FedUpUSA

Here’s the bottom line folks:

These are the major spending items in the US Budget, from 1980 to today.  I am ignoring all the ones that don’t matter, and I’m also intentionally leaving in one foil often used by both sides of the debate for scale purposes (Education.)

Of particular interest (and alarm) is Welfare, which doubled from 2007 to 2010.  But — it appears to have come down some in the least two years and change.  Therefore, while this is a problem, it is not the emergent one.

Those are the three categories on the top — Pensions (Social Security, mostly), Health Care and Defense.

One of them is discontinuous — Defense.  It is possible that the rough tripling from roughly 1998 to today has stopped.  If so then its impact on what is to come is not material.

Before you protest, please read the rest of this.

That leaves two categories — “Pensions” and “Health Care”.

Note the right scale graph, the purple dashed line.  This is the reason that the so-called pundits, from Bernanke on down, all argue that we must deal with this sometime in the reasonable future, but right now we’re not about to hit the wall.  That is, GDP is rising in rough conformance with those three major contributors to the government’s spending profile.  And it is GDP (in one form or another) upon which all taxes are levied.  Therefore, by first appearance, they argue, we are not about to have an imminent crack-up.

They’re wrong.

Note the category called “interest” and that it has been rising much slower that has the debt over the last few years.  It tracked the debt growth until approximately 1996.

This is when active manipulation took hold by both The Fed and Government.

It is when, approximately, we transferred from growth in the economy to debt-financing for consumption.

Now I want to project out a few other assumptions just a couple of years.

First, I will project forward both Pensions and Health Care to 2015, along with the Debt.

I’m assuming defense remains constant.  This is probably unrealistic given the screaming coming from the DOD right now, but let’s assume it in order to give the budget folks the benefit of the doubt.

Note that our public debt has exceeded $20 trillion.  Note also that we have added $355 billion in annual expense to the budget and exactly none of it is discretionary.  The so-called “sequester”, at $80 billion a year, is (by the second year) less than one quarter of this amount, and that assumes that every penny of it sticks.

Now I want to make one final assumption — The Fed loses control of interest rates because it is forced to abandon its programs due to either runaway “inflation” or the ongoing destruction of purchasing power in the American people’s lives.

That ongoing destruction is happening now and it is responsible for the zero GDP print last quarter.  This is an emergent problem, not one for the future two, three or five years down the road, because without growing GDP that purple line does not go upward and the alleged ability to cope with the growing expenditures instantly evaporates.

That’s the bad news.

The worse news is what happens if The Fed is forced to back off.

Let’s assume that the One Year T-Bill rate goes back to the midpoint of its historical range (not including the 1980s discontinuity), or about 3.5%.  What happens?

The expense profile of the government does not rise by $355 billion in mandatory spending, it rises by nearly $900 billion annually in just two years time!

This increase is approximately one third of all tax revenues and into a flat GDP there is no chance of collecting the taxes necessary to fund it.

That in turn will provoke a discontinuous interest rate move.

Pensions we can fix; OASDI can be repaired.  We did the first piece of it with the expiration of the payroll tax cut that was (foolishly) passed.  The rest is handled by indexing (now!) the retirement age to longevity.

The medical spending problem cannot be fixed within the government alone.  It has to be addressed in the medical system as a whole.  In short, the medical system must contract in terms of dollars spent by about 80% and then rise at no faster than GDP in the future.

This has to happen now.  It can happen now, but doing so is a political nightmare.

We cannot do this in the future.  We cannot do this over a period of 10, 20 or 30 years.  We must do it right now, this year, today, in the present tense.

There is no other option and I don’t give a damn how much the medical providers, hospitals and lobbyists scream.

“Scotty, I need warp power in 2 minutes or we’re all dead.” 

Really.

Yes, I’m fully-aware that the government and Fed will try to “kick the can” in some way, even if they see this as the imminent outcome of their acts.  But any further ”can-kicking” just makes the problem worse by compounding the debt and expense profile even more.

Some of the back-of-the envelope numbers I had been working with gave us until about 2020 or thereabouts before the discontinuous spike occurred.  Those models were ones that I tweaked back in 2007 and were the reason for my alarm at the time — we had less than a decade left before the impact started.

