We're not in Kansas anymore: US National Debt and the Fiscal Cliff

I saw this in my inbox this morning. Combined with Jeff Opdyke's commentary about the difference between a real social safety net and the Social Security system the United States (and virtually every other western country) has today, and Laurence Kotlikoff and Scott Burns's The Clash of Generations, and I think my own views concerning the current so-called "debate" between Democrats and Republicans are coming into sharp focus.

I see so many of my Democratic friends touting the "compassion" and "love" being shown by their favorite politicians, and I think: "Really?"

It's all well and good to speak of compassion. But who can pay for this so-called compassion--much less who is willing to pay for it (with their own money)? Please don't talk to me about your great compassion when you are willing to saddle future (not-yet-able-to-vote and/or not-yet-aware-enough-to-vote) generations with massive debt that they will never be able to repay [that's the message I get from Kotlikoff and Burns; good summary of their book here]. And please don't talk about compassion when the supposed social safety net is being used, today (and for the foreseeable future--unless Congress decides to change the system) as a primary vehicle of retirement funding [the message I get from Jeff Opdyke's article].

The following, by Alexander Green of InvestmentU in last Friday's Investment U Plus newsletter, provides further perspective, I think:

Imagine that your 18-year-old son goes off to college for the first term of his freshman year. You are happy to pay for his education costs - room, board, tuition, books, etc. - but you also give him a credit card "in case of emergencies."

When he comes home for Christmas, you discover that he has run up $70,000 on his MasterCard. You hit the roof and demand an explanation.

"Now hold on, Dad," he says. "Before we start talking about how much less I might spend, let's talk about how much more money you [really ought to be giving] me."

Consider your response - and whether it would be printable in a family paper. Yet Congress makes our hypothetical spendthrift look like a piker.

Most reasonably well-informed Americans know that our $16.1-trillion federal budget deficit is now larger than the nation's GDP. But what most don't realize is this figure doesn't include the unfunded liabilities for Medicare, Medicaid, Social Security and the Prescription Drug Benefit. That's another $121.6 trillion. [According to Kotlikoff and Burns, it's actually more than $200 trillion. But what is $80, $90, or $100 trillion between friends? --JAH] Combine the federal budget deficit with the unfunded liabilities for current entitlement programs (excluding ObamaCare) and it comes to a mindboggling $1.2 million per taxpayer.

Some will argue that this is exactly why we need to stick it to the ultra-rich, an approach that has clear populist appeal. But here's a bit of perspective. Less than a hundred years ago, the nation's richest man, John D. Rockefeller, could have written a personal check and paid off the entire national debt, every penny accumulated since 1776. Today the government could confiscate the entire net worth of the nation's wealthiest man, Bill Gates, and it wouldn't pay six weeks' interest [NOTE: That's interest! --JAH] on the national debt. . . .

Writing in The Wall Street Journal this week, former Congressional Committee Chairmen Chris Cox and Bill Archer note that even if the government confiscated the entire adjusted gross income of every individual and corporation in America, it still wouldn't cover U.S. entitlement obligations. Yet the first order of business according to President Obama, Senator Reid and Mr. Buffett is not to reform entitlements or rein in spending but to raise tax rates? You might as well try bailing out the Pacific Ocean with a teaspoon.

Congress has a world-class spending addiction, but then so do most other Western democracies, including Canada, Britain, Western Europe and Japan. In every case, politicians on both sides of the aisle have learned that promising lush government benefits paid for by "someone else" is a big winner at the polls.

As for the current fiscal cliff negotiations, the Congressional Budget Office estimates that raising the top marginal tax rate to 39.6% - as Obama proposes - would generate approximately $70 billion a year. That's not an inconsequential sum. But it won't come close to fixing this year's $1.1-trillion federal budget deficit. Where would we get the other $1.03 trillion?

And why did I title this post "We're not in Kansas anymore"? 

Because I get the impression that the American empire has run its course. It can no longer maintain the illusion. Reality is beginning to set in. The U.S. cannot continue to inflate away its debt problems and expect its citizens not to feel the impact. We all--wealthy and poor--are going to experience the results of almost  three decades of spending beyond our ability to pay.

Entitlement States of America

There's plenty of blame to go around. We know the rich as well as the poor are leaching off the government . . . i.e., whoever is "stupid" enough actually to pay taxes.

I didn't realize it was quite this bad, however.

From the August 5 Sovereign Digest published by The Sovereign Society:

Maybe this is Just a Conspiracy Theory, But . . . Have you ever wondered whether the government – both Democrats and Republicans – secretly wants a nation addicted to welfare? Sure would make for a more-compliant bunch of voters when the bulk of Americans are dependent on Uncle Sam for their bread and tuna.

I tucked away a report earlier this year that tracks a dependency index, and among the latest findings it showed that those who take from the government (let’s call them Thy Brothers) received benefits of about $32,700 from the government in 2010. Those who earn money and pay taxes in America (let’s call them Thy Brothers’ Keepers) earned on average about $32,400.

Is it just me, or is there a terminal flaw in the system when Thy Brothers are living larger than Thy Brothers’ Keepers?

If you want to see the true impact of this addiction to dependency, look no further than the $1 trillion Farm Bill the House passed last month. A huge chunk of the spending has nothing to do with farms or farmers. It’s earmarked for food stamps.

We, Thy Brothers’ Keepers, now spend about $80 billion a year on food stamps.

In the 1970s, one in 50 Americans received food assistance from the government. Today, it’s a stunning one in 7. But to see just how broken the system really is, dig a bit deeper. Half of all the folks receiving food assistance have been on the program for more than eight years. That, dear reader, is a sign of dependency.

In all, more than 67 million Americans – about 22% of the country – depend on the government for their livelihood. That number will only grow as more Boomers fall into Social Security, as Obamacare lassos more Americans into a government health network, and as failed economic policies create more Americans who are (wink wink) permanently disabled.

Sooner or later, we reach a point where the Entitlement States of America runs out of other people’s money. Then what?

Prescient?

Which of the other presidential candidates has spoken so openly and, apparently, presciently, about what is occurring today? Which of the other presidential candidates has offered policy proposals to overcome these predictions?



Thank you, Jaime in TX, for providing the link. And thank you, too, for the quote:

If you want government to intervene domestically, you’re a liberal. If you want government to intervene overseas, you’re a conservative. If you want government to intervene everywhere, you’re a moderate. If you don’t want government to intervene anywhere, you’re an extremist.

I had begun to "get" the first two. I hadn't thought of the last two.

I had never thought of myself as an extremist.

Can we learn from the past for the benefit of the present and future?

I'm not sure why I keep writing about this kind of stuff. Maybe because I think it could be of help to someone.

I received an email this morning that sent me to a video/advertisement. I hate video advertisements! They take way too long to watch. So what I usually do is click on the "Close Window" tab and they then offer to let me "Stay on the current page" and read the transcript.

Yeah. So that's what I did.

And I've copied just a few of the more salient points for your benefit, here. (There's lots more. Lots of historical detail--about inflations from the Roman era to the present; about people's experiences from those times; about laws on the books or being projected (even by government officials; about current trends in the United States . . .)

From Addison Wiggin of Agora Financial:

Many years ago, the United States lived well within its means...
Thomas Jefferson walked to and from his own inauguration ceremony — right down Pennsylvania Ave — and spoke to anyone who came up to him. ^[13]

But now when the U.S. president travels, he does so in imperial style... 

When President Bush vacationed in Crawford, Texas, the flight on Air Force One alone cost nearly a quarter million dollars. And that didn't include the costs of the cargo planes that shuttled the president's limousines and helicopters... or the salaries of the hundreds of workers who laid the groundwork and organized the trip. ^{[14] [15]}

During President Obama's recent trip to India, it was rumored that he brought an entourage of 3,000... that he took with him 40 aircraft and six armored cars (one of which was equipped to even launch a nuclear missile... can you imagine what that car cost?)

