$71 trillion National Debt?

I have been reading ShadowStats analysis of the Federal Government 2009 Balance Sheet using GAAP accounting, and the author, John Williams, thinks that the total debt should be shown as $70.7 trillion. His numbers come from the following: 1) total liabilities of the fed. gov. of $14,123B as of 9/30/09; 2) "closed group" of Social Security participants present value of $52,145B; and 3) total intragovernmental debt of $4,391B; totalling $70,659B. (By the way, the "open group" present value total, which also includes future participants is only $45,878B because future participants will pay more in taxes than they will get back as benefits).

What I want to know is why they show unfunded SS liabilities of $52T when the Social Security Trustees show unfunded liabilities of only $5.3T. Part of the difference is that the "closed group" number shown above includes Medicare, but that is still an enormous disparity.

One guess is that the total present value of Social Security only is -$7,677B. Of this, $2,296B is "funded" with Treasury bonds, leaving $5,381B unfunded, which is close enough to the $5.3T number.

Even the $71 trillion does not include liabilities from the Federal Reserve or Fannie Mae/Freddie Mac. I'm going to have to think about this, but it appears that I will need to recalculate again what I am now calling the "expanded national debt".

Edit: I think the Total Federal Obligations column from the report is inaccurate because it includes both the closed group total and intragovernmental debt. Some of the intragovernmental debt is dedicated to paying Social Security obligations, so including both is double counting. So a better number is probably "GAAP Fed. Negative Net Worth", which is the total net position from the balance sheet, plus "closed group" unfunded liabilities. This figure is as follows:

Year NNW Change
=== ==== =====
2009 $63.6 $4.3
2008 $59.3 $5.0
2007 $54.3

The next steps would be to figure out when this becomes unsustainable, and to project out to that point.

The CBO's bleak projection

The CBO just produced a new report called "The Long-Term Budget Outlook". Under the "alternative fiscal scenario", they say that after 2020 "the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels", and that debt as a share of GDP would reach 185% by 2035. (For this purpose they define debt as including only debt held by the public).

The alternative fiscal scenario assumes that "most of the provisions of the 2001 and 2003 tax cuts would be extended", which is unlikely. However, I doubt that the repeal of those provisions, which will kick in in 2011, will bring as much revenue as they are projecting because of the recession we are in. The scenario also assumes that "spending on activities other than the major mandatory health care programs, Social Security, and interest would fall below the average level of the past 40 years relative to GDP". This is also unlikely, since Congress loves to spend money.

I think that neither of the scenarios they present is realistic. They should use the revenue figures based on the repeal of the Bush tax cuts, but lower them slightly to account for the recession. Then they should assume that spending will continue as it always has and maybe even increase slightly. This would produce something like my 2028 projection.

Creative Destructionism

The deflationists believe we will have years of deflation because of the credit freeze. Banks are still loaded with bad debt and viable borrowers are difficult to find. While I understand the similarities with the Japanese experience (massive fiscal stimulus, zero interest rate policy, low inflation, and stagnation) I believe the situation will be different here.

That difference is that we are cleaning up our mess whereas the Japanese, perhaps because of cultural reasons, let bankrupt (zombie) companies and banks stay alive. This tied up capital in unprofitable businesses (malinvestment), and new capital was not able to be directed to entrepreneurs and profitable companies.

While we may be going at it slowly, America has a rich tradition of failure, foreclosure, and bankruptcies which acts as a cleansing mechanism to rid the economy of malinvestment. This is what Joseph Schumpeter referred to as “creative destruction,” or the process by which capitalism corrects its mistakes. This process is occurring here, but the problem is that the process is being slowed down by government policies that prevent bankruptcies (mark-to-make believe, extend and pretend, delay and pray, and TARP, TALF, Cash for Clunkers, and housing subsidies).
--http://www.zerohedge.com/article/will-we-have-inflation-deflation-or-hyperinflation-part-4-final

I concur wholeheartedly. Let the foreclosures and bankruptcies happen. Delaying them only delays the recovery, and any government funds spent propping up zombie companies will be wasted.

