Wednesday, July 30, 2008

The American Dream (Nightmare)

US GDP in 2007 was US$13.843 trillion (or US$13,843 billion). Malaysia's GDP was US$186.482 billion. There are plenty of long term bears over the US economy. The US economy has been running on empty, running on it being the reserve currency, for far too long. The events and developments over the last 5 years have shown that the world economy is realigning and the rest of the world is making the US more accountable for their excesses. The sub prime mess and Fannie & Freddie bailouts are just a portion of the financial and economic problems within the US. To get a grasp of each problem, lets use it as a percentage of US GDP. Its quite frightening. I certainly would not like to be going into retirement age and living in the US over the next 20 years.

Just consider the sub prime mess so far and we are just talking of US$1 trillion here. The social security and Medicare unfunded liability is supposed to borne by a growing base of tax payers. We know that is not going to happen as America has an aging population, unless the country admit a whole lot more people under 35 into their workforce now and for the next 10 years.

How to pay for all these, well, issue more bonds. We all know where that's going to lead to. Or the country can raise taxes a lot, which will be very bad for consumption and their livelihood. Or the country will have to keep its military leadership and fight some more wars for the democratic world - that will keep the USD as the reserve currency and ensure the current countries buying US bonds will continue to do so.

The IMF estimated asset write-downs resulting from the 2007-2008 credit crisis to be US$1.1 trillion. By most estimates, only half has been written down so far. In all likelihood, corresponding to defaults on 20% to 30% of home mortgages, we should be looking at another US$500 billion in writedowns. (8% of 2007 GDP)

b) U.S. national debt of US$4.4 Trillion. This figure is obtained from the “Long-term Financial Outlook”, U.S. Government Accountability Office, Jan. 2008. The risk is high that the national debt will continue to grow through deficit spending for many years to come. This gigure is likely to continue to grow in the coming years. (31% of 2007 GNP)

c) The unfunded liability of the Social Security System is estimated to be US$6.7 Trillion (Government Accountability Office, Jan. 2008). Thats the problem with having a lot of social safety nets that is not properly funded. (48% of 2007 GNP)

d) The unfunded liability of Medicare is estimated by the Government Accountability Office to be US$34.1 Trillion. This is the motherlode. One can argue that the liability will be funded over a very long time, but the amount will also grow as well. (347% of 2007 GNP)

e) The cost of imported oil. Despite all the hoo-hah, oil is one of US smallest problem. Yearly import cost is between US$825 billion to US$1 trillion. The danger is if the cost of oil were to go to US$180 in 3 years and the American consumption patterns does not change, then we are looking at maybe US$1.8 trillion. (6% of 2007 GNP)

p/s photos: Sonja Kwok Sin Ney


KoSong Cafe said...

One Indian economist made an analogy of US and the world's other producers, as like a big customer having to be given a loan so that he can afford to buy from the shopkeepers, otherwise not enough business (something to that effect).

This is also like a bank treating its big loan defaulter with 'velvet gloves' compared with harsh actions on small borrowers.

I think the end result is likely to be re-alignment as a result of new big economies like China and India, with USD being relegated from its main role. Many believe the slump in US will not affect other countries as badly as before because of the new big markets.

yj said...

My feng shui sifu said for the next 100 years the western side (meaning US & Europe) will suffer severe economic downturn. China and India did went through that period last 100 years. Now it's their turn to be Taiko...very soon u will see Mr Lee Ah Kau will be CEO of Merrill Lynch...Mr Ramasamy CEO of Citibank and Mr Li Fu CEO of UBS etc...or Mohan Singh CEO of Fannie Mae/Freddie Mac...

Malek said...


the western world has been the 'taiko' for the last 6 centuries beginning w/ imperialism as their national agenda. it's enviable that it's the eastern world to be the new taiko for this century and possibly the next.

too bad not much Americans today are as forward thinking like their founding fathers 2 centuries ago..

this NYT magazine article how china and EU is becoming the new superpowers for the 21st century and "swing states" like Malaysia in milking on that market. I'm inclining to agree.

see said...

I would seriously doubt what feng shui fellas say, after all they say good year for market & gonna be very wet year with lots of rain....think better change job become feng shui "master"

IMO China won't be super power anytime soon, their institutions eg legal, banking, property rights, etc are still at infancy. Remember they basically started from zero ie from communism & trying to reach capitalism something which will take time.

As for Europe MUAHAHA! super power! bahhumbug! Europeans are anything but a power as spineless as they are....

Russia is a country that should be watched in tandem with China

yj said...

see, just to let u know...60% of students doing Phd in prestigous Universities in US are from India and China. True, rapid economic expansion in china/India may result in some economic recession or adjustment or maybe they will face some short term difficulties...but eventually they will be there. Can u imagine the 60% of those Phds much they can contribute to their economies ?

Open Letter - Some Recommendations To New Government

Investing Funds I have spoken on this in the past. We have about 1,100 listed companies and the majority are the market capitalisation ...