Obama and his crew rented out 870 rooms in the five-star Taj Mahal. Political sites claimed that the trip cost the United States over $200 million per day. ^[16]

But as I'm sure you're aware, the executive branch isn’t the only one spending like crazy. Like a disease, this spree has spread to every branch of the government…

According to the most conservative numbers from the Bureau of Labor Statistics (BLS), the average federal worker is paid 20% more in salary than their private-sector equivalent. Add in the cost of benefits and the total federal employee’s salary boost is 50% over the private sector worker’s. ^[17]

One report recently revealed that half of the publicly funded Californian lifeguards are making more than $150,000. ^[18]

Lifeguards making $150,000? Out of taxpayer money? That’s out of control... wouldn’t you agree?

I've even read recent government audits that found...

The National Institute of Health will spend $2.6 million in U.S. tax dollars studying whether or not alcohol increases a Chinese prostitute's chance at getting AIDS... ^[19]

The National Science Foundation spent $500,000 studying how sick shrimp recover from treadmill exercise... ^[20]

The New York's Psychiatric Institute spent $400,000 of government grants studying why gay Argentinean men engage in risky sexual behavior while drunk... ^[21]

The government even spent $80,000 studying why the same NCAA basketball teams always dominate March Madness... ^[22]

This wasteful spending sounds made up, I know.

But it's not. You can look it all up for yourself after this presentation... and you'll find that it's all 100% true.

Of course, these spending sprees and lavish salaries wouldn't be a problem if our government used its savings to pay for them.

But that’s the rub: The U.S. government has no savings.

Instead, we’ve relied on the savings of foreign nations... mainly places like China, Japan, India, and the Middle East... to pay for these things.

Until now, these "emerging" countries have been happy to lend us money. They're happy to take part in the “great American economic miracle.” . . .

But what's around the corner? Wiggins asks.

[T]he government has spent so much money... we’ve racked up so many bills... we’ve dug a hole sooo deep...
There’s no possible way we could ever pay our lenders back.

Let me ask you: When you can't pay your bills, what happens?

It's only a matter of time before our credit card is finally shut off for good.

The rating agencies Standard & Poor's and Moody's, as well as the International Monetary Fund (IMF), have all issued warnings that they believe the day the U.S. government's credit card gets shut off is fast approaching. ^{[24] [25] [26] [27]}

Even David Walker, the former top accountant of the federal government, has gone on record warning that the U.S. government's credit could be cut off...

"You cannot spend trillions of dollars more than you take in… without someday having a day of reckoning," says Walker. ^[28] . . . .

In response to the Great Recession of 2008, the government used its “credit card” to borrow even more money to pay for all the stimulus and bailout programs you hear about in the news... putting us even DEEPER in the hole!

"Bank failures? No problem." Ka-ching!

"Automakers going under? No problem." Ka-ching!

"Extended unemployment benefits? No problem." Ka-ching!

The U.S. government’s financial hole has been getting deeper by the trillions of dollars every year since 2008.

Let's look at one specific item the government’s been charging on its credit card: mortgage loans.

You may not know this, but in the past few years, the federal government has used its credit card to buy up 90% of all mortgage loans. ^[29]

The government’s goal is to keep mortgage interest rates well below free market rates. They believe this stimulates the housing market.

But what will happen to mortgage loans and home prices when the government can no longer buy mortgages with its own credit card?

Look around the world and you’ll find that mortgage rates are...

• 30% higher in Canada…
   
• 42% higher in the U.K....
   
• 147% higher in Australia...
   
• 344% higher in India...
   
• 404% higher in Brazil... ^[30]

Once your government’s credit card is cut off — and they’re unable to fund the entire mortgage industry — mortgage rates will skyrocket.

Imagine what would happen to the price of your home if mortgage rates doubled...

The housing market would crash yet again.

All that needs to happen to crush the housing market is for our foreign lenders to say, “America, you’ve spent too much... we know you will never be able to pay us back... so we’re cutting up your credit card.”

The reality is this...

The government's outstanding "credit card" bill is now more than the entire economic output of China, Japan and Germany — the next three largest economies in the world — combined! ^[31]

There’s not a snowball’s chance in hell that we will ever be able to pay this money back to our lenders. I say that with 100% confidence.

Consider this fact from the National Inflation Association (NIA):

America’s greatest business success story of the past decade has been Apple Inc. — maker of the iPod, the iPhone and the new iPad.

The U.S would need to see the creation of 700 companies like Apple in the next year just to generate enough tax revenue to balance [this year’s] budget deficit... that's impossible. ^[32]

Amazing, isn't it?

Think we’ll create 700 new companies like Apple this year?

It took Steve Jobs, the founder of Apple, a lifetime to create the wealth he built in that company. It's not likely we can just wave a wand and create 700 more companies like that overnight.

But it's not really important what we think, is it?

It's only important what our lenders think. What happens if our lenders — mainly foreign nations — lose confidence in getting any of their money back? Or even getting a portion of it back?

After they finish being mad as hell, they'll stop lending to us. They'll cut off the credit card. They’ll look for better places around the world to park their own money.

Without that open-ended credit card… without being able to borrow more and more money… without our politicians being able to promise anything they want to get elected… the United States would look like a completely different place.

You know the feeling... standing at the register wondering if your credit card will go through. Wondering if you'll have to select a few items to put back on the shelves... all the while holding up the line.

The U.S. government is in the very same predicament... but the stakes are much higher.

All it would take for chaos to erupt is our creditors saying, “Enough is enough… we’re not lending you any more money.”

You may think this will never happen.

But the reality is that the cutoff process is already under way. Look around you. The consequences are easy to spot.

Consider this...

Throughout the property boom of the early 2000s, our state and local governments bet big that housing prices would continue going up. For them, higher home prices meant increased revenue from property taxes.

Based on those increased revenue projections, state and local governments expanded. They spent beyond their means.

When home prices crashed and foreclosures skyrocketed, the property tax revenue they so desperately needed to come in… never showed up. And they couldn’t “unspend” the money they had spent.

That’s why certain cities and states are now in deep financial trouble.

It’s also why the federal government used its credit card to send “stimulus” money directly to the state governments. The hope was to use Uncle Sam’s credit card to bail out the states and local governments.

With “stimulus” money, the states could continue to pay for more teachers... law enforcement officers... firemen... and other workers.

In total, 80% of the total stimulus money the feds borrowed went directly to the state governments. ^[33]

But now that “stimulus” money has run out. Now no one wants to lend these states money… because they know local governments can’t pay the money back.

And just this month, in a very similar "denial of credit," the United States Treasury itself cut off funding for state and city governments entirely. (The feds can’t afford to extend any more money. As we've shown you, their credit is already in danger!) ^[34]

So.... what we get is a real-life, in-your-face view of what America looks like without its credit card. Here’s a terrifying example…

* AMERICAN HELLHOLES — Camden, N.J., used to be the home to the entire Campbell's Soup factory. It was home to the world's first color television. They invented the "drive-in" movie theater. With almost full employment, innovation and massive manufacturing output, the mayor once proclaimed the place "the city of contented industries."

But just like what we’re seeing play out right now, they eventually got in over their heads…

The city's workers demanded more. They began to produce less. The politicians in Camden spent and promised too much.

And now lenders have shut off their credit card — giving them no choice but to cut services.

City leaders have been forced to lay off a quarter of the city workers — including nearly half of the police force and one-third of the firefighters. ^[35]

"The fear quotient has been raised," said Rev. Heyward Wiggins, pastor of the local church. His fellowship once held choir practice on Thursday and Friday evenings. Now he says he's cancelled those. Members are simply too afraid of being out after dark. ^[36]

Fellow Camden resident George Watson fears for his life... and home. He told the local news that "[Criminals will] be coming into the houses... they know you can’t call the cops. There won’t be any cops to call."

