The legal definition of bankruptcy can get very complex but according to Peter G. Peterson in his new book Running On Empty : How The Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It, we are really bankrupt because the NPV of our future liabilities is more than our current net worth. Here is what his analysis shows (based mostly on the data compiled by the Federal Government):
- In 2000-2001, America had a surplus problem (too high!). Most estimates put our surplus at $5.6 trillion but conservative estimates today project a deficit of $5 trillion over next 10 years. If we continue the current growth in spending on defense and homeland security and implementing other new programs, it could be even higher.
- We have a serious trade situation. We continue to import more than we export. Here is the balance of payments situation for the US and it is not pretty.
- Almost all economists are convinced that we will need to borrow heavily to pay for defense (and homeland security), social security, Medicare, and other government programs and there is no other way than to borrow more. According to Peterson, by 2020, we will be borrowing to pay for all domestic discretionary programs since Federal revenue then will only benefit checks and interest on national debt.
- A very simple NPV calculation done by Peterson estimates that our future deficits stand at $74 trillion (which is more than our current net worth of $43 trillion) clearly showing that we are bankrupt. While some of the underlying assumptions for this analysis can be points of argument, a high level analysis clearly shows that (1) we export less and import more (2) we consume more and save less (3) we do not have a cushion if things don't turn out well.
What are other weaknesses of our economy?
- The center of gravity of growth has moved eastward and we are unlikely to see much growth in the future.
- Due to high cost of labor, the job situation is expected to remain bleak with most of the new jobs being created in countries with lower cost of labor. Most jobs eliminated during last three years are not coming back to America.
- Our education system is not producing enough well-educated people forcing American companies to find them elsewhere.
- American health system is broken with over 40 million people without any access to medical care and when these people get old (and sick) the cost to the society will be enormous (at a time when our overall financial situation is not expected to be healthy).
- The dollar could depreciate in value rapidly if the center of gravity of growth continues to shift from US to other countries. We have had a strong dollar because of the strength of our economy but with a poor balance sheet that we are now developing, a correction may happen soon. Many economists believe that the current value of dollar is not supported by fundamentals but by expectations and beliefs.
What can businesses do to prepare themselves?
- Take a portfolio approach: Diversify your business and position yourself in high-growth economies.
- Think again if you manufacture in the US: There is no simple answer since a lot of other factors come into play, but if you cannot maintain your competitiveness on a global basis, relocate or outsource manufacturing.
- Sell what consumers can buy: Over the next 10 years, as financial health of Americans continues to decline, think inexpensive products and "luxury for the masses".
- Develop a hedging strategy for a declining dollar: If confidence of foreigners in the strength of our economic system disappears and capital moves elsewhere, you better be prepared as prices of imported goods go up.
- Innovate using the American models of creativity and enterprise: While economic environments can change, our value systems that make us a vibrant economy because of our capacity to innovate can be transferred anywhere. Do it now.