New Prediction: we have until 2028

The good news is that I think we have a few more years before the financial collapse I see occurring. My new year is 2028, and my figures are as follows:

Year Debt GDP %
==== ===== ===== ===
2009 11,910 14,273 83
2010 13,410 14,563 92
2011 14,866 14,927 100
2012 16,109 15,300 105
2013 17,330 15,683 111
2014 18,780 16,075 117
2015 20,480 16,447 124
2016 22,511 16,889 133
2017 24,806 17,311 143
2018 27,382 17,744 154
2019 30,392 18,187 167
2020 33,823 18,642 181
2021 37,426 19,108 196
2022 41,210 19,586 210
2023 45,182 20,075 225
2024 49,354 20,577 240
2025 53,733 21,092 255
2026 58,332 21,619 270
2027 63,161 22,159 285
2028 68,231 22,713 300

Notes: 1. These numbers are much more optimistic than the previous figures. However, the problem still exists.
2. I'm using dates ending on 9/30 of each year instead of 12/31 as I previously did. It doesn't really make a difference except for the first few years.
3. I'm assuming GDP growth of 2.5%/year, whereas previously I was using 2%.
4. For revenue, I am using the CBO number of 2460 for 2011, assuming 10% growth in 2012-2013, and 5% growth thereafter.
5. For expenses, I am using the CBO numbers through 2020, but adding a 3% cumulative "fudge factor" starting in 2011. I assume that spending will be 3% higher than they project. After 2020, I assume that spending will increase 5%/year.
6. In none of these years does the annual deficit exceed revenue. If this were ever to occur, I think this would be a warning sign of an imminent collapse.

==========================
Update 6/19/2012:

I am labeling this model A-2.  The debt projection seems spot on, but the GDP numbers are too low. I think this model has ongoing validity.

Will tax revenues magically increase?

In a blog entry entitled: Widening US Deficit To Collapse the Dollar , the author, Eric King, points out that tax revenue are projected to vastly increase over the next several years, but he thinks that this is a fantasy.

To look at some hard numbers, according to the CBO baseline, revenues are projected to increase from 2,116B in 2010 to 2,967 in 2012. During this same timeframe, expenses are projected to increase only from 3,545 in 2010 to 3,609 in 2012. If revenues do in fact stall, then this would indicate nearly a $1.5 trillion deficit in 2012.

Johan Galtung see 2020 as the end of the US Empire

From http://geraldcelentechannel.blogspot.com/2010/06/johan-galtung-fall-of-us-empire-and.html

... I made a comparative study of quite a lot of declines of empires. I'm a little bit of an expert on that, actually. And there are certain factors that are similar. They rise and decline more quickly now. Of course, the two Roman empires, the Western and the Eastern, lasted longer. Now it’s quicker. The US started, I would say, in 1898, walking into the shoes of the dying or dead Spanish empire. And we are now dealing with a phenomenon which is about 110, 112 years old. And as I told you, I put the upper limit at 2020.

More quantitative easing on the way?

From http://www.telegraph.co.uk/finance/economics/7852945/Ben-Bernanke-needs-fresh-monetary-blitz-as-US-recovery-falters.html:

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. ...

Gabriel Stein, from Lombard Street Research, said the US is still stuck in a quagmire because Mr Bernanke has mismanaged the quantitative easing policy, purchasing the bonds from banks rather than from the non-bank private sector.

"This does nothing to expand the broad money supply. The trouble is that the Fed does not understand broad money and ascribes no importance to it,"he said. The result is a collapse of M3, which has contracted at an annual rate of 7.6pc over the last three months.

Mr Bernanke focuses instead on loan growth but this has failed to gain full traction in a cultural climate of debt repayment. The Fed is pushing on the proverbial string.

Translation: Helicopter Ben Bernanke thinks the depression can be fixed by throwing even more money at banks. He is going to create trillions in new debt that will do nothing to fix the crisis we are in.

What happens if the Fed quits paying interest on excess reserves?

First, see this article from Forbes predicting that the Fed will quit paying interest on excess reserves:

recent economic data--including the Philly Fed Index, first-time jobless claims and retail sales--are already pointing to a probable double-dip recession. Therefore, the Fed’s next move is more likely an easing than a tightening of rates.
...
The Fed’s likely ease will involve zero interest on excess reserves: Since October 2008 the Fed has been paying interest on commercial bank deposits held at the central bank. But because of Bernanke’s fears of deflation, he will do whatever it takes to increase the money supply. With rates being near zero and the Fed’s balance sheet already at an intractable level, the only viable solution to fight Ben’s phantom deflation fear is for him to remove the impetus on the part of banks to keep their excess reserves laying fallow at the Fed.

