For 40 years, the doom and gloomers have said with each recession, "this is it." We are going to collapse. The dollar is toast. We are entering a depression. So, why believe them now? I believe they were right but, terribly wrong in their timing.
Why were they so wrong in their timing? Bottom line, they underestimated the power of debt and deficit spending and central banks working together to keep the financial system going.
In our hearings on TARP, we were told we have to save the financial system or the financial systems and economies of the nations in that system would collapse. I believe they would have. So, the first sign that things are different this time is that the warnings of a total collapse had not been heard from our government before, or at least not since the Great Depression.
We started borrowing $1 for each $1 of GDP growth in 1968. Now, look at the chart of the return we got on that ever increasing debt and at the end, is another sign that is is different this time.
In the article, Global systemic crisis / USA-UK, that chart comes from, is this comment. "....which creates US public debt which is now counter-productive: a borrowed Dollar now causes a loss of 40 cents."
Now, lets look at some more signs from the Presidents own budget. (comment in parenthesis is from another page in budget)
Page 150
Deficit projection President's 2011 budget ...
2010--.556 trillion
2011--.267 trillion
2012--7 billion
2013--7 billion
2014--6 billion (2014... .192 Trillion GDP)
2015--2 billion
2016--8 billion
2017--8 billion
2018--5 billion
2019--8 billion
2020--.003 trillion
President's 2011 Budget Request
Notice how it doesn't improve anywhere near enough before it starts growing worse again. This is another sign that we aren't even projecting our nation getting out of trouble. I don't care how big the GDP is or the percentage of deficit to GDP, it is still a drain. Also, the larger it gets, the more you have to borrow from a world that doesn't want to lend to us as long as we continue to drive jobs, business and investment dollars out of our nation.
We are borrowing about trillion a year. You can't believe that? The debt is only going up .6 trillion or so? Yes, it is true that the new debt is only going up about .6 trillion. The rest is rolling over maturing debt. Here is the Government's own data on what we borrow and most months recently, it has been around 0 Billion or more. Look at the last report they have on their site for the fiscal year Oct 1, 2009 to May 31, 2010 for public debt (the rest of the trillion in national debt is from money borrowed from places like the S.S. and Medicare trust funds called intergovernmental holdings).
Balance Sept. 30, 2009 ,551,862,000,000
Borrowings from the public ,303.534,000,000
Repayments held by the public ,360,577,000,000
Balance May 31, 2010 ,494,419,000,000
Why is that important? Because we have to convince holders of over trillion of our debt (for the first 8 months of this fiscal year) to buy it back or find new lenders to buy it. That is about 0 billion a month that we are rolling over besides the new debt we are taking on. And much of our debt is going into short term debt. On that government site we see how much of our debt is now in short term debt.
Marketable: **************Amount******Ave. Interest Rates
Treasury Bills************,842,293******0.2%
Treasury Notes**********,701,670******2.8%
Treasury Bonds******** 2,542 *******6.2%
TIPS ***********************1,058********2.0%
Total Marketable********,877,563
Nonmarketable**********6,872 ******* 3.6%
Numbers are in millions
Notice how little is in longer term bonds compared to short term debt. Then, think about just a 1% increase in interest rates. For the debt with interest at .2%, that is a 500% increase. If that isn't a "stop" sign, it should be. Yet, if we stop borrowing, and thus, stop spending, we will cause the depression we will have sooner or later, now.
Now look at how much tax revenues interest on debt will consume. (comments in parenthesis are this author's)
2011 Budget request from President Obama
Tax revenue projections
2009... ,105
2010... ,165 ( Interest as percent of tax receipts (8 billion interest in budget projections) 8.6%)
2011... ,567
2012... ,926
2013... ,188
2014... .455 (Interest as percent of tax receipts (6 billion interest in budget projections) 15%)
2015... ,634
2016... .887
2017... ,094
2018... ,299
2019... ,507
2020... ,710 (Interest as percent of tax receipts (2 billion interest in budget projections) 19.3%)
President's 2011 Budget Request
This is not sustainable and the GAO as stated so for years. And, don't forget the CBO says these projections are too optimistic. That may be why one recent analyst says interest on debt will be 28% of tax revenues by 2015. The interest has also been a sign we should watch because the current interest rates are so low, that any return to normal will devastate us. While the President has projected interest on debt going to 15% of tax revenues by 2014, some analysts believe interest will climb faster than expected and it could be as high as 28% by 2014.
In Congressional Testimony, early in June, Bernake was asked if it would take double digit growth for decades to get the deficit under control. He agreed with that estimate. So, now, look at the President's projections for growth in GDP.
2011 Budget Request from President Obama
Table S–13. Economic Assumptions (page 177)
Real GDP, percent change, year/year ............ 0.4
2009... –2.5%
2010... 2.7%
2011... 3.8%
2012... 4.3%
2013... 4.2%
2014... 4.0%
2015... 3.6%
2016... 3.2%
2017... 2.8%
2018... 2.6%
2019... 2.5%
2020... 2.5%
President's 2011 Budget Request
We aren't going to make it to 5%, let alone double digits.
That is like a flashing neon sign we are in trouble as we are a mature economy. A high growth economy like China, has a hard time just getting to 11% or so. We are lucky to get 4%.
Bernanke was also asked if it would take a 50-60% tax rate increase with the top bracket at 88% to make progress with tax revenues. He again, agreed. Then he was asked if the economy would be harmed if we did raise the rates enough to help and he agreed it would.
