Wednesday, August 11, 2010

The Financial Circumstances of the U.S. Federal Government

The Financial Circumstances of the U.S. Government are much much worse than can be comprehended.

“The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.... closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” - section 6 of above link

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

You just can't make this stuff up. The Keynesian nit-wits on the Left were, in fact, assisted by some rather small brains on the Right (War on Drugs, surging prison populations, disastrous wars...) to put us in the soup.

I swear to you that with every fiber of my being that I am convinced that there is no macro solution for this (or none that will be effected within the time period required). And not knowing the irrational, knee jerk(0ff) policy responses or their unintended consequences we cannot know when, exactly this current deflationary will turn into the inflationary blow off.

What a shame that our founders were unable to secure the nation sound money... and what a shame FDR was ever born.


bureaucrat said...

And now the other side of the equation, as told to you by a real, live Federal employee ...

Hank Paulson dragged 14 or so bankers into a room in 2008 and told them that, in order to save the banking system, they would sign a piece of paper saying they would accept money to balance their books enough to prevent a financial Apocalypse from happening. And, for all the plusses and minuses, the ATMs all still work.

So do you all think for even ONE minute that, when the time comes, when we are 3 inches away from hitting the wall, that the government won't ask you a simple question ...

"What will you do to save your country?"

The "Hank Paulsons" of the Federal government will say, loudly and proudly ..

"80% of the Federal Budget goes to Social Security, Medicare, Medicaid, Interest and Defense"

Effective immediately, social security benefits will be cut by 50%, Medicare will make ALL bills from all vendors subject to 30-day waits to be reviewed before payment, and near-dead people will not be allowed endless spending (cutting payments easily by 50%), the Defense Dept. empire will start to shrink tomorrow, and all Americans will be forced to put 10% of their IRAs in Treasury Mutual Funds."

(or something like all that)

"That is what has to be done to save out country, to save us from becoming another province of China"

And with that, just as with 9/11 and Pearl Harbor and all the other catastrophes of history, the American people rise to the occasion, stop watching "America's Got Talent" on TV, stop spending money they don't have, and change drastically ... because we have to.

I am a $100,000 a year Fed. I am supposed to get a $3,400 per MONTH pension at age 57 when I retire, plus health, plus a sizeable 401k.

You think for a minute I'm ACTUALLY gonna get all that? I don't, so I'm planning not to.

Have a little more faith in ourselves. We will not all die from some common sense financial solutions. We aren't panicking yet, cause there is no reason to ... yet.

bureaucrat said...

The whole reason Obama was elected was as a "cry for help." We thought he was the guy who was going to lead us through this unpleasant deleveraging and contraction process. I even gave his campaign $500 cause I believe this would be the guy! Sadly, he surrounded himself with Keynesian pump-primers and other war-mongering dolts, and is now in over his head. Sad.

PioneerPreppy said...

Of course the government will try to cut medicare spending, social security benefits, even food stamps etc.

While they continue to give raises to federal employees, give aid to states to pay teachers. Of which Education is the countries overall largest single expenditure and predominately NOT filled by anything male.

Those who benefit from these cuts in one area to pay the other hope the other guys will pitch in. Personally I don't think it's going to be that simple or easy anymore.

In the past those who really shouldered the burden for this country felt like they were doing so as a part of it. Before family courts took all their wealth, before affirmative action left them jobless, before stimulus money went everywhere except to "white male construction workers".

America today has turned into the proverbial lonesome wall flower. It decided to dance with everyone except "the one who brought them". Now we are all paying for it and the bill isn't even remotely settled.

Dextred1 said...

Life is unfair. That’s THE conservative philosophy. Now’s the time to find out whether you can really stomach that or just like waving flags around.

The government stole your money and it isn’t there anymore, so they can’t pay you back. Ever. Just like Madoff.

The sooner we all face reality the

Link to SSA saying it is not a ponzi scheme. Just a note, if you have to say you’re not something, you probably lying.

Anonymous said...


Interesting comments. Let's see, the government makes promises it can't keep. You are fully OK with the lies and expect the solution to be more government. Or, am I missing something??


Coal Guy

Anonymous said...

Bur said-
"What will you do to save your country?"

I'm not sure there is a country left to save. The levels of atomization and polarization have reached such extremes that the nation may just fall apart under crisis conditions.

Here is Dmitry Orlov on present social and cultural collapse of the USA-

"Hints of political collapse are starting to emerge as local political machines and systems of patronage break down due to lack of money. Social and cultural collapse have already run their course to a significant extent, leaving many people completely isolated, their only contact with the rest of humanity mediated by a glowing electronic screen of one sort or another. There are numerous people all of whose relationships are based on commerce, and evaporate as soon as their money runs out, stranding them in a social landscape about as hospitable as the surface of the moon."

One hard wind and the USA may be no more.


Donal Lang said...

Very good post Greg. No Government can afford to take the measures outlined. Cutting benefits almost becomes irrelevant with this scale of debt, and its not just Gov't debt; its overvalued real estate, personal debts, corporate debts, overvalued companies, banks with unassessed losses on collateral,and let's not forget all those inventive 'financial instruments' lurking in the financial sewers.

I'd say the administration has no choice but to keep going; its either going to be ok (long drawn out recession, decline in dollar wipes out international value of debt), or it'll hit the cliff at full speed.

No Gov't votes to reduce expenditure. Expect to see drastic measures like seizing gold (again), taxing pension pots, big rise in death duties, asset taxes, maybe even VAT.

Welcome to the Real World!

Anonymous said...


It seems the debt in the UK is higher as a percent of GDP than in the US on most all fronts. It doesn't seem that all those taxes helped much.

Coal Guy

Greg T. Jeffers said...

Once a pyramid scheme has begun, the end of the scheme is known. I know this sounds blasphemous BUT... perhaps the best course of action IS to keep the party going as long as possible... especially for rich guys and gals in their 50's and 60's...

Donal Lang said...

CoalMan; I agree. But three differences; this new UK Govt is slashing spending, yours isn't, and, most of our debts are 'out there' and acknowledged whereas you guys have been hiding your collective heads in a sand dune, and lastly, we are still almost self sufficient in North Sea oil (although declining fast) whereas you guys........

I'd add one other thing; the £ sterling is floating, so bad news drives the value of the Pound down and our exports are growing, especially to China and India. The dollar is set high (maybe 40% too high) because its the reserve currency, so you can never become truly competitive for exports and your trade balance is appalling, especially with China.

Yes, we're in trouble. But you guys.....!!!

Anonymous said...

They'll probably end up doing what most developed countries are doing now: Raise taxes and cut benefits. It means hard times are ahead. Death rates will increase and birth rates will decline, the standards of living in the US will erode, skilled laborers will leave the country to look for work. Blame it on FDR? That doesn't do much good, he's already dead. That $1 trillion Iraq war didn't help anything. People are going to have to be responsible for their own future and not depend on social security, which is what most sensible people in their 40s and 50s are doing now. If you have a better solution, please propose it, you're not telling people anything they don't already know.

Greg T. Jeffers said...

Anon @ 9:13

Please register or use a nickname so we know who we are talking to.

All goo points EXCEPT the $1 trillion spent on the wars...

If you read my stuff you know that, while not strictly pacifist, it would take something pretty outrageous for me to support hostilities...

$84 TRILLION in unfunded social program liabilities are the issue. The Defense budget is indefensible, but the transfer payment liability is just so large the most cannot get their minds around it. People think we are just kidding...

tweell said...

Excellent summing up of the current US financial situation. Congress isn't even planning on making a budget, let alone sticking to it, and America's credit card has a very high balance on it.