If commercial banks stop being paid to keep their money dormant, they will find a way to get money out the door. They may even start shoving loans out through the drive-up window. Banks need to make money on their deposits (liabilities). If they don’t get paid by the Fed, they will be forced to take a chance on the consumer. After all, it has been made clear to them that the Fed and Treasury stand ready to bail out banks’ bad assets at any cost. So why not take a chance once again?
--http://www.forbes.com/2010/06/22/bernanke-fomc-deflation-personal-finance-inflation-depression.html

Next, read an opinion on what will happen if banks start lending out those excess reserves:

The threat to the money supply occurs if banks decide they are comfortable with deploying those excess reserves or lending them out. If this were to happen, it would not increase the money supply by $855 billion; rather it would increase the money supply by some multiple of that. Historically this multiple is conservatively around 7x, which implies a potential increase in the money supply of approximately $6 trillion.
--http://www.scribd.com/doc/20660727/Hayman-October-Letter

Comment: I'm not sure what the author means by "money supply". The money multiplier for M1 has been about 1.6x, until Sept. 2008 when it fell off the cliff and dropped below zero. If all the excess reserves were lent out, they would increase M1 by $1,368B if the ratio returns to 1.6. The current level of M1 is now at $1,700B, so it would suddenly increase by 80%. Even if M1 didn't increase quite this much, it could lead to high inflation almost overnight. This could lead to interest rates rising at least slightly in order to compensate. This in turn could start to burst the government bond bubble, since bond prices are inverse to interest rates, making bonds harder to sell and requiring higher rates, reinforcing the trend. The higher inflation and interest rates would cause the budget deficit to swell even more and ruin the CBO's projections. So this act of reducing interest rates on excess reserves to zero could be similar to striking a match in a forest full of dead trees.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are 79.9% owned by the Federal government and any debts they have should be included in the computation of the expanded national debt. I don't think mortgage-backed securities, however, should be included because they are primarily backed by real estate and any exposure by the gov't would be much less than the face values. Here are the numbers that should be included:

Fannie Mae: 9/30/09, $905B; 12/31/08, $928B, 12/31/07, $839B
Freddie Mac: 9/30/09, $856B; 12/31/08, $882B; 12/31/07, $768B
2007 Fannie Mae & Freddie Mac: 1,607
2008 Fannie Mae & Freddie Mac: 1,810
2009 Fannie Mae & Freddie Mac: 1,738

There is an interview with former CBO director Peter Orszag on 9/9/08 where he says that the GSEs should be included in the budget.

Liabilities including Medicare

I found some good numbers to use for the Medicare unfunded liability. As of 1/1/2009, the amount is $13.4T and the 1/1/2008 number is $12.4T. See the 2009 Medicare Annual Report. I'm still going to leave off Medicare Part D (the drug plan) because I consider it too speculative. Adding this to the equation makes the numbers look like this:

Calculation of the US Consolidated Liabilities as of 9/30/2007 (in billions):
9,008 National Debt
4,769 Federal Pensions
4,700 Soc. Sec. unfunded
11,600 Medicare unfunded
52 Federal Reserve liabilities
-------
30,129 Total
=====

Calculation of the US Consolidated Liabilities as of 9/30/2008 (in billions):
10,025 National Debt
5,319 Federal Pensions
4,400 Soc. Sec. unfunded
12,400 Medicare unfunded
630 Federal Reserve liabilities
-------
32,774 Total
=====

Calculation of the US Consolidated Liabilities as of 9/30/2009 (in billions)
11,910 National Debt
5,284 Federal Pensions
5,300 Soc. Sec. unfunded
13,400 Medicare unfunded
1,051 Federal Reserve liabilities
-------
36,945 Total
=====

The 2008 was an increase of 2,645 or 8.8% over 2007, and the 2009 total is an increase of 4,171, or 12.7% over 2008. By way of comparison, the total tax revenue in FY2009 was $2.7T. I find it interesting that adding Medicare to the mix reduces the total rate of growth. So other debts are growing at an even faster pace than Medicare.

United States Consolidated Liabilities

The pro-government spending crowd wants to minimize the amount of debt shown and focuses on debt held by the public to say that the national debt is only about $8 trillion. The anti-government crowd includes speculative unfunded liabilities to say that the national debt is over $100 trillion.