What’s happening in New Jersey is also happening in California...

After Oakland's police chief was forced to lay off his staff, he informed citizens that the police could no longer respond to various crime calls. Here are just a few things the police won’t show up for anymore…

• Burglary…
   
• Theft…
   
• Failure to register as a sex offender…
   
• Passing fake checks…
   
• Embezzlement…
   
• Extortion…
   
• Vandalism
   
• And the list goes on… ^[37]

Can you imagine being the victim of a robbery… and knowing the police won’t be there to answer your 911 call?

Then there’s this…

* POOR MAN'S PAVEMENT — In Spiritwood, N.D., they've run out of money for road paving. So they've begun the process of ripping up roads that need repair... and turning them back into gravel.

Sounds unbelievable, I know. But here's what The Wall Street Journal reported:

Paved roads, historical emblems of American achievement, are being torn up across rural America and replaced with gravel or other rough surfaces as counties struggle with tight budgets and dwindling state and federal revenue. State money for local roads was cut in many places amid budget shortfalls...

In Michigan, at least 38 of the 83 counties have converted some asphalt roads to gravel in recent years. Last year, South Dakota turned at least 100 miles of asphalt road surfaces to gravel. Counties in Alabama and Pennsylvania have begun downgrading asphalt roads to cheaper chip-and-seal road, also known as "poor man's pavement." Some counties in Ohio are simply letting roads erode to gravel. ^[38]

Residents have complained of cracked windshields. They now cough up the dirt stirred up by traffic driving on gravel roads. And they worry about how the lack of roads will affect their businesses.

"When [counties] had lots of money," stated the local county highway superintendent, "they paved a lot of the roads and tried to make life easier for the people who lived out here. Now it's catching up to them."

Just think about that for a second...

Without access to Uncle Sam's credit card, some cities and states in America are already going back to gravel roads... back to the start of the 20th century. . . .

******* 

. . . Did you hear the nasty rumors flying around last year about the government seizing control of private 401(k)s? ^[57]

Financial researcher Jeff Schneider writes:

Americans have $4 trillion saved in 401(k) plans and another $8 trillion in IRAs and pension plans...

If the U.S. government forces investors to invest 50% of their IRAs in government bonds, that would raise $6 trillion. ^[58]

As you see, the idea was that politicians would take control of your retirement accounts... and then forcefully loan your money to the government.

All in hopes to continue our consumption-driven way of life.

Whether or not this will happen is anyone’s guess. But here’s something that HAS been confirmed...

As I record this presentation for you. Treasury Secretary Geithner has announced that he will start tapping into federal pensions to borrow money for the government. ^[59]

When times get tight, governments have a history of seizing control of retirement accounts and savings accounts and controlling money flow in and out of the country.

Most people don’t remember this, but in 1982, the Mexican economy was suffering through its worst recession in over 60 years.

Unemployment was running at 40%. Massive money printing resulted in the prices of goods and services going up by 100% in just five months.

“Everything is so high,” said Trinidad Angeles, a widow living in Mexico during this time, “I can’t afford anything anymore. Even the price of water has doubled.”

When Mexicans began trying to trade in worthless pesos for other currencies, the Mexican government promptly outlawed the trading.

Here’s the report from a local paper, the Sept. 11, 1982, edition of The Evening Independent:

In a surprise move Friday, the Commerce Department announced Mexicans will not be allowed to take pesos from the country...

The controls, expected to curtail trading in the peso on the international market, are an attempt to maintain the artificially high value of the currency set by the government last week.

The announcement… also included a long list of silver and gold items, jewelry and gems that cannot be taken from Mexico without government authorization. ^[60]

The same thing that happened in Mexico during a currency crisis also happened in Malaysia, Venezuela, Russia... and other countries.

For you, of course, it doesn’t matter what happened in other places. What matters most is the answer to this question: Will it happen here?

No one can say for sure. But I suggest you don’t wait around for a “surprise”...

Wiggin goes on to offer at least some outlines of what he is doing in response to these looming and breaking crises. And, of course, he offers to sell you some newsletters.

I can't comment on the quality of the newsletters. I do think he may have some insights--even in his advertisement/presentation--that could be of benefit.

I hope you find it so, anyway.

Brilliant suggestion to balance the budget . . .

Received this from my dad's wife. I tracked it down to ICanHasCheezburger.com's PunditKitchen.

Apparently, Warren Buffett was on CNBC back on July 8th when he said he could end the federal government deficit in five minutes. I'm afraid even he didn't quite get it right, but he definitely suggested the way. His brilliant idea:

You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.

Good luck getting Congresspeople to agree to such a law! But, hey!

But how did he go wrong? you ask.

Three percent of GDP is still a deficit. Indeed, it is a rather severe deficit. In a $15 trillion economy, that's a $450 billion deficit. And, as one of my previous posts noted, it's not even touching the larger problem of debt. The size of the debt itself--on which interest must be paid--is continuing to rise.

Still, as I say, I think Buffett has pointed the way: There must be significant negative (painful) consequences for those "public servants" who are unwilling to do their duty to ensure fiscal responsibility.

While I'm at it, I thought I would offer an update on my July 30 post about The difference between debt and deficit. At the time I said that Senator Mark Udall of Colorado either didn't understand the difference between a deficit and a debt, or he was cynically playing upon the lazy thinking of his constituents when he suggested that "The President's National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, came up with a set of recommendations that would reduce the debt by over $4 trillion over the next decade."

Well, he wants credit for coming back with a proposal for a balanced budget constitutional amendment, "the first Democratic senator in many years to introduce [a] balanced budget amendment."

Key components:

• Requires that the federal budget be balanced each year unless 3/5ths of each House (60 votes in the Senate) vote to waive.
   
• Requires the President to submit a budget each year that is balanced.
   
• The provision would be waived when the U.S. is in a declared time of war.
   
• It would create a Social Security lockbox that protects the revenue and outlays of Social Security from any balanced budget requirement.
   
• It would prohibit Congress from providing income tax breaks for people earning over $1,000,000 a year, unless we are running surpluses (those surpluses must also not be eliminated if such a tax break were enacted).
  

My comments:

The first three points make eminently good sense.

The last one, too, seems reasonable. I'm not sure how it can possibly go into effect without massive court battles. For instance, what is an "income tax break"? If Congress at some point decides to raise taxes on those earning over $1,000,000 a year so that they must pay, say, 70% of their marginal dollars in income tax (while persons whose income is $999,999 must pay, say, "only" 50% of their marginal dollars in income tax), if someone subsequently suggests the top marginal rate should be reduced to 60%, is that an income tax break?

What if someone who makes more than $1 million wants to take advantage of a tax write-off, say, available to those who invest in green energy. Will such a write-off be disallowed because it would "provide an income tax break" to that wealthy individual?

But the one proposal that really bothers me is the fourth one: to "create a Social Security lockbox that protects the revenue and outlays of Social Security from any balanced budget requirement."

What is that supposed to mean?

It is the case, already, that Social Security is "off-budget" and treated separately in certain ways from other Federal spending, and other trust funds of the Federal Government.

EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS
Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104
Stat. 1388-623, provided that: "Notwithstanding any other provision
of law, the receipts and disbursements of the Federal Old-Age and
Survivors Insurance Trust Fund and the Federal Disability Insurance
Trust Fund shall not be counted as new budget authority, outlays,
receipts, or deficit or surplus for purposes of -
"(1) the budget of the United States Government as submitted by
the President,
"(2) the congressional budget, or
"(3) the Balanced Budget and Emergency Deficit Control Act of
1985 [see Short Title note set out under section 900 of this
title]."

