrinking GDP indicates a nation is in recession.

It's been four years since Britain's real GDP peaked in the first quarter of 2008. At the end of the first quarter of 2012, its GDP was still 4.3 percent below its pre-recession high. That's telling. It indicates that Britain never truly recovered at all.

On Monday Spain officially fell into recession, for the second time in three years. This means the Iberian nation is now grappling with a rather rapid double-dip recession. The Spanish economy is projected to contract 1.8% this year, according to the International Monetary Fund. Bad news.

Naturally, the credit ratings agencies have taken notice.

Standard & Poors downgraded Spain by two notches on Thursday, from "A" to "BBB+", saying the country's budget problems are likely to worsen due to economic weakness. The contracting economy will ultimately expand the nation's debt. S&P also assigned a negative outlook, meaning it may downgrade Spain again in the near future. The lower rating will likely raise Spain's borrowing costs, which is the last thing it needs right now. Moody's had previously cut Spain's credit rating by two notches back in February.

The pain in Spain is widespread. The Spanish unemployment rate is a whopping 23.6%, with youth unemployment at a stunning 49%. That's akin to a full-on depression. Spanish home prices dropped more than 11% in the fourth quarter, year-over-year. And in December, mortgages collapsed 39%. That's also akin to a depression.

Amidst all of this gloom, the Spanish government is following other European nations in trying to reduce its deficit through painful austerity measures. Many doubt that this will do anything but shrink the country's GDP, making it even harder to repay its debts.

"Austerity itself will almost surely be disastrous," said Nobel Prize-winning economist Joseph Stiglitz. "It is leading to a double-dip recession that could be quite serious. It will probably make the Euro crisis worse. The short-term consequences are going to be very bad for Europe."

The fear is that Spain may eventually follow in the footsteps of its smaller euro-zone partners — Greece, Ireland and Portugal — and need its own financial rescue. The problem is that there is no mechanism in place to bail out Spain. It's simply too big to save and there isn't enough money to rescue it.

Like Spain, Italy is another economic zombie, shouldering a Greek-like debt-to-GDP ratio of 121 percent. And, like Spain, it is also too big to save.

Data released earlier this month showed no growth in France's economy in the first quarter. It seems highly likely that France is now contracting as well. Europe is so interconnected that these things have a tendency to spread. If Germany — the continent's economic powerhouse — follows, it would be a most ominous outcome.

These are huge economies we're talking about here. A European recession will have global consequences. Germany has the world's sixth biggest economy; the UK is ninth biggest; France is 10th; Italy is 11th and Spain is 14th.

As a whole, the European Union has the world's biggest economy. When Europe gets sick, the rest of the world can get sick along with it. Recessions can be contagious and are often global.

Even China's massive economy is slowing from its torrid double-digit growth rate. The global demand for goods is declining and this will affect all exporters, including the U.S. That could result in higher unemployment here and elsewhere.

Yes, this could get ugly.

Due to widespread deficit and debt problems, European governments have been making large budget cuts. But the private sectors in most of these economies have been struggling for years. The only thing keeping most of them afloat has been government spending. That's where all the debt came from.

So, cutting spending, while seemingly necessary, will have the unintended consequence of cutting into GDP as well. That will hurt the European economies and cut tax receipts, which will only make the debt problems worse. It's a downward spiral in which the medicine only makes the patient sicker.

While the ratio of a nation's debt relative to the size of its economy is often viewed as critical, what is more important is the size of a nation's revenues. That's what allows a country to pay its debts.

Which brings us to the U.S.

Absent the government's deficit spending, real GDP has been flat for 15 years. Without the growth in government debt, the U.S. would be in a depression. Perhaps the deficit spending was the lesser of two evils, but now the government has an absolutely massive debt problem on its hands.

After the November elections, Congress will have nine weeks to make a whopping $5 trillion in tax and budget decisions. Even if it weren't for all of the ugly partisan politics the process will surely involve, it would still pose an incredibly difficult challenge and be very unpopular with voters. There is a whole lot less money to fund the government these days, yet there are even greater needs.

The U.S. is still dealing with the hangover from the Great Recession. During any recession, GDP and revenue invariably decline, while safety net payments increase.

In 2010 the federal government brought in $2.16 trillion in revenue — down from $2.56 trillion in 2007 — putting revenue at a 60-year low.

According to the Congressional Budget Office (CBO), automatic stabilizer payments (such as unemployment and food stamps) are adding significantly to the budget deficit. And with 22% of the workforce either unemployed or underemployed, GDP cannot reach its full potential.

The CBO estimates that automatic stabilizers added the equivalent of 2.4 percent of potential GDP to the deficit in 2010, an amount somewhat greater than the 2.1 percent added in 2009.

Millions of Americans remain in dire straights and this is adding to the deficit. These people are not contributing to government revenues, but are instead relying on them. This is not about to change any time soon. In fact, if the U.S. drifts back into recession, the ranks of the needy are certain to grow.