But now we have both Europe (which is falling back into recession), Britain (which is an utter basket case) and Japan, which has effectively declared that it will debase its currency and destroy the purchasing power of its citizens into a depleted savings base.  In addition we have what is now a known set of outcomes from Obamacare, which I predicted would be an utter disaster and for many people would double their health care expenses (mostly insurance) and which is now known to be correct.

This changes have forced updates to those graphs and expectations and unfortunately they have pulled forward the “aw crap” date to as few as two years from now.

Note that these are quite-conservative estimates.  If defense spending rises from here then it’s even worse.  If welfare spending rises (E.g. more food stamps anyone?) then it’s even worse.  If we subsidize more student loans, it’s even worse.  This estimate and work assumes that no other part of the federal budget increases by one single net penny — a ridiculously conservative set of assumptions.

If the corrective actions aren’t taken in the immediate present tense then what you’re looking at is the outcome that will happen, and when that outcome occurs immediate collapse of the government’s funding model is assured. 

This is not speculative — it is arithmetic.

The only option The Fed would have would into such an event would be to try to “QE” the difference via what at that point amount to completely-phony auctions and “open market operations” on top of what it’s doing now — that is, roughly double the destruction of purchasing power that is taking place today via their “QE-to-infinity.”

But that simply transfers the deficit to the population directly via that destruction of purchasing power and it falls almost-entirely on the bottom two quintiles of the income spectrum.

That’s a recipe for a nearly-guaranteed civil war as you will generate over 100 million Americans with nothing to lose.

Raw chart data from usgovernmentspending.com, traceable to US Budget data (official)

This office still exists?

Economic growth will remain slow this year, CBO anticipates, as gradual improvement in many of the forces that drive the economy is offset by the effects of budgetary changes that are scheduled to occur under current law. After this year, economic growth will speed up, CBO projects, causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels. Nevertheless, the unemployment rate is expected to remain above 7½ percent through next year; if that happens, 2014 will be the sixth consecutive year with unemployment exceeding 7½ percent of the labor force—the longest such period in the past 70 years.

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $845 billion, or 5.3 percent of gross domestic product (GDP), its smallest size since 2008. In CBO’s baseline projections, deficits continue to shrink over the next few years, falling to 2.4 percent of GDP by 2015.

Uh huh.

How is this organization’s track record?

Remember that in 2000 it was predicted that by 2010 there would be no federal debt at all.

What happened instead?  Well gee, we seemed to have massively increased Federal Debt.  Like by more than double.

It gets better.  CBO believes that the deficit will go under 3% by 2015.  May I ask how, given that borrowing costs are going up (since we’re borrowing more and more) and in addition consumer purchasing power is being trashed by Fed policy?

The CBO, for its part, does issue the following disclaimer:

Those projections are not CBO’s predictions of future outcomes. As specified in law, CBO’s baseline projections are constructed under the assumption that current laws generally remain unchanged, so that they can serve as a benchmark against which potential changes in law can be measured.

In other words CBO is required by the law to publish things it does not believe in.

That’s a surprise?  Of course not.  Congress does this all the time.

In addition CBO “projects” that federal revenues will rise by 25% over the next two years due to “a growing economy” (which it predicts will grow at a puny small single-digit rate!) from policy changes related to tax increases (but which of course will not impact behavior) and more.  All of this is “projected” to increase revenues from 15.8% of GDP (today) to 19.1% of GDP in the next two years — a 21% increase as measured against GDP.

Pull the other one boys.

Oh, the CBO also projects that outlays (spending) will decrease as a percentage of GDP from 22.8% (today) to 21.5%.  This, despite the outrageous rampjob that we’re seeing in places like health insurance, where many small business and individuals plans have already been notified that their premium expense will roughly double over the next two years.

And this won’t hit the government, either in medical spending or lower tax receipts — right?

Pull the other one boys.

In order for government, or the people, to make good policy you must first have good data to analyze.  The willful and intentional abuse of statistical organizations such as the CBO through law that effectively commands them to produce lies is an outrage.