Congress has been raiding Social Security for just about "forever"--using all funds brought into the Social Security system to fund current government expenses. I.e., the approximately $2.6 trillion Social Security trust fund consists solely of federal government IOUs--sorry: debt.

So the only way any Social Security obligations will be paid is by taxing current and future taxpayers to cover the outstanding obligations. Same kind of thing with Medicaid and Medicare. They are not pre-funded. There are no assets sitting around waiting to be utilized to cover future expenses. Same thing with all the mandatory spending programs of the federal government (expenditures in the U.S. budget that are mandated by programs outside of the budgetary process, including Social Security, Medicare, Medicaid as well as Food Stamps, Unemployment Compensation, Child Nutrition and Tax Credits, Supplemental Security for the Disabled, Student Loans, and Veterans Retirement programs.)

According to Kimberly Amadeo of About.com, mandatory spending is slated to total $2.109 trillion in FY 2012--in other words, very nearly 100% of real income of the federal government.

Forget defense. Forget Health, Education and Welfare. Forget EPA, OSHA, FAA, FDA, USDA, and so on and so forth. You could cut out 100% of all the "optional" programs of the federal government, and you still couldn't balance the budget . . . unless you make massive changes in the enabling laws--the basic rules--surrounding all of these social programs.

It can't be done.

Well, finally, this.

My sister sent me a summary of something Dave Ramsey said:

If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year, and are $327,000 in credit card debt. They are currently proposing big spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt, reduced to a level that we can understand.

I replied:

That was interesting, Miriam. I really appreciate your sharing that. It puts things into a more manageable perspective.

But something didn't seem right about the numbers. The spending seemed too low. So I did a little checking.

Based on what I can find—from the 2010 federal budget (see charts on the right hand side of the page; data from the Congressional Budget Office Historical Tables) . . .

If we start with a family income of $58,000 and multiply by the proportion of spending as compared to income of the federal government (divide by 2,162, then multiply by 3,456): you've got a proportional annual spend of $92,714!

Oh. And when it comes to “cuts”? Supposing Congress actually follows up on them all, we're looking at a reduction in annual spend from approximately $93,000 to $82,000 ($93,000 * (3,056/3,456)). So that’s nice. The family is proposing “only” to go into further debt at a rate of $24,000 a year instead of its former $35,000 a year!

Finally. It’s probably unfair to call it “credit card debt,” since credit cards are generally considered short-term debt and are charged at a much higher rate than the federal government. But that’s a relatively minor quibble. With an acknowledged debt of about $15 trillion and an income of $2.2 trillion (approximately), we find ourselves with a debt multiple of 6.8 [15/2.2]). Multiply $58,000 by 6.8 and you come up with the proportional total debt of this family: about $395,000.

Families with annual incomes of $58,000 generally aren't permitted to purchase $395,000 homes . . . or to wrack up $395,000 debts. Not normally, anyway! They can't pay their debts back. Especially not when their standard and expected annual expenditure--for years and years--is and has been significantly more than their income. (Even--to use Buffett's example--a "modest" 3% deficit for a family with annual income of $58,000 is $1,740. But when the family is borrowing--and seems intent on continuing to borrow $24,000 more every year for the next 10 years, at least?)

And Steve Forbes, Larry Summers and others see the S&P downgrade of American credit worthiness as an "outrage"?!? Would you want to lend to a family with this kind of credit profile?

The difference between debt and deficit

I have been observing with ongoing horror at what our nation's political "leaders" are doing with respect to the onrushing fiscal crisis.

I finally decided, on Thursday, to take the time to write them. Not that I expect they really care that much what I have to say!

I wrote first to my congressman, who is a Republican, then to my two senators, who are both Democrats. I wrote much the same to each one. Except for the last one. Senator Mark Udall has the beginning of a statement on his homepage that directly addresses the situation: "Letter to Congress on the Debt." He offers only the first few sentences, before hitting a link to Continue Reading. I realized I needed to Continue Reading if I was to write him. So I clicked the link.

And the first thing I saw on the new page, was a statement he makes on the side of the page: "Add your name to my letter to Congress and send the message: we need a sensible, bipartisan debt plan -- now."

And, of course, my first thought was--and still is--"Oh, yes! We do!" And, boy! If his plan is sensible, I absolutely do want to sign it.

So what was (or is) Senator Udall's sensible, bipartisan debt plan?

Here's what he wrote:

Letter to Congress on the Debt

Dear Members of Congress,

Today, I delivered remarks on the Senate floor about our government's inability to come together to address our looming national debt and its fast-approaching limit. The clock is running out, and Americans are calling for a comprehensive, bipartisan solution. Yet once again negotiations are at an impasse. Our escalating national debt stands at over $46,000 per citizen - that's an outrageous number that is weighing down our economic recovery, jeopardizing our status as the world's economic leader and threatening our national security.

There's a growing disconnect between what most Americans want - quality roads, a safety net for the sick and elderly, and strong investments in education and research that will develop the well-paying jobs of tomorrow - and our country's ability to pay for them. But I believe we have to be realistic and make tough decisions - on both sides. For example, spending cuts alone won't reduce our deficit. And if those cuts are too deep they will hurt the middle class and prevent us from creating the jobs we need for a full economic recovery. So I believe generating more revenue must at least be part of the solution. There are plenty of wasteful tax loopholes - not tax rate increases, but corporate giveaways through the tax code - that can be closed. Our economic future rests on the fulcrum of this balance: both sides have to come to the negotiating table with skin in the game and agree that nothing is off limits.

If we continue arguing over whether to use the right or left paddle, we'll just keep going in circles until we careen over the edge together. I'm willing to stay in Washington as long as it takes to achieve a sensible, bipartisan plan that puts our country back on track. We already have a template: The President's National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, came up with a set of recommendations that would reduce the debt by over $4 trillion over the next decade, including spending cuts, reasonable entitlement reform and revenues generated from closing special interest tax expenditures. Now let's start paddling in unison.

Respectfully,

Senator Mark Udall and co-signers

It was that penultimate sentence that put me over the top: "The President's National Commission on Fiscal Responsibility and Reform . . . came up with a set of recommendations that would reduce the debt by over $4 trillion over the next decade."

Though I should have been ready for it based on what he wrote in the middle of his second paragraph: "spending cuts alone won't reduce our deficit. . . . I believe generating more revenue must at least be part of the solution. There are plenty of wasteful tax loopholes - not tax rate increases, but corporate giveaways through the tax code - that can be closed."

In case the problems with Udall's letter aren't immediately obvious, please permit me to point them out.

1. The President's National Commission on Fiscal Responsibility and Reform came up with no suggestions on how to reduce the federal debt, as Udall claims. All they proposed was means by which, maybe (if Congress could possibly allow itself to do nothing to alter the situation over the course of 10 years! --Ha ha!), . . . --They proposed means by which maybe they would spend $400 billion less each year, for ten years, than they were otherwise planning to spend. They would continue to spend in deficit--$1.2 trillion more than they bring in in taxes. The debt would continue to increase at a pace of $1.2 trillion a year (again, assuming no one got any ideas over the course of 10 years concerning how to spend more money than they did in 2011--a far-fetched idea if I ever heard of one).

So Udall's comment about "reducing debt" is total hogwash.

But his first comment about "spending cuts alone [not being able to] reduce our deficit" is also hogwash.

2. Look, I'm all for closing wasteful tax loopholes. Or even non-wasteful tax loopholes. If the government would treat everyone with greater equality, that would be fine with me: The tax code that impacts one person should be the tax code that hits the next.

But if you're spending more than you can afford, then if you cut spending--any spending at all--you will reduce your deficit. You won't be spending quite as much beyond your means.

