Another out of control government spending milestone tries to slip by quietly:
It’s another record-high for the U.S. National Debt which today topped the $12-trillion mark. Divided evenly among the U.S. population, it amounts to$38,974.34 for every man, woman and child.
Technically, the debt hit the new high yesterday, but it was posted on the Treasury Department website just after 3:00 p.m. ET today. The exact calculation of the debt is a 16-digit tongue-twister and red-ink tsunami: $12,031,299,186,290.07
And the 12 trillion mark was reached 8 months after reaching the 11 trillion mark – with oceans of red ink ahead as far as the eye can see according to the budgets the Obama administration has projected.
But don’t worry, Sec. of Treasury Timothy “Turbo Tax” Geithner, hero of the AIG bailout, had said they plan on getting serious about the debt. Are you feeling more assured now?
James Pethokoukas thinks he’s picked up on how they plan on doing that – or at least the trial balloon they’ve launched concerning their idea to see how well it flies. He saw this is the Wall Street Journal.
But the chairman of the president’s Council of Economic Advisers admitted that health reform and a growing economy isn’t enough to bring down the deficit. She did mention one other place that revenue could come from: letting the Bush tax cuts expire.
You say, “that’s not news, they’ve always talked about letting the Bush tax cuts expire”. No. That’s not what they’ve always talked about. They’ve talked about letting them expire on the richest of Americans. But “95% of you won’t see your taxes go up by a single dime” – remember? Pethokoukas thinks the statement by CoEA Christina Romer is talking about all of the Bush era tax cuts:
Since Obama already wants to get rid of the income and capital gains tax cuts for wealthier Americans that expire at the end of 2010, clearly what Romer is referring to is the rest of the 2001 and 2003 Bush tax cuts. Letting all the 2001 cuts — rate reductions, child tax credit marriage penalty relief — expire would raise tax revenues by $2.5 trillion through 2019. (These CBO numbers assume no negative economic feedback impact from higher taxes.) And letting the 2003 tax cuts on capital gains and dividends expire would be tantamount to a $350 billion tax increase through 2019. And none of this includes possible plans for a VAT that could raise $400 billion a year more to close the huge projected gap — maybe 7 percentage points — between spending as a percentage of GDP and revenues as a percentage of GDP.
3 trillion in raised taxes? If they can manage to get away with it – you bet. And the previous no new taxes pledge for the 95%? It will be explained away as having been overcome by events – the financial meltdown, bailout, stimulus, etc. And again, you will be reminded that government, not you, has first claim on your property as they again raid your paychecks to the tune of a cool 3 trillion over 10 years.
I think this is one of those “gift horses” one would really want to look in the mouth. It has a whole lot of government, but very little in the way of health care improvement. I can’t wait to see the hokey name they dream up for the bill. Whatever it is, the opposite will most likely be true. And, as noted in other posts, it will leave a significant portion of the uninsured, well, uninsured, even though that was supposely the entire reason for all of this nonsense.
The final product in the House, reflecting many of President Barack Obama’s priorities, includes new requirements for employers to offer insurance to their workers or face penalties, fines on Americans who don’t purchase coverage and subsidies to help lower-income people do so. Insurance companies would face new prohibitions against charging much more to older people or denying coverage to people with health conditions.
The price tag, topping $1 trillion over 10 years, would be paid for by taxing high-income people and cutting some $500 billion in payments to Medicare providers. The legislation would extend health coverage to around 95 percent of Americans.
What do you get for your trillion dollars? Higher debt, fines and penalties galore, cuts in Medicare, etc. etc.
Of course this is the House version, and the Senate version would include prison time for those who “choose” not to participate and a hefty tax on those “cadillac” plans which dare to offer those paying for them better benefits than average.
Both, of course, will offer a form of the “public option”, aka, government health insurance, with the House bill making it a mandatory part of the bill while the Senate version has an opt-out clause for the states (but, of course, no “opt-out” clause for the individual).
I’m sure the House vote will be very close because a number of blue-dogs are going to be seeking cover in a “no” vote. So Pelosi will be closely counting noses before a vote is taken. In the Senate, it is more problematic for the Democrats. The usually dependable Olympia Snowe (dependable for the Dems) has said she won’t vote for a bill with a public option and that has been seconded by Joe Lieberman (who, as usual, is being called everything but a child of God by the left). Mary Landreau and Ben Nelson are also not in favor of such a provision. So Reid is short of the 60 votes he needs to end debate.
