Christian Digest #5 Presents THE COMING ECONOMIC EARTHQUAKE--Excerpts from the Book by Larry Burkett
(Chicago: Moody Press, 1991)
Larry Burkett is a Christian author who has written and lectured on financial planning. His other books include "Debt-Free Living," "How to Manage Your Money," and "Your Finances in Changing Times."
INTRODUCTION
I have often said that I am not a prophet of the Lord (in the sense that I have any ability to foretell the future), although we are all prophets in the sense that we should be able to "forthtell" the truth from God's Word. I say that as a prelude to this entire book.
This particular book is unlike anything I have ever written before. I'm going to step out on that proverbial limb and say what I believe is going to happen in our economy between now and the turn of the century. My timing may be off some, but I believe sincerely that my analysis is not.
What is coming may be the greatest economic calamity of the millennium. It is important to remember that earthquakes don't just happen. There are specific geological forces working that result in an eruption on the surface. Modern science knows very little about how to predict accurately when an earthquake will occur, but the scientists do know enough to predict accurately where one will occur. It does not take a geological wizard to see the San Andreas fault when flying over southern California. The ground is split open for hundreds of miles. Whether it will be this year, or in ten years, no one can predict accurately. But virtually no geologist of any stature denies that pressures are building for a major movement.
The same can be said of our economy to a lesser degree. No economist of any report (outside government employment) denies that pressures are building in our economy that will erupt one day.
THE GREAT DEPRESSION
People who live in earthquake regions often develop a fatalistic attitude toward the eventuality of a major disaster--until they actually experience one.
The same attitude prevails among those who have not experienced an economic earthquake. Those who lived through the Great Depression still remember and shudder at the thought. And those born after the Depression have a rude awakening in store.
The following is a description of the events that took place the week of October 24-30, 1929. The narration is my creation; the events are historical fact.
Due to one of those quirks of fate, the president of the New York Stock Exchange, Edward Simmons, was in Hawaii on his honeymoon the last week of October 1929. His vice president, Richard Whitney, was in charge. Whitney had a long history as a habitual gambler and was deeply indebted to the New York banking interests. He was appointed as the president of the New York Stock Exchange in 1930, but later he went to prison for "insider trading."
Whitney was nervous about the week ahead. He recalled the previous week when the whole of Wall Street had gone crazy. October 24 was a nightmare. As the buying frenzy hit the trading floor, Whitney saw something he would never forget as long as he lived, and he prayed to God he would never see again: nearly twelve million shares of common stocks traded in a single afternoon. No sooner had one level of trading been established than another ten thousand shares were offered. The men who had manipulated the sell-off were like sharks waiting for their victims to bleed to death.
What Whitney didn't know was that since the big traders had sold out at top prices on the 24th, they intended to drive the prices down even further by calling in the loans of some of the margin traders who were stretched thin. If the bankers could force them to sell in the down market, prices would plummet. Then they would re-buy their original stocks and pocket the difference.
"A smart man makes his money with money," J.P. Morgan was often heard to say, and, "God wouldn't have made sheep if He didn't expect them to be sheared."
Although few men realized it at the time, the finances of America were in shambles, and the thin veneer of prosperity covered a festering wound. The industrialists and bankers had succeeded in getting laws passed by the federal government that profited them greatly while undermining the economy as a whole.
The bankers were making huge "paper" profits through loans that often carried interest rates of 20 percent or more. The competition for loans became so intense that bankers eased loan qualifications to attract more borrowers.
The average American watched the money merchants getting wealthy in the stock market and flocked to the market to "strike it rich." Lacking the capital to invest, they financed a large portion of their speculation with the bankers. With virtually no controls on market trading, any speculator could hold blocks of stocks with as little as 10 percent down. If that stock was then used as collateral for more loans, the ratio could easily be fifty-to-one.
It was a win-win situation for the lenders. They loaned the money for small investors to buy the very stocks they themselves were forcing up through manipulation. Then, when the prices fell, the small speculators would borrow more to cover their losses. It was one of the most massive transfers of wealth in the history of civilization. It was the era of "paper" prosperity--the Roaring Twenties, when America could do no wrong. The country was on a roll, and no one really thought it would come to an end.
On Tuesday, October 29, the market opened just as it had for two decades. No one had any particular sense of apprehension or anxiety. Most of the major traders assumed that Monday had been the real test of the market's resiliency; and although it had not set any growth records, at least there were no major cracks either.
When the Exchange opened for business, the trading volume quickly reached the level of the previous day, except that virtually all the trades were sell orders. The market plunged as more sellers flooded the floor. Once the plunge started, it was like Whitney's worst nightmare. The radio carried the bad news to the American people and more sell orders flooded in from panic-stricken investors, fearful of losing their savings. It was like a gigantic economic snowball--as more sellers panicked, fewer buyers would step forward.
As the frenzied trading continued, even the veteran traders knew this was not just another down day on the market. It was a true sell-off of all stocks. Even the traditional "blue chippers" (high-priced stocks issued by well-established companies) were being dumped.
