FedUpUSA

Most people fail to understand basic mathematical concepts such as exponents and ratios as they apply to everyday life.  We usually “get it” when it comes to the mathematical facts that are taught in school (if we passed through basic Algebra) but nobody in our government schools ever teaches how these functions apply to the real world.

The reason they don’t, I assert, is that the educational establishment from the government itself on down knows full well how these functions relate to everyday life, and they also know that if you understood these facts there would be a revolution the next morning as you would understand exactly how you have been systematically and intentionally robbed by the mavens of finance with not only the consent but the active participation of your government.

With that in mind I wish to present two pieces of data today.  The first is “average hourly earnings”, which is  from the St Louis Fed, and the second is the total systemic debt, public and private, taken from the Fed Z1.

Why the second as a point of comparison?  Because as I have repeatedly pointed out “credit” (that is, debt on the other side of the balance sheet) spends exactly the same as does currency (emitted money.)  Therefore, when one compares earnings power in real terms one must look at the denominator that is in actual use, which is that currency + credit.

Over the last 30 years, from 1980 to today, the average production and non-supervisory employee earnings have gone from $6.61 to $20.09 (not seasonally adjusted.)  We will use the September 2012 cut-off for this because that’s where our Z1 data ends (for another few weeks), which is $19.83.

This is an almost-perfect triple, which sounds great at first — you’re making three times as much, per hour, today as you were in 1980.

But how far does that money go?

In January of 1980 (in other words, the end of Q4 1979) the total systemic debt was $4.274 trillion.  Were that to have tripled, that is, your purchasing power was to remain exactly constant then systemic debt would be about $12.82 trillion.

It is in fact $55.358 trillion, or 12.95 times greater.

Now to be fair we adjust for the population change.  It has gone from ~227 million to about 314 million; roughly a 38% increase.  In other words on a per-person basis the increase in debt has been a bit over 9x.

You got 3 of the multiples in increased dollars in your paycheck.  You went backwards at three times the rate of “nominal” acceleration unless you were somehow able to glom some of the debt cycle “profits”, all of which were factually illusory.

This is what “drove” you into the stock market.  It is what “drove” you into “investing” rather than saving. But since you can only pick up small crumbs even if you do so, and even if you’re right more often than wrong, the fact remains that you are still behind.

Who stole your purchasing power via this mechanism?

That’s simple — the 0.01%.  The Wall Street Banks.  The politicians.  Their friends.

Everyone but you.

But — but — but you say, how about since 2006?

Ok.  2006, incidentally, is when the BLS started tracking all employees, not just non-supervisory ones. At the end of the first quarter of 2006 the average hourly earnings were $20.38.  Again, as of 10/1/2012 (last update for the Z1) they were $23.55, or an increase of 15.6%.

At the end of the first quarter of 2006 systemic debt was $43.16 trillion.  As of the end of the third quarter of last year it was $55.36 trillion, as noted before,an increase of 28.3% while population only increased about 5% during the same period.

In other words you are still going backward and in fact your hourly earnings are decreasing in purchasing power terms and have been since 2006, just as they have been since 1980.  In fact GDP has “increased” by 20.1% over the same period (2006-Q1 to 2012-Q3) yet debt has gone up by 28.3% (22.2% population-adjusted), which means that GDP has actually declined in real terms on a per-capita basis over that period, not advanced.

The so-called “increase” in your wages are an intentional chimera which is thrown to you to make you “feel good” about your earnings “going up.”  But in point of fact they’re not going up at all, they are going down because the divisor, the total number of dollars in the system that are available to buy the goods and services are rising much faster than your earnings are.

The fraud you’re being sold is exactly identical to going into a bakery and ordering a sheet cake.  The baker asks you how many pieces you would like the cake cut into; your options are 2, 4, 8, 16 or 32.  He then tells you that if you’re really hungry you should choose 32, because that way you can eat more pieces.

You’d either laugh at the baker or string him up by his necktie were he to pull that crap, yet this is exactly what Ben Bernanke along with all the politicians have been selling you for the last 30 years.

Incidentally the S&P 500 stood at about 107 at the start of 1980.  If it increased at the same rate as systemic credit it would stand at 1385, which is not all that far from where it actually is.  “Greatest Bull Market in History” or outright fraud due to credit manipulation by a 0.01% of the population who have systematically and intentionally lied to you while skimming off 90+% of the so-called “gains” of said “bull market”, leaving you with scraps — if you’re fortunate enough to be able to participate at all.

There is no answer to these problems found in “redistribution” or “entitlements.”  There is only one answer available, and that is to stop inflating the monetary system through fraudulently unbacked emission of credit and remove same from the system, forcing those who unjustly stole your effort to eat the losses that will ensue and go bankrupt, deflating the price level and restoring balance to the economy so that your purchasing power is also restored.

Would doing that result in a large amount of short-term economic pain?  You bet it would.  But that pain would fall disproportionately on those who stole from you in the first place, exactly as it should.

There is no other means by which you can restore your purchasing power; all other schemes to “increase credit”, “increase lending”, “lend support through QE” or “tax and redistribute” will simply steal more through the exact mechanism that has been used to rip you off thus far.

I can understand how someone might not “get it” when it comes to how they’ve been robbed if it has not been clear to them, and they simply didn’t know where to look to find the truth.  But after seeing this (and verifying it for yourself, which is not very hard), exactly what excuse do you have for continuing to play the puerile game run by both the banksters and the politicians of all stripes?

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)