The CBO, as currently operated, is a farce.

Isn’t it amusing how this is entirely ignored within the markets?

The U.S. fiscal gap, calculated (by us) using the Congressional Budget Office’s realistic long-term budget forecast — the Alternative Fiscal Scenario — is now $222 trillion. Last year, it was $211 trillion. The $11 trillion difference — this year’s true federal deficit — is 10 times larger than the official deficit and roughly as large as the entire stock of official debt in public hands.

We of course are not really talking about this.  Oh we do talk about the $1 trillion+, more or less, that we add to the “official debt”, but nowhere is mentioned the growth in the actual liabilities — if, that is, you accept that things like Medicare are actual obligations.

Hint: They’re not.

When fully retired, 78 million baby boomers will collect, on average, more than 85 percent of per-capita gross domestic product ($40,000 in today’s dollars) in Social Security, Medicare and Medicaid benefits. Each passing year brings these outlays one year closer, which raises their present value.

No they won’t.  Not because they won’t try to, but because the working people of the nation won’t pay it.  If pressed that hard they will do what all people do when pressed hard enough — they will revolt, violently if necessary.  The reason why is obvious and inescapable; nobody submits to being a slave voluntarily and communism doesn’t work as the quality and quantity of work drops as you try to put your boot on the people’s neck.

Ask young people about this – will you give up everything you earn and have so your Dear Old Dad can live in the way to which he is “entitled”, including all the medical care he wants despite being 300lbs and eating like a pig for the last 30 years?

Answer: No.

Compassion?  Sure, especially for their own parents.  But forcible extraction of literally every bit of value in the labor that working people have so that the “old farts” can sit in their ass and collect that to which they’re “entitled”?

Not a prayer in Hell.

That’s a problem.

The answer for the U.S. isn’t pretty. Closing the gap using taxes requires an immediate and permanent 64 percent increase in all federal taxes. Alternatively, the U.S. needs to cut, immediately and permanently, all federal purchases and transfer payments, including Social Security and Medicare benefits, by 40 percent. Or it can mix these terrible fiscal medicines with honey, namely radical fiscal reforms that make the economy much fairer and far stronger. What the government can’t do is pay its bills by spending more and taxing less. America’s children, whose futures are being rapidly destroyed, are smart enough to tell us this.

Actually, if we don’t cut this crap out they’re going to tell us with guns, pitchforks and torches — or simply by refusing to work at all.

This is the problem with confiscatory tax rates — they drive behavior.  People say that “very few” people ever paid the 90% tax rates of years past.  That’s true.  Nobody made that much, on purpose.

You could set the tax rate over $250,000 at 100% if you wanted to.  There are two problems with such a move — first, doing so wouldn’t close the deficit (there aren’t enough people who make over $250,000 and enough income to steal doing this to reach budget balance) but more importantly if you did this the next year nobody would make more than $249,999 since they would get to keep none of it!

What would that do to our economy? Good question; a lot of people would spend a lot of time at the beach instead of innovating and creating, I suspect.  And while this might be good for the makers of rum and various other libations, I doubt very much the net economic effect would be positive.

As I noted yesterday  (and, I might note, forms one of the key items in Leverage, available to the right) there are interconnected items in our national debate that nobody wants to talk about as interconnected items.  Yet we have to, because they form the basis of the fiscal challenges we face.

Policy decisions were intentionally taken that, on any objective basis, amount to massive frauds against the public.  A tiny minority of people — banksters — have benefited tremendously from these frauds.  The expansion of the credit bubble over the last 30 years has made a tiny percentage of the population fabulously “wealthy” but the wealth they obtained was false prosperity in the first instance.  It appeared to be “freely earned and/or given” but it was not; it was stolen as the premise under which it was tendered wasknowingly false and the beneficiaries are the ones who constructed the knowingly-false edifice under which they obtained it.

When you get down to brass tacks it all comes down to the reality of two exponential functions.  They always run away from one another.  It cannot be otherwise; this is a basic principle of arithmetic, and no amount of arm-waving can or ever will change it.