Clearly, either Udall doesn't understand the difference between a deficit and a debt, or he is cynically playing upon the lazy thinking of his constituents to try to woo them with his nonsense.

I decided to write him much the same letter I wrote to his colleagues--with just some minor modifications that directly address his letter:

******
--Oh! . . . And I was sure I had saved a copy. I planned to share it here. But it seems to have disappeared from my computer.

So summary: Basically: Hey, I'm one of the people whom you want to tax more. I am more than happy to pay more taxes . . . under one condition, and one condition only: That you-all come up with a reasonable plan actually to stop the bleeding, stop the deficit, balance the budget and, eventually, actually pay off the debt.

My problem: I have seen no one in Congress--or the White House--at any time during my adult years make any serious attempt to pay down the debt, even at the best of times. Even when the economy was screaming along, the government was wracking up more debt, more unfunded future obligations.

Until our supposed "leaders" in Washington actually lead and come up with a real plan to stop borrowing more and, at some point, actually pay off what they have already borrowed, I don't want to throw any more of my somewhat-good money after bad.

That, more or less, is what I wrote.

But there is more.

The government talks about the $14-point-some-odd trillion debt. But that's only what they are willing to acknowledge. Our federal government has obligated itself for far more. At this point, well over $100 trillion--most of it, obviously, "off book."

I mean, we're talking about Medicare and Medicaid and Social Security and all the retirement funds for all the federal retirees, not to mention the unlimited obligations they have signed up for with respect to Fannie Mae and Freddie Mac. They never reference those obligations. (Oh, yes, they reference them: that they contribute--or will, at some day in the future, contribute--to the federal deficit.) But they don't acknowledge that the funds supposedly set aside to pay off these obligations don't exist; that all the Social Security taxes you and your employer pay (or used to pay) go (or went) directly into paying the current expenses of the federal government. There is absolutely nothing there--or anywhere--to pay you what the government has promised to pay you . . . other than the "full faith and credit of the U.S. government"--which means the tax generating and paying ability of those Americans who will be paying taxes at the time you try to draw upon the program that the federal government has set up supposedly to meet your needs.

Put another way: The acknowledged debt of the federal government is "only" the debt upon which it is actually paying interest at the moment. It is not the future debt--the contracted obligation--for which any normal business would be investing in anticipation of having to pay.

All those tens or hundreds of thousands of dollars you hope to draw upon from Social Security? They don't exist. And the federal government has no plans for how they are supposed to come into existence . . . except somehow, miraculously, that taxpayers will show up in the future to give up the funds they need to live a modest (hopefully non-dismal) life so you can enjoy the benefits you believe you are entitled to (because the federal government made some promises to you: that if you paid in your Social Security taxes now--which would go to pay off those who had come before you--they would ensure that they fleeced future taxpayers to cover what they have been promising you).

[By the way, if you would like to read a very clear summary article about the on-going frauds involved in the Social Security system, read this from Merrill Matthews at Forbes.]

*********

When my family was all together a week ago, I got talking with my sister and brother-in-law from Germany. They are the ones who are being directly impacted by the Greek government's fiscal irresponsibility as they are being taxed to pay for their Euro-using cousins down in Greece. In Greece, I read, the average retirement age (and, therefore, the average age for receiving government funds), is 61! In Germany--where they are having to pay for the Greek government's largesse--the retirement age was recently increased from 65 to 67.

It strikes me: When Social Security was first created, the average lifespan of Americans who hit adulthood was significantly shorter than it is today. According to the Social Security administration, the numbers look like this:

Table 1: Life Expectancy for Social Security
Year Cohort Turned 65	Percentage of Population Surviving from Age 21 to Age 65		Average Remaining Life Expectancy for Those Surviving to Age 65
	Male	Female	Male	Female
1940 1950 1960 1970 1980 1990	53.9 56.2 60.1 63.7 67.8 72.3	60.6 65.5 71.3 76.9 80.9 83.6	12.7 13.1 13.2 13.8 14.6 15.3	14.7 16.2 17.4 18.6 19.1 19.6

"As Table 1 indicates," writes the author of the article in which I found the above table, "the average life expectancy at age 65 (i.e., the number of years a person could be expected to receive unreduced Social Security retirement benefits) has increased a modest 5 years (on average) since 1940."

Okay. But/and/so why hasn't the retirement age been raised to match? And considering the fact that our government has obviously over-promised on its ability to deliver, why isn't the retirement age raised a little bit more than a mere match to the obviously erroneous earliest assumptions? Put another way, why aren't we looking at full Social Security benefits beginning only for those who refuse to accept them until age 70? And significantly reduced benefits for those who take early retirement at 62 or 65 or any other age before that?

That kind of change might actually be real "reasonable entitlement reform," to borrow a phrase from Senator Udall!

Let's stop offering false hope to Americans that they (we!) can continue to retire in our 60s and expect to receive the kinds of Social Security benefits our parents or grandparents did. It's not going to happen.

One way or another, our system is collapsing. Let's acknowledge the collapse and make solid plans to move forward.

How deep are we?

I was listening to the news yesterday when they mentioned the congressional debt commission had at least broached the subject of eliminating the mortgage deduction for home purchasers--an astonishing shift in political tides. I mean, that the topic was even mentioned as a possibility to bring government revenues slightly more in line with expenses.

After all, "It's a lot of money and we [i.e., the government] have an enormous deficit."

Yeah.

Except I was astonished at how much money the entire country's mortgage interest deductions equal. Something like $103 billion or $105 billion. Total.

That's over 7.7% (close to one thirteenth) of the current deficit--deficit! we're not talking debt, here! deficit. The government needs to find thirteen changes of this magnitude to puts its house in order.

But think of the impact on the U.S. economy that this one tiny change would make.

If the U.S. economy is in the tank right now while the federal government is "stimulating" it to the tune of $105 billion per year in income tax deductions on mortgage interest alone, where do you think it will be if and when they eliminate the deductions?

• If you are purchasing your home, would you be able to afford your mortgage if the income tax deduction were eliminated?
   
• If you could make your payments, do you think the price of your home would remain stable? Would it go up (so you could borrow equity) or would it go down (so if you are still "right side up" on your mortgage debt, you might find yourself "upside down"--owing more than your house is worth)?

I bring this up not to make a political statement either in favor of or against the proposal. Rather, I bring it up to point out that federal deficit spending is not without cost, it is not without pain.

I think, for many, the federal government's spending and tax collection has no impact on the economy. So what if they raise the debt ceiling? So what if they aren't collecting enough taxes to cover their expenses?

Well, the so what's are getting ready to come home to roost.

At some point, the debt really does have to be repaid. Somehow. Those who loan the money want it back. The Chinese will say, "No, no. You've borrowed enough. We're not sure you can pay back what you owe us already, so we're not going to loan you more. We're not going to buy any more of your bonds. You'll have to find someone else to loan you more money."

"But, but, but!!! There is no one else to lend us money!"

"Tough."

"Okay. Then we'll buy our own bonds, by creating more dollars. We'll engage in quantitative easing."

"Good luck!"

When we put it into these kinds of terms; when we see how only one thirteenth of the federal deficit (not debt!) is equal to the entire home mortgage interest deduction; when we realize how devastating it would be to eliminate the interest deduction: it should be obvious that federal deficits do have an impact on the economy.

Of course, that should have been clear, anyway.

So here's the question.

We see the riots occurring in France and Britain, in Greece and elsewhere around the world as people say, "No, no, no! You can't take my benefits, my expected retirement at 62 [or whatever]. You owe it to me." Do you think we will escape similar social dislocations here in the United States?

If we are afraid of the impact of reining in the deficit now, when our national debt is still officially less than $14 trillion (let us not speak of the unfunded liabilities!): do we seriously think there will be fewer or less significant social dislocations later on if we continue to dig ourselves further into the hole?