Since the financial crisis, only about 15 percent of the total debt increase was due to the 2008 bank bailout (Bush) and the 2009 stimulus (Obama), according to the CBO. The rest was the result of a huge drop in federal revenues. Absent a rather immediate and significant reduction in unemployment, revenues will not improve.

As it stands, revenues haven't rebounded much and that's a bad sign for the government, the annual deficit and the total debt — now $15.6 trillion, and climbing.

Though the U.S. has added nearly two million jobs over the past two years, the economy is still down about five million jobs since the recession. The unemployment rate has been falling because so many people have dropped out of the work force. That tends to lower the total percentage of those officially defined as unemployed.

The labor participation rate fell steadily after the recession began in 2007, yet it has continued to fall ever since the economy started its 'recovery' in 2009.

An alternate measure of the jobless rate is the employment-to-population ratio, which paints a more sobering picture of the employment outlook.

After peaking at the end of 2006 at 63.4 percent, the portion of the 16-and-over population holding a job (excluding those in prison, the military, or long-term care) fell to 58.2 percent by the end of 2009. Since then, the ratio has barely budged — rising by less than half a percentage point.

That's not good for the revenue side of the equation.

While a solid argument can be made that the U.S. government needs to reduce spending, such action will result in some very heavy consequences. What the government really needs, above all else, is more revenue. Without it, the U.S. will be attempting to bail out a sinking ship.

I'm not arguing that the U.S. doesn't have to reduce its deficits, and eventually its debt. It clearly needs to do both. The country's debt burden is massive and potentially crippling. What I am saying is that the U.S. is caught between a rock and a hard place, with no good choices any more. We're damed if we do, and damned if we don't.

The U.S. will surely follow Europe's lead and initiate its own round of austerity measures in 2013. The budget cuts will shrink GDP, thereby shrinking revenues. Even if those cuts result in a lower deficit (they will by no means eliminate it), they will not reduce the underlying debt. Consequently, the smaller GDP and lower revenues will only raise the debt-to-GDP ratio.

The ratings agencies won't like that one bit. You can expect the U.S. to be downgraded yet again, probably next year.

Congress should have cut the government's budget when unemployment was low and wages were stronger. But cutting spending during this time of high unemployment and stagnant (or declining) wages will only cause unemployment to rise even further, which will reduce revenues even further.

Cutting the safety net payments that millions of Americans rely on will also increase the chances of social unrest. Desperate people do desperate things. It could ultimately result in the kind of social upheaval not seen in the U.S. since the 1960s.

Such unrest has already begun in Europe. Will the U.S. follow Europe down that road?

U.S. Will Bounce From One Economic Crisis To The Next

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The U.S. economy appears to be stalling.

Gross domestic product rose at a 2.2% annual rate between January and March, slower than the 3.0% pace in the prior three months. The first-quarter growth reading was lower than expectations.

Economic growth needs to be at least 2.5% to improve the nation's dismal unemployment situation. Anything lower won't even keep up with population growth.

The Commerce Department reported that durable goods orders tumbled 4.2 percent in March, the largest drop in three years. Durable goods range from appliances to aircraft. And recent data also showed that industrial production was flat in March for a second straight month. These are sure signs that the U.S. economy is slowing.

Even before this latest round of bad news, the nation was already grappling with the worst recovery since the early years of the Depression era. For tens of millions of Americans, there has been no recovery at all. And consumer sentiment reflects this.

Consumer confidence remains stuck in recession territory. The consumer-confidence index fell to 69.2 in April from a revised March reading of 69.5, according to the Conference Board. Generally, when the economy is growing at a good clip, confidence readings are at least 90.

Here's the central problem for the U.S. economy: the middle class — the nation's economic engine since the end of the Second World War — is vanishing. And the economy is suffering as a result.

The long term erosion of the middle class has triggered a major loss of purchasing power. The result is chronically inadequate demand for goods and services. Consequently, the economy struggles to grow, leading to further shrinking of what's left of the middle class.

The nation's relentless unemployment issue is only one part of the problem.

From January through April, the economy added an average of about 200,000 jobs a month. Though job growth of any size is obviously a good thing, that pace is not nearly fast enough to recover the losses from the Great Recession and its aftermath in the foreseeable future.

At that rate of job growth, it would take us until 2019 to get back to full employment. The trouble is, the country should actually have even more jobs given population growth and the current size of the economy.

Here's some perspective: the U.S. labor market started 2012 with fewer jobs than it had 11 years ago in January 2001. The only reason the unemployment rate keeps dropping is because people continue dropping out of the labor force. They're too discouraged to continue looking for work. Most worrisome, the largest drop in U.S. labor participation is coming from men 20 years of age and older.

That's a troubling trend.

Believe it or not, the U.S. economy is now producing more goods and services than it did when the recession officially began in December 2007. However, it is doing so with about five million fewer workers. Employers have learned how to produce more with fewer workers. That's good for employers, but bad for workers and the unemployed.

Unemployment aside, the other major issue is stagnant or declining wages for those who still have their jobs.