That leaves the Senate with the nuclear option – reconciliation. But that too has its perils and pitfalls for them. Bottom line though is your future is being determined by a bunch of people who have no interest or desire in anything but gathering power for themselves. They’re about to vote in a costly and bureaucratic nightmare which will, by all indications, make health care worse for the vast majority of Americans.
And, unfortunately, there isn’t much that can stop them.
I am not an investment advisor. I’m not a guru. I’m not qualified to give you any investment advice at all. I’m just looking around and seeing things, and telling you what I see. And, in this case, I’ll even tell you what I’m doing.
I do so, however, with the strong warning that you should not, under any circumstances, use me for an example, or follow my example. What I do may not be suitable for you at all. I just want to make that clear.
First let me recap some data points I’ve made in several previous posts:
The Fed has more than doubled the monetary base over the past year. The amount of money that is just sitting there in the economy is incomprehensible. But, it’s not making any trouble for us in inflationary terms, because it is just sitting there. It’s what will happen when it does stop just sitting there that is worrisome.
The Federal Budget has spiraled out of control, with the TARP, stimulus, and recession bringing additional massive amounts of debt to bear, and future deficits signifigantly larger than any in recent memory–on top of which, there is now talk of “Stimulus II”.
Despite the happy talk about the economy’s recovery, the fact is that it is still in decline–just a slower rate of decline. If a recovery doesn’t occur soon, we will run into another leg down in the economy, as households and businesses draw down their cash reserves, hit their credit limits, and slash their spending. The longer the recession continues, the more people and business that will be forced into bankruptcies, the more foreclosures will rise, etc. We call things like this “black swan” events.
On the other hand, even if there is a recovery, the Fed will be faced with the task of trying to wring the extra money back out of the economy. If they are unsuccessful, inflation will rise. If they are successful, they may spark another recession through tightening, much as they did to cause the second leg of the back-to-back recessions in 1981-1982. A second leg of a recession will undoubtedly result in greater debt and more money funneled into the economy as the government re-imposes monetary and fiscal stimulus again to re-inflate economic activity. This will both deepen the debt and increase the money supply, making the next round of interest rate tightenings more difficult, unless the economy comes back strongly.
Social Security is now estimated to begin having a negative cash flow in 2019. In other words, Social Security expenditures will exceed the payroll tax receipts. We have, until now, been running surpluses in Social Security receipts, but, of course, the government spent that money in the general fund. There is, therefore, no pot of money saved to make up for the deficit in receipts in 2016. Benefits will be cut. Taxes will be increased. Economic growth will be affected.
1. Some of these nations have no reason to risk destabilizing the USA. Esp the Saudi Princes.
2. Some of these nations have no reason to risk destabilizing the global financial system. Esp. Japan.
3. Many of these nation have leaders who are some combination of cautious, slow, reactive, and incrementalists.
4. Something of this scale would be almost impossible to keep secret 2 days after the first discussions.
5. If multiple Hong Kong banking sources knew it, their fingerprints would be all over the US dollar – as they shorted it to the max.
Having said that, while I believe this particular story is implausible, it is obvious that a number of countries, China and Russia chief among them, are urging that the dollar be replaced as the world’s reserve currency, or, at the very least, allow some other currency or basket of currencies to be used in addition to the dollar. If this happens, billions of dollars will be repatriated to the US, drastically lowering the dollar’s foriegn exchange value. China is already denominating regional trade deals in yuan, and the use of gold has been on the rise as an instrument for international settlements in Asia and Europe.
There are many more data points, but it would be both tedious and depressing to continue.
The bottom line is that the trends outlined above will, in all probability, necessitate dealing with our foreign creditors. Such dealings may require us to reschedule our debt payments, which will devastate the bond market, make future borrowing far more difficult, and end the notion that treasury notes are “risk-free” investments. If so, we will have become a financial banana republic in which future investment will be given the gimlet eye. We may also be required to those foreign debts off in some currency or basket of currencies other than dollars, in order to prevent the government from inflating the debt away.
These trends will also probably require devaluing the US dollar by a substantial amount, so that our imports become expensive, while our exports become cheap. This will allow us to earn the money to pay off our foreign debts, although it will, of course, result in a lower standard of living in the USA.
This the inevitable result of allowing the government–and the voters–to loot the system for 70 years.
So here is what I have done–and this is purely for informational purposes. I do not recommend it for you, and I urge you to consider that I may be entirely wrong.
Several months ago, I completely pulled all of my investments out of equities, and into some select bond funds with a mix of government and private bonds. As of today, I have ceased placing any more money in to either equities or bonds.