I think the true figure is somewhere in between and so I present my calculation of the Consolidated Liabilities. This shows my biases, so your calculation may be different. I want to include all the debt that the US government is liable for. I arbitrarily include unfunded liabilities for Social Security, but exclude any amounts for Medicare, simply because I think Medicare is much more likely to be revised.

I also include any liabilities of the Federal Reserve (less treasury deposits). This is because Federal Reserve Notes and bank deposits with the Fed are assumed to be backed by the full faith and credit of the US. Any off-balance sheet bailouts by the Fed will show up here.

Calculation of the US Consolidated Liabilities as of 9/30/2009 (in billions)

Amount Category
====== ======
11,910 National Debt
5,284 Federal Pensions (1)
5,300 Soc. Sec. unfunded (2)
1,051 Federal Reserve liabilities (3)
-------
23,545 Total (4,5)
=====

Notes:
(1) source: http://www.gao.gov/financial/fy2009/09stmt.pdf

(2) source: http://www.ssa.gov/OACT/TR/2009/II_highlights.html. This is called "the present value of the open group unfunded obligation for OASDI over the 75-year period" and is as of January 1, 2009.

(3) source: http://www.federalreserve.gov/releases/h41/20091001/. The number comes from $2.093 trillion in liabilities, less $273B of US deposits, less $769B of US treasury security assets. The treasury securities owned by the Fed should perhaps be subtracted from the National Debt total instead, but this is the cleanest way of calculating it without double counting.

(4) This total excludes any amount for housing securities or housing related debt. The total of this is about $7,784 billion, consisting of the following: Fannie Mae liabilities, $905B; Freddie Mac liabilities, $856B; government-financed mortgages, $813B; government-backed mortgage pools, $5,300B. Sources: http://www.wikinvest.com/stock/Freddie_Mac_%28FRE%29/Data/Balance_Sheet. http://www.federalreserve.gov/econresdata/releases/mortoutstand/mortoutstand20091231.htm.

(5) As noted, this excludes any potential liabilities for Medicare, which could be in excess of $100 trillion. There are additional liabilities that could be included such as FDIC guarantees, student loan guarantees, PBGC, environmental liabilities, etc., but these total less than $1 trillion.

Conclusion: I think this will be a useful calculation, and should be updated annually. So long as the total increases by 10% or less annually, there should be no cause for concern.

===========================================
Update. The 9/30/2007 numbers are:
9,008 National Debt
4,769 Federal Pensions (1)
4,700 Soc. Sec. unfunded (2)
52 Federal Reserve liabilities (3)
-------
18,529 Total
=====

(1) http://www.gao.gov/financial/fy2008/08stmt.pdf
(2) From: http://www.ssa.gov/OACT/TR/TR07/II_project.html#wp105057
(3) From http://www.federalreserve.gov/releases/h41/20071004/. Total Fed liabilities of $838B, less treasury deposits of $6B, less $780B of treasury securities.

=============================================
The 9/30/2008 numbers for comparison are as follows:
10,025 National Debt
5,319 Federal Pensions
4,400 Soc. Sec. unfunded
630 Federal Reserve liabilities (1)
-------
20,374 Total
=====

(1) From http://www.federalreserve.gov/releases/h41/20081002/. Total Fed liabilities of $1,457B, less treasury deposits of $350B, less $477B of treasury securities.

So 2008 increased by $1,845B or 10.0% and 2009 increased by $3,171B, or 15.6%.

========================================================
The 6/17/2010 numbers for comparison:
13,039 National Debt
5,284 Federal Pensions
5,300 Soc. Sec. unfunded
1,229 Federal Reserve liabilities (1)
-------
24,852 Total
=====

(1) From http://www.federalreserve.gov/releases/h41/Current/. Total Fed liabilities of $2,292B, less treasury deposits of $286B, less $777B of treasury securities.

So, YTD the total has increased $1,307B or 5.6%.

Deflation is a good thing

See the latest article by Ambrose Evans-Pritchard, "Gold reclaims its currency status as the global system unravels". His point:

It is certainly not inflation as such that is worrying big investors, though inflation may be the default response before this is all over. Core CPI in the US has fallen to the lowest level since the mid-1960s. Unlike the blow-off gold spike of the Nixon-Carter era, this rally has echoes of the 1930s. It is a harbinger of deflation stress.

Capital Economics calculates that the M3 money supply in the US has been contracting over the past three months at an annual rate of 7.6pc. The yield on two-year Treasury notes is 0.71pc. This is an economy in the grip of debt destruction.