By the ending bell, AT&T was down 100 points, General Motors down 150 points, General Electric down 90 points. More than 16 million shares were traded at a loss of $10 billion--twice the amount of currency in the entire country at that time.
The evening newspapers all carried the headline: "Wall Street Crashes!" By the next morning, virtually every small investor in the country had issued a sell order, hoping to salvage something of their equity.
Panic ruled the market from that fateful Tuesday on. There were small rallies where determined investors attempted to support their portfolio of stocks. But those who did, quickly found themselves among the destitute. Millions of Americans lost their life savings, and thousands of millionaires became just more statistics in the growing ranks of the unemployed.
People who had grown up in the American enterprise system and thought it could not be defeated were swallowed up as banks, businesses, farms and homes all fell victim to what would be called "The Great Depression."
By the end of the year, the stock market had lost the unbelievable sum of $40 billion in equity, taking with it hundreds of banks and millions of jobs. By 1932, the depth of the Depression, more than five thousand banks had closed their doors, leaving millions of depositors with nothing to show for their thrift. The national income plummeted from over $80 billion in 1929 to less than $40 billion by 1932. The promise of prosperity built on debt had tempted normally conservative Americans to risk all they owned. They lost.
In order to understand this crash, and the coming "economic earthquake," it is critical to understand how our government functions monetarily. What we accept as normal today, any generation prior to the Great Depression would have seen as unconstitutional. According to the Constitution, the central (federal) government is to have no powers except those specifically granted it by the Constitution. All other rights and powers not specifically granted the individual states are preserved for their citizens. That includes the right to succeed or fail according to one's own abilities, unrestrained by the government. So fearful were the founders of this country of a strong central government that they went to great lengths to ensure that its powers were severely limited. Basically, the central government could settle arguments between the states, organize an army to defend the nation's common cause, regulate interstate commerce, and negotiate foreign treaties. The federal government was allowed to raise its operating capital by charging an interstate tariff on goods only--period!
The Depression set the stage for the federal government to dominate American business, banking, commerce, and the economy as a whole. Franklin Roosevelt raised the status of the federal government to that of the "great provider." Whether or not you agree or disagree with the New Deal, no one can deny it changed American politics and the economy forever.
In my opinion, it also set the stage for an eventual economic disaster unparalleled in American history.
THE NEW DEAL
Franklin Roosevelt was elected at the depth of the Depression, in 1932, based on a catchy slogan his party had adopted from the Republicans: "A chicken in every pot." Only this time, it would be a government chicken in every pot. The promise was to restore the American economy, no matter what the cost. It was a clear trade-off between the short-term needs of families in a depression and freedom from government controls. According to the interpretation of the Constitution at that time, there was simply no way that the federal government could give taxpayers' money to private individuals and call it welfare or government aid or anything of the sort, no matter how justified it seemed. In order to get its agenda passed, the Roosevelt administration had to literally reinterpret the Constitution. The founding fathers had created a remarkable system of checks and balances that ensured that no short-term crisis could undermine the long-term rights of American citizens, even if the citizens wanted to do so, which clearly the thirties generation did.
The New Deal designers had a four-item agenda they wanted to implement:
1. Initiate direct transfers of payments (dubbed "entitlements") to Americans who needed help.
2. Establish the federal government as an overseer and regulator of American business--particularly banking.
3. Establish a strong central banking system to regulate all monetary policy.
4. Establish a national depositors' insurance program.
Taken individually, each of these ideas were radical enough, but, collectively, they represented the most sweeping changes in America since the framing of the Constitution. Perhaps the president could have convinced the American people to amend the Constitution to allow these adaptations, but time did not permit the process. So he attempted to implement them through legislation--virtually all of which the Supreme Court ruled unconstitutional. This set off a six-year battle between the president and the court, which eventually ended with the replacement of the dissenting majority of the court by 1939.
In the meantime, the agenda went forward through the well-established political process known as "stonewalling." This is where Congress creates a law, which the president signs and implements, such as relief payments to farmers for farm price supports. The Supreme Court vetoes the law as unconstitutional, but since the funds have already been distributed, they cannot be recovered. Congress then passes another very similar law, which the president signs and implements. The new law is later vetoed by the court again. And so the process goes on year after year, until enough of the court retires and is replaced that presidential policy becomes constitutionally acceptable. With no limit to the number of consecutive terms a president could serve, it was simply a matter of whether Roosevelt would outlive the older court members. He did.
Government Regulations: Roosevelt shut down all the banks under the laws of the New Deal and reopened them with strict federal controls, including a strong central bank and federally insured deposits. From this base, the government branched out to touch virtually every business in America. Using cheap federal credit, the New Deal established controls over how many tractors were built, and at what price. Homes financed with federal monies had to be built according to the Federal Housing Authority's codes. Farmers who wouldn't join the land bank program found their credit cut off. Even states that didn't adopt federal standards for schools, roads, sewage, etc., were in jeopardy of having their supplemental federal funds cut off. Money became an effective social weapon to place the federal government at the top of all planning.
