I don't think the financial crisis is the end of America
There’s this idea going around that the United States is hopelessly in its nadir, due principally to the public debt being accumulated by our federal government. As far as I can tell, it’s held by groups from the American right to the European left. While there can be no denying that the United States is facing serious financial issues, it’s worth keeping the following facts in mind:
The current public debit of the United States is around 60% of GDP. At the end of World War II, the public debt was closer to 120% of GDP. Ironically, except for a few periods of budget surplus, the debit has only grown since 1944, but the economy has grown faster.
While the federal deficit is currently unsustainably high, the debt the government is accumulating is quite cheap. As I write this, the yield on the five year treasury is about two percent—roughly target inflation. Even the 20 year treasury isn’t much above four percent (which is an indication of the market’s view of government’s long term fiscal health).
Of course, these low yields are in part due to a dysfunctional banking system in which the government is serving as a borrower of last resort, but it’s worth bearing in mind that the debt accumulating today will not be particularly difficult to finance.
The belief that America is approaching financial Armageddon is fueled by the belief that we’re nearing a point where bond issues will start failing—where the government will not be able to raise more money. If we were anywhere near that point, though, it would be reflected in the yield on the bonds. The world still sees United States federal debt as the safest investment there is.
Some believe that the US is losing the confidence of foreign countries such as Japan and China, who are warehousing vast sums of American treasuries.
China’s buying of treasuries actually has little to do with their calculus that it’s a worthwhile investment opportunity and everything to do with maintaining high dollar values with respect to the Yuan. A change in their buying habits would not come as a result of anxiety as a lender, but a change in monetary policy—towards allowing a weaker dollar and a stronger yuan. This should not be unwelcome in America as it would be a boon to our economy.
In the medium term, all foreign central banks are compelled to support the continuing vitality of the American dollar due to its central role as a reserve currency.
Any move by a foreign bondholder to undermine America’s credit would be a murder‐suicide act as the resulting instability would have drastic repercussions in every economy on Earth. This is the “extraordinary privilege” Charles de Gaulle complained about. Eventually this will (and should) end, but for now, it makes all discussions of debt loads and foreign confidence or retaliation moot.
Granted, my percentage‐of‐GDP figure above ignores such things as the social security trust fund, which is a huge claim on future government revenues that must be paid. Moreover, while there is no trust fund, Medicare costs are expected to balloon out of control in the next few decades. Beyond any present problems, this is the real impending financial crisis.
Remember though, that we’re talking about our ability as a nation to meet our obligations. Currently, we lack the political will to address our structural deficits, but I contend that this country does not have a physical inability to do so.
Demographically, much of the developed world—from Germany to Japan—are facing declining birth rates and aging populations. This will put profound strain on all modern economies as smaller workforces will bear the retirement and medical costs of large retiree populations. In contrast, the United States still has birth rates above the replacement rate and positive population growth. While we have one large generation nearing retirement, we don’t have the persistent projected aging trend present elsewhere. Moreover, our federal income taxes are currently very low—especially on the high end. This gives us plenty of “slack” to pull in and meet those obligations.
Of course, raising taxes currently appears to be a political impossibility. I believe that will change because I do not believe that this country will make a conscious choice to drive off a financial cliff.
Consider this: In this past crisis, we saw the bankers very carefully engineer the collapse such that they were able to take their money off the table. This is because the crisis was full of “known unknowns” for them. Goldman may not have been fully aware of their counter‐party risk with AIG but they did know the Treasury would backstop the losses.
A federal default would be a situation in which there would be no cavalry riding in. It would be a world of unknown unknowns. One doesn’t have to hold a hope that the American Banker or CEO will suddenly grow a patriotic conscience to believe that they will make the rational decision that it’s better to pay higher taxes than to potentially risk everything in a sovereign debt crisis.
I often find clients with horrendous legacy technology stacks—systems that are bug‐ridden, poorly‐written, undocumented, and that don’t even work for what they need to do.
It makes sense that people will end up with some technical debt. But in many cases, people in the organization who are trying to improve the situation are stymied by political blocks from other people who would rather protect a fief than try to improve the business process.
I’ve begun to wonder if it’s possible for such companies to actually have nice software, or if the organizational dysfunction is so fundamental that it will poison any development or acquisition process.
I was speaking to a friend of mine a bit ago, who is the IT manager of a hospital. We got on the subject of Electronic Medical Record systems, and he said that there’s little chance for anything good to come of them.
He said that problem is that American private hospitals already are highly computerized, it’s just that the computer systems are focused entirely billing and not at all on medical records management. The hospital considers it critical that you get charged for every tongue depressor used, but they’re significantly less enthusiastic about making sure your x‐ray gets to the right person.
He said that his hospital will end up turning to their billing software vendor to purchase their EMR system. This is a decision that has, pretty much already been made, and one over which he has no control.
While EMR systems like the Veterans Administration’s VistA program exist and are well‐liked by nurses and doctors, they provide no functionality to ensure that you get billed for that tongue depressor. Software that doesn’t integrate with the hospitals’ existing billing system has no chance of being chosen. This gives hospital billing system vendors the contract by default. And they have no incentive to actually make EMR software that works.
Western Europe has long defied economic growth models by remaining stubbornly poorer than the United States. In his 2002 paper Two Centuries of Economic Growth: Europe Chasing the American Frontier, Robert J. Gordon, an economist at Northwestern University, attempts to explain the paradox. His conclusion questions our assumptions about wealth, the wisdom of American post‐World War II urban development policies, the GDP as an accurate measure of wealth, and the future viability of the American way of life.