U.S. corporations are reporting record profits. In fact, they are sitting on a huge pile of money — an excess of $2 trillion — and yet the unemployment / underemployment rate stubbornly remains at 22%.

Clearly, there is still plenty of money in the U.S. economy. The problem is that far too much of it is concentrated at the top and is not being spent into the economy.

American CEOs saw their pay spike 15 percent last year, after a 28 percent pay rise the year before. That's in line with a trend that dates back three decades.

CEO pay spiked 725 percent between 1978 and 2011, while worker pay rose just 5.7 percent, according to a recently released study by the Economic Policy Institute. That means CEO pay grew 127 times faster than worker pay.

Last year, CEOs earned 209.4 times more than workers, compared to just 26.5 times more in 1978.

As long as all of that money remains concentrated at the top, instead of being fairly paid to workers in the form of salaries and wages, the nation will remain in decline.

Wealthy Americans spend a much smaller portion of their incomes than does the large, but shrinking, middle class. There are only so many houses, yachts and exotic sports cars the wealthy will buy.

Big U.S. companies have emerged from the deepest recession since World War II more productive, more profitable, flush with cash and less burdened by debt, says the Wall Street Journal.

An analysis by the Journal of corporate financial reports finds that cumulative sales, profits and employment last year among members of the Standard & Poor's 500-stock index exceeded the totals of 2007, before the recession and financial crisis.

But judging by the way the economy is performing, and by the number of people requiring unemployment and other government assistance, you'd never know it. These huge corporate profits haven't translated into an adequate number of good-paying jobs.

Instead, companies have driven their employees — fearful of losing their jobs — into becoming increasingly more productive.

Overall, the Journal found that S&P 500 companies have become more efficient, and more productive. In 2007, the companies generated an average of $378,000 in revenue for every employee on their payrolls. Last year, that figure rose to $420,000.

While corporations and CEO's prosper, ordinary Americans continue to suffer, many of them toiling away in low wage jobs.

Out of 34 industrialized countries, the U.S. had the highest share of employees doing low-wage work in 2009, according to OECD data.

One-in-four U.S. employees were low-wage workers in 2009, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

There are far too many low-wage earners for the economic well-being of the country. That's not good for a country in which 70 percent of the economy is driven by consumer spending. That sort of consumption seems unsustainable.

According to a recent study by University of California economist Emmanuel Saez, based on an analysis of American tax returns, in 2010, 93 percent of all new income growth went to the top 1 percent of American households. Everyone else, the bottom 99 percent, divided up the remaining 7 percent.

Again, as long as the middle-class continues to shrink and doesn't have adequate wages to spend back into the economy, this predicament will not only continue, but will worsen.

There is a widespread feeling of foreboding that the economy is not just stalling, but may in fact be headed for yet another contraction, resulting in a double-dip recession.

Famed economist Nouriel Roubini said the U.S. economy could fall into stagnation in 2013 and ultimately put the nation into the second half of a double-dip recession. Roubini, who correctly predicted the housing-market crash and recession of 2008-09, noted that real wages for U.S. workers are not growing and that America’s crushing debt is strangling growth. Roubini said that GDP will be “lucky” to grow 2% this year and the U.S. could retreat into near-zero growth next year.

And prominent Yale economist Robert Shiller, the designer of the Standard & Poor’s/Case-Shiller house price index, says that the global economy is mired in a "late Great Depression", despite the stimulus policies of central banks. Shiller says the world is in a “new age of austerity" and also says housing prices will drop by a further 20 percent as the downturn gripping the United States deepens.

All of that sounds quite stark. Yet, these two guys know what they're talking about. They've made accurate calls in the past. Both men can see the writing on the wall. And it isn't good.

Due to the financial crisis, the Great Recession and the subsequent stagnation, the federal government is dealing with a huge falloff in revenues. Meanwhile, there has been an enormous increase in consequent safety net payments for unemployment, food stamps and Medicaid. This is the reason for our continued annual deficits.

Government spending has actually fallen for six straight quarters as Recovery Act funds have been exhausted and state and local governments have struggled with tax revenue shortfalls.

Congress will be forced to act to address its fiscal crisis, or else the nation's credit rating could be downgraded yet again. Such a downgrade may inevitable no matter what Congress does. Yet, the legislative branch is now so dysfunctional that it would surprise no one if they fumble yet again.

The failure of Congress and the White House to agree on taxes and spending next year could spell doom for the economy.

Early next year, the government is set to enact huge budget cuts, while allowing the Bush tax cuts and the payroll tax cuts to expire. The likely result will be a choke hold on the already struggling economy.

We are finally seeing the limits of fiscal and monetary policies.

The Fed has pumped $2 trillion into the financial system, slashed overnight interest rates to zero and made the unprecedented promise to keep them there for an extended period. Yet, this is the best that monetary policy can do.

For good reason, Americans have little confidence in any of the institutions pulling the strings on the U.S. economy: Congress, the Federal Reserve or corporate America.

Europe is already in recession, and the U.S. is almost certain to follow. It is against this backdrop that the U.S. braces for yet another storm. We can only hope that we are not dashed upon the rocks like an old ship.