Albert Edwards from Societe Generale says the Atlantic region is one accident away from outright deflation - that 9th Circle of Hell, "abandon all hope, ye who enter".

Yet the markets are already moving on, in any case. They doubt whether the EU’s strategy of imposing of wage cuts on half of Europe without offsetting monetary and exchange stimulus can work. Such a policy crushes tax revenues and risks tipping states into a debt-deflation spiral, as if everbody had forgotten the lesson of the 1930s.

My point: I think you can be afraid of a deflationary recession, or of hyperinflation, but it doesn't make sense to be afraid of both. My fear is hyperinflation, and I don't understand why everyone is so afraid of deflation. When deflation occurs, your dollar is worth more. And if you do need to borrow, interest rates are much lower. And so I think the article is contradictory - if there is deflation, then why would you buy gold?

A little deflation is a good thing. "This is an economy in the grip of debt destruction." Good, we need much more debt destruction. So a few more bank fail. That's a bad thing - if you are a bank, but it's good for everyone else (assuming depositors are taken care of). We can survive a depression. What we can't survive is Zimbabwe-style hyperinflation.

Deflation does require a change in everyone's mindset. Workers need to accept lower wages. Businesses need to ruthlessly cut costs to survive. Governments need to cut programs (oh the horrors!). Everyone needs to either pay back or default on debts. But after a period of deflation, the economy will come roaring back on its own, without the need for artificial stimulus.

Austerity is the watchword of the day. We need more of it. We don't need any more "stimulus" programs which do nothing except waste money on pork projects and encourage even more dependence on big government.

Some good news

I am feeling more optimistic today. The good news is that Obama's out-of-control spending is scaring even Democrats. And the National Debt Clock has been slowing down recently. On 4/30/2010, the debt was at $12.949T, and since then "only" $89B has been added to it. Its too early to celebrate yet, since there are typically huge adjustments made at the end of a month, but the rate of change looks very good. I want to revisit this after the 4th of July weekend.

Since the national debt is still increasing, why is this good news? Well, the global economy can absorb, and may even expect a certain increase in the US debt. We are not only the lender of last resort, we are also the spender of last resort. The problem is not deficit spending, it is out-of-control deficit spending. And for the moment the spending seems to be in control. Any month in which the deficit increases less than $100B is good news. According to the CBO numbers, the deficit from here on out will be about $50B/mo. I don't quite believe that but I am willing to meet them half-way.

So expect an article about July 6 saying something like "2022 Financial Collapse postponed". I don't think that we are totally out of the woods yet and I don't think our financial system is perpetually sustainable. But I am tentatively calling off my 2022 projection.

Home Ownership to Drastically Decrease in America

Here is the latest video from George4Title:

Global crisis in 2014

From: http://www.dailymail.co.uk/news/article-1287271/World-plunged-crisis-2014-Cambridge-expert-predicts-Doomsday.html

A 'Doomsday' moment will take place in 2014 - and will determine whether the 21st century is full of violence and poverty or will be peaceful and prosperous, according to a Cambridge University professor.

In the last 500 years there has been a cataclysmic 'Great Event' of international significance at the start of each century, he claims.

Occurring in the middle of the second decade of each century, they include events which sparked wars, religious conflict and brought peace.

• In 1517 Martin Luther nailed his theses to the door of Wittenburg church, sparking the Reformation of the church and rise of Protestantism.
• 1618 marked the start of the 30 Years War and decades of religious conflict in Western Europe
• That conflict ended with the establishment of the Hanoverians in 1715. They ruled over Great Britain and Ireland, and Hanover (in Germany).
• The enlightened Congress of Vienna took place in 1815, following the defeat of Napoleon, and heralded a century of relative stability across Europe.
• In 1914 the First World War broke out, a catastrophic conflict that would claim millions of lives and set the tone for international discord throughout the 21st century.

Professor Nicholas Boyle of Cambridge University, who carried out the research, has pinpointed the global financial crisis as the trigger for the next 'Great Event'.

And he claims the U.S., with its waning economic influence but unrivalled military power, holds the key to determining the course and character of the next 90 years

Professor Boyle said: 'The character of a century becomes very apparent in that second decade, so why should ours be any different?

Thesis: Professor Nicholas Boyle claims 2014 will mark a significant change in world events

'Partly the timing has to do with the way we divide our understanding of human life and human history.