For the forseeable future, I will be buying gold bullion. Not gold stocks. Not Krugerrands. Not gold depository accounts. I mean direct bullion purchases of gold bars or rounds. My personal preference is for APMEX or Pamp Suisse 10g bars, or Scotia Bank 1/4 oz. rounds, since they have the lowest premiums over the spot price, and are small enough to conveniently convert at local jewelry stores, pawn shops, or gold dealers at need.
Trying to convert a 1kg bar on short notice would be…inconvenient. Even 1oz. Krugerrands might be hard to convert as the value of each single coin is now over $1000.
I have no interest in paying a premium for “collectible” coins. I have no interest in purchasing a depository account, where my gold holdings have to be reported to the government. In fact, prior to this month, I had no real interest in gold either. Indeed, if you bought gold at any time from 1979 to 2001, by march of 2001, you would have lost money–perhaps quite a lot of money, depending on when you bought it. However, in the current circumstances, let’s just say that my interest is now…heightened substantially.
Whether your interest should be heightened…well, I couldn’t say.
Today was one of those days when a couple of trends came together that should be making us think seiously about changing our current fiscal and monetary policies.
The first thing I was was this debt chart from John B Taylor that shows how our current policy will effect the national debt.
This what you call your unsustainable debt path.
Then, there was this:
Since the crisis began, the Fed has pumped more than $800 billon into the banking system, kept the federal funds rate near zero and purchased so many Treasurys and mortgage-backed debt that the amount of assets on its balance sheets has now swollen to $2.14 trillion.
“If you think the Federal Reserve had it tough devising a strategy to rescue the U.S. economy from of the worst recession in 70 years, just wait,” wrote Bernard Baumohl, chief global economist, at the Economic Outlook Group. “We think it is going to be hellishly more complicated this time to come up with a plan that encourages growth and keeps inflation expectations well anchored.”
All of which leads directly to this:
Chinese central bank governor Zhou Xiaochuan, who supervises more than two trillion dollars worth of dollar reserves, the world’s largest, raised the stakes by calling for a new reserve currency in place of the dollar.
He wanted the new reserve unit to be based on the SDR, a “special drawing right” created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.
“These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own,” said Richard Cooper, a professor of international economics at Harvard University.
Here’s the problem. Because we are on an unsustainable debt path, we will eventually accrue more debt than we can possibly repay. There are many people who think that–since our debt, coupled with Social Security and Medicare obligations currently outstanding, are greater than the entire capital stock of the United States–we’re there already. We ill be unable to pay the debt, so our choices are to repudiate it outright, or to destroy the value of the currency and inflate it away, both of which amount to essentially the same thing. In doing so, the government will destroy the life savings of everyone in the country, save those that are in hard assets
The Chinese, whatever else they may be, are not stupid. they know this, and they want a new worldwide reserve currency now, before everyone realizes that the dollar is in very serious danger of becoming worthless. They don’t want to be stuck holding dollars when that happens–although their holdings in bonds will probably have to be written off.
I’ve written previously that China moved their gold reserves into the BoC a few months ago. Some international trade deals are already being denominated in gold, tool. It looks very much like the dollar’s days as the world reserve currency are numbered. In fact, the dollar’s days may very well be numbered.
And we’ve let it happen. Over the past 80 years, we’ve sat by and watched as the Fed–whose primary mission was supposed to be the stability fo the currency–has presided over a tenfold reduction in the dollar’s value. For the last 30 years, we’ve watched as the debt has mushroomed–yes, even during Bill Clinton’s presidency–and we’ve refused to either cut spending or to raise taxes to a level commensurate with our increased spending. In short, we’ve looted the system, and the looting is nearly complete now.
And now, with all the trumpetings of a coming economic recovery, the Fed has to try and figure out how to re-call the more than doubling of the monetary base we’ve engaged in in the past year without completely crashing the economy. Failure to do so, of course, means serious inflation–which will further degrade the value of the dollar.
Or, as predicted, taking the rocket sled to debt hell:
This is what America is protesting – at least those with an inkling of what’s going on. The “isn’t he dreamy crowd” – they haven’t a clue or, if they do, just don’t care. They’re the same bunch that call themselves the “reality based community” even while apparently always believing money does indeed grow on trees.