Given our structural deficiencies, it now seems that the U.S. is doomed to bounce from one economic crisis to the next. This seems to have become a way of life for us. It's a tough thing to get used to.

European Crisis Has Global Consequences

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What has been clear to me for quite some time is that Greece is going to exit the eurozone, either willingly or unwillingly. The nation is in a full-on depression and there is no way for it to ever repay its debts.

The Greek unemployment rate was last measured at 21.7 percent in February, a new record. More than half of young people (15-24) are without a job, a recipe for social disaster. In a population of 10.7 million, 1.1 million are jobless and only 3.87 million are employed, a decline of 8 percent, year-over-year.

Even the nation's population is in decline, which will thwart any lingering hope of long term economic growth. Absent a growth in population, energy supplies and credit, there can be no economic growth.

As it stands, the Greek economy is projected to contract by about 20 percent from 2008 to 2012. That's just brutal.

There has been a wave of corporate closures and bankruptcies across Greece. Tax collections, already poorly enforced prior to the economic meltdown, have collapsed.

Under these conditions, there is no way for Greece to grow its economy and service its debts.

Fearing a banking collapse, Greek depositors withdrew €700 million ($890 million) from the nation’s banks on Monday. This is creating a self-fulfilling prophecy and putting enormous strain on the Greek banking system, which will need even more funding from the European Central Bank.

The ECB is just one of the entities that Greece is heavily indebted to and will likely be unable to repay. At a minimum, given its plight, Greece may simply refuse repayment because it will otherwise remain permanently indebted.

At its heart, a debt crisis is really a crisis of confidence. In Greece, and elsewhere in Europe, there is no confidence.

The failure of Greek party leaders to reach an agreement to form a unity government is raising fears that Greece could soon be ousted from the euro zone. It may even choose to leave voluntarily. Such a possibility is rattling global financial markets. There is no mechanism for a nation to leave the euro zone and that is a vexing problem.

Any sign that Greece is preparing to exit the euro zone would trigger contagion in the more vulnerable euro zone bond markets, such as Spain and even Italy. The trouble in Europe is expanding and worsening. Leaders have been delaying some rather ugly outcomes for years, but they are now running out of time. They can no longer kick the can down the road because they have finally run out of road.

This week, Moody's downgraded the ratings of 26 Italian banks. But that's only half the story.

Moody's also downgraded 16 Spanish banks in what was the latest blow for a country already facing economic recession, surging unemployment and a property bust. There is a legitimate fear that the run on Greek banks will shift to Spain next.

The contagion in Europe has been continually spreading, from Greece, to Ireland, to Portugal, to Spain and even Italy. The yields on Spanish and Italian government debt are again rising to unsustainable levels. If unchecked, that could raise the crisis to entirely new levels. Italy and Spain are the third and fourth largest economies in the euro zone.

As it is, there are now debt and/or bank problems in countries that have been traditionally viewed as safe and stable: Holland, Austria, Switzerland and Sweden, for example.

The continent's recession will have global consequences. It will dampen demand and hurt exporters that rely on the European market, such as the U.S.

The European sovereign debt crisis and slowing global economy have driven the dollar to its longest rally since 1985, as investors seek to reduce risk. The strength of the dollar is weighing on dollar-priced commodities such as gold and oil, making them more expensive for holders of other currencies.

In essence, the purchasing power of the dollar is rising, making commodities cheaper. So, commodities aren't really going down in value; the dollar is going up in value.

On the one hand, this is good for the U.S. and American consumers. Lower pump prices would be a welcome outcome. However, while oil/gas prices are dropping here, they are rising elsewhere in the world. That will hurt other economies, and this is ultimately a global issue.

Furthermore, the strength of the dollar will make U.S. goods more expensive overseas, ultimately hurting American exporters. That's not good for the country's whopping trade deficit, or the economy in general. So the rising dollar can be viewed as a tradeoff, or a mixed blessing.

The global economy is just creeping along, reacting to one crisis after another. Even the giant Chinese economy is slowing. That's bad news. The world needs robust economies to spur trade and growth.

Ultimately, the nations of the world are grappling with unsustainable debts. And the whole world needs economic growth to service all those cumbersome debts. The trouble is, there can be no growth without debt. Growth equals debt. In order to grow, the world's economies will have to incur even more debt. But that's like adding more disease to an already sick patient.

Furthermore, there can be no economic growth without an abundant supply of oil, particularly cheap oil. Neither exists.

The global economy is inextricably linked due to trade, finance and the competition for finite resources, such as oil. That's why the pain in Europe will be felt worldwide.

Not every nation can be a net exporter, meaning that huge trade imbalances will not only continue, but will worsen. This is simply unsustainable.

As credit risk rises, lenders will become increasingly scarce and the cost of borrowing will reach unmanageable levels, as is already the case in parts of Europe.

