How do I reconcile my newfound optimism on the long-term US economic outlook with my previous mathematical calculation that the system will collapse in about 10 years? Well, I think that the Federal Reserve balance sheet assets, currently about $2.7 trillion, should be subtracted from the national debt. Most of this is invested in treasuries anyways.
I don't have time to do this right now, but if these assets are subtracted and the projections recalculated, it will be easy to show that the debt will be sustainable for at least 20 years, which is my worry event horizon.
Isn't this monetizing the debt? Yes it is and it is sustainable if done in moderation. Which means I have another worry about the Fed assets not increasing more than 7%/year, but maybe we can give them some leeway for a couple of years. (The Fed assets were about $2 trillion as of 1/1/2011, so year-to-date this number is up 35%).
Quantitative easing is a form of theft from everyone who holds dollars. But another way of putting it is that it is a tax on everyone who holds dollars. So this is a tax on the Chinese and on off-shore hedge funds, who should be paying some taxes.
So don't fear QE3. However, I think the Fed has done enough easing for the year and should wait until next year to do any more. (BTW, POMO stands for Permanent Open Market Operations).
Tuesday, May 24, 2011
Sunday, May 22, 2011
ECB goes ballistic on reprofiling
First the news:
http://www.eurointelligence.com/article/article/ecb-goes-ballistic-on-reprofiling-and-strauss-kahn-resigns.html
"The FT reports that Jean-Claude Trichet walked out of a recent meeting chaired by Jean-Claude Juncker in protest at Juncker’s proposals to reprofile Greek debt. FT Deutschland reports this morning that Trichet told finance ministers on Monday night that the ECB would respond to a reprofiling by refusing to buy any new Greek debt instruments (meaning it will not be part of any voluntary arrangement in respect of its own Greek debt portfolio). Furthermore, the ECB would refuse to supply the Greek banking system with any further liquidity."
Now the parody:
Hitler is mad about the Greece Bailout
"%$##@ lazy Greeks!
They have the olympics then think they can sit around and do nothing!
They should be kicked out of the EU.
Then they can just go devalue their currency just like they used to.
If we bail Greece out then what's next?
We will have to bail all the bastards out!
Portugal, Spain, Ireland! The whole lot of them!"
An explanation of the Euro crisis
Summary: The Germans work hard and are getting sick and tired of subsidizing the lazy Greeks. If Greece doesn't exit the Eurozone then the Germans will. The Euro is dead.
Why I am bullish on America again
I doubt if anyone reads this blog. I started it a couple of years ago because of my worries about the economy. Today, despite the continued problems, I am feeling much more positive. Here is why:
1. Europe will default (see previous post). The dollar will be seen as a safe-haven and will be strengthened as a result. Dollar 1, Euro 0. There are no other serious competitors, although the Australian or Canadian dollars might be a good investment.
1. Europe will default (see previous post). The dollar will be seen as a safe-haven and will be strengthened as a result. Dollar 1, Euro 0. There are no other serious competitors, although the Australian or Canadian dollars might be a good investment.
2. There is some truth to my "alchemy" theory (see previous post). Part of this has to do with being monetarily sovereign. But most of it has to do with the unique position of the US in the world. Call it American exceptionalism or being the world's policeman or being trusted by China, but the US dollar's position as the reserve currency is still unique in the world.
3. As long as the dollar is still the reserve currency, the US can handle deficits that will increase the debt by 7% per year. I use this figure because it will take 10 years to double the debt at this rate. $14.3 trillion x 7% = $1 trillion. If the US can reduce its deficit to $1 trillion/year, then it should be sustainable indefinitely. The deficits for FY2011 and FY2012 will exceed this amount, but maybe these can be excused because of the deflationary tendencies they are offsetting. As of FY2013, the deficit is projected to be under the $1 trillion amount. And the Tea Partiers will make sure that the deficit comes under control.
So no worries. I am going to keep this blog alive to comment on some events, but as soon as the deficit drops below the "magic" 7% number, I will close it.