With all the “new” figures out there concerning deficit and debt numbers, plus the old, it’s rather confusing as to which can be believed. Greg Mankiw cites the Concord Coalition who makes the case that perhaps neither the CBO or the White House have their finger on the real deficit numbers:
The Concord Baseline makes some key assumption changes to the CBO baseline. CBO is required to assume that congressional appropriations continue increasing only at the rate of inflation for the 10 year baseline. They also extend emergency supplemental at their “current” level plus inflation over the duration of the baseline. For tax legislation, they assume current law will govern–so if there are tax cuts that have sunsets (as the 2001 and 2003 tax cuts have), CBO is required to project revenues assuming the tax cuts expire as written in the legislation. They also project economic growth in a very conservative fashion–they do not try to anticipate major changes in the economy, either recessions or accelerations.
The Concord Coalition takes the CBO baseline and adjusts it to assume appropriations increase at the same rate as the economy (GDP growth). This increase is closer to the historical average rate of increase. We also assume that supplemental appropriations do not continue indefinitely. For recent appropriations for the wars in Iraq and Afghanistan, we include realistic estimates from CBO about how much will be spent under a scenario where troop levels slowly decrease to about one-third of their level at the time of the estimate. For taxes, we assume that all of the major tax cuts will be extended beyond 2010. We also assume the one-year patches to the Alternative Minimum Tax will continue to be enacted, holding the level of taxpayers hit by the tax roughly constant throughout the baseline period. Finally, we include a calculation for the increased debt service (interest payments) that these policies would cause by their increasing the deficit. We do not make any changes to CBO’s economic assumptions.
With those seemingly more complete assumptions and numbers, the Coalition finds that we’re most likely looking at much higher deficits over the next 10 years than either CBO or OMB are projecting:
As you can see, the Concord Coalition believes their projections to come from a more “plausible” set of baseline assumptions than either CBO and OMB. If so, and reading the description above, I see nothing that is implausible in their assumptions, we’re seeing the deficits understated by almost half.
Another in a long line of reasons not to be enacting any new and huge entitlement or cap-and-trade. In fact, the business of Congress right now should be a long and detailed look at how it can cut entitlement spending and scale back government.
But they’re not. Instead they’re busily engaged in expanding multi-generational taxation without representation. Didn’t we once fight a revolution over that?
Back in March of this year, when both the White House and the CBO put out their budget deficit numbers, we were told that the CBO simply had it wrong and were much too pessimistic about the 10 year budget that the Obama administration was touting.
The head of the White House’s Office of Management and Budget, Peter Orszag, had this to say at the time:
White House budget chief Peter Orszag said that CBO’s long-range economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve and that he remained confident that Obama’s budget, if enacted, would produce smaller deficits.
Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama’s budget would produce deficits that could not be sustained.
“Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable,” Orszag told reporters.
Deficits so big put upward pressure on interest rates as the government offers more attractive interest rates to attract borrowers.
“I think deficits of 5 percent (of GDP) are unsupportable,” said economist Mark Zandi, chief economist at Moody’s Economy.com. “It will lead to higher interest rates to the point where it will force policymakers to make changes.”
Of course, today the White House’s OMB acknowledged that, in fact, the CBO’s estimates in March were indeed correct. OMB has adjusted its deficit estimate up 2 trillion dollars to over 9 trillion. That means that in 2019, the deficit will be 6% of GDP – or to quote Peter Orszag, “unsustainable“.
What does “unsustainable” mean to you, and how does one address such a problem?
Well, it certainly isn’t addressed with increased spending, new entitlements and more debt, is it?
Is there any wonder a sizable majority thinks the country is still on the wrong track despite a change of administrations?
In case the politicians still don’t get it (and after this morning’s awesomely dumb move by Republicans, they need to be reminded as well) — It’s the spending, stupid!
For the first time since 1975, Social Security recipients will not get a cost of living allowance increase in their Social Security check. Another in a long line of ominous indicators that, to quote President Obama’s favorite disavowed preacher, the fiscal “chickens are coming home to roost.”
We seem to have been living in a dream world for the last few decades where the majority of Americans ignored the reality and believed we could continue to increase the size of the welfare state forever with no ill consequences. The small coterie of realists claiming that it was indeed a fantasy world we were living in were declared alarmists who were using scare tactics and dismissed by the politicians.
Now, with huge deficits, we’re about to see the US go from one of the least-indebted developed nations to one of the most indebted. The IMF reports that for the US, general government debt as a percentage of GDP will rise from 63 percent in 2007 to 88.8 percent this year and to 99.8 percent of GDP next year.
That’s huge and, with the revised deficit of almost 10 trillion over 10 years, getting larger.