When the price of oil drops, that means the world economy is slowing or stagnating. That's a bad tradeoff. And, as previously stated, if oil prices are dropping only in the U.S. due to a rising dollar, that has an opposite effect to the rest of the world, which must buy oil in dollars.

We are witnessing a slow motion train wreck, or even collapse. Europe's leaders, as well as the central bankers around the world, are attempting to hold back the tide.

How this ends is open to speculation, but one thing is certain; it won't end well.

Economic Growth Is Predicated On Debt

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Though the national debt already exceeds $15.7 trillion, and is bigger than the entire U.S. economy, it is projected to just keep on growing.

According to the latest estimate from the Congressional Budget Office (CBO), the government will run a $1.2 trillion deficit for the current fiscal year, which ends September 30. The new projection is about $100 billion higher than the previous estimate and is due primarily to the renewal of a 2 percentage point cut in payroll taxes and extended jobless benefits for people languishing on unemployment rolls for more than six months.

There have been persistently large deficits every year since the start financial crisis and subsequent Great Recession. Tax revenues fell nearly 17 percent in fiscal 2009, the biggest decline since 1932. That year, the deficit was $1.4 trillion, followed by $1.3 trillion deficits in both 2010 and in 2011.

According to the CBO, President Obama‘s proposed budget would produce a deficit of $977 billion in fiscal year 2013.

The problem stems from a huge collapse in personal and corporate tax revenues and a commensurate rise in safety net payments for things like unemployment, food stamps and Medicaid.

Last year, federal spending amounted to nearly 24 percent of GDP. However, federal revenues fell to 14.8 percent of GDP, the lowest intake relative to GDP in 60 years. The shrunken receipts were part of a continuing trend; revenues were 14.9 percent of GDP in 2009 and 2010.

It's evident that Washington has a revenue problem in addition to its spending problem.

U.S. corporations now contribute just 6.6 percent to the federal tax base. In the 1950s, US corporations contributed a 30 percent share.

Revenue from corporate income taxes was between 5 percent and 6 percent of gross domestic product back in the early 1950s. However, federal corporate tax collections made up only 1.3 percent of U.S. GDP in 2010.

Confronted by these historically low revenues, Congress will seek a combination of budget cuts and tax hikes. However, due to strong Republican opposition, the latter may amount to nothing more than allowing the already legislated expiration of the Bush tax cuts at the end of this year.

But, as Europe is painfully learning, austerity (aka budget cuts) can push a struggling economy right off the rails. The U.S. economy has become heavily reliant on government deficit-spending to maintain growth. Absent government deficit-spending, our economy would still be in recession (more likely a depression) and would have entered one years earlier, long before the financial collapse of 2008.

Think about what would happen to the economy if federal spending were halved right now, from 24 percent of GDP to just 12 percent. Even if spending were cut by a quarter, the economy would grind to a halt. Sadly, the U.S. economy has become wholly dependent on government deficit-spending.

As it is, economic growth remains sluggish. The U.S. economy expanded at a 2.2 percent annual rate in the first quarter after expanding at a 3 percent annual rate in the fourth quarter of 2011. That's not nearly good enough.

Growth would need to equal 5 percent for all of 2012 just to lower the average jobless rate for the year by 1 percentage point. Clearly, that's not going to happen.

Too many Americans are unemployed or have dropped out of the workforce altogether. In April, the number of people not in the labor force rose from 87,897,000 to 88,419,000, a whopping increase of 522,000. This is the highest on record. The labor force participation rate recently dipped to a new 30-year low of 63.6%.

Until employment improves considerably and genuinely (not some phony government accounting that ignores all the millions who have dropped out of the workforce), tax revenues will remain perpetually low.

So, without jobs there will be no economic growth. But if the economy isn't growing, companies won't hire. It's a chicken and egg conundrum.

To make matters worse, the U.S. will find it increasingly difficult to service its mammoth debt without robust economic growth.

The U.S. paid $454 billion in interest on its publicly held debt in fiscal 2011, which ended September 30. However, the National Commission on Fiscal Responsibility and Reform, better known as the 'debt commission', projects that the interest on the debt could reach $1 trillion by 2020 if Congress doesn't act immediately.

With a debt so massive, the U.S. desperately needs growth. Yet, the private sector isn't capable of doing it alone.

Despite this, Congress plans significant budget cuts next year, in addition to allowing the payroll tax holiday and the Bush tax cuts to expire. That combination will lead to a recession, the CBO announced on Wednesday.

If these planned tax hikes and budget cuts aren't changed, the CBO says it will result in a fiscal drop-off (commonly referred to as a "fiscal cliff"), that will shrink the economy by 1.3% in the first half of 2013 (a technical recession) before expanding 2.3% in the second half.

However, the CBO projects that this combination of tax hikes and budget cuts will reduce the budget deficit by 5.1% of GDP. Yet, last year, the CBO projected a budget deficit of $1.1 trillion in 2012, or 7.0 percent of GDP.

So, even if those budget cuts and tax increases are enacted as planned, they would still result in a continued deficit and even more debt.

