FedUpUSA

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.

File this in the “no, really?” box:

With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.

So let’s see…. if you buy bonds today there’s a chance you could lose some of your money, or there’s a chance you could lose a whole lot of your money.

That sounds comforting, doesn’t it?

But it’s the next sentence that ought to make you sit up in your chair:

Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States.

Right.

This is what history tells us.  It is also what I have been trying to amplify now for the past three years.  The reason is this graph:

What I find amusing is that the CBO is flapping its jaws over only the government’s liabilities.  It, by the way, is also looking only at the debt held by the public (and not the games played with FICA and Medicare):

Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections through 2020 (with adjustments for the recently enacted health care legislation) and then extending the baseline concept for the rest of the long-term projection period. The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.

It never ceases to amaze me that Congress and others will flap on about this (as CNBS is this morning, as they have many mornings), but none of them want to talk about the real gorilla in the china shop that is blasting everything in sight – that’s this graph:

That’s total systemic debt compared to GDP – both public and private.  The breakdown looks like this:

See that nice pink slice at the top?  That’s all the federal government is responsible for. 

So…. why are we focusing only there again?

Oh, maybe it’s because we don’t want to talk about the rest – especially not on “business pump-monkey” television that is sponsored by all the big businesses that CREATED this crap-pile of trouble, which incidentally is focused in the following areas:

• Household credit.  That’s “bigger mortgage, bigger house” BS.  It’s “A Lexus and a BMW in the driveway, so long as I can barely make the payments, because that makes me speshul”, driven, of course, by the advertising revenues on that same pump TV.

• Non-financial business credit.  This is the “small businesses need to go broke faster with their credit cards” game.  It’s the “borrow your money, rather than make it” to expand your business.  It’s “growth at any cost, whether you can actually make a profit after all the stripping of your money by the very same big banking and business interests that run that very same pumptastic media.

• And, of course, the big daddy, Financial Instruments.  That’s all the fun stuff.  It’s the banks “creating money” – well, not really money.  The illusion of money.  The naked short of unbacked credit issuance against nothing at all.  And of course these very same pumptastic crap-spewers on our airwaves are all companies that have a very, very vested interest in seeing that bubble continue.

The problem is, it can’t.

Oh sure, government has tried.  It has spent and spent and spent, none of which it had, in a puerile and futile attempt to avoid truth-telling – that the above three sectors of the economy must shrink dramatically or our economy is headed straight for a collapse.

Indeed, what history tells us in both Iceland and Greece is that it is precisely when a captured government tries to protect the above three sectors of borrowing from the just desserts of their foibles that a sovereign debt crisis erupts – at least in modern economies.

In one sentence: Wake the hell up America.

The Market-Ticker