That’s the bottom line right there.  Any two growth functions, where one has a larger growth figure than the other, will run away from one another.  Growth in debt, irrespective of the name you give it (e.g. “entitlements”, whatever) may never exceed the growth in the economy.

If it does the above happens.  It will not happen some of the time, it will not happen only if you get unlucky, it will not happen only on Tuesdays, it will happen each and every time, without fail, and it will screw you each and every time without fail.  It must therefore never be allowed to happen.

This is what all fiscal policy debates are ultimately about.  It has never and will never be about anything else.  It can’t be about anything else, because this is the reality of that fiscal debate, whether people wish to deal with and admit it or not.

We’re still arguing over stupid things, more than 30 years after the alleged debate began.

Until we address and conform our debate to the above simple mathematical relationship no progress will be made, and the longer we wait to do so the higher the odds that an all-on fiscal and economic collapse becomes inevitable.

I love it when this sort of thing happens….

The U.S. economy will probably tip back into recession next year if Congress fails to address an impending “fiscal cliff,”the Congressional Budget Office said.

The nonpartisan agency said in a report late yesterday that the economy would contract at an annual rate of 1.3 percent in the first half of 2013 if lawmakers allow the George W. Bush-era tax cuts to expire and $1.2 trillion in government spending cuts to take effect in January.

“Fails to address”?

Is this an admission that the so-called “growth” of those years (and up until now) was a fraud?  You bet it is.

Remember this graph?

So let’s look at 2000 – 2008 for how of a “spread” this has been, and how much fake money was showing up in alleged “GDP” that was not real, but instead was simply expansion of debt in the system.

The answer?  $13.1 trillion dollars, or awfully close to a full year’s worth of economic output.

That’s what our bankrupt policies did to us over just eight years.

And no, the previous administrations going back to 1980 were not “clean” in this regard, nor is President Obama now.  All have done the same thing; they’re just changing exactly how they try to hide the rot.  Some paint over it, some hang a flag over it, some dupe you with various schemes like housing bubbles and worthless (or nearly so) IPOs.

How much damage must be absorbed to return the economy to balance?  An amazing amount.  And the worse news is that we cannot take a decade or more to do it, since the longer you wait to do it the more damage you’re inflicting.

Europe is playing the same game we are.  Their banks are “unprepared” for a Greek exit from the Eurobecause they were not forced to take their leverage down nor to stop creating credit against nothing after 2008, just as our banks were not.  Their governments, like our government, loves that “cheap credit fix” and continues to abuse it to this day.

The CBO’s plaintive bleating is amusing to listen to, as is Eric Cantor and others arguing over “which way” to address this problem.  Nobody on either side of the aisle is actually talking about addressing anything, because the only way to address the problem is to stop spending more than we make.

And that, for many people, means what amounts to a “sudden stop” faces them in their daily lives.

Rather than tell people to deal with it in 2008 among the “elites” who led the world off the cliff, we instead coddled them and allowed them to lie, and lie they did.  Rather than force the leverage out of the system by refusing to support it with government games and debasement of the people’s purchasing power, we instead continued the same bankrupt policies that got us in trouble.  And rather than deal with the truth now, we instead wave our arms and play partisan politics with intentionally-fraudulent “budget proposals” from Ryan and equally-fraudulent bleating about the rich “paying their fair share” from Obama, Pelosi and Reid.

Neither side will simply put its foot down and say “there will be no more deficit spending — period” — and back it up by refusing to move and pass a single spending bill until the budget is balanced.  Neither side can claim to be “right” as both are spending money they do not have and therefore are committing an active and intentional fraud upon the people of this nation.  The same fraud is being committed in Europe.

The problem is that the old game is running out of rope, as the people have figured out that it doesn’t work any more.  Their purchasing power is in the toilet, stocks are starting to sink under the pressure of the fraud, spreads are blowing out in the credit market (again) as traders are (correctly) surmising that there’s no way they’ll get paid and recognition is starting to dawn on people that the first guy who runs for the door might make it through before the crush of bodies turns into a mash of blood and guts.