It is an interesting parallel that many of the same policies were being instituted in Germany at this time. The Nazis enforced their rule through force. The New Deal strategists enforced theirs through financial intimidation. The term "fascist," which is normally applied to Nazi Germany, is equally applicable to the American economy. The term simply means "privately owned but centrally controlled."
A Central Bank: President Woodrow Wilson had been successful in getting the Federal Reserve Banking Act passed into law; but in reality, it was little more than a paper system. The strong independent banks called the shots, and the Federal Reserve followed obediently. The New Deal changed all that. With virtually all the banks on the brink of collapse, President Roosevelt succeeded in establishing the Federal Reserve Board as the authority in banking. Independent banks were not forced to join the Federal Reserve System. But those that did not found they could not transact business through any member bank. Once the member banks' deposits were insured through the Federal Depositors Insurance Corporation (FDIC), the death of the nonaligned banks was just a matter of time.
With the Federal Reserve Banking system in place, the administration had a potent weapon to fight swings in the economy. The central bank could inflate the currency (the New Deal also dropped the gold standard and made the ownership of gold illegal); it could reallocate funds to distressed areas through loans; and it could create money out of thin air through the use of "fractional banking." Fractional banking is so fundamental to our discussion of the coming economic earthquake, that I would like to digress for a moment and explain it.
Fractional Banking: The central bank (Federal Reserve) establishes a minimum reserve requirement for all member banks. This policy is meant to maintain a reserve in the central bank that can be used to help members when necessary. The money is loaned to members, who then can lend it to distressed citizens; at least that was the rationale behind it. Two factors become important in such a reserve system: the reserve requirement and the discount rate (the interest paid to the Reserve for members to borrow money). Requiring member banks to set aside reserves at no interest and then borrow from the reserves at interest would seem to be a difficult policy to sell, unless the system offered them something in return. Let's look at an example of how the Federal Reserve and "fractional banking" aids its members.
In our example, let's assume that the Fed (Federal Reserve) required member banks to deposit 10 percent of all their deposits with the central bank. Now let's assume that a member bank accepts a customer's deposit of $1,000. You would logically assume it would send 10 percent ($100) to the Fed. Right? Wrong. Instead, it sends the entire $1,000, representing assumed deposits of $10,000. The bank then lends an imaginary $9,000 to its customers.
Where did they get this money to lend? That's the function of the centralized system of "cooperating" banks. They don't actually have the money. Each member bank agrees to accept the "paper" of the other banks. So the loan is honored the same as cash when deposited. It works even better if the borrower deposits the "loan money" in the issuing bank. Each deposit becomes collateral for additional loans and member banks can lend as much as 700 percent of actual cash deposits!
Unfortunately, the same system that makes it possible for banks to multiply their deposits into loans also makes them vulnerable to defaults by borrowers. With scant reserves, the banks must depend even more heavily on the central bank, further securing the system. Look around and see how many nonmember banks survive today.
LIFE IN A DEPRESSION
At one point during the Great Depression, nearly 40 percent of all available workers were unemployed, causing a trauma so great it can only be grasped by those who lived it. America was a country without hope, at least economically. The middle class virtually disappeared. There were the rich who prospered through, and even because of the Depression, and there were the others who had lost everything.
To understand the impact of the Great Depression, we must return to the decade leading up to the collapse. This era was called the Roaring Twenties, appropriately named because society was roaring--both economically and socially.
Almost 70 percent of all Americans lived in rural communities that supported the farming industry. Agriculture was the primary business of America. For the most part, farmers were hard-working, family-oriented people whose social lives revolved around their churches. Elections were held in the church, politicians spoke to constituents there, even public schools met in church buildings. The vast majority of Americans believed in God, attended church regularly, and considered themselves to be moral, ethical people.
The same could not be said about all Americans, though--especially those in the entertainment, political, or money-lending business. Often their lives revolved around gaudy shows, gross immorality, gangsters, and crooked politicians.
The successful conclusion of World War I established America as the world leader in virtually every category: economics, military, entertainment, and social "graces." The Vanderbilts, Carnegies, Morgans, and Kennedys became the socially elite, replacing the European gentry.
When Americans turned their energies toward producing goods, they simply out-produced the entire world. It was a time of unprecedented economic prosperity, led by a mechanized revolution in industry and agriculture. For the first time in the history of Mankind, less than one-half of the working force could provide enough food for the majority and still have plenty left to export for sale. By the end of the twenties, farm efficiency had improved so greatly that only 20 percent of the working force was needed on the farms; 80 percent was freed to work in other areas of production.
In addition to being relieved from heavy labor and long hours on the farm, Americans were confronted with a plethora of new products. Automobiles were within the reach of average wage earners; homes were available on long-term financing (up to seven years); refrigerators, washing machines, radios, gas stoves, and the like were all flooding onto the market.
