FedUpUSA

Archive for February 1st, 2012

CBO Confirms Tickerguy’s Projections…..

Here’s the old sign again…

(Reuters) – Gvernment spending for Medicare, Medicaid and other healthcare programs will more than double over the next decade to $1.8 trillion, or 7.3 percent of the country’s total economic output, congressional researchers said on Tuesday.

In its annual budget and economic outlook, the non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022, mainly as a result of an aging U.S. population and rising treatment costs. It will continue to be a key driver of the U.S. budget deficit.

That’s not going to happen, because it can’t.  That number would represent approximately 1/2 of today’s Federal Budget, incidentally.

The bad news is that it doubles again in another eight years.

This is the nature of all exponential functions folks.  Compound growth just is, and it is never, ever sustainable over the intermediate and longer term.  Yet we’ve played this game since 1980, with medical spending by the Federal Government expanding at roughly 9% for that entire 30 years.

What’s worse is that the bolded text is false — in the private sector insurance costs are rising at least as fast as they are in the government.  When I ran MCSNet in the 1990s we were seeing double-digit premium increases every single year, and this is still going on.  The only way to keep it under some resemblance of control was to cut back on the offered services in the plan, but on a “like-for-like” basis there was never a year during my time running MCSNet that we saw increases under 10%. 

Not once.

There is no solution to this problem that can be found with “reform” of Medicare and Medicaid.  The problem lies in the underlying medical system in this country and addressing it must happen there, not through things like Obamacare or changes in the government side.

The ridiculous growth in medical costs have come from ridiculous cost-shifting and obfuscation, along with a completely-unrealistic set of expectations.

Consider the cost of putting a man on the moon.  We can do it, but it’s ridiculously expensive.  Likewise, we can put men in space at the ISS, but on a per-person basis it’s ridiculously expensive.  Ditto for flying in a private jet — yes, you can do it, but it’s ridiculously expensive.

Now consider what would happen if everyone could demand and enforce via government a ride in a moon rocket, a month at the ISS, or the ability to walk into any executive airport and demand that the Lear sitting there immediately take off for Bermuda, irrespective of how much money you had in your bank account!

That’s exactly what we’ve done in the medical system.

Provenge is just one example.  Dendreon developed the drug for late-stage metastatic prostate cancer, a terrible disease.  Statistically it adds 4 months to your life, but costs $100,000.  So for about a quarter of a million dollars per person-year, you can have it — the problem is that you don’t need to have the quarter of a million bucks first, or choose to spend your own funds on the treatment.

Bypass operations and myriad other very expensive procedures, drugs and devices are also part of this problem.  Many chronic conditions have costs in the tens or even over a hundred thousand a year, yet your access to those treatments is not conditioned either by your lifestyle choices that led to the problem (or lack thereof) or your ability and willingness to personally spend the money.

The medical industry capitalizes on all of this and then adds both anti-trust exemptions and intentional forced cost-shifting onto the backs of those who can pay for those who can’t.  This is why the aspirin in the hospital costs $25 — you’re paying for Juanita the illegal immigrant who showed up last night in labor at 7-1/2 months, having drunk and drugged herself during pregnancy while receiving zero prenatal care, and pooped out a severely-underweight kid who’s now in the NICU and is in the process of running up a million dollar tab.  This happens every single day and it is why you can buy the same operation in India, performed by a US trained doctor with US medicines, devices, and operating room equipment with a hospital room that is equipped like a luxury suite in the Ritz-Carlton to recover in for 1/5th the cost of the same procedure here in the United States.

Then there’s defensive medicine.  You show up with a non-specific pain in the abdomen.  The doc checks what he can and rules out appendicitis (an immediate emergency) and a few other things.  Now there’s a problem — he has a list of a dozen things running around in his head that could be wrong with you.  There’s a 10% chance that one of the couple of really nasty ones (such as cancer) are involved but ruling them out will require $5,000 worth of tests.  The odds, however, are 90% that the problem is not serious and is something as simple as a mild case of food poisoning.  Who’s money and risk is involved in the decision as to whether or not to run those tests?  Today, the answer is that they get run every single time because if he doesn’t and you hit the bad dice roll you’ll sue (and win.) 