********

A few additional items of interest.

• According to USDebtClock.org, which keeps running tabs on all kinds of numbers like these I have been talking about, total interest per year per citizen of the U.S.--on all debts, both governmental and personal--is $10,541. That hit me. That's saying our economy faces a headwind of $10,541 in interest every year per person: before we can move forward one inch; before we can pay for anything new; before we can repair what we already own . . . we have to pay $10,541 per person in interest.
  
  That's quite a headwind!
  
  What could we do if we did not have that headwind working against us?
   
• The Dagong Global Credit Rating agency, what I understand is the official Chinese government credit rating agency, has downgraded U.S. debt. I.e., it has said it believes that purchasing U.S. bonds is more risky now than it was in the past. Moreover, it has also said the outlook for the future is "negative"--meaning that, unless something changes, the risks are only going to get worse . . . which means, in turn, that we can expect further downgrades in the future.
  
  And all of this means? Expect the U.S. government will have to pay higher interest rates on its debts. It will have to pay higher rates. It is the supplicant. It is the beggar. Beggars can't be choosers.
  
  See World Currency Watch for more.

I thought he was "green." So what's with the sudden move to open oil fields?

Perhaps you were as surprised as I was when President Obama announced his intentions to open huge new oil fields off the coast of the United States.

You can be sure of this, writes Keith Fitz-Gerald of Money Morning, it "has nothing to do with oil. It's all about the U.S. dollar."

Fitz-Gerald reminds us of a little British history from the early 1900s--when Britain was the world's most powerful country--to 1939--at which point "England had spent itself into oblivion and the pound sterling was being abandoned en masse by the international banking community - not to mention by the Crown's own subjects. To prevent a complete breakdown in global markets, the government made it an act of treason to use anything but the pound sterling to settle debts, while simultaneously implementing strict exchange-rate controls designed to prevent an all-out currency collapse"--to the present:

By the start of the 1970s, Britain was all but bankrupt and unable to sell long-term government bonds. . . .

So what saved Great Britain from oblivion? Many historians attribute this rebirth to the leadership of the dynamic Margaret Thatcher, and the proliferation of "Thatcherism." But the truth is that the catalyst for the United Kingdom's turnabout was the North Sea oil fields, which began pumping in earnest in the latter part of the 1970s - producing a trade surplus that helped engender new support for the pound in international markets.

By the way, in case you didn't see my post of February 21, or haven't been following the story since that time:

• Government bond auctions have continued weak and weaker and, as a result, interest rates continue to rise. Not yet front-page news, but don't be surprised when it gets there.
   
• Then there's the story of the national debt.
  
  Some commentators keep pointing out that the U.S. debt is relatively small compared to several other countries' debts as a percentage of GDP. And that is true.
  
  However, we have to look not only at total quantity of debt, but when the debt is due. And a large portion of the U.S.' debt is due very soon. As Porter Stansberry points out, the federal government has about $7 trillion of debt it needs to sell in the next 30 months. It's nice that the government is so eager to "supply" all that debt. The question is, is there enough demand from the market in order to swallow it all? At what price? (After all, when there is too much supply and too little demand, prices inevitably fall . . . which, in the bond markets, means interest rates rise.)
  
  I think it's time to say goodbye to low interest rates!
   
• And then, finally, what about exchange controls? (Did you note Keith Fitz-Gerald's comment about Great Britain in the early '70s?)
  
  Did you see this item in your local paper? Yep. The United States government is tightening the noose on freedom of commerce. As Tyler Durden suggests, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487) ought really to have been called the Capital Controls Act. Durden concludes,
  

  [V]ery soon the only option US citizens have when it comes to investing their money, will be in government mandated retirement annuities, which will likely be the next step in the capital control escalation, which will culminate with every single free dollar required to be reinvested into the US, likely in the form of purchasing US Treasury emissions such as Treasuries, TIPS and other worthless pieces of paper.
  
  Congratulations bankrupt America - you are now one step closer to a thoroughly non-free market.

Good for the goose, good for the gander?

You heard about the business owner who was visited earlier this month by two rather officious IRS agents over a supposed failure to pay four cents in income tax back in 2006. They demanded $202.35 to cover the four cents plus penalties and interest over the intervening years. (Crazy!)

And you've heard about President Obama's concern to ensure that no businesses that are delinquent in tax payments should receive federal contracts. (Good.)

Why is it, then, that Tim Geithner was approved as Secretary of the Treasury (yes, Treasury!) when he messed up on his taxes and permitted a woman to work for him illegally? When caught, he paid the taxes, but "the IRS waived the related penalties." (How nice for him! But how completely two-faced.)

And, though he eventually withdrew his name from the process for consideration, why does it seem that former Senator Tom Daschle was perfectly acceptable to the president as a candidate to become Secretary of the federal Department of Health and Human Services--despite his failure to pay $146,000 in back taxes? (!!!!)

And why was it only after massive pressure that Charlie Rangel finally--at least temporarily--stepped down as chairman of the House Ways and Means Committee (the committee responsible for writing tax legislation and bills affecting Social Security, Medicare, and other entitlement programs), despite well-documented problems with his fundraising, major known tax evasion on property he owns in the Dominican Republic, and improper use of four rent-stabilized apartments in Manhattan?

But this one seems to take the cake: Earlier this month it comes out that nearly 100,000 federal employees (including 678 congressional staff members) owe just shy of a billion dollars in back taxes--and yet they can't be fired. (Include retirees and military service members, the numbers go from nearly 100,000 up to 276,000 current or former workers who owe $3 billion in taxes.)

So not only do federal employees, on average, make significantly more than their private economy peers (see also here), but, apparently, they are also permitted to steal from their employer, the federal government (and we the people who actually pay our taxes) without repercussions.

A different take on the economy (???)

An acquaintance of mine, Doug Tengdin, a CFA (Chartered Financial Analyst), writes an engaging five-days-per-week financial commentary on his employer's website.

His perspective about the state of America's finances has seemed so far out-of-step with what I've been thinking that last week I "couldn't take it anymore." So I wrote him:

Doug:

Your Global Market Update for last Friday (i.e., 2/12) suggested Greece’s economic difficulties should be “a cautionary tale for all countries with budget problems.”

I'm curious, then, why you seem rather sanguine about the United States’ situation. . . . I can't put my finger on specific posts, but that has been my general feeling.

I “just” wish I could get a stronger sense of WHY I should look with favor on the U.S.’ position . . . or acquire some kind of confirmation that I'm not quite crazy to be writing posts like these on my blog:

• The long-term demise of the U.S. dollar
   
• The financial future of the United States
   
• Need a Churchill for our age?

Yesterday morning’s post:

• The Greenspan-Guidotti Rule (or Guidotti-Greenspan)

. . . I'm hoping perhaps some of this might inspire a post or two. . . .

Thanks!

He wrote back pretty much what he posted on Tuesday in Why Not Here? Major reason people in the U.S. ought not to worry: "The US isn’t Greece."

• "We don’t have a culture of permanent employment and tax evasion as a national sport."
   
• "We have a culture that includes a modest safety net along with entrepreneurial innovation."
   
• "We have an incrementalist political culture that is . . . hostile to revolutionary change. . . . That’s a good thing for investment and wealth accumulation."
   
• "The US debt level isn’t as high as many people fear. Much of our 'debt' is held internally by Social Security."
   
• "For the past 30 years, real economic growth has averaged 3%. Deficits have averaged 2.5%. So the debt, as a percentage of the economy, has been getting smaller."
   
• "Greece [ran 10% deficits] for years. And played with the accounting rules to mask this. We didn’t do that." (On the other hand, "if we run 10% deficits in the long run, that’s another story.")
   