Credit cards were not yet invented, but consumer credit was readily available from willing merchants who knew that their friends and neighbors would pay their bills.
It was in this time of prosperity that the average savings rate of Americans declined from 12 percent of their incomes to less than 4 percent. The reason was twofold: There were many new products they wanted and no real need for pessimism about the future. The Republicans had originally coined the term "a chicken in every pot" to describe the prosperity that Americans were enjoying under their leadership.
THE SEEDS OF DESTRUCTION
The sixties: Perhaps the most significant economic change of the second half of the twentieth century was the discovery of instant prosperity (called credit) by millions of American families. Since the Great Depression, most Americans had been weaned from the use of credit; some because of bitter memories, others because the bankers simply knew better than to lend money to people who could ill afford it. Credit was available during the fifties, but was limited primarily to home mortgages and short-term car loans. During the sixties, loans for almost everything--from college tuition to television sets--burst onto the scene.
The federal government, after running budget surpluses during the Eisenhower administration, began its disastrous experiment with massive entitlement programs. If the Kennedy era could be dubbed "the space explosion," the Johnson era must be dubbed "the deficit explosion."
In his famous inaugural address, President Kennedy said, "Ask not what your country can do for you ...." At that time those with their hands in Uncle Sam's pockets (receiving welfare or some sort of government aid) numbered only about twenty-two million. In the next decade, that number would swell to almost 160 million.
President Lyndon Johnson was consumed by two strategies that would prove to be the most costly in American history: the protection of South Vietnam, and massive federal transfers of money to the "war on poverty."
The sixties may have been tumultuous times politically, but economically the country was still on a roll.
A few prophets of doom issued warnings about too much debt and too much government in the economy; but in large part, their warnings fell on deaf ears. After all, poverty was due to be eliminated by the mid-seventies; people were bored by men on the moon; and Watergate had not yet tarnished President Nixon's administration.
The seventies: What few Americans realized was that the seeds from FDR's New Deal were just beginning to germinate in the economy. The aggregate national debt had grown from $22 billion in 1932 to just under $400 billion by 1970. By 1979 the debt had doubled to $800 billion.
The difficulty with a debt that doubles in ten years is that the interest compounds to the point that it can no longer be paid out of current revenues. Once the interest itself is debt financed, the compounding accelerates.
If the debt had been dealt with swiftly and aggressively, it could have been controlled or even eliminated. But Americans had no such mentality in the seventies, nor did their elected officials. Tax revenues could never sustain the level of growth Americans were used to--not and still fulfill the goals of the Great Society too. So the die was cast for a debt-run economy.
The total federal debt increased by approximately $35 billion from 1950 to 1960 and by $90 billion from 1960 to 1970. But it would climb by $600 billion by 1980! But I'm getting ahead of myself in the logical progression of our economy.
The eighties: When Ronald Reagan became president, he brought into the office something that had been lacking in the previous three administrations: confidence. His programs were innovative (to be sure), and he was an eloquent orator. Simply put, Americans (in general) trusted his leadership, and he capitalized on that.
"Reaganomics" instituted sweeping tax cuts, particularly for the upper-income taxpayers. The Reagan advisers assessed (correctly I believe) that more money in the hands of those with a surplus would be reinvested in the economy. The American economy boomed for nearly eight years, but President Reagan left the White House having bloated our economy with debt. The largest deficits in the history of any economy (nearly $2.2 trillion) were accumulated during the longest period of uninterrupted economic growth.
The Debt
National Debt: It is not new for our government or any other to borrow money. Most governments do so when in a crisis, such as a war. What is unique today is that our government borrows during good times and bad, during war and peace alike. But what makes our government's debt so dangerous is that we are in debt beyond our total asset value. In other words, we are broke.
Unfortunately, there seems to be no thought of ever trying to repay the debt. In truth, our government cannot even pay the interest on its debt, unless it does so through additional borrowing. The media presents countries like Mexico, Brazil, and Argentina as so-called "banana" republics because they must borrow to pay the interest on their debts. But who would have ever believed this was possible for the world's largest economy?
It is very possible that the federal debt could reach $20 trillion by the year 2000. At an interest rate of just 10 percent, Americans would be paying $2 trillion a year in interest! That would leave about $1 trillion to operate the country, assuming that all Americans were being taxed at a 50 percent rate.
In 1991 the federal budget was one trillion 300 billion dollars, in round figures. In addition, the government spent nearly another $300 billion in "off-budget" expenditures. Such figures tend to lose their significance to most of us, so let's put it in manageable "bites." At this spending level, the federal government spends $4.6 billion a day! That amounts to $195 million an hour, or $3.25 million every minute, day and night. The average taxpayer's "contribution" to the federal budget (based on an annual income of $38,000) operates our government for approximately one-seventh of one second. Think about that the next time you read about how the government spends our money.
