Old days of entitlement may be gone in US

The US may just be starting to come to terms with some home truths.

No nation's government can continue to spend $1 for every 60 cents it gets in revenue, and think it can borrow the rest. No country living beyond its means like that can spend $692 billion a year on its military, more than the spending by the next 16 countries added together, including China and all the leading countries in Europe. No nation can be so spendthrift and continue to waste tens of billions of dollars on a disastrously inept system of healthcare in which simple operations and drugs cost more than anywhere else in the world.

If you want to know why Standard & Poor's cut the US triple-A credit rating, just consider some of these numbers and cringe at all the criticism leveled at the rating agency by Treasury and White House officials who behaved as if the US hadn't gone on a spending and tax cutting spree in the past 11 years.

Remember that under former President Bill Clinton the budget was balanced and the US debt started to get paid off. But then the administration of George W. Bush began two very expensive wars in Iraq and Afghanistan, delivered two costly tax cuts, and then created the conditions for the worst financial crisis since the Great Depression. Oh, and that financial crisis was caused by ridiculously exuberant borrowing by homebuyers and equally as ridiculous lending by the banks. The nation took its cue from the government: Spend today because there may be no tomorrow.

Well, now we are at that moment of truth which means that tomorrow is going to be very different from today and yesterday.

Things could be about to get very grim. Talk of a recession, which started about two weeks ago when the nation's GDP figures were much worse than expected, has really picked up steam now as the markets have been sinking. The fear is that consumers will stop spending and businesses will stop investing because of the economic uncertainty, and this at a time when the government and the Federal Reserve have run out of money or monetary policy tools to stimulate demand.

It isn't beyond the realms of possibility to imagine the jobless rate, already at 9.1 percent, surge well above double digits, or to see the economy contract next year, home prices fall another 10-20 percent, and social unrest in some major cities. This week's riots in London could be a sign of things to come.

So, how can the Americans get out of this nightmare? First of all, they have to learn from countries that have been through major financial crises, such as Latin America in the 1980s or much of Asia in the 1990s. These nations bounced back through lower currencies, lower standards of living, increased savings rates, and austerity. In the same way as you or me would balance our personal income and spending if we had gone on a shopping binge, by cutting back.

For the US, the adjustment process would mean lower wages, less welfare, higher retirement ages, and more tax. And I almost forgot - this great nation can no longer spend as much on soldiers and weapons. It can't afford it.

But will it happen? Unfortunately it may not anytime soon. Already, polls show that while Americans are concerned about the budget deficit and the massive debt burden, they don't want to see the so-called entitlements of American society go away. Those entitlements include the social security pension system, the healthcare support for the elderly and poor, and the food stamps that tens of millions of Americans receive.

The US economy is likely to remain in intensive care or critical condition for some time to come. It could easily drag down the rest of the world with it. Tighten your seatbelts.

[Source: By Rong Xiaoqing, New York, Global Times, Beijing, 14Aug11]

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