How's that for an outcome? This fiscal "solution" would not only result in a recession, but would still leave the federal government with a budget deficit as well. That's what you call bad medicine.

Our economic system is predicated on debt. Since all money is loaned into existence, money equals debt. The economy can't grow without an expansion of debt, meaning that debts can never be fully retired. If debt isn't accumulating, then money isn't being created and the whole system locks up and shuts down.

It's for this reason that you can expect continued deficit spending and a perpetual expansion of the federal debt. It's been going on for many decades, with the exception of a brief respite during the Clinton years. When the government finally runs out of foreign lenders, the Federal Reserve will just ramp up its printing and further devalue the dollar.

This fiscal mess comes at a particularly bad time for a nation confronting a long term wave of retirements by its Baby Boomers, one-quarter of the population. This will dramatically raise expenditures for things like Social Security and Medicare, even as the nation's productivity suffers a parallel and resulting decline.

Such a decline in productivity is a recipe for disaster for a nation so reliant on the perpetual-growth economic model.

As I've said repeatedly, there are no good solutions to our economic woes; only very difficult choices. We have entered a debt trap that presents an enormous conundrum; do we continue to mortgage our nation's future by becoming even more grossly indebted? Or, do we show fiscal restraint and suffer the consequences of lowered growth, economic stagnation or even the possibility of another depression?

My guess is that the government maintains its deficit spending because it has no other choice. The economy must grow or it will die. Stasis equals death. Some entity must attempt to spend the economy into growth, meaning further debt. If it's not the private sector, then it will be the public sector.

There are some really serious and difficult challenges ahead us as a nation. And I'm not talking about ten years from now either. Some really unpleasant realities will have to be confronted starting next year, and again each year thereafter.

You could say there's a shit storm a brewin'.

$7,782,816,546,352 debt just an IOU

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April 10th 2005 - This week, President George W. Bush went to the Bureau of Public Debt, in Parkersburg, West Virginia, to make the point that there is no Social Security trust fund -- nothing there that can be really counted on. All it is, he said, was a bunch of IOUs. Parkersburg is a river town near the Ohio border, where the Ohio and Little Kanawha Rivers meet, and it is something of an irony that the one presiding over the largest explosion in federal budget deficits would use the Bureau of Public Debt as a backdrop for his plea for solvency in Social Security.

But the bureau may indeed serve as a confluence of many of the serious problems confronting the country over the long term: booming deficits fueled by wildly out-of-balance federal budgets and reckless, sometimes dishonest federal fiscal policy. This week in Washington, the GOP leadership in Congress is continuing its efforts to come up with a budget resolution for the next fiscal year, a blueprint of priorities that will also look out at the next five years. There is some question about whether they can come up with a deal that they can sell to the disparate and increasingly rowdy elements of their party.

The Senate and House plans reveal sharp ideological disagreements, and both plans differ in important ways from the president's budget blueprint. In two of the last three years, Congress was unable to produce a budget resolution, the basic framework of how the federal government will spend and raise money. This year, the GOP has a lot of incentive to pull it off. A budget resolution will give them the opportunity to pass a lot of controversial initiatives [drilling in the Arctic National Wildlife Refuge and making tax cuts permanent] by a simple majority, since budget bills can't be filibustered.

Without the budget resolution, those proposals face Democratic filibuster and will likely die. Regardless of how it is sliced and diced, we are looking at an annual deficit of $368 billion this year and a 10-year projected deficit on $1.35 trillion, according to the Congressional Budget Office. And none of these numbers include the cost of the continuing military operations in Iraq and Afghanistan.

The president's suggestion in Parkersburg, that the $1.7 trillion in Treasury bonds held by the Social Security Administration is "not a pot on money to be drawn on," is a scary proposition. It not only threatens the future of Social Security, but it also goes to the heart of the debate over the long-term health and viability of the national economy. Debt and deficits, colliding with the spiraling costs of entitlements -- Social Security, Medicare, Medicaid, farm subsidies, student loan programs -- may mean we are headed for desolate economic shoals.

Newsweek's Robert Samuelson envisions it as an "and economic and political death spiral."

And when one considers how deficit concerns dominated the politics of the 1990s, it is remarkable how sanguine we are faced with the current situation. Remember that giant sucking sound? It has fallen quiet. The first President Bush agreed to a $500 billion deficit reduction plan that required him to raise taxes, breaking a no-tax pledge that may have cost him his presidency. But he may have made it easier for Bill Clinton to go down the same road two years later, in 1993, when he negotiated another $500 billion deal to reduce the deficit over five years. That solidified Clinton's reputation as a good economic steward and may have saved his presidency later.

And in 1994, it was largely over concern about the size of the federal government that allowed the Republicans to take control of Congress. Deficits politics turned to surplus politics, making it easier for George W. Bush to get his record-level tax cuts.

These days, there is nothing on the table worthy of the name "deficit reduction," but there is growing concern. Conservative GOP budget hawks in the House -- embarrassed by the tarnish that the deficits puts on their reputation as the party of smaller, cheaper, more responsible government -- have been challenging their leadership to more aggressively address the deficit problem. The comptroller general of the General Accounting Office, David Walker, has been saying the solvency problem in Social Security is essentially a small stream headed for a much bigger river.