• "[T]he government is a much smaller part of the economy here than most people realize. Government spending makes up about 28% of GDP. By contrast, the Greek public sector is 40% of their economy. So it’s harder to cut spending there without pushing Greece into another recession."

There was one last comment he made in his personal response that particularly struck my eye.

It appears he read my Banking, lending . . . and government bond auctions post in which I reference Bob Prechter of Elliott Wave fame.

Doug wrote:

I’m skeptical of the Elliot Wave. . . . History is not destiny—it’s a guide as to human character and behavior. Prechter misses the fundamentals for the charts.

Here’s a fundamentalist I respect:

http://www.ft.com/cms/s/0/7467f85e-1b30-11df-953f-00144feab49a.html


In this post Martin Wolf quotes Brad DeLong. I’m not so keen on DeLong, but he makes a good point: short-term deficits are a bet that borrowing is worth it in the long run. If the present value of the future cash streams of the borrowing are less than the present value of the income stream that you create by avoiding the wealth destruction of a financial panic (or revolution or war), then the borrowing was an economic plus.

Many of the gloom-crew ignore Stein’s Law: If something cannot continue it will stop. And Coolidge’s dictum: if ten problems are coming toward you down the road, chances are that nine of them will go off into the ditch before they reach you.

There's a lot in these three paragraphs. But even more in the referenced article. And at far too many points, in what Doug wrote and in what I read in the referenced article, I found (and find) myself highly skeptical or critical of what the authors are saying.

Let me begin with Doug's comments:

• "We don’t have a culture of permanent employment and tax evasion as a national sport." --Okay. That's good. I'll buy that. For now. (Though it appears our country is heading downhill on this score.)
   
• "We have a culture that includes a modest safety net along with entrepreneurial innovation." --Again a good point. Indeed, a very good point. May it continue!
   
• "We have an incrementalist political culture that is . . . hostile to revolutionary change. . . . That’s a good thing for investment and wealth accumulation." --Amen.

But now I begin balking:

• "The US debt level isn’t as high as many people fear. Much of our 'debt' is held internally by Social Security." --???? I'm afraid our debt is far higher than our government acknowledges. What about all the unfunded future obligations? And what about the debt Doug tries to minimize by means of the quotation marks? He says it is "held internally by Social Security." --And we are supposed to take comfort in that? The fact that the government uses debt to pay debt? That it has already spent all the funds Americans have "invested" in their Social Security accounts? The fact that all of the federal government's future obligations for Social Security and Medicaid and Medicare are going to have to be funded through future taxes . . . because it has saved absolutely no money in any of the "fund" accounts that have supposedly been "set aside" for those purposes?
   
• "For the past 30 years, real economic growth has averaged 3%. Deficits have averaged 2.5%. So the debt, as a percentage of the economy, has been getting smaller." --There is some truth and, I'm afraid, quite a bit of falsehood in that statement. Yes, the debt as a percentage of the economy declined quite steadily from 1948 till 1974; but then it began increasing--in fact, it more than doubled--from 1974 through the early 1990s. At that point, it officially began to hold steady and even decline till about 2001. But then it has taken off again.
  
  Part of the problem, however: We are talking about acknowledged public debt. We are not talking about the government's massive unacknowledged "off-book" and unfunded obligations. As Michael Hodges explains in answer to the question, "Since debt increased each year, how could [federal government] officials claim they had a budget surplus in the late 1990s and 2000?"
  

  Answer: the general federal government did not have a surplus. In fact, they ran a huge deficit each and every year. . . . The Deficit-Trust Report shows the general government spent more than its general revenues, but they covered up the over-spending deficit by siphoning-off all surpluses from all trust funds, including spending every penny remaining in the social security trust fund on non-pension items - - while creating even more debt IOUs to 'paper-over' their actions. . . . See the 1999-2000 data report.

• "Greece [ran 10% deficits] for years. And played with the accounting rules to mask this. We didn’t do that." --Really? You wouldn't call the use of all the Social Security funds for current government expenses, and the massive increases in unfunded mandates and unfunded future obligations and massive "off-book" accounts (for example, the trillions of dollars of Fannie Mae and Freddie Mac obligations now being guaranteed by our government--off the books--a kind of "playing with the accounting rules"?
   
• "[T]he government is a much smaller part of the economy here than most people realize. Government spending makes up about 28% of GDP. By contrast, the Greek public sector is 40% of their economy. So it’s harder to cut spending there without pushing Greece into another recession." --How wonderful! But should we rejoice simply because they are worse off than we?

But where I really got bogged down was here, in the material Doug had me consider from the "fundamentalist" he said he respects:

First, Doug's comment about Brad DeLong's "good point" . . . that "short-term deficits are a bet that borrowing is worth it in the long run."

And I wonder: Are they really? Always? Or do some people--and some governments--borrow not with any real intention of paying the debt back, but with the (vain) hope that somehow, somewhere, someone will get it paid back . . . "just so long as it's not us (or me) right now." --The whole "Let's palm our problems off on someone else" methodology; the kind of behavior that Porter Stansberry noted that GM managers were engaging in for years before the company was finally forced to declare bankruptcy: "GM had no conceivable way to repay its debts. It was even borrowing money to pay for the interest expense on its existing debts." Moreover, "GM used byzantine accounting to hide the truth of its deteriorating fiscal condition." --And isn't that what the United States government is doing at this point?

"Many of the gloom-crew ignore Stein’s Law," Doug says: "If something cannot continue it will stop."

Oh, yes! That is correct. It will stop. The question is, will it stop of its own accord, with a positive outcome? Or will it stop in pain by the force of outside agencies?

"And [the gloom-crew ignore] Coolidge’s dictum: if ten problems are coming toward you down the road, chances are that nine of them will go off into the ditch before they reach you."

Very nice.

But/and/then, what are we to make of Martin Wolf's concluding remarks?

[A]s the BIS [Bank of International Settlements] paper . . . noted, long-run fiscal prospects, largely driven by ageing, are dire. Projecting forward from the dreadful starting points [i.e., where these nations' balance sheets are today], the BIS authors argue that ratios of public debt to GDP could reach 250 per cent of GDP in Italy by 2050, 300 per cent in Germany, 400 per cent in France, 450 per cent in the US, 500 per cent in the UK and 600 per cent in Japan. If the sovereign debts of high-income countries are not to be reduced to junk, these countries do indeed need credible plans for retrenchment. On this there is no disagreement.

????!!!!

Did you catch what Wolf is saying? That the United States, Great Britain and/or Japan might wind up with public debt equivalent to 4.5, 5, or even 6 times their Gross Domestic Products?

Can you imagine anyone being foolish enough to lend a government money so it can go that far into debt?

Suppose we take the "conservative" 450% of GDP number that the authors of this study--and the "conservative" fundamentalist Martin Wolf!--suggest for the United States.

At an interest rate of only 5%--which is extremely low, considering the risks involved!--the interest payments alone on such a debt would amount to 21.25% of Gross Domestic Product. That is interest only. No current expenses. No services. No employees.

I don't believe that day will ever get here. Impossible. Doug is correct: Stein’s Law will come into play long before that occurs: "If something cannot continue it will stop."

But what really gets me is how Wolf "argues" his "case."

Look at his conclusion:

The best approach [to the future crisis] would be sharp reductions in long-term growth of entitlement spending. Furthermore, as economies recover, short-term fiscal action will be needed. Actions will have to include spending cuts and increases in tax, to restore revenue lost forever in the crisis. . . .

So, yes, high-income countries face huge fiscal challenges. And yes, the crisis-hit countries start from grossly unsustainable fiscal positions. But the US is not Greece. Moreover, a massive fiscal tightening today would be a grave error. There is a huge risk – in my view, a certainty – that this would tip much of the world back into recession. The private sector must heal. That, not fiscal retrenchment, is the priority.

