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SHANTANU BASU | 2 OCTOBER, 2016

Imploding US and European Debt Bombs: Irrelevance of the Trump-Clinton Debates


During the Clinton-Trump debate on Sep. 26, 2016, the latter kept harping on unsustainable US debt, something that the former turned a conveniently blind eye to.

Trump even went to the extent of proposing that US allies ought to pay for US military protection. Trump painted a grim picture that was only too real. Not surprisingly, few, if any, US TV channels or newspapers raised this issue as if everything were hunky-dory or feigned ignorance.

The public debt bomb is ticking for several countries in the US and Western Europe. The US national debt as on date is $19.51 trillion that makes for debt of $60147/capita and $163011/taxpayer. US states are indebted by another $3.23 trillion. The current fiscal’s federal budget deficit is $579 billion. $2.30 trillion of federal expenditure goes to social security, pensions and Medicare/Medicaid while defense consumes $579 billion and $246 billion on interest upon debt of total govt. (federal, state & local) of $ 7 trillion in 2016.

Estimated Federal revenue is $3.27 trillion while state revenues are another $1.92 trillion in 2016. As if this were not enough, foreign nations hold $6.30 trillion of US debt (and repatriable interest thereon), overall trade deficit of $736.61 billion, of which PRC accounts for $354.23 billion, i.e. about half.

The end result is gross US revenues are $20187/citizen leaving a gap of $40000/citizen covered (against the national debt figure above) by borrowings, i.e. for every dollar of its own money, the Federal government. is borrowing over $2. In addition, the total unfunded liabilities of the Federal govt. are $103.35 trillion of which $43 trillion owes to social security and Medicare/Medicaid.

In other words, these two items are on the verge of bankruptcy. Going a step further, total US debt is $66.21 trillion with $2.42 trillion interest paid per annum (and rising), interest/citizen of $7457 and total debt/citizen is a whopping $204154.

An average US family has debts of $810941 against nominal annual saving of $10085. The average American is personally indebted by $17.60 trillion of which $13.94 trillion is mortgage debt (with 520276 foreclosures to date), $1.38 trillion student and $977 million in credit card debts. Is this the healthy Democratic US economy Hillary Clinton was talking of in the debate?

In comparison, US allies on the other side of the Atlantic do not fare far better. The external debt to GDP ratio of Australia (101.29%), UK (265.01%), France (206.32%), Germany (141.13%), Greece (193.39%), Ireland (783.78%), Italy (130.42%), Portugal (235.64%) and Spain (143.79%) is matched by public debt to GDP ratio in Canada (101.10%), UK (87.15%), France (100.83%), Greece (178.49%), Ireland (92.31%), Italy (140.28%), Japan (252.84%), Portugal (134.58%) and Spain (116.31%) show the US and its allies reeling under mountains of debt. From where would these allies pay for US military protection, Trump when the Western bloc is in the throes of a seemingly worsening economic crisis?

The foregoing statistics lead to the most alarming conclusions. First, that printing US dollars limitlessly to cover rising indebtedness would make the dollar worthless, akin to the Weimar Reichsmark. This casts doubts on acceptability of US dollar payments for all the goods and services the US imports today.

Second, there being no gold standard either, there is no security of the US dollar for Americans and non-Americans alike.

Third, with US companies fast establishing cheaper manufacturing bases in low-cost territories overseas, repatriation of profits would happen between overseas units in other safer currencies, leading to a further decline in the value of the now traded US dollar.

Fourth, to fuel such gargantuan indebtedness, US banks across the world would, indubitably, have collected investments on which giant interest too is payable, part from the principal. These banks have huge exposure to US Treasury Bonds serviced by the US Federal Government that is virtually living off printing money to service such debts.

Adding to these are rampant domestic debt defaults as mentioned above and indebtedness to foreign investors like the Japanese ($1.10 trillion as of Feb 2016), Chinese ($1.3 trillion as of Feb 2016) and others ($3.80 trillion). Of the $12.90 trillion domestic debt owned by Americans, $5.30 trillion is held by government trust funds such as Social Security, $5.10 trillion is held by individuals, pension funds and state and local governments and the remaining $2.50 trillion is held by the Federal Reserve.

