U.S. economic competiveness is in decline. Since 2009, the U.S. ranking has dropped from number 15 to 19 of the 144 nations evaluated by the Fraser Institute http://www.freetheworld.com/release.html.
The primary factor damaging the U.S. ranking was the escalating size of the federal government with U.S. federal spending as a percent of the nation’s gross domestic product (GDP) climbing from 21.8 percent in 2008 to 24.1 percent in 2012.
Moreover, between 2008 and 2012, overall private employment declined by 2.5 percent while federal employment increased by 1.2 percent. As the size of the federal government rose, the national debt soared from $9.4 trillion in 2008 to $15.9 trillion in 2012, advancing by approximately 70 percent as the overall economy expanded by only 9 percent.
As a result of the massive U.S. debt, Standard and Poor’s downgraded U.S. bonds in 2011. But the U.S. Federal Reserve has delayed the “debtageddon” by buying U.S. debt and effectively turning on the dollar printing presses and risking rampant inflation in the years ahead. Moreover, global investors, afraid to invest in stocks, have put their funds in U.S. bonds driving rates lower even with downgrades and the cheaper dollar.
However, with 300,000 baby boomer retiring each month pushing social security spending and Medicare outlays higher, there will be a day of reckoning for the U.S. taxpayer and bond investor, but no economist knows when that is. However, the sure signal is when bond investors begin abandoning (selling) U.S. debt. This action will send the yield on the 10-year U.S. Treasury bonds skyrocketing.
How high could they go? Today’s rate of 1.7 percent will surely bounce to something approaching Spain’s current 6-7 percent. This will mean more and more federal tax collections will be devoted to the payment of interest.