Personal Debt: Besides the national debt, most Americans also have a great deal of personal debt. In fact, most American families, in spite of their outward appearance of affluence, live on the brink of economic disaster. They have little or no savings to fall back on in difficult times and now are borrowing against the equity (cash value) in their homes to buy nonessential goods. If the value of their homes falls during an economic downturn, both the borrowers and the lenders are going to be in real trouble.
State debt: Anyone who reads the newspapers or watches the evening news knows that many states are in severe financial trouble. The same abuses that we see at the federal level are evident on a smaller scale at the state (and local) level. It is astounding to hear of state debts in the billions of dollars. It is even more astounding to hear about cities (like New York and Boston) with debts in the billions. It's as if the whole public system has gone insane. There is virtually no way these state governments can sustain such huge debts, and there is no "politically acceptable" way to repay them. With the taxpayers already struggling financially, higher taxes will push them to the brink of disaster, economically and emotionally.
What's next: Those who fail to learn from the past are doomed to repeat it. You'd think that just a little more than six decades after the most severe depression in U.S. history, we would remember the lessons learned: you can't spend more than you make forever and not pay the price, and when the bottom falls out, it is the lenders who will be protected, not the borrowers.
God's Word gives us a clear indication that this principle has endured for more than three thousand years. For as Proverbs 22:7 says, "The rich ruleth over the poor, and the borrower is servant to the lender."
Inflation
In 1984 President Reagan commissioned a panel of private citizens to review the federal budget and make recommendations on how to reduce the deficits. The study, under the direction of J. Peter Grace, was dubbed the Grace Commission. One of the economic possibilities for the United States studied by the Grace Commission was that of hyperinflation. To get an accurate picture of what sparks hyperinflation (annual price increases of at least three digits), a committee selected by the Grace Commission did an extensive study of inflation in other countries. One of the principal figures in this study was Harry E. Figgie, Jr., chairman and chief executive officer of Figgie International, Inc., and a world-renowned industrialist.
While visiting Brazil, Argentina, Mexico, and Bolivia to evaluate their hyperinflation, Mr. Figgie was struck by the similar comments made by the more conservative members of their monetary policy groups.
In effect they all said something very similar: "What's wrong with the United States? You are on the same course that we were on--just several years behind us. Everything that we did wrong, you are doing wrong--only on a bigger scale. You have big budget deficits. You have a deficit in your balance of payments. You have allowed confidence in your currency to be eroded. You are dependent on foreign loans. You blame outsiders for your problems. Your businessmen call for more protectionism. And the exchange value of your currency is falling."
Their final comment to Mr. Figgie was, "Can't you tell your government to stop this madness before it's too late?" Mr. Figgie's reply was, "I sure do hope so."
That was in 1985. Six years later the deficits are bigger, the balance of payments are worse, and the government has yet to implement more than a token amount of the Grace Commission's suggestions.
THE COWBOY RIDES ON
The strength of the U.S. economy is truly remarkable when some of the negatives against it are considered. For instance:
* Twenty percent of all Americans work directly for federal, state, and local governments and, as such, create no new goods and services.
* Eighty percent of all Americans now draw some form of government subsidy in the way of loans, grants, or direct transfer (welfare, Medicare, or other aid programs).
* Our currency is not backed by any fixed-value assets, has been inflated by huge amounts of debt, and yet is still the value standard throughout the world--at least for now.
Unfortunately, in the past decade we have dropped from the status of creditor nation to that of debtor nation. We have annual budget deficits in the hundreds of billions of dollars; we have a national debt that exceeds our government's total net worth; and the American taxpayer now works four months to pay federal taxes and a fifth month to pay state and local taxes.
As the national debt continues to grow, our dependence on foreign loans continues to mount. Eventually the interest leaving the country will exceed the government's tax revenues. Then a "solution" must be found.
A short-range solution will be more taxes. One recurring suggestion is to tax the "wealthy" more. The difficulty is that if all the income above $100,000 a year were taken from the wealthy, it would operate our government for only ten days! Also, stripping the wealthy of all their surpluses is a little like killing the goose that lays the golden eggs. The poor don't invest for the future. They need all they have just to live.
Then comes the danger of foreign investors not lending us the money we need. If they stop lending, then we must print the money (monetize the debt). When we begin this process, hyperinflation is certain to follow. So what do we do? It's a little like a cowboy in the old West riding his horse to death trying to avoid the Indians chasing him. He knows if he keeps on riding, his horse will eventually collapse. But he also knows if he stops, he will die. So he rides on, hoping for a miracle.
THE GROWTH OF DEBT
The debt picture in America today is alarming. Not only is the size unmanageable but, as noted previously, much of the interest paid is leaving the country. The small debtors borrow from the banks (and others). The banks place a large portion of their earnings in government securities (Treasury bonds or Treasury bills created out of thin air, otherwise known as debt). The government in turn pays out a huge chunk of this in interest to foreign lenders, who then use their profits to reinvest in American businesses. A whole nation is literally selling its birthright, as Esau did for the proverbial "mess of pottage."