Even if Trump touched the tip of this iceberg (without the foggiest idea about solutions), for Clinton, this crisis did not merit much mention as she went on to romantically project America’s historical strategic role in the world. The US is evidently and fatally caught in the Trump-Clinton cusp.

Fifth, a crash of US and European banks is no longer a distant reality, least of all a pipe dream. Reports speak of a major German bank in distress.

Sixth, anticipating such unparalleled banking crisis, several trillion dollars would have moved into US, Caribbean and UK offshore havens. Doubtless, substantial chunk would be of Indian origin. Recent reports suggest the US is ironically becoming the favorite haven since the ICIJ’s investigations turned the heat on the traditional havens.

A report commissioned by the UK-based Tax Justice Network estimated $21-31 trillion in secretive offshore accounts, equal to the GDP of the US and Japan combined. US bank Goldman Sachs managed more than £4.20 trillion in 2010, a sharp rise from £1.5 trillion in 2005. As of Sep, 2016, the World Gold Council estimates total official gold holdings at 32924 tons, of which the US and 12 major US allies in Europe held 20803 tons, i.e. 63% making for an estimated $2.75 trillion (@ $1342/10 gm on Jul 31, 2016).

Conversion of even part of such assets (including an estimated $700 billion Russian since 1990 and $ one trillion in 2015 alone from China) into bullion will raise the scarcity of gold and other precious metals and make it increasingly difficult to introduce a gold standard for any alternative to the US dollar. Besides, it is barely a tenth of the total US debt alone. Clearly, the US and European banking sector is alarmingly distressed.

Seven, what is the alternative to US and European currencies for trading in goods and services? Are the Chinese Yuan and the Russian Rouble viable alternatives? Would these be backed by gold reserves since both these nations officially hold just 3335 tons of gold together as of Sep, 2016?

Last, but not the least, is the US standing on the precipice of another Great Depression? Last time two World Wars bailed the US and its European allies out of the Depression. This time round, US-led wars in Kuwait, Libya, Afghanistan, Iraq and Syria have only added to indebtedness.

In contrast, major non-European American allies like Argentina (39.19/15.93%), Brazil (59.03/31.82%), Mexico (46.26/34.63%), South Korea (33.84/29.10%) and Saudi Arabia (12.47/27.50%) fare far better on these twin GDP ratios. Japan still has external debt to GDP ratio of 60.07%, better than the American 74.01/100.20% ratios respectively. China (24.14/4.74%), India (52.32/22.48%), Russia (17.13/44.12) and Mexico (46.26/34.63%) fare far better.

While the Trump-Clinton debates go on in the giant circus of the US Presidential Election, 2016, the world is undergoing cataclysmic shifts in the balance of power from the West to the East. CPEC, reclaimed South China Sea islands by China and rising belligerence matched by Japan’s growing military prowess, new seaports in Chabahar, Gwadar and some more in Sri Lanka and Bangladesh, development of overland transport links between China, Central and West Asia and Russia, increasing Russian military and naval reach to the Mediterranean, trials of sophisticated Russian military equipment in Syria and European borders, string of joint military exercises in South and East Asia, and much more, increasingly point to the rapid shift of the global balance of power.

The economic crisis the US and its major allies face is unprecedented in its magnitude, exacerbated with recent rising social tensions owing to large refugee influx into Western Europe, declining oil revenues of West Asian allies and concomitant growing Russian and Chinese belligerence.

Alliances are being rapidly rewritten with an Eastern slant; high seas in East and South Asia are bristling with navies on the prowl and new financial instrumentalities that invest national moneys with host nation collaboration to buy security and prosperity (CPEC, Chabahar, Gwadar, etc.) are taking shape.

India therefore needs to seriously reconsider its pro-US and Allies tilt if it must profitably survive rapidly changing strategic dynamics in the Persian Gulf, South, SE and East Asia. A Clinton/Trump Administration and its distressed allies are hardly worth pursuing for India’s pressing military and strategic interests.

(The author is a history and management graduate from St. Stephen's College and University of Queensland, the author held several senior civil service positions in the Govt. of India for over three decades. He presently lives in New Delhi and his first book,The Worm Within: Corruption and Erosion of India's Accountability Institutions was published in July 2015)

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