There’s no excuse for this folks.  There never has been and never will be.  Fraud is never excusable and it is not a mistake.  None of the participants in this game are innocent nor are they ignorant.

They’re liars and they are undeserving of not only your vote, but also your respect and deference until and unless a confession of sins is made and the truth is brought front and center for public debate.

There’s no indication that any of that will happen and as such I fully expect that before the election the entirety of this fraudfest is going to come crashing down around our heads, much as it did in 2008 — but this time, with central banks having already played their “QE” cards and interest rate games there will be no stopping it.

Make sure you remember who’s responsible for this when you are once again trashed as the economic and financial system come apart – if you see a lawmaker on TeeVee or pontificating in print, they’re responsible and should be held personally to account — irrespective of which major party they hail from.

You have to remember, these are the folks who said we’d have no Federal Debt by 2010 – in 2000.

Now they’re saying this:

CBO expects that the recovery will continue but that real (inflation-adjusted) GDP will stay well below the economy’s potential—a level that corresponds to a high rate of use of labor and capital—for several years. On the basis of economic data available through early July, when the agency initially completed its economic forecast, CBO projects that real GDP will increase by 2.3 percent this year and by 2.7 percent next year. Under current law, federal tax and spending policies will impose substantial restraint on the economy in 2013, so CBO projects that economic growth will slow that year before picking up again, averaging 3.6 percent per year from 2013 through 2016.

Ok, that might be realistic if we were to look only at the recent past.  After all, GDP from 2000-2010 expanded at a compounded annual rate of approximately 4.1%.

But here’s the problem with this projection: It assumes that the debt ponzi will fade.  See, from 1990 to 2010 GDP expanded at 4.8% annualized, but debt was expanding faster, at 7.4%.  So the real rate of expansion was in fact negative.

If the recovery continues as CBO expects, and if tax and spending policies unfold as specified in current law, deficits will drop markedly as a share of GDP over the next few years. Under CBO’s baseline projections, which generally reflect the assumption that current law will not change, deficits fall to 6.2 percent of GDP next year and 3.2 percent in 2013, and they average 1.2 percent of GDP from 2014 to 2021. Those projections incorporate the effects of the deficit reduction measures in the recently enacted Budget Control Act of 2011; they also reflect the sharp increases in revenues that will occur when provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 tax act) expire.

Look at those “ifs”.

IF the economy AND GDP expands, even though at the end of this year (current law) the payroll tax credit expires and then in 2012 the entirety of the Bush tax cuts expire, and none of that reflects back into GDP (the total of the two in terms of deficit spending, incidentally, is well north of 3% of GDP, as they total to more than $500 billion!) THEN these projections are credible.

The problem is that there’s 30 years of history that says this can’t happen.  If the government actually cuts deficit spending to 3% of GDP by 2013 GDP will contract by a minimum of 10%, and more likely by a figure closer to 15%.

This in turn will trash both unemployment and tax receipts.

How CBO can publish this sort of trash with a straight face is beyond belief.  Given their record of ignoring the mathematical facts in evidence from the 2000-2010 time frame, at which point their projections were trivially able to be dismissed as an outright farce, one wonders how these jackasses sleep at night.

I’m sure this will give cover to the government thinking it’s “doing just fine”, but the fact of the matter is that none of the “Ifs” in that paragraph up above will happen in combination with economic expansion, because it simply can’t.  At present the government is providing roughly 12% of GDP in deficit spending.  For this to fade over the space of two years and yet produce a 3% growth rate actual private production would have to expand at an approximate 9% annualized rate.

Of course the CBO places all sorts of disclaimers in their page, and notes that the tax code changes scheduled to take place are going to have a major impact should they actually come to pass.  What they’re not saying, but should be, is that if those come to pass, or if spending reductions take place, either mathematically must hit GDP, simply because GDP is the sum of consumption, net investment, government spending and net exports.  Either reducing government outlays or increasing taxes must hit one of these categories dollar for dollar, and thus must directly impact their GDP projections.

The CBO’s projections are a public disgrace as they intentionally ignore third-grade arithmetic. 

As a consequence it is entirely fair to call those “projections” a fraud upon the public.