At the current rate of growth, the federal deficits will feed approximately $7 trillion of additional debt into the economy between 1992 and the year 2000. There never has been anything approaching this level of debt funding in the history of Mankind in so short a period of time, even on a percentage basis. The effects of this will be felt throughout the U.S. and ultimately the world's economies. It is estimated that, at most, approximately 3 to $5 trillion is available from all sources to fund this deficit. That leaves only two logical conclusions: Either the government will take the necessary steps to control the budget and reduce the deficits drastically, or they will resort to "monetizing" (creating) the debt by printing massive amounts of new currency.
I don't know what your analysis is but, based on observation, I find it hard to believe our government leaders have either the inclination or the will to cut their spending sufficiently.
Allow me to outline what kinds of cuts would be necessary to bring the budget into balance over the next five years. This does not deal with reducing the national debt--only the annual deficits that are adding to it presently.
1. All federal payrolls would need to be reduced by approximately 40 percent. This would require the dismissal of 1.3 million employees, saving approximately $40 billion annually.
2. Welfare would need to be reduced by 25 percent, saving $46.5 billion annually.
3. Defense spending would need to be reduced by 25 percent, saving $80 billion annually. (This would require the closure of 3,000 obsolete military installations all across the country, resulting in the additional loss of 300,000 jobs in civilian-related businesses.) It would also necessitate recalling at least one-half of all active U.S. military personnel stationed outside the United States.
4. Entitlement programs, such as student loans, farm support, education grants, and the myriad of other government-subsidized programs would need to be cut across the board by at least 25 percent, saving $60 billion.
As you can see, even with these cuts the budget has been reduced by only $226.5 billion a year. We would need to make another round of cuts to trim out the additional $120 billion in actual overspending, if the government could not shift any of its spending to the "off-budget" category (the realm where they don't have to officially account for it).
My obvious question is: Does anyone realistically believe that politicians are going to make the kinds of logical choices necessary to balance the budget? And would the average American be willing to make the common-sense sacrifices necessary to allow such cuts, even if the politicians wanted to do so?
Logic and common sense seem to play small parts in our present society, as confirmed by the following facts:
* We get soft on prosecuting criminals and then wonder why crime increases.
* We legalize abortion and then wonder why there are fewer kids to fill the schools.
* We protect child pornography as free speech and then wonder why so many kids are abducted and murdered.
* We take discipline out of the classrooms and wonder why kids don't learn as well.
* We entice young couples to get into debt and then wonder why the divorce rate is so high.
The list could go on and on. The answer is found in God's Word. All of these things are but symptoms. The real problem is that we have removed God from the decision-making process in America today. When any nation does this, evil will prosper.
TREMORS
Earth tremors are an indication of unstable geological forces, warnings of greater things to come. In the case of the coming economic earthquake, there are also tremors. The following are presented as tremors signaling the excessive buildup of economic stress.
Tremor Number 1:
The Savings and Loan Collapse
Tremors often rumble past us, giving warnings of greater catastrophes to come if no changes are made. The Savings and Loan debacle is just one of these. The total effect on the economy has yet to be felt. The immediate effect is a direct cost to the taxpayers of at least $400 billion to cover the losses suffered by insured depositors.
Tremor Number 2: The Banks
For several years, keen-eyed accountants have been warning that some of the biggest banks in America were in financial trouble. Banks like Chase Manhattan, New York City Bank, Chicago Bank and Trust, Bank of America, and dozens of others have been making loans that no prudent investor would ever have made with his own funds. Loans were made to Mexico, Brazil, Argentina, Yugoslavia, and Donald Trump--all of which were in trouble right from the beginning.
According to a 1990 audit done on the nation's banks, there are some 435 banks that are insolvent (unable to pay their debts) by any accounting standards. Among these are twenty of the largest banks, representing nearly $2 trillion in depositors' funds. Each dollar on deposit is a potential debt for the government if a bank fails. The FDIC is obligated to repay all depositors up to $100,000 per account. (And the FDIC itself is falling low on funds.)
Tremor Number 3:
The Insurance Industry
One of the selling features of the insurance industry is that no major insurance company failed during the Great Depression. But the economy of the nineties is not the economy of the thirties, and a great many insurance companies are in financial trouble--some because of imprudent investments in things like junk bonds, but, overall, more are in trouble because of business and real estate loans they made when times were good.
From 1988 to 1991, fifty-two insurance companies failed, leaving millions in unpaid claims in their wake. So far, these failures have been limited to the smaller companies. However, the Standard and Poor's Service, which rates all major insurance companies, is constantly downgrading the stability of some huge companies.
Other Black Holes
Social Security: Our generation is emotionally dependent on retirement. We have come to expect retirement as an "entitlement," unlike any generation before us.