That leaves spending cuts.
With one in four jobs tied to government spending, we may focus too much on the Federal numbers. It is the cities and states and the number of people they lay off and the spending they cut that hits private sector businesses hard.
InvestmentWatch: I believe this is one of the most important lines in the report they released
We now are borrowing money when we send aid to Haiti. We are borrowing money for the shortfalls in Social Security and Medicare that weren't supposed to have for five or six years. We are borrowing money for unemployment benefits.
Tax revenues for this year are projected to be .2 trillion and .6 trillion next year. While I don't believe they will be that high, lets assume they will be and look at the projections the President has in his 2011 budget proposal. While I don't believe they will be that high, lets look at the projections the President has in his 2011 budget proposal.
2011 Budget
Page 140
Social Security Total, Mandatory outlays ...... 9 Billion
Page 78
Department of Health and Human Services Total, Mandatory outlays 8 Billion
Total Outlays for Health and Human Services for 2011 0.8 Billion
Total Outlays for Social Security 1.6 Billion
Total Outlays for S.S. and H&HS .692 Trillion (66% of tax receipts)
Page 49, food and nutrition programs Total outlay .....4 billion.
Projected Tax revenues for 2011 .56 trillion (10 .16 trillion)
President's 2011 Budget Request
Lets next check Defense, which the President has increased as well and it doesn't include any off-budget spending.
Department of Defense Page 48
Total outlays 8.8 billion
Homeland Defense Page 84
Total outlays .6 Billion
Veterans affairs
Total outlays 3.7
Total for defense (includes Homeland Sec.) and Veterans 6.1 Billion
President's 2011 Budget Request
What about interest on debt next year and the coming years?
Pg 153 of budget (net interest)
2010... 8b
2011... 1b
2012... 0b
2013... 4b
2014... 6b
2015... 6b
2016... 2b
2017... 6b
2018... 9b
2019... 4b
2020... 2b
President's 2011 Budget Request
When you add defense to Social Security and Health and Human Services you are left borrowing the interest on debt. What a sign we are insolvent. The GAO says we owe more than we own as a nation in their 2007 report to Congress, so what do you think the situation is now, 3 years later? What does the CBO (Congressional Budget Office) warn about this in one of their reports to Congress.
CBO report
The Long-Term Budget Outlook
page 15
The systematic widening of budget shortfalls projected under CBO’s long-term scenarios has never been observed in U.S. history.
International comparisons show that the debt projected for the United States under CBO’s two scenarios would also be greater than the amounts that other industrialized nations have accumulated in the post-World War II period.
Page 16
The large amounts of federal debt that would accumulate under each of CBO’s long-term budget scenarios imply that the government would have to spend increasing amounts to pay interest on that debt. The growth of debt would lead to a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.
page 17
As investment was displaced by government debt, GDP would grow more slowly and eventually decline. In the longer run, as the debt continued to grow and unless the interest premium was very large, capital would probably flee the United States, further reducing investment.
Because the textbook growth model is not forward-looking, the analysis assumes that people will not anticipate the sustainability issues facing the federal budget; as a result, the model predicts only a gradual change in the economy as federal debt rises.
In actuality, the economic effects of rapidly growing debt would probably be much more disorderly as investors’ confidence in the nation’s fiscal solvency began to erode. .....All in all, the U.S. economy could contract sharply for a long period.
Page 18
Although an unexpected increase in inflation would let the government repay its debt in cheaper dollars for a short time, financial markets would not be fooled for long, and investors would demand higher interest rates going forward. If the government continued to print money to reduce the value of the debt, the policy would eventually lead to hyperinflation (as occurred in Germany in the 1920s, Hungary in the 1940s, Argentina in the 1980s, Yugoslavia in the 1990s, and Zimbabwe today).
CBO Report to Congress
Is this sustainable? Here is what the Government Accounting office said before this crisis even hit. It too, is another warning sign the road we are kicking the can down, is coming to an end.
...the federal government’s current fiscal policy is unsustainable. Continuing on this imprudent and unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our domestic tranquility and national security.
...Further, GAO’s audit report also included an emphasis paragraph for the 3rd consecutive year noting that the nation’s current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary to address the nation’s large and growing long-term fiscal imbalance.
Government Accounting Office Report to Congress 2007
I have chosen to mostly stick with our own government reports because too many people believe the doom and gloomers are behind all the bad news. Sorry! It is the reality of our own government data and our own accountants reading that data that are behind the signs that signal doom and gloom.
There is no way out and hasn't been for decades. Whether the "doom and gloomers" are right and "this is it," right now, or not, reality says we have or are about to run out of road. It has taken two consecutive bubbles, tech and housing, to avoid a depression. Without another bubble, it is highly probably we have less than a year or two to kick the can further down this dead end road.
When our government says we will lose our standard of living, that means water, sewer, hospitals, clinics, power, police and fire protection, education, and buying power. When it says we will lose our domestic tranquility, that means we will have riots and looting and higher crime rates. Stores will be emptied by the looting and you won't feel safe coming home with groceries if you can get them. Gasoline stations may be closed causing you to walk to the stores and not have fuel for generators.
Don't discount what our own government accountants are saying. They not only say it, but put it in writing and sign their name to it.
You can't avoid it, but you can prepare for it and many of the articles on Financial Sense and other sites are doing that task of giving you the information you need to prepare. Read the signs of the times and get ready for what they are warning us will happen sooner that many believe possible.
