Friday, June 12, 2009

NYT: America's Red Sea of Ink Was Years in the Making

I am always bemused when we hear one party blame the other for deficits; both parties have a focus on the short term (helps to get elected, make people happy, and pay back the large corporate donors) without care for the long term. Sure there are a few souls who care, but they seem to get lost in the blather of D.C. In the meantime, in just the last year alone we've added a staggering $55,000 in obligations for each household in America and now we each owe half a million; even if we did not build up a penny more of debt and 0% interest on our debt. [May 29, 2009: In 1 Year U.S. Taxpayers on Hook for $55,000 More per Household] Just wait until you see how much you owe in about a decade.

We've gone through a litany of our long term obligations many times on the blog, along with all the new debts we've added to bail out the financial oligarchs... err, save the economy [Mar 31, 2009: Financial Rescue Pledges Now $12.8 Trillion] because if you don't make bondholders of banks 100% whole on the dollar - the economy dies. I never have even touched the lesser issues i.e. the fact that taxes such as the AMT, which was intended to capture a tiny slice of the citizenry is ensnaring huge swathes of the middle to upper middle class. Just reversing that alone on an annual basis will take a tremendous hit - and that's one of our easiest fixes (which we won't address).

[Nov 23, 2008: David Walker in Fortune Magazine]
[Aug 7, 2008: I.O.U.S.A. Movie Trailer]
[Jul 28, 2008: US Budget Deficit to Half a Trillion]
[May 23, 2008: David Walker on CNCB this Morning]
[Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears]

Anyhow as I peruse the internets I see these issues are just the concern of a select few, and most are just out to "get theirs", and try to profit from paper printing prosperity. Understandable - who cares about the future anyhow. I will post these just so they are here when some soul stumbles on them in 2015 and wishes these alarming numbers were all we had to worry about.

Keep in mind, in my 2009 Outlier Predictions [Dec 16, 2008: 13 Outlier 2009 Predictions] I wrote

Consensus is that the United States will face it's first trillion dollar deficit in budget year 2009 (Oct 1, 2008 - Sep 30, 2009). That is excluding the war since we don't consider the war an expense but much like our banks an "off the balance sheet" accounting "figure". The largest postwar budget deficit has been $413B in 2008; hence consensus says we are about to do 2.5x the largest previous record. I say it will be 5x the previous record and not only will we have our first $1 trillion deficit, fiscal 2009 will be so poor we will have a $2 trillion deficit.

Within weeks of that piece the CBO came out with [Jan 7, 2009: CBO Projects $1.2 Trillion Deficit in 2009]

Who should you of placed your chips on? The CNBC pundits? ($1 Trillion)? CBO ($1.2 Trillion)? Or that grassy knoll blogger who keeps a trade in 'creating doom and gloom out of green shoots' aka reality. You can guess which will be the most accurate. Rhymes with Tea.

Folks, I am but a simple man with a simple (solar powered, $2.99) calculator. I don't have an army of federal workers with platinum benefits working 40 hours a week in an office like the CBO to crunch these numbers in a sophisticated way with their so called "computers". But one advantage is I don't drink Kool Aid as my daily beverage of choice... by not doing so I don't live in denial and I could see receipts would plummet and expenditures would soar. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] [May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States Do you realize how much money our country could save if I took over the entire CBO? Not sure how big their office is ... but I digress. (to be fair, the CBO is one of the "better" federal organizations)

So with 4 months to go in our fiscal year we already sit right at $1 Trillion.
  • The federal budget deficit soared to a record for May of $189.7 billion, pushing the tide of red ink close to $1 trillion with four months left in the budget year.
  • As a share of the overall economy, the deficit this year would be the highest since 1945, (what happened then?) when the government was borrowing heavily to win World War II. (oh; well now we have the war on financial oligarchs losing net worth - I'd rank them equally important)

CNBC pundits from last fall - you're wrong again. That said, when can we reschedule you for more insight about the future without talking about how you've been wrong on almost everything for 2 years? Just make sure you end the segment with "stocks are for the long haul and always end up being the winning play" and "I'm bullish". This April was the first April since the early 80s that in the month the US gets tax monies it ran a deficit. May? We're rocking the house... a staggering $190B deficit.

I need to stop here. $190 Billion. Folks, the worse year before this was last year - at just over $400 Billion*. For a year. We almost did half that in 1 month in 2009. People are numb to the numbers; they are staggering.

*some things, like war spending were kept off balance sheet under the Bush years, so perhaps it was closer to $500 Billion in "non Enron" accounting.