According to the Grace Commission's report, the Social Security system will need approximately $1.8 trillion a year to fund retirement and Medicare by the year 2000. Assuming a "normal" inflation rate of approximately 6 percent, the shortfall will be about $400 billion annually--in just nine years! Even if the government was saving the surpluses now, which it is not, the annual deficits would still run in excess of $300 billion. That does not take into account the escalating costs of health care that we have seen during the last five years.
Health Care: The last area I want to discuss, in terms of deficits, is the huge black hole called "health care." Both federal and state health care costs are escalating out of control. Medicare now costs over $104 billion a year; up from $39 billion a decade ago. It is estimated (without the impact of AIDS) that federally supported health care costs will be more than $1.3 trillion by the year 2000.
AIDS: The cost of lifetime care for a symptomatic AIDS patient is approximately $175,000 at the present time. Thus the care of ten AIDS patients represents a cost of $1.75 million; 100 patients represent a cost of $17,500,000; 1,000 patients represent a cost of $175 million. It is estimated that there will be at least 4 million symptomatic patients in the United States in this decade. Factor that cost into the national health care system, and the economic effects are catastrophic.
It is clear that we are having some severe economic tremors. These are merely the forewarning of some violent tremors to come before the "big quake" strikes. If my analysis is correct, we all need to make some radical adjustments--personally and "governmentally".
THE FINAL WARNING
When you see cracks appearing in the earth in an earthquake zone, the actual eruption is near. When you see cracks in the economy, you'll know that financial eruption is near also.
Crack Number 1: Banking Crisis
We have discussed in part the potential of a banking crisis, but one of the signs of an imminent collapse is massive bank failures. Just in case you may not be aware that there is a banking crisis looming, I need to point out some facts.
Prior to 1991, interstate national banks were prohibited by law--this meant that one corporation could not own banks across the country. The logic behind this limitation is obvious: If one corporation controls banks throughout the country, it could eventually develop a monopoly and choke off the competition. Also, if a nationwide banking corporation developed financial problems, it could threaten the whole banking system. Things have changed, and banks are now spreading across state lines nationally. Watch these new "mega-banks" very closely.
Crack Number 2: Business Failures and Departures
Some time ago a businessman I know called to say that he was relocating his business outside the U.S. The reason: the constant pressure from our government bureaucracy.
He owned a company in the western United States and a sizeable portion of his business was providing parts for catalytic convertors on automobiles. A part of the manufacturing process involved the use of a potent acid catalyst, which was recaptured, cleaned, and reused again.
Three years earlier he was required by the Environmental Protection Agency (EPA) to install some very expensive equipment to monitor the plant's environment to ensure that no workers were exposed to the caustic fumes. He did this willingly, believing it was in the best interests of his employees.
Recently he received a bill from the EPA for his "share" of an environmental cleanup. It seems the company he bought the monitoring equipment from also used toxic chemicals in their testing facility. The facility failed to meet EPA standards and was required to decontaminate their entire complex, which meant chipping out several hundred yards of concrete and storing it in sealed containers for the next 150 years or so. Rather than absorb these costs, the company, a subsidiary of a foreign firm, declared bankruptcy and closed its doors.
The EPA then sent a portion of the cleanup estimate to all the companies that had ever done business with the firm, including this businessman. The thing about it that bothered him the most was the veiled threat he received. The attorneys for the EPA warned him that if he refused to pay his "share," amounting to tens of thousands of dollars, he could be held liable for the entire cleanup, amounting to several million dollars. The timing was significant since he had just returned from an industry meeting where other business owners shared horror stories of similar conflicts with various government agencies; many of them had had their assets attached (held by the government) when they refused to comply.
"Enough is enough," he told me. "Government officials from another country want me to relocate my business there, and they've offered me tax breaks, low-interest loans, and governmental guarantees of no interference. I can see the handwriting on the wall here. So I'm going!"
He offered his employees a chance to relocate also. As expected, no one took the offer, so 1,300 employees were out of a job, and another industry left the U.S.
I'm sure some newspaper or television station in his area will eventually do a report on the callous businessman who dumped his employees for a few dollars. But that was not the case at all. He grieved over his decision, and then he provided liberal benefits to those who were dismissed.
"My great concern," he said, "is that one day the rules will get so oppressive that I won't be able to operate profitably and laws will be passed to keep me from relocating. So I'm getting out while I still can." He saw the EPA in the same role as the KGB in Russia. They have become a paramilitary enforcement group running amuck throughout the free enterprise system.
The environment has become the new buzzword in Washington, and there is little doubt that more of this kind of activity will take place.
Crack Number 3: The Denial Syndrome
The one thing you can be certain of is that no one in the power structure of Washington will admit to any problems until the evidence is so overwhelming that it is obvious to all. It's like we're headed down the Niagara River in a powerless boat, and yet they still insist, "There is no problem. The sound you hear in the distance is not a waterfall. We promise!"
I heard Lee Iacocca say during an interview in the midst of the 1990 recession, "I know the politicians tell us that we're not in a recession and we're not going to be, but, from where I stand, it sure does look like a recession."
