The USA is living beyond its means

Posted on August 9, 2011

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(Swedish version in separate blog)

One question that has dominated the news in recent weeks is the USA’s debt crisis and I will begin there. The newspapers around Sweden are discussing this issue and one example is an editorial from Dagens Nyheter [a broadsheet] titled, “When craziness reigns”.

When we celebrated the new millennium in 2000 I was with my daughter Malin in Washington. At the stroke of midnight we had gathered with thousands of others and with President Clinton on National Mall to see a fantastic fireworks display. At that time the US foreign debt was $5,751,743,092,605 or $5,752 billion. One year later when President George W. Bush took control in January 2001 the debt had shrunk to $5,727 billion. The strong growth in the US foreign debt that had occurred under the presidencies of Reagan and Bush Senior from $1,000 billion to $4,000 billion had been dampened. During the first four years of Bush Junior’s reign the debt increased to $7,596 billion and when President Obama took control on 20 January 2009 the debt had risen to $10,700 billion. Last Friday on 4 August when the stock market closed in New York the debt had risen to $14,565 and it was in this situation that Standard & Poor decided to downgrade the USA’s credit rating from AAA to AA+. The USA is living beyond its means. The downgrade is the first since 1941 when the USA received the highest grade of AAA. China is the nation that has loaned the most money to the USA. They have also criticized the political turmoil in the USA. They have even asserted that this is evidence that democratic rule is not very effective. “Those who are in debt are not free” so what might China do with the USA?

A contributing factor to the large foreign debt is, of course, the high oil price. It can be interesting to compare the import cost of oil with the rising state debt. The difference between consumption and production of oil in the USA requires the USA to import 11 million barrels per day. Five years ago it was 13 million barrels per day. At an oil price of $110 per barrel the cost per day is $1.2 billion and, per year, $440 billion. At the start of the first decade of this century the import cost of oil for the USA was only 110 billion dollars. I have not made any exact calculations but one can see that the high oil price in recent years has caused an increased import cost of around $1,500 billion. The war in Iraq is estimated to have cost 900 billion and to that we must also add the cost of the conflict in Afghanistan so the increased costs for oil and war during the past 11 years are of the order of $3,000 billion. The increase in debt between 2000 and 2011is $8,000 billion and approximately 34% of this increase is related to oil and war. The rest – more than $5,000 billion – is from overconsumption that the USA could not afford to pay for.

During the periods when the Republicans have held the US Presidency their priority has been to reduce taxes rather than balancing the budget and now the Republicans have forced President Obama to follow the same line. Apparently 70% of US tax income is based on consumption so the more people shop the more tax the people of the USA pay. Thus, the oil price has a direct cost on the USA economy as its price rises and an indirect cost as people paying higher petrol prices reduce other consumption and so tax intake decreases. One year ago the price of oil was down at $70 per barrel and now it is up at $110 per barrel. This price increase means that we are seeing dampened economic growth around the world. It is time that those in control, not the least the World Bank, to stop ignoring reality and Peak Oil.

Posted in: Dagsaktuellt