Now perhaps the green shoots of prosperity will reduce the monthly deficits to something like $150B a month the next 4 months (I doubt it); I think we have a great chance of $200B a month from here until September. But let's say it's going to be $1.7-$1.8 Trillion for the fiscal year. That's impressive considering our entire debt is $11 Trillion. And our entire economy is $13-$14 Trillion. We done good; overachievers.

And don't expect any serious improvement next year.


I saw this piece by David Leonhart over at the New York Times dividing the "blame" if you will on how we got here. Since each time you bring up the G word, and the D word the banshees come from the heavens to attack, I thought this was a quite fair piece. Even if it comes from a "liberal rag" (not my words, I got them straight from FOX News). Truth is we are all to blame to some degree. Because we let the fearless leaders take us down this path... and we live in dogma infested waters.

Basically it breaks down how we "got here" via 5 categories...

Read on, unless you just want to find a way to make money in the next 24 hours ... then this is inconsequential. Unless you have kids I suppose.
  • There are two basic truths about the enormous deficits that the federal government will run in the coming years. The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.
  • The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years. ($2 Trillion swing)
  • You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.
  • (1) The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.
  • (2) About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt. (trickle down economics - boo yah)
  • (3) Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing. (no bailouts here... Main Street = Wall Street)
  • (4) and (5) About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas. (let's revisit this in about 1 year) If the analysis is extended further into the future, well beyond 2012, the Obama agenda accounts for only a slightly higher share of the projected deficits. How can that be? Some of his proposals, like a plan to put a price on carbon emissions, don’t cost the government any money. Others would be partly offset by proposed tax increases on the affluent and spending cuts. (again, let's revisit in 1 year)
  • Alan Auerbach, an economist at the University of California, Berkeley, and an author of a widely cited study on the dangers of the current deficits, describes the situation like so: “Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it." (fair statement) “And,” he added, “not fixing it is, in a sense, making it worse.”
  • The Medicare budget really is the linchpin of deficit reduction. But there are two problems with leaving the discussion there. First, even if a health overhaul does pass, it may not include the tough measures needed to bring down spending. Ultimately, the only way to do so is to take money from doctors, drug makers and insurers, and it isn’t clear whether Mr. Obama and Congress have the stomach for that fight. (no way that happens - that would hurt one of the largest lobbyist groups) So far, they have focused on ideas like preventive care that would do little to cut costs.
  • Second, even serious health care reform won’t be enough. Obama advisers acknowledge as much. They say that changes to the system would probably have a big effect on health spending starting in five or 10 years. The national debt, however, will grow dangerously large much sooner.
  • Mr. Orszag says the president is committed to a deficit equal to no more than 3 percent of gross domestic product within five to 10 years. The Congressional Budget Office projects a deficit of at least 4 percent for most of the next decade. Even that may turn out to be optimistic, since the government usually ends up spending more than it says it will.
This is a favorite take away line from the piece and pretty much sums up our issues with only have 2 (almost identical by this point) "captured" parties...
  • So Mr. Obama isn’t on course to meet his target. But Congressional Republicans aren’t, either. Judd Gregg recently held up a chart on the Senate floor showing that Mr. Obama would increase the deficit — but failed to mention that much of the increase stemmed from extending Bush policies. In fact, unlike Mr. Obama, Republicans favor extending all the Bush tax cuts, which will send the deficit higher. (ah but if you just cut taxes - perhaps to 5% for everyone we will grow out of these problems. 0% taxes might generate even more revenue. Cutting spending? Nah. Just make the solution into a 10-15 second sound bite. Sophisticated massive problems are generally solved by sound bites that are half the length of a typical commercial break)
And...(more solutions)
  • Republican leaders in the House, meanwhile, announced a plan last week to cut spending by $75 billion a year. But they made specific suggestions adding up to meager $5 billion. The remaining $70 billion was left vague. “The G.O.P. is not serious about cutting down spending,” the conservative Cato Institute concluded. (another of my favorite tactics, talk in sweeping generalizations - "we'll cut all that pork!" while coming through with specifics that are meager. Because being specific means you upset someone... and if you upset someone, you might lose a vote. So everyone must be made happy because 'representative' is now a career choice, unlike what the founding fathers had in mind. Kick the can. Kick it hard. Kick it long. Just keep kicking until you take us all into a brick wall)
What, then, will happen?
  • Either a solution will be put off, or foreign lenders, spooked by the rising debt, will send interest rates higher and create a crisis.
  • The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else, or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.
It will be an interesting decade ahead. In the meantime, back to the gambling hall and watching futures rise pre market as they do 8 out of every 10 days...

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