In short you’re not required to allocate the risk and cost on your own.

There’s no fix for Medicare and Medicaid, nor for the Federal budget, without resolving all of this.  And make no mistake folks, this will blow up and destroy not only the federal budget but privately-provided medical care as well within the next five years if we don’t stop it right now.

How would you feel if someone told you that one of the largest banks on Wall Street makes more money whenever the number of Americans on food stamps goes up?  Unfortunately, this is something that is actually true.  In the United States today, one out of every seven Americans is on food stamps.  In fact, the number of Americans on food stamps has increased by a whopping 14 million since Barack Obama entered the White House.  All of this makes JP Morgan very happy, because JP Morgan has been making money by the boatload on food stamps.  Right now, JP Morgan Chase issues food stamp debit cards in 26 U.S. states and the District of Columbia.  The division of JP Morgan Chase that issues these debit cards made an eye-popping 5.47 billion dollars in net revenue during 2010.  JP Morgan is paid per customer, so when the number of Americans on food stamps goes up, they make more money.  But doesn’t this give JP Morgan an incentive to try to keep the number of Americans on food stamps as high as possible?  Of course it does.  JP Morgan is interested in making money as rapidly as possible. If JP Morgan can get more Americans enrolled in the food stamp program and keep them enrolled in it for as long as possible, that is good for business.

And the Obama administration is certainly doing what it can to help out.  Even though a whopping 46 million Americans are now on food stamps, the Obama administration plans to give out large amounts of money to organizations that are able figure out ways to get even more people enrolled in the program….

Despite the historic rise in food stamp use, however, the Obama Administration believes not enough people are receiving food stamps who should be and is offering $75,000 grants to groups who devise “effective strategies” to “increase program participation” among those who have yet to sign up.

In fact, U.S. Agriculture Secretary Tom Vilsack says that if we can get even more Americans enrolled in the food stamp program, that will be a great way to “stimulate the economy“.

Of course JP Morgan just loves all of this.  The more people they have in the system the better.

Christopher Paton, the managing director of JP Morgan’s “Treasury Solutions” business, made the following statement about the “food stamp business” that his firm is engaged in during an interview with Bloomberg Television….

“This business is a very important business to JPMorgan. It’s an important business in terms of its size and scale…Right now, volumes have gone through the roof in the past couple of years. The good news, from JPMorgan’s perspective, is the infrastructure that we built has been able to cope with that increase in volume.”

You can see more of the interview with Paton in the video posted below….

As the interview above noted, more than 40 percent of all food stamp recipients in the United States actually have a job.

This is an exciting “growth area” for JP Morgan.  As the middle class continues to decline, the number of “the working poor” in America is exploding.

Back in 1980, less than 30% of all jobs in the United States were low income jobs.  Today, more than 40% of all jobs in the United States are low income jobs.  This trend is perfect for JP Morgan because it means that the number of low income workers that are eligible for food stamps is going to keep increasing.

And what makes all of this even sadder is that JP Morgan has outsourced many of the customer service jobs for its food stamp program to India.

Yes, you read that correctly.

When Americans that can’t find a decent job need help with their food stamps there is a good chance that they will be talking to a customer service representative sitting in India.

Isn’t that crazy?

When ABC News confronted JP Morgan about this, JP Morgan would not tell ABC which states have customer service calls sent to India and which states have them handled inside the United States….

JP Morgan is the only one today still operating public-assistance call centers overseas. The company refused to say which states had calls routed to India and which ones had calls stay domestically. That decision, the company said, was often left up to the individual states.

But JP Morgan doesn’t just handle food stamps.  JP Morgan also issues child support debit cards in 15 states and unemployment insurance debit cards in 7 states.

Of course JP Morgan is not the only big bank involved in this kind of business.  Several others are also making money in massive quantities on the backs of the poor.