"First, [Social Security's] financial challenge is a subset of our nation's financial and fiscal challenge," Walker told a House tax panel recently. "Social Security has an estimated unfunded commitment in current dollar terms for the next 75 years of $3.7 trillion. ...That compares with a roughly $43 trillion problem for our country."

So the problem is not just that Social Security may not be able to mail out monthly checks someday in the distant future but that, more perilously, the federal government may find itself so mired in debt that the whole economy just slowly grinds to a halt.

Walker says that without significant reforms we could end up with a federal budget almost entirely committed to interest payments. "[W]e could be doing nothing more than paying interest on federal debt in 2040 if we don't end up engaging in some fundamental reforms of entitlement programs, mandatory spending, discretionary spending and tax policy," he says.

If we assume the Treasury issues are the same as a trust fund, because they are backed by the U.S. government, then the real problem with Social Security is almost a half-century away.

If there is a question about the reliability of those bonds down the road, then you are talking about a larger set of problems: There may come a time when the federal government might not be good for its IOUs.

"Four years ago, the Bush administration inherited a projected 10-year budget surplus of $5.6 trillion," says House Minority Whip Steny Hoyer. "Since then, we have run record deficits of more than $400 billion a year, and Congress has been forced to increase the national debt limit three times. Even worse, the administration and Congress have no real plan to rein in deficits and debt. This threatens our investments in issues important to our communities -- on everything from health care to our national security."

Walker made an interesting point when he recently appeared before the House Ways and Means Committee: The Social Security Trust Fund has IOUs because the Federal government spends, every year, hundreds of million of surplus payroll taxes collected for Social Security. These days, that means the federal deficit looks smaller that it actually is. In 2008, those surpluses begin to dwindle.

"And since Congress has, for a number of years, spent every dime of the surplus on other operating expenses," said Walker, "that means it will increasingly put additional pressure on the balance of the federal budget starting in 2008."

That's about the time an almost-62-year-old George W. Bush heads back to Texas to begin his retirement and, sooner or later, to start cashing those Social Security checks.

The day Bush was sworn into office in 2001, the national debt was $5.7 trillion, and there was a surplus. On the day he showed up in Parkersburg, it had climbed to $7,782,816,546,352.29. That is seven trillion, seven hundred and eighty-two billion, eight hundred and sixteen million, five hundred and forty-six thousand, three hundred and fifty-two dollars, and twenty-nine cents.

But it's just an IOU.

Deficit cracking GOP's solidarity

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November 27th 2005 - More than a decade after the Republican Revolution, when Newt Gingrich became House speaker on the promise to downsize government, Republicans are facing another revolution.

This one is from within.

When Congress returns next month from its Thanksgiving recess, Republican leaders who have never failed to marshal their forces on big party-line votes face the prospect of defeat on tax cuts and spending restraint -- the core issues that have united the party since President Ronald Reagan and gave them their House majority in 1994.

They have lost some tax and spending votes already, and postponed others because of the specter of losing. After a five-year spending spree on everything from the Iraq war to Medicare, deficits are now jeopardizing the tax cuts that were the centerpiece of President Bush's first term.

A move to preserve tax cuts on capital gains and dividends -- the gemstone of the Bush tax cuts for conservatives -- is in trouble in both the House and the Senate. For the first time since George W. Bush took office, House Democrats are united against tax cuts, and Republican moderates are bucking their party leadership.

GOP leaders are pushing a measure to control entitlement spending by shaving Medicaid and food stamps for the poor. But the combination of investor tax cuts and reductions in poverty programs has already led to a series of embarrassing defeats in committee and on the House floor. Republicans are headed for a pre-Christmas showdown that could turn into a political disaster.

Hurricane topples plans

Hurricane Katrina last summer was a tipping point. The storm forced Republicans to ditch the estate tax repeal because it was deemed unseemly to end a wealth tax after poor people had lost their homes. Sensing a public relations disaster, Republican leaders also postponed extending the investor tax cuts until the end of the year.

Congress quickly passed $62 billion in emergency disaster relief. But Bush's promise to "do whatever it takes" to rebuild the Gulf Coast set off a rebellion among conservatives, who demanded spending cuts to pay the bill.

"I think they blinked after Hurricane Katrina," said Brad Woodhouse, a liberal activist who helped defeat Bush's Social Security overhaul and has turned his fire on the Republican budget, heading a liberal alliance called the Emergency Campaign for American Priorities.

"It was such an acknowledgment of how inappropriate these spending cuts to finance tax cuts are," Woodhouse said. "It was like blood dripping in the water for us."

The budget outlook -- and the problems facing the GOP -- promise to get much worse. Medicare's costly new prescription drug benefit, an $18 trillion unfunded liability sponsored by the White House and Republican leadership, starts in January. Just two years from now, in 2008, the enormous Baby Boom generation will begin retiring, ceasing income tax payments and starting to collect benefits, leading to a budget squeeze unprecedented in U.S. history.