'If a century is going to have a character it is going to become apparent by the time it is approaching 20 years old, the same is true of human beings.

Read more: http://www.dailymail.co.uk/news/article-1287271/World-plunged-crisis-2014-Cambridge-expert-predicts-Doomsday.html

Comment: He is saying that is century is sort of like a person, and events that occur early in a person's life have a great impact on their whole life. But I don't know where he gets the 2014 date from.

What is the half-life of the National Debt?

Half-life usually refers to how long it takes radioactive elements to decay to half of their previous strength. I am using it to mean how long it takes the debt to double, so it really is the wrong term to use, but it sounds cooler than saying doubling-time.

Mark Year
==== ====
$5T 1995
$5.5T 1998
$6T 2002
$6.5T 2003
$7T 2004
$7.5T 2004
$8T 2005
$8.5T 2006
$9T 2007
$10T 9/2008
$11T 11/2009
$12T 3/2009
$13T 5/2010
$14T 2011
$15T 2011
$16T 2012
$18T 2013
$20T 2014
$22T 2014
$24T 2015

The future projections are my guesstimates. It seems like the half-life is 7 years. So in 2003 the debt was at $6.5T and in 2010 is at $13T. It will reach $26T in 2017, $52T in 2024, and $104T in 2031, assuming hyperinflation doesn't kick in sooner.

2010 US Inflation Report

The group www.inflation.us just released their 2010 US Inflation Report. These are the statements I found most interesting:

If the U.S. reaches a point where nearly 1/4 of projected tax receipts go towards just paying the interest on our na­tional debt, it will be a danger zone that it must do every­thing possible to reverse from. The White House budget is projecting an interest rate on its marketable debt in 2014 of only 4%, but history tells us that artificially high interest rates will eventually be needed to counteract the damage being done today with artificially low rates. By 2014, an outbreak of inflation could cause interest rates on our debt to reach 10%, which based on our likely marketable debt at the time of about $15 trillion, would equal interest pay­ments of $1.5 trillion or 43% of projected 2014 tax receipts of $3.455 trillion.

If the free market was allowed to function, it would persuade Americans into having a savings rate of 10% or higher. The Federal Reserve’s manipulation of interest rates to artificially low levels is preventing Americans from increasing their rate of savings to a healthy level.

NIA considers it to be hideous that CNBC and other mainstream media outlets continue to invite on and give credibility to people like Dave Ramsey. Ramsey calls pre­cious metals, “dumb”, “speculative”, “volatile”, and one of the “weirdest” investments. ... Unfortunately, the majority of Americans don’t think for themselves. They get suckered into believing the financial advice of Ramsey and others who spew the same nonsense.

Eventually the U.S. government will realize that you can’t solve problems that were created by too much debt, but getting deeper into debt at a much faster rate than before. When you have an artificial boom, there needs to be a recession. By trying to avoid a necessary recession by in­creasing government spending through borrowing and print­ing money, the U.S. government is only creating a currency crisis that will lead to the destruction of the U.S. dollar.

The bearish views of Felix Zulauf

Felix Zulauf is a Swiss money manager who, if I understand him right, that the world is in a deflationary cycle that will last from 2 to 5 years. This is caused by deleveraging because countries have too much debt. The central banks are trying to fight this with quantitative easing. And then some shock will occur, similar to the Lehman Brothers meltdown in 2008, and in a flash (although it will take a few weeks), the dollar will lose most of its value, and there will be currency reform. See the link to the audio interview at http://pragcap.com/felix-zulauf.

Here are some excerpts from the interview:
- We have been living in a fiction for the last 20 years or so, in which we thought that we could borrow ourselves into sustainable prosperity
- When an entity has too much debt, it has to borrow more and more to pay interest. We are in that Ponzi-type of scheme. At some point you have to decrease your income because more and more goes to paying interest service on the debt.
- We are in the final end game of the system as we used to know it over the past 70 years. We are entering a deflationary period which is accelarating and the policy makers are trying to counteract it by using highly inflationary policies. We are dancing on a high rope and we don't know for certain which way the dancer will eventually fail - deflationary collapse or hyperinflation.
- The deflationary pressure on our system will intensify. We will come to the point where there will be a Lehman Brothers/AIG/Citi event in one day happening (entities of the same significance). There is no way the banking system can handle it - they will be bust. But the government can not come in again because they are perceived as being bust too. The central banks will step in bigtime and the balance sheets will expand by a factor of 50 or 100. Once that happens, you have virtually in a matter of a few weeks made the currencies valueless and destroyed them. Within a short period of time we will have a currency reform.
- I see this happening in the next 5-6 years. I can't tell you whether this will be in 2 years or in 5 years or in 7 years, but I think we will see it this decade.
- We won't see conventional inflation or hyperinflation over a period of years, but once the central banks come in, it will happen in a matter of a few weeks. Once you come out with a new currency, you eliminate part of the debt. This will be very different from anything we have seen in the last 70 years.
- If you own a bond you will lose money. Owning gold and real estate, like a farm, is a good thing. We are in a transition period.
- The rates on government bonds will reach a low within the next 12 months, and this will be the end of the 30 year bull market in government bonds.

