By John Browne
Senior Market Strategist

 
The monstrous typhoon that pounded away at coastal areas of the Pacific last weekend certainly qualified as a disaster for anyone who happened to be in its path. But for those of us safely in bed, the storm not only provided some remarkable meteorological footage, but also a stealth lesson in economics.

The most dramatic image, which involved a water torrent sucking away the sand beneath a stoutly built six-story hotel, struck me as an apt metaphor for the current economic environment. As the hotel’s foundations became exposed, the building toppled over like a massive domino. It was a vivid reminder that no structure, no matter how mighty, is safe if its foundation is weak.

Since the financial deluge erupted last year, the authorities, at least in the United States, have concentrated their repair efforts on the upper floors of our economy, and have virtually ignored the rotting foundation beneath.

Since 1971, when President Nixon broke the last link between gold and the U.S. dollar, American politicians have unleashed an ever-increasing number of entitlement projects designed to boost consumerism. With some 70 percent of our economy now based on consumption, we can safely say they accomplished their aim.

Following Alan Greenspan’s financing of the largest asset boom in the history of the Fed, America now faces massive deleveraging and a severe recession. However, it is becoming increasingly clear that neither the Obama Administration nor Congress have the slightest appetite for the political costs of deleveraging. Instead, the government has decided to lavish unprecedented trillions more of borrowed dollars on preventing a natural deleveraging from taking place.

Today, the official U.S. Treasury debt stands at a shocking $13 trillion, or 100 percent of the (declining) total wealth created in the United States each year (GDP). But total federal debt amounts to an almost unimaginable $56 trillion, or 4.3 times GDP.

Notwithstanding this precarious state of affairs, the government intends to spend trillions more dollars on wealth-consuming entitlement projects such as education, health care, auto sales, and the pursuit of fruitless wars in Iraq and Afghanistan.

America still has the largest economy in the world, but that doesn’t mean that it is the richest. Although Americans enjoy one of the world’s highest standards of living, they are also its largest debtors. As a result of the debt, which is subtracted from output, the worldwide rank of U.S. GDP is not first, as most would expect, but fifteenth!