"We're seeing the future," said Bruce Bartlett, a former Treasury official in the George H.W. Bush administration and tax-cut advocate. "The decisions that have been made over the last five years have resulted in the chickens coming home to roost."

Total spending increases under the current President Bush closely rival those of President Lyndon Johnson, a Democrat famous for conducting the Vietnam War while simultaneously increasing domestic spending.

Discretionary spending rose 48.5 percent in Bush's first term, according to an analysis by the libertarian Cato Institute, twice as much as in two terms under President Bill Clinton, when spending rose 21.6 percent. Adjusted for inflation, Bush has increased total spending at an annualized rate of 5.6 percent, compared with 1.5 percent under Clinton.

"It's only a matter of time before we stop talking about cutting taxes for a very long period of time and talk basically about increasing taxes," Bartlett predicted. "The end of the era of tax cutting is going to put tremendous strain on the Republican coalition, just as the end of the era of big spending put tremendous strain on the Democratic coalition" in the 1980s. "You're hearing more and more people on the Republican side talking about major losses in the congressional elections next year and about 2008 being a really, really bad year for Republicans."

In the two months since Republicans pulled their tax cut bills, the atmosphere has only gotten worse. Republicans lost two important off-year gubernatorial elections in Virginia and New Jersey. Bush's popularity has hit new lows, with the public now decidedly opposing the Iraq war. Leading GOP candidates, including Sen. Rick Santorum, a conservative member of the Senate leadership who faces a tough re-election fight in Pennsylvania, have refused to appear with Bush at campaign events.

"Republican members of Congress recognize that the president can't help them very much any more," said Cato Institute Chairman Bill Niskanen, a former Reagan administration economist. In addition, the indictment of former House Majority Leader Tom DeLay seriously weakened party discipline in the House and exposed deep divisions between fiscal conservatives and moderates.

"There is a substantial ideological split, particularly among House Republicans, on fiscal responsibility," Niskanen said. "A lot of them have gone along with a high rate of growth of spending but have done so without any enthusiasm."

As the post-Katrina conservative revolt gelled, the Republican leadership turned to Medicaid, food stamps and student loans for spending restraint. The Senate is proposing $35 billion in reductions and the House $50 billion; both chambers are also seeking between $56 billion and $59 billion in tax cuts.

Large gap to cross

There are enormous differences between the House and Senate on both measures. Reconciling them will be very difficult in the two weeks Congress has left before adjourning for Christmas.

Combined, the measures increase the deficit. The spending restraint appeased conservatives but provoked an outcry from Democrats and GOP moderates. Efforts to console moderates by dropping a measure for oil exploration in the Arctic National Wildlife Refuge and adding subsidies for home heating costs and dairy farmers have done little but stoke more controversy.

The Medicaid and food stamp cuts have attracted the most fire, and barely passed the House 217-215 before Thanksgiving, with no Democratic support. Republicans recessed before attempting to pass the tax cuts.

Much of the roughly $11 billion in cuts over five years proposed by the Senate for Medicaid, a health care program for the poor that many elderly use to pay nursing home costs, were recommended by state governors. They contend the program is becoming burdensome for the states, which must come up with money to match federal funding. Democrats have portrayed the reduction in the growth of Medicaid spending as dire, but even liberal analysts concede they are not severe. One provision would increase co-payments from $3 to $5, and another would allow elderly nursing home residents to shield $750,000 in home equity, raised from $500,000 after Republican moderates objected.

The cuts are "not awful," said Jason Furman, a former adviser to Democratic presidential candidate John Kerry now at the liberal Center for Budget and Policy Priorities.

"It's less about the magnitude and more about why should you be asking poor people to pay anything more for health care at the same time that you're giving brand-new tax cuts to the most fortunate," Furman said. "That is what is just completely wrong with this picture.

"A go-it-alone Republican strategy works when you're trying to cut taxes or increase spending, but when you're trying to make tougher choices, the only way to do it is to work together with the other party for shared sacrifice," Furman said. "Budget reality is starting to catch up with the Republican Party."

Heavy U.S. borrowing with much more on the horizon is stoking concern about a potential financial crisis. Any one of several big economic imbalances -- including looming pressures on the federal budget, the zero U.S. savings rate, the historically high trade deficit, a real estate boom that has supported consumer spending -- could provoke a sudden financial shift, economists say.

"It's not unrealistic to think that if we continue to delay -- and the Baby Boomers do start to retire as early as 2008 -- that sooner or later the lenders to this country may decide it's not the best place to park all their savings," said Maya MacGuineas, director of fiscal policy for centrist New American Foundation.

Bartlett warns of a "financial Katrina."

"It's just a matter of time before we have some kind of economic event that I think is just going to change the political situation 180 degrees and make deficit reduction the order of the day," he said. "I don't know what it will be. I just know that when you've got gasoline spilling onto the floor of your house, it doesn't really matter where the spark comes from."