Meridian Magazine:: Ideas and Society: 2010 – A Very Unstable Time
About the Author:

Stephen M. Studdert has served as a White House advisor to three U.S. Presidents. In the Church he has served twice as a stake president and as a mission president. He is the author of America in Danger.

A fresh and hopeful outlook should accompany one’s beginning of a New Year. As a perennial optimist I’m filled with hope, but I’m also coldly realistic.

Make no mistake about it: the United States of America is in very unstable times.

Space does not permit an analysis of abundant bilateral and multilateral geopolitical pressures, terror, failed nation states, international security challenges, food security, unfolding pandemics and re-emerging diseases, new threats like climate change, costly engagement in two simultaneous wars, and persistent budget disarray, so I’ve limited myself to domestic economic issues of an unprecedented magnitude.

As we begin a New Decade in the midst of the worst recession since the Great Depression, it’s only at our own peril that we ignore the many worsening storm clouds on the economic horizon, portending ever more difficult days ahead for America’s struggling families. Some of our individual financial dangers are personal and self-inflicted, but many are national and wreaked by elected officials.

Out of Control

The unashamed lack of government fiduciary responsibility to the American public is stunning. The promised turn-around in the economy has not materialized, and the lasting effects of the worst recession in seventy years will linger for years of economic stagnation. A long-lasting economic calamity remains a menacing possibility.

Washington is out of control. Vice President Joe Biden, speaking of the government’s financial crisis, recently said “We are going bankrupt.” The day before Christmas, our spendthrift Congress again raised the ceiling on government debt, this time to an astronomical $12.4 trillion. Yet this massive increase of another $290 billion only keeps government operations funded until mid-February, when a larger increase in the government debt is certain.

As we close the books on last year, our federal government amassed a record out-of-control $1.4 trillion annual deficit, with no relief anywhere in sight. The Congressional Budget Office predicts our federal budget deficit will be an incomprehensible $22 trillion by 2019, just nine years from now.

The Budget Office also estimates interest on the public debt will reach $800 billion per year by 2019; other economists say the annual interest costs could exceed $1 trillion.

How we ever get out of this astonishing fiscal mess is anybody’s guess. The Budget Office says we can grow our way out of this through inflation, or by raising taxes 60%, or by cutting federal spending by 50%. We better start planning accordingly, because any solution will hurt.

How long do we avoid acknowledging the hard truth of the dangerous reality upon us as a nation? At the beginning of the last decade, in 2000, the United States held 28% of global economic output. It’s now down to 20%, and dropping. During the Great Depression we were the world’s principal lender; shamefully, today we are the world’s largest debtor nation.

To finance the accelerating federal debt, the government must sell “United States Treasuries”. China, America’s essential creditor and the largest foreign buyer of US government bonds – now holding $2.3 trillion reserves, most of it in dollars – has announced it is diversifying its assets away from the dollar. China and other foreign creditors may soon refuse to buy more Treasury securities. As Washington continues to issue ever more debt, the dollar will continue to fall in value, and a currency crisis is highly probable by autumn. As the dollar drops in value, so does our standard of living.

China’s ability to continue to fund the U.S. debt is questionable; China’s banks issued $1.2 trillion in new loans in the first half of 2009, laying the possibility for a wave of Chinese toxic debt failures.

But that’s just part of the problem that burdens every American family – and mostly without our permission.

On Christmas Eve, our gift-giving Congress passed the so-called health care reform legislation, yet to be reconciled by both Houses. Setting aside the debatable pros and cons of such legislation, which fundamentally and irreversibly changes 1/6th of the U.S. economy, the financial impact is likely to be staggering. Congressional budget watchers project its true deficit impact between $1.8 trillion and $2.5 trillion in the out years.

Also not fully reflected is the insolvency of the Medicare trust fund, the nation’s medical program for the elderly, already running annual deficits and anticipating bankruptcy in 2017. Some estimates peg the combined unfunded obligations of Social Security, Medicare, Medicaid, and government entitlements as incomprehensibly high as $100 trillion.

Politicians, for whom reelection trumps warning and resolve, are telling us the economy is now in a recovery. If so, it’s weak and slow at best. 2009 saw the U.S. economy have its worst decline in 27 years, and now growing at a far weaker pace than the government projected, growing only 2.2% in the third quarter. Much of our supposed recovery is misleading, given such taxpayer-funded stimulus giveaways as Cash for Clunkers and tax credits for first-time home buyers. Many economists are predicting our economy's growth will remain at this slow pace for the first half of 2010, while China’s economy will expand at a projected rate of 9% in 2010.

Sales of new homes remain lower than expected; new construction languishes. In Las Vegas, home values have dropped for 38 consecutive months. Builders nationwide cut spending on commercial building projects at an annualized pace of 18.4% in the third quarter, much more than previously estimated – and that’s just the tip of a coming iceberg our economic ship is about to hit.

In excess of $1.2 trillion in commercial loans are due to mature in 2012. Two-thirds of the securitized commercial loans due to mature between 2010 and 2013 can’t qualify for refinancing. The problem is compounded by the 40% decline in real estate values since 2007, and by banks severely restraining lending. Commercial real estate may become just as problematic as the residential housing collapse which began in 2008.

