The budget deficit is much worse than you've heard, says Bud Conrad of Casey Research:
Yesterday, however, I came upon a surprising measure that is as simple as it is effective in helping to understand just how extraordinary today’s deficits are. The measure calculates how big the deficit is, expressed in “constant” dollars – dollars that have the same purchasing power over time.
Using that measure, the current deficit ($1.4 trillion) is a surprising 260% of what the government deficit was in the worst years of WWII, the biggest war we as a nation have ever fought.
The comparison to WWII is relevant and important, because the effort for that war turned this country completely upside down and saw the government commandeer the levers of industry, for example auto makers and refrigerator plants, to make tanks, airplanes, bullets, and bombs. At its peak, the war effort consumed 90% of government spending.
But there’s a crucial difference between then and today: back then we knew that, in time, the war would end and the elevated government spending would be reduced. Today, however, while the cost of military is a still high 20% of federal spending, the vast majority of our government’s expenses are for non-discretionary items, such as Social Security and Medicare, that aren’t expected to be cut. In fact, they are only going to go higher from here.
Add this annual expenses figure to the some $70-80 trillion in unfunded liabilities, as measured by David Walker (a life-long bureaucrat who, if anything, is underestimating the problem), and a hyperinflationary collapse becomes an almost certainty. Is there anyone out there who'd like to gainsay me on that assessment? We've moved well beyond a point at which we might wonder, "Do you think they'll have to raise taxes?"
Richard (the other one) brings up a very important point in the comments section, and it's worth addressing here. (Though this is such a big issue that my response will have to remain elliptical.)
America certainly isn't the only nation-state that's in a whole lot of trouble, but there are some structural differences worth pointing out:
1) Japan and Europe still have high savings rates, so they "owe [their debts] to themselves," so to speak. I dislike this Keynesian phrase, but the fact that the Japanese people own the debt of the Japanese government is an important sign that the country is still economically viable and able to absorb detrimental government policies. The U.S. savings rate, on the other hand, hovers around 2-5 percent, and was recently negative. Thus, some 60 percent of U.S. government debt is held by foreigners, and much of the rest is monetized by the Fed.
2) GDP is a bit of a fatuous number since not only does it include government expenditures but it doesn't differentiate between productive and destructive spending. For example, the cleanup of Hurricane Katrina increased GDP, but everyone would agree that spending money on this is an unfortunate necessity -- it doesn't comprise a sound investment or an increase in America's productive capacity. (See Henry Hazlitt's famous "Broken Window" fallacy.) Much of U.S. GDP is made up of consumption, and this is something that can fall quickly -- and thus multiply the debt-to-GDP ratio -- once the second leg of the Depression hits.
3) The reason that America has been able to take on so much debt, and the Fed has been able to monetize so many expenditures, has been due to the fact that the dollar is a world reserve currency. The state can print greenbacks, and foreigners want to hold them. Indeed, most dollars aren't in the U.S., they're held abroad. But this is a double edged sword, as global political changes can put an end to this situation and ensure that trillions of paper units will flood back into the country. Again, hyperinflation.