The following example comes from a Huffington Post article….

Shawana Busby does not seem like the sort of customer who would be at the center of a major bank’s business plan. Out of work for much of the last three years, she depends upon a $264-a-week unemployment check from the state of South Carolina. But the state has contracted with Bank of America to administer its unemployment benefits, and Busby has frequently found herself incurring bank fees to get her money.

To withdraw her benefits, Busby, 33, uses a Bank of America prepaid debit card on which the state deposits her funds. She could visit a Bank of America ATM free of charge. But this small community in the state’s rural center, her hometown, does not have a Bank of America branch. Neither do the surrounding towns where she drops off her kids at school and attends church.

She could drive north to Columbia, the state capital, and use a Bank of America ATM there. But that entails a 50 mile drive, cutting into her gas budget. So Busby visits the ATMs in her area and begrudgingly accepts the fees, which reach as high as five dollars per transaction. She estimates that she has paid at least $350 in fees to tap her unemployment benefits.

There is something about all of this that just seems very, very wrong.

When we have good jobs, the big banks hit us with outrageous bank fees and they try to get us enslaved to credit card debt.

When we are down on our luck and become dependent on the government, the big banks still find ways of making money at our expense.

Why do the banksters always seem to win and we always seem to lose?

The Economic Collapse

The U.S. economy is in effect a counterfeit economy, living on money created from thin air that is unbacked by an equivalent productive expansion of surplus value.

Yesterday we looked at counterfeiting and money printing and discovered they are one in the same: (Counterfeit Money, Counterfeit Policy.) If we apply the same analysis to the U.S. economy, we have to conclude the entire U.S. economy is also counterfeit.

The analysis is not as complicated as store-bought economists would have you think.Much of what passes for “economics and finance” is simply distraction, a sophisticated version of bread and circuses.

Let’s start with two basic concepts: productive value and surplus value.The classic example of a productive asset is a factory that produces goods that have a market value that exceed the input (production) costs. In other words, the factory produces surplus value.

We can measure value by any number of means: ounces of gold, quatloos, sea shells, etc. To keep things simple, let’s just measure value in units. If it costs 10 units to produce a good (including labor, materials, energy inputs, transportation, and a return on the investment to construct and maintain the factory), then the output (products manufactured by the factory) must fetch 11 units in the open market to create 1 unit of surplus that can be invested or spent on consuming other goods or services.

If it takes 10 units of input costs to make a product that is only worth 9 units, then the process generates a net loss. There is no surplus to spend; rather, there is a loss that must be covered by cash, borrowing or the selling of other assets. When the cash, ability to borrow and assets that can be sold all run out, then the enterprise is recognized as insolvent and it closes.

If the factory’s output has little to no market value, then the investment is what we call a mal-investment–an investment that only claimed to be valuable because it was speculative or protected from price discovery in a transparent market.

Our current economic theory holds that any good or service produced has value, which we measure in dollars of gross domestic product (GDP).The intrinsic flaw in this way of assessing value is that it doesn’t recognize mal-investments.

Here are some examples.

– If a military aircraft woefully underperforms and costs so much field commanders dare not risk its combat deployment, then what value was created by its manufacture?

– If it takes 10 units of input costs to produce a biofuel crop that is processed into fuel worth 9 units, then what value was created by the process of making that biofuel?

– If a subdivision of new homes is built in the middle of nowhere and finds no buyers, then what value was created by the construction of these houses?

– If a costly medicine is distributed at great expense in the millions of doses and is discovered to have little to no effect on longevity or other metrics of health, then what value was created by the immense cost squandered on this medication?

In all these cases, the mal-investment was added to the GDP as if it created productive value.The factory and the costly but essentially useless aircraft (think B-1B bomber) were added to the GDP, but they did not create useable military value. The biofuel production facilities were all added to the GDP, even though the process generated a net loss. The homes built in the middle of nowhere were also added to the GDP, along with the costs of the worthless medication.

