However, even in the midst of these boom times, it was apparent that so much of the expansion could fairly be called "artificial" growth. The very low interest rates manipulated by the Federal Reserve, combined with the easy credit offered by banks, was a toxic combination, leading to housing bubbles across the U.S. This in turn, led to easy money for homeowners in the form of home-equity cash outs, fueling consumer demand that would expand across the economy, fueling overall economic growth and inflation but further increasing the bubble in the housing market. An overall credit bubble accompanied all this, high-lighted by the incredible growth in mortgage-backed securities, which allowed banks to become very wealthy (for a time), and allowed homeowners to feel the same.
As everyone now knows, these bubbles burst, with resulting economic declines and flat-line growth. Arguably, these declines would have been even sharper if not for the federal government stepping in, providing even easier credit and backstopping the financial industry, particularly, the financial oligarchs, such as Bank of America, J.P. Morgan, Citigroup, Fannie Mae and Freddie Mac.
Unfortunately, this has not decreased the risk of financial collapse. It has simply shifted the risk onto the backs of American taxpayers, present and future.Additionally, just as the housing bubble can now be seen to have been something of an artificial economy, today's economic growth, tepid as it is, is also largely artificial because it has resulted from the federal government's ability to spend much more than it takes in from taxes. If one includes increases in "unfunded liabilities" like Social Security and Medicare, the federal government alone, not including state and local governments, is spending more than $2 trillion a year that it doesn't have. In the long run this is simply unsustainable. To make up this financial gap, the government must either borrow the money, adding to future taxes, or simply print the money, adding to today's and tomorrow's inflation, and risking further destabilization of the financial markets.
While overspending of this magnitude is currently tolerated by the financial markets and our creditors, the guide of history shows that if continued, this overspending will seriously hinder future economic growth. It is has been shown throughout history, that countries with large debt overhangs lead to slower potential growth rates for an economy. We see a current example of this in Japan which has used many of the same "tools" (using that word very loosely) that U.S. government officials have used in the past three years to manipulate the economy and prevent it from doing what it must do - achieve supply and demand equilibrium. And just like Japan, it has been extremely low interest rates that have seduced governments into borrowing and spending with nearly-free money. But just as we have seen with Japan, burgeoning debt levels will lead to lower long-term economic growth, not stronger.
The question now is whether the various interventions and credit manipulation have done such serious long-term damage to the country from which it can never recover. This is not impossible and has been seen throughout history's timeline in the countries that have turned away from policies conducive to strong economic growth and toward more rigid, command-control style economies. These are not typically the countries that people associate with strong economic growth, but inevitably fall to financial ruin.
Assuming our federal government doesn't simply default on its debt, which would induce immediate and painful financial austerity, the current debt overhang, to say nothing of any additional, will weigh on the U.S.' future economic growth for years, if not decades. This potential for slower growth is combined with negative demographics in our country, where each year we have fewer workers to support those that are retired, disabled or otherwise supported by government programs. Compounding this, taxes are likely to increase in the years and decades ahead to pay for its financial obligations as well as to pay the debts we've incurred from our lenders in Japan, China and Middle Eastern countries.
Despite the currently harmful economic and financial policies currently in place, it is probable that in the long-term the American economy will survive, and even prosper, despite the harmful economic policies in place. Away from U.S. shores, economic growth continues strongly around much of the world, with yearly growth rates above 7% still seen in China, India and Brazil, a combined population nearly ten times
our own. And more and more American companies than ever are participating in the world's growth, supporting not only U.S. multinational companies but also overall American economic growth.
The federal government is playing a very dangerous game with its unbelievably leveraged finances, and risking destroying the finances of the companies and individuals that are responsible for its existence. Governments should have more confidence in the ability of Americans to survive and prosper. They will certainly need to exercise more financial discipline if they want to survive this financial storm. In the end however, I believe that despite the oppressive obstacles, the entrepreneurial spirit of Americans, while currently hindered, will survive and thrive in the years ahead.