I agree with Mr. Iacocca. If it is in the best interests of the political system to deny a problem, they will do so in spite of overwhelming evidence to the contrary. The more vehement the denials, the bigger the potential crisis.
Even if the evidence indicates bank failures, business failures, and desperate efforts on the part of federal and state governments to raise funds, you can be sure the information coming out of Washington will be upbeat and positive. In fact, government economists who even dare to suggest that the federal budget is out of control usually find themselves buried in the inner sanctum of Washington, or teaching Economics 101 in a community college somewhere.
The same political system that allows taxpayers' funds to be spent for a study of why bees can fly ($378,000), free playing cards for Air Force II ($52,000), anti-Christian art ($480,000), and a Congressional workout room ($42 million), also allows for our tax dollars to be poured down another ten thousand "rat holes."
Why should we think that our governmental leaders would suddenly get conservative when it comes to running our nation's economy? We have surrendered control of our finances to a group of people ignorant in basic economics. It is time that the average American woke up and realized that a housewife who has learned to live on an average income is imminently more qualified to make economic decisions than is the average politician.
Keep in mind that the people who are trying to convince us that an economic crisis will not occur are the same ones who spend $500 for hammers that are commercially available for $12, buy 20-cent bolts for $60, spend $40 billion a year in taxpayers' funds not to grow food, and increase the welfare rolls from 6 million to 14 million people while spending $3 trillion to accomplish this remarkable task.
WHAT CAN YOU DO?
The one certainty is that God is still in control no matter what happens. I continually remind myself that the Lord said not even a sparrow falls to the ground without His knowledge. That really is comforting, even if you happen to be that sparrow.
However, knowing that God is in control does not remove our responsibility to do everything possible to change what is happening or to prepare ourselves for some difficult times.
Get out of debt: Recently I wrote a book entitled Debt-Free Living. In it I tried to discuss all the arguments for and against borrowing in our economy, so I won't expound on that material here. However, I believe there are some pertinent points that must be made in relation to the coming crisis in our economy.
First, debt created this problem, and debt will make it far worse before we see any resolution. Debt is not the problem though; debt is merely the mechanism by which weak-willed politicians feed their constituents easy money--which is what borrowed money is. Debt, therefore, has allowed the government to spend money it didn't have on projects that most Americans wouldn't have approved if they had been required to pay for them with tax dollars.
Second, there is no way to sustain debt spending for an indefinite period of time. Eventually the interest accumulation will exceed anyone's (or any country's) ability to keep the debt current.
Don't go into debt, and get out if you can. What you own belongs to you and not a lender.
(Editor: All these physical economic problems are merely symptoms of the larger spiritual problems, of course. As the Bible says of one king, which can also be applied to any nation, "As long as he sought the Lord, God made him to prosper. But when he was strong, his heart was lifted up to his destruction."--2Chr.26:5, 16.)
Picture captions & fact boxes:
Page 1: The dog's acting funny, George...
Page 2: The San Andreas fault is a disaster waiting to happen.
Page 3: HOW THE GREAT DEPRESSION AFFECTED THE REST OF THE WORLD
a. Grain prices fell
b. Silk & cotton prices fell
c. Tin & rubber prices fell
d. Wool prices fell
e. Meat prices fell
f. Coffee prices fell
g. Sugar prices fell
h. Cocoa prices fell
i. Europe's industry collapsed
Page 4: Franklin Roosevelt
Page 7:
LIFE IN THE DEPRESSION
When the Depression came, America had no national system of unemployment benefits; each state provided its own measures, such as money payments, relief work and free soup. In some states, relief was practically non-existent.
Thousands took to the road, looking for work, begging & stealing and living in squalid camps by rail tracks. There were 12 to 15 million out of work in the United States, six million in Germany, nearly three million in Britain, and countless others throughout the world.
Revolutions and riots occurred in some countries and, as Capitalism seemed to have failed, many turned to Fascism or Communism. In the Western world, apart from Mussolini's Italy and Hitler's Germany, the birth rate fell, as though parents dreaded bringing children into such a world.
On the other hand, those with jobs and money found life enjoyable. Food, clothes, houses and transport were cheap. It was in the old industrial areas and in farming communities that people really suffered the most.
Page 9:
Black Monday, Oct. 19, 1987, when the sky fell on the five-year bull market. The Dow dropped an unprecedented 508.32 points, and investors lost $500 billion. In '89, a surging Dow surpassed precrash levels.
Page 10: Borrowing to buy non-essential goods.
Page 11: The American taxpayer now works four months to pay federal taxes & a fifth month to pay state & local taxes.
Page 14: The economic effects of AIDS are catastrophic. 1,000 patients represent a cost of $175,000,000.
Page 15: As housing costs rose, more & more Americans lost the struggle to keep a roof over their heads. By 1985, 350,000 were homeless. By 1989, 3 million.