Consider a financial sector that is declared “too big to fail” and trillions of units are borrowed on the taxpayers’ account to bail out the albatross banks. The bailout of banks created no productive value, even as it took money away from potentially productive investments.

Since surplus value is not limitless, the money squandered on these mal-investments was no longer available for productive investments.Rather, these mal-investments sucked up all the surplus generated by the entire economy. Now there is no money left for superior (and cost-effective) military aircraft, medications that actually cure diseases rather than reduce symptoms, homes that are in desirable, cost-effective locales, productive energy investments, and solvent banks.

Let’s say an economy required 1 million units of input costs to generate 2 million units of productive value, i.e. goods and services whose price has been discovered by a transparent market. That economy has 1 million units of surplus to spend on consumption, productive investments and mal-investments.

Since everything requires maintenance and infrastructure, then there is no such thing as a steady-state economy: for example, factory machines wear out and have to be replaced. If there is no surplus money left because it has been sunk into mal-investments, then the factory’s ability to create productive value and surplus value degrades.

If the mal-investments have been prodigious, at some point the factory is incapable of producing any surplus at all.

There is a “fix”: borrow money based on the future surplus.If the amount being borrowed is modest in comparison to the potential surplus created by a refurbished factory, and the borrowed money is productively invested, then this reliance on credit and leverage may pay off.

But if the borrowed money is spent on consumption and mal-investments rather than being invested in productive assets, then the only “fix” left is to borrow more money–not just mortgaging the future surplus of the factory, but leveraging it into a stupendous sum of borrowed money.

At some point the sums being borrowed far exceed the potential surplus generated by the factory, even if the factory amd market are running at optimum levels.If the factory requires 100 units of investment to generate 50 units of surplus, but 1,000 units of money have been borrowed against that future surplus, then the interest payments on that 1,000 will eventually exceed the modest potential surplus value.

Note that future surpluses are all imaginary; it could turn out that the market for the factory’s goods declines and there will be little to no surplus value created in the future.

Borrowing money based on imaginary future surpluses is a higher form of counterfeiting. And that is precisely what the U.S. is doing, borrowing immense sums at every level, private, corporate and State/Federal, all leveraged against phantom future surpluses, even as the economy requires some 10% of its supposed output (GDP) to be borrowed and spent on consumption each and every year just to run in place, i.e. the Red Queen’s Race (Bernanke, Goldilocks and The Red QueenJanuary 10, 2011).

In other words, the U.S. economy is running a massive deficit, and squandering the vast sums being borrowed on consumption and mal-investments.Once you rely on more borrowing against imaginary future surpluses to fund your current expenses, then eventually the costs of servicing that debt exceeds any possible future surplus.

The last-ditch “fix” is to simply print units of money (or borrow it into existence like the Federal Reserve)–counterfeiting, pure and simple– and deceive the market for a time via the illusion that the freshly printed units of money are actually backed by productive value or surplus.

As history has shown, eventually the market discovers the actual value of this counterfeit money, i.e. near-zero, and the system implodes.

Alternatively, the credit markets grasp that there is no way the economy can pay the interest on its monumental debts, never mind pay back the principal, and then the number of people willing to lend surplus capital to the economy declines to zero, as does the economy’s ability to sustain itself with leveraged debt.

The system then implodes as the “free money machine” of ever-expanding debt breaks down. Once there is no more “free money” to fund consumption and mal-investment, then the reality of systemic insolvency is revealed to all.

You cannot counterfeit actual surplus value generated by productive assets, you can only counterfeit proxy claims on future surplus. That is the U.S. economy in a nutshell: we are counterfeiting claims on our future surplus, even as we squander vast sums on horrifically obvious mal-investments and wasteful, cost-ineffective consumption.

Charles Hugh Smith – Of Two Minds

A Financial System Built to Fail: a look back at 2008 w/Karl Denninger

The Fort Knox Gold Scandal will be aired on the History Channel’s H2 channel Saturday, Feb. 4 at 22:00 EST or 21:00 at 21:00 CST.