In other words: Yes, we're in trouble, and yes, we need to take care of the dire future we can see coming at us. And, yes, we need to sharply reduce our entitlement spending. But . . . not now. Not now. This is a bad time.

Put another way: "I don't really have any good solutions. But tightening our belts right now is a very bad idea."

And I reply: Based on the federal government's behavior throughout the last 40 years, when is a good time to tighten our belts?

My hypothesis?

Never. Never "now." Tightening our belts is always a good idea "sometime in the future."

From the politicians' perspective, it is never a good time to pay back debts we have accrued. It is always a fine time to borrow on the future.

. . . Which brings us back to the issues I've been raising in so many of my posts over the last few weeks: My friend Doug's attempts to dissuade me notwithstanding, I don't see a bright future for our country . . . primarily because there is no one who has the guts to address the fundamental fiscal problems that confront us.

All those stimulus dollars: where are they going?

I was astonished, dismayed, and pleased to find an article that talked about where all the federal economic "stimulus" dollars are going.

Any surprise?

Proportionately, Washington, DC, is swimming in dough. It's having one of its best years ever.

First, in case you didn't know, the government is being at least somewhat transparent about its shenanigans. Check out www.recovery.gov. As someone said, "If this is the stuff they're willing to talk about, I'd hate to know what they're hiding!"

But the data is pretty raw.

So then I found out about the nonprofit investigative news outlet ProPublica. It has organized and reported the "stimulus"/"recovery" data per capita by state and county as of December 2009.

Very interesting.

In most states, the numbers aren't particularly remarkable. Thirty-five states are in the upper hundreds of dollars per person, most between $700 and $900 a person. Though Florida is at the bottom, with just under $650 per person. (Interesting, however, Florida is tied with Kentucky for 8th worst unemployment in the country (as of October last year)!)

There are 15 states with more than $1,000 per person in stimulus spending. One of those received well over $2,000 per person.

Guess which one?

Alaska! ($2,147.27 per capita.)

And then . . . there is Washington, DC.

$5,276.84 per capita in stimulus spending.

Poor Washington, DC!

As the guy who brought this to my attention commented, "The bureaucrats aren't helping the average American; they're feeding themselves from the taxpayer trough."

While we're on the subject, perhaps I should mention payscales. USA Today reports that "[f]ederal employees making salaries of $100,000 or more jumped from 14% to 19% . . . during the recession's first 18 months — and that's before overtime pay and bonuses are counted. . . ."

Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.

And the federal government dares to wag its fingers at the banks?

Look at this: The average employee of the federal government makes $71,206. And in the private sector? $40,331.

Do we really need government employees to be paid so much so they can serve us so . . . ahem! . . . poorly?

As the same guy who brought these things to my attention commented, concerning a trip he took out of Bozeman, MT (the third largest city in Montana; the metropolitan area population is less than 100,000; the entire state has a population of slightly less than a million!):

I watched 14 Transportation Security Agency (TSA) workers stand around at the security gates to process a plane of only 40 or so passengers. . . .

For my flight, three ladies stood at the gate entrance. One checked my driver's license, while talking loudly to the other two next to her about the weekend. I'm certain I could have handed her someone else's library card and gotten through.

Next up was the guy at the front of the conveyor belt. He was pushing the plastic bins down the belt and into the chemical/electronic detector, repeatedly saying: "Are your liquids and gels out?"

What a farce! I've walked on board with mouthwash and juice bottles accidentally stuffed in jacket pockets or carry-on bag pouches.

We're paying these people to sit around and do nothing. It's embarrassing that anyone thinks this group can protect us from anything.

********

--For another take on the stimulus programs, see Do Direct Stimulus Jobs Really Cost $533,000 Apiece?!

Massive inflation over the horizon?

I've been concerned about the future of the Federal Reserve "dollar" following the recent massive increase in (i.e., inflation of) the "money supply" (i.e., printed paper "notes" issued by the Federal Reserve board).

Right now, we are experiencing price deflation, but one day in the not-too-distant future, I expect we should be seeing some very serious price inflation . . . since the demand for goods should remain relatively constant (or increase) while the supply of money has increased astronomically. (Put another way: the supply-demand ratio will eventually tip toward lots of money demanding relatively few goods . . .).

We met with our legacy planners yesterday. They showed us the following chart.

I thought it was telling.

Note that all numbers are in inflation-adjusted 2009 Dollars.

PPIP = "Public-Private Investment Program" . . . by which private investors, with federal government loan guarantees, are supposed to help banks rid themselves of the so-called "toxic loans" that hurt their operations and capital.

TALF = "Term Asset-Backed Securities Loan Facility"

I needed some more data . . .

This morning's "United States of France" post, I now realize, was too mild. Way too mild.

Considering the intent of his email, somehow I don't think Ron Paul will mind if I quote what he sent a few hours after I posted this morning:

Wednesday, September 24, 2008

Dear Friends,

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The events of the past week are no exception.

The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It's bailing out the financiers, the banks, the Wall Streeters."

That describes the current bailout package to a T. And we're being told it's unavoidable.

The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

• The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.

• Financial institutions are "designated as financial agents of the Government." This is the New Deal to end all New Deals.

• Then there's this: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.

There goes your country.

Even some so-called free-market economists are calling all this "sadly necessary." Sad, yes. Necessary? Don't make me laugh.

Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we're supposedly presented with this November: yes or yes. Now, with a backlash brewing, they're not quite sure what their views are. A sad display, really.

Although the present bailout package is almost certainly not the end of the political atrocities we'll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.

The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?

When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?
Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.

In liberty,

Ron Paul

And then there is this from Gary North:

For months, high-level government officials assured us that America's financial markets were safe. They continued to assure us right up until Treasury Secretary Henry Paulson on September 18 said a $700 billion bailout is required to save the economy from a collapse comparable to the Great Depression.

Our leaders, including Paulson, did not have a clue as to what was going on. . . .

The assurances began in August 2007. They accelerated right through September 18.

It did not matter that Fannie Mae and Freddie Mac were nationalized without vote by Congress on a Sunday afternoon, September 7. The experts remained optimistic.

It did not matter that a week later, also on a Sunday, Merrill Lynch sold itself without a vote by its Board of Directors to Bank of America, which also did not ask for a vote by its Board of Directors.

It did not matter that on Monday, September 15, Lehman Brothers Holdings declared bankruptcy -- the largest bankruptcy by far in American history, dwarfing Enron and WorldCom combined.

We were assured on September 15 that everything was under control.

It was not just Paulson, Bernanke, and the President who assured us. It was also almost every talking head from the financial world who appeared on television. The main exception was Prof. Nouriel Roubini, whose grim forecasts have come true, one by one.

On Sunday, September 14, he said that no investment bank would survive. He said the model was fundamentally flawed. Two went bust within 24 hours: Merrill Lynch and Lehman. The other two were bailed out by a change in their legal structure on Friday, September 19. Both Goldman Sachs and Morgan Stanley surrendered their status as investment banks, switched to holding companies, thereby coming under Federal regulation, and immediately becoming eligible for bailout money.

We have seen a stream of ex-geniuses depart as multi-millionaires: Angelo Mozilo (Countywide Financial), Charles Prince (Citigroup), Stan O'Neal (Merrill Lunch), and Dick Fuld (Lehman). They join the legendary Franklin Raines (Fannie Mae), who had departed years earlier, and who today is an Obama advisor. Then there were the recent heads of Fannie and Freddie.

The head of AIG will be replaced soon.

How is this possible that we, the people of the United States, are supposed to pay these guys--and our elected officials--multi-hundreds of millions of dollars for the "privilege" of taking on the trillions of dollars of debt they have wracked up in our behalf?

I think it's time for us to get on the telephone, as Ron Paul urged!