Even without the numbers and reports, Americans have increasingly come to understand that the government we have and the programs it funds through our tax dollars and massive borrowing are unsustainable. And, as I’ve pointed out, that realization has been brought to a head by the recent financial problems we’ve suffered and government’s reaction (under both the Bush and Obama administrations) to that problem. And yet the supposedly tuned-in Obama and the Democrats simply don’t seem to understand that, or, perhaps worse, don’t want to believe it, given the agenda they’ve undertaken. Matt Welch lays it out well:
After 11 months of federal bailouts and freakouts, Americans have become bone tired of panicky power grabs from Washington. It’s the big government, stupid.
The message of the various Tea Party protests, which predated this summer’s ahistorical media panic over town hall “lynch mobs,” has been pretty simple, says Matt Kibbe, president of FreedomWorks, the nonprofit that has helped organize the protests, told Reason magazine this spring. “It was: stop spending so much money, stop borrowing so much money, and stop bailing out people who were irresponsible.”
It’s a reality that surely haunts the politically sensitive Obama administration: Ever since George W. Bush first tried to cram the Troubled Assets Relief Program (TARP) down the throats of largely unwilling citizens, bailouts of failed institutions, from AIG to American Axle, have been enormously unpopular.
What Obama and the Democrats are left with then, when pursuing an agenda that is a naked attempt at even more government expansion, is a natural resistance that has been building since before this administration took office. Either the Democrats and Obama completely misread the election results and assumed a mandate that wasn’t at all present, or their natural hubris left them believing that even if that was the country’s attitude, they would be able to allay the fears and talk them into supporting more big government.
As is obvious, it’s not working. And the mood of the country seems to be at a point where it is swinging in exactly the opposite direction.
You have some Democrats who are realizing that – Senator Kent Conrad (D-SD) among them – who are talking about a vastly scaled back health care bill (I stick by my claim that Democrats realize they must pass something called “Health Care Reform” or the Obama presidency is DOA). But that too flies in the face of polling which says that a majority of Americans would like to see this version scrapped and for lawmakers to start over. The obvious implication of that poll result is the public is not happy with the size, depth of intrusion and cost of the current proposals.
Bill Clinton once famously said that the era of big government was over. And most cheered. But that turned out to be a mirage as Republicans took over, became Democrat-lite and expanded government yet again. Big government came back with a vengeance. As pointed out by Welch, the Tea Parties, which were the first public evidence of discontent within the country, began under George Bush and had absolutely nothing to do with Barack Obama.
If, as with most protests, the protesters represent the tip of the iceberg, we may be seeing the political sea change that many government minimalists have been hoping for for decades.
The winning political issue is out there for the politician and party smart enough to grab it. Smaller and less expensive and intrusive government.
Who will grab it and how will turn it into a winner is at this point unknown. But Americans are very uneasy right now and their anger at being marginalized by their politicians and ignored is mounting. Not only is 2010 going to be a very interesting year, but depending on who emerges on the right and how they approach addressing this anger, 2012 could be equally as interesting.
Right about what? Well, in this case, the 10 year budget estimate. Remember this chart first seen in March?
This was the difference between the Obama administration and the CBO estimate based on the Obama administration’s 10 year budget. At the time the CBO said that the budget estimate would raise the debt by 9.1 trillion dollars. The Obama administration said, at the time, that the CBO was wrong.
Quietly, at 7pm this last Friday night, the Obama administration raised its estimate of what their budget would add to the debt by the 2 trillion the CBO had said was always there. What that means for the chart is you can ignore the pastel red bars – the Obama estimate – in favor of the dark red bars.
The administration claims that its change in the estimate is due to things which have apparently changed since March, but of which they were just unaware might happen:
Obama administration officials have concluded the economy was much worse last year — and tax revenues much lower — than they had initially assumed, which means that the estimated budget deficit will increase from $7 trillion to about $9 trillion over the coming decade.
This has to give you all sorts of confidence in other White House cost estimates not to mention their denials of the CBO’s accuracy on things like cap-and-trade and health care in favor of their own.
They didn’t know enough to make an accurate estimate. But the CBO did.
So when the administration says that health care reform will save money and the CBO says it will “bend the cost curve upward”, what should this example lead us to believe?
The cost curve is going to bend upward.
UPDATE: James Pethokoukis thinks this is a prelude to CBO kicking their estimate up a notch:
Expect the CBO to also crank up its forecast, which will be higher than the administration’s. Also, this is further evidence that the common wisdom that people don’t care about budget deficits (no matter what the polls say) is wrong. C’mon, leaking such news on a late Friday afternoon?