See also: http://beforeitsnews.com/news/79/413/The_world_is_at_a_major_crossroads._Some_countries_are_at_the_end_of_a_dead-end_street.html

To summarize, I will call his view the "2015 flash meltup theory".

Why the deficit can't be cut

According to Keynesian economic theory, beloved by big government spenders everywhere, it is not only harmful but impossible for the federal deficit to be cut. There is an equation known as Modern Monetary Theory which states as follows: private surplus + government surplus - trade surplus = zero; or restated: private surplus - government deficit + trade deficit = zero. (See: http://www.nakedcapitalism.com/2010/06/martin-wolf-austerity-is-risky-business.html)

Currently, there is a trade deficit of about 5% of GDP. And currently the private sector for the first time in a long time is trying to save money and pay back debts, and this savings equals another 5% of GDP. Therefore the federal government must fill the gap by running a 10% of GDP deficit.

The solution to this is to increase exports. But it seems impossible for several reasons for the US to export items in large quantities to China or Japan. Therefore, as long as the private sector insists on saving money, there must be huge deficits to fill the gap. And these huge deficits will continue to accumulate until one day, no one knows exactly when, the whole system will pop.

The Official Projections

The official projections are presented in a document entitled "The Budget and Economic Outlook: Fiscal Years 2010 to 2020". Instead of using Total Public Debt Outstanding, it uses only Debt Held By the Public. The CBO's numbers are as follows. (The GDP was derived by dividing the debt by the %).

Year Debt GDP %
==== ===== ===== ====
2009 7544 14234 53%
2010 8797 14589 60.3%
2011 9785 14985 65.3%
2012 10479 15734 66.6%
2013 11056 16676 66.3%
2014 11556 17616 65.6%
2015 12055 18433 65.4%
2016 12595 19229 65.5%
2017 13133 20050 65.5%
2018 13678 20819 65.7%
2019 14329 21678 66.1%
2020 15027 22529 66.7%

These numbers don't look so bad. So what's the problem?

1. Using only Debt Held By the Public ignores the amounts held by the Social Security Trust Fund and other trust funds. Social Security can't be ignored by calling it an "intragovernmental holding". The balance in it isn't owned by the federal government, it is owned by social security recipients. Is the CBO claiming that the debt doesn't exist because it hasn't been paid yet? Why not just ignore the entire debt then?

2. It assumes that GDP will grow by 4-6%/year, after being adjusted for inflation. I think that the 2% growth rate is much more realistic.

3. It assumes that annual budget deficits will be reduced to 4% of GDP, and so conveniently, debt as a percentage of GDP stays the same. I suppose it is possible that the budget deficit could be reduced to $500B/year, but I think the US will be lucky if they can ever have a year in which the deficit is under $1 trillion.

Conclusion: The government's numbers are unrealistic.

The Pension Timebomb

The biggest component or cause of the financial problems the US will be facing is pensions.

1. To start with, there is Social Security. The current trust fund balance is about $2.5 trillion ($2,539 billion of March 31, 2010 ; source: http://www.ssa.gov/OACT/ProgData/assets.html) and outlays are about $700 billion/year. In 2010, the outgoes are already starting to exceed the income. Unfunded liabilities for Social Security are estimated at about $14.4 trillion. There is a very good article about the problem here: http://www.zerohedge.com/article/social-security-mid-year.

2. Next, there is the problem with Medicare, which has unfunded liabilities of $75.7 trillion. Obamacare isn't going to make this go away, instead it will make this number much larger.