Unemployment

Officially, 15.4 million of us are unemployed. Over 20 million of our fellow citizens collected unemployment benefits at some time in 2009. Those out of work the last six months is now a record 5.9 million. Unemployment, officially at an artificially low 10%, is likely to increase as high as 12%. Some areas are especially hard-hit, like Detroit where the official unemployment rate is a depression-era 28.9%. California saw its unemployment rate climb from 8% to 12.5% in 2009.

To make matters worse, over 7 million jobs simply no longer exist, and there’s been zero net job creation since December 1999. Most economists are now saying unemployment rates won’t return to normal levels before 2015 or later, and some forecasters predict pre-recession employment levels won’t return in this new decade. And if all that weren’t bad enough, forty states will run out of unemployment funds within two years; the unfunded replenishment cost is $90 billion.

Almost certainly, in the next five years we will suffer high rates of unemployment and slower growth. Small-businesses, the prime source of job creation, have been devastated and are facing unprecedented failure rates as consumers tighten spending, banks curtail business credit, essential capital is difficult to secure, and operating debts increase.

Small-business bankruptcy filings are up 44% nationwide for the year ended September 2009. In California the small-business bankruptcy rate increase is a staggering 81%. Almost 19,000 small businesses filed for bankruptcy in California during the 12 months ended September 2009, up from 10,500 the previous year. The number of small-businesses believed to be in precarious financial condition nationwide is staggering.

Declining Tax Revenues

As unemployment rises and businesses fail, tax revenues decline. According to the National Conference of State Legislatures, 35 states and Puerto Rico anticipate budget shortfalls of at least $56 billion just to fund existing programs. The Center for Budget and Policy Priorities forecasts total state deficits at $166 billion.

At the city level, the picture is equally troubling. In a national survey, 53% of local governments report budget shortfalls greater than 2009 for the coming fiscal year. The Pacific and Mountain West regions of the country are especially impacted, with an average 2010 revenue shortfall of 11%.

In Arizona, Nevada, and New Jersey, the state government shortfall amounts to at least 25% of their budgets. California, the most populous state, is facing another $21 billion state budget deficit – $6.3 billion in the current year and another $14.4 billion in the new fiscal year. But this time around there are no more gimmicks in California politicians’ bag of tricks, after they just sold $36 billion of new debt. All this is made even more onerous for each state because of expanding federally-mandated social program costs.

The European Union is urgently ringing alarm bells about the financial health of Greece, its poorest nation. Yet Moody’s Investors Services gives California, triple the size of Greece, a financial rating two grades lower than Greece.

As property, income, and sales tax revenues continue to decline, it is unavoidable that state and local governments will be forced to either raise taxes or severely cut funding for transportation, education, public safety, social programs, and a host of other government services.
New taxes seem inevitable, especially if the health-care legislation is any indicator. The Senate version contains dozens of new taxes and creates 111 costly new bureaucracies.

Fannie Mae and Freddie Mac, the bankrupt federally-chartered housing mortgage behemoths, have now lost $400 billion in taxpayer money. In September, the latest available month, 46% of mortgage applications were government-insured, the highest level ever. At last count, the Federal Reserve has purchased $854 billion in mortgage-backed securities.

On top of that is the on-going and largely unmonitored risk of the $592 trillion global market in derivatives, but save that discussion for another day.

So What Do We Do?

In 2007, the First Presidency said, "We encourage you wherever you may live in the world to prepare for adversity by looking to the condition of your finances.”

At the most recent General Conference, the voice of warning was notably apparent. President Thomas S. Monson said, “We live at a time when many in the world have slipped from the moorings of safety…” President Deiter F. Uchtdorf referred to “these challenging times.” Elder Todd Christofferson spoke of “a disintegrating society” and “perilous times”.

How much more warning to we need? A favorite verse of modern day scripture, for me, is Doctrine & Covenants 88:119. Though speaking of a temple, it may hold special relevance to each of us for our own house: “Organize yourselves; prepare every needful thing; and establish a house, even a house of prayer, a house of fasting, a house of faith, a house of learning, a house of glory, a house of order, a house of God.”

There are a host of actions we each should be taking to establish houses of order, but these seem especially urgent:

1. Pay careful heed to the Prophet and Apostles!
2. Immediately begin to live below your present income. Get serious. Spend less than you make.
3. Do not make purchases with debt.
4. Reduce debt as quickly as possible, paying off highest interest-rate obligations first.
5. Spend wisely and only for necessities.
6. Set aside something every month into a rainy day fund.
7. Rejoice in your progress.
8. Get involved in your community, state, and nation. Become knowledgeable about government spending proposals, and speak up.

British Prime Minister Winston Churchill once said, “A politician looks to the next election, and a statesman looks to the next generation.” In this New Decade, since there seem to be so few true statesmen, you and I – as citizens – must safeguard the next generation, hold politicians at every level of government to account, require aggressive budget constraint and persistent fiscal discipline, and insist national interests be placed ahead of politics. We must cease to tolerate spending largess and demand an end to unacceptable self-serving political motivations.

This is a divinely inspired nation, with a citizenry blessed with a determined spirit. In that I find great hope. You and I have too much at stake to sit idly by and watch politicians squander this nation into oblivion. We desperately need a more responsible country – morally, ideologically, politically, and economically – and for our own houses to be in order. It’s up to you and me.