3. The prescription drug program (Medicare Part D) has unfunded liabilities of about $19 trillion. This number seems way too high to me, since actual expenditures in FY2008 were only $49 billion; however, the cost of closing the "doughnut hole" must be enormous.

4. Federal pensions. Unfunded retirement benefits for federal civilian employees and military members are about $5.3 trillion (see http://www.gao.gov/financial/fy2009/09stmt.pdf) . The annual cost is about $120 billion for federal employees and $63 billion for military.

5. PBGC insures the pensions of 44 million American retirees at private companies. The PBGC had a $10.7 billion deficit as of 9/30/2008. Everytime a big company like GM declares bankruptcy, the PBGC ends up picking up the tab for the shortfalls in the company's pension plan.

6. State and local pensions face a $1 trillion deficit ($3.35 trillion owed less $2.35 trillion invested to pay for them; source: http://www.pewcenteronthestates.org/uploadedFiles/Trillion_Dollar_Gap_embargoed.pdf). Although there is no explicit federal guarantee backing up this shortfall, it is inconceivable that the federal government would allow state pension plans to default.

Conclusion: I don't care enough about this aspect of the problem to try to get better numbers. My point is that the federal government is directly or indirectly responsible for paying the pensions of nearly all seniors, with the only exception being small plans that aren't insured by the PBGC. None of these unfunded liabilities are included in the calculation of the national debt. As the bills for these "sacred" promises become due, the national debt will continue to increase.

Greetings!

Welcome to my new blog. The purpose of this blog is to discuss the financial collapse of the United States, which I project will happen about 2022, and how to prepare for it. I will also discuss ways to delay or prevent this from occurring and alternative theories. The term "aftermath" really refers to the aftermath of an atomic blast, and seems appropriate as the devastation that will be caused will be similar.

Why 2022? I have a theory that the maximum debt that the US Government can incur will be about 300% of GDP before it either defaults or hyperinflation occurs. At about this point, the interest paid on the debt will equal 100% of tax revenues (although this depends on interest rates and tax rates), and any futher interest will just be tacked onto the debt causing it to spiral out of control even faster. Beyond this point it should be completely obvious to everyone that any additional debt will never be paid back, and the debt would acquire junk bond status and would require extremely high rates of interest to attract buyers.

The numbers I am using are as follows. Dates are as of 12/31 of each year. I'm assuming that debt increases 3%/quarter and that GDP increases 2%/year.

Year Debt GDP %
==== ===== ===== ====
2009 12311 14235 86.5%
2010 13958 14595 95.6%
2011 15709 14992 104.8%
2012 17681 15292 115.6%
2013 19900 15598 127.6%
2014 22400 15910 140.8%
2015 25200 16228 155.3%
2016 28400 16552 171.6%
2017 31900 16883 188.9%
2018 35900 17221 208.5%
2019 40500 17566 230.6%
2020 45500 17917 254%
2021 51200 18275 280.2%
2022 57700 18641 309.5%

I don't think it is inevitable that this will occur; however, I think this is the most likely scenario if nothing changes. Obviously lots of assumptions are being made here that could be wrong. It doesn't help to be in denial about the problem, nor does it help to be overly pessimistic. We need to talk about the problem, and find ways of dealing with it.

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In related news, which I will add on here instead of making another post, is a recent article by Alan Greenspan about the problem:

“Perceptions of a large U.S. borrowing capacity are misleading,” and current long-term bond yields are masking America’s debt challenge, Greenspan wrote in an opinion piece posted on the Wall Street Journal’s website. “Long-term rate increases can emerge with unexpected suddenness,” such as the 4 percentage point surge over four months in 1979-80, he said.
...
“The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms,” Greenspan said. The “very severity of the pending crisis and growing analogies to Greece set the stage for a serious response.”
...
The swing in demand toward American government debt and away from euro-denominated bonds is “temporary,” he said.

“Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis,” Greenspan said. “Our policy focus must therefore err significantly on the side of restraint.”--http://preview.bloomberg.com/news/2010-06-18/greenspan-says-u-s-nearing-limits-on-borrowing-capacity-restraint-needed.html

Paraphrase: Nobody knows exactly what the borrowing capacity of the US is. When it is reached, interest rates will surge rapidly. Therefore the US shouldn't test the limits and should err on the side of restraint, even if this means reducing spending during a time of recession.

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Update 6/19/12:  Obviously I was way too pessimistic.  I label this model A-1.