3. As long as the dollar is still the reserve currency, the US can handle deficits that will increase the debt by 7% per year. I use this figure because it will take 10 years to double the debt at this rate. $14.3 trillion x 7% = $1 trillion. If the US can reduce its deficit to $1 trillion/year, then it should be sustainable indefinitely. The deficits for FY2011 and FY2012 will exceed this amount, but maybe these can be excused because of the deflationary tendencies they are offsetting. As of FY2013, the deficit is projected to be under the $1 trillion amount. And the Tea Partiers will make sure that the deficit comes under control.
So no worries. I am going to keep this blog alive to comment on some events, but as soon as the deficit drops below the "magic" 7% number, I will close it.
What happens when Greece defaults
Read: http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/
I'm not going to repost the whole thing but these points stand out:
"It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that)."
"Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting). The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
"The Irish will, within a few days, walk away from the debts of its banking system."
"The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn."
"There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps. This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps."
So, at some point in the next 2 years, all of the PIGS, with the possible exception of Italy, will default.
I'm not going to repost the whole thing but these points stand out:
"It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that)."
"Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting). The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
"The Irish will, within a few days, walk away from the debts of its banking system."
"The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn."
"There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps. This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps."
So, at some point in the next 2 years, all of the PIGS, with the possible exception of Italy, will default.
Saturday, May 21, 2011
Deflation is coming ... hurrah!
This video purports to show why deflation is "scary".
Reason 1: Consumers put off spending if prices are falling. Why is this scary? The money not spent will be saved. What is so bad about saving money?
Reason 2: Monetary policy loses its effectiveness - the central bank can't lower rates below zero. This is based on the assumption that people want to borrow money. Why should people constantly be in the position of borrowing money?
Reason 3: People put off borrowing money, such as mortgages, as the threat of rising real debt burden grows.
The truth is that inflation is a form of theft from savers. Debtors, who are assuming that inflation will continue, will find it "scary" that they actually have to pay back their debts. Cry me a river. Deflation encourages saving, which is a good thing (except to bankers). It enables savers to stop being debt-slaves.
Wednesday, May 18, 2011
Tuesday, May 17, 2011
The Chinese are buying up Vancouver
See: http://www.bloomberg.com/news/2011-05-16/chinese-spreading-wealth-make-vancouver-homes-pricier-than-nyc.html
"Buyers from mainland China are leading a wave of Asian investment in Vancouver real estate as China tries to damp property speculation at home. Good schools, a marine climate and the large, established Asian community as a result of Canada’s liberal immigration policy make Vancouver attractive ...
In 2010, Vancouver had the third-highest housing costs among English-speaking cities worldwide, according to Canada’s Frontier Centre for Public Policy. Only Hong Kong and Sydney, another magnet of Asian immigration, were more expensive."
"Buyers from mainland China are leading a wave of Asian investment in Vancouver real estate as China tries to damp property speculation at home. Good schools, a marine climate and the large, established Asian community as a result of Canada’s liberal immigration policy make Vancouver attractive ...
In 2010, Vancouver had the third-highest housing costs among English-speaking cities worldwide, according to Canada’s Frontier Centre for Public Policy. Only Hong Kong and Sydney, another magnet of Asian immigration, were more expensive."
Monday, May 16, 2011
Social Security losing $100 billion per month
See http://brucekrasting.blogspot.com/2011/05/social-security-tf-we-lost-11-trillion.html
From the recent report:
The open group unfunded obligation over the 75-year projection period has increased from $5.4 trillion (present discounted value as of January 1, 2010) to $6.5 trillion (present discounted value as of January 1, 2011).
I thought it was already almost $8 trillion in the red, so I am not sure which number is more accurate. The rate of the decline is more of a cause for alarm.
His conclusion:
"The NPV of the unfunded liabilities at SS are now growing by at least $100b a month. One would think that this massive cost would spur some response in D.C. Don’t count on it. As a result, SS is going to come off the rails in about two years."
From the recent report:
The open group unfunded obligation over the 75-year projection period has increased from $5.4 trillion (present discounted value as of January 1, 2010) to $6.5 trillion (present discounted value as of January 1, 2011).
I thought it was already almost $8 trillion in the red, so I am not sure which number is more accurate. The rate of the decline is more of a cause for alarm.
His conclusion:
"The NPV of the unfunded liabilities at SS are now growing by at least $100b a month. One would think that this massive cost would spur some response in D.C. Don’t count on it. As a result, SS is going to come off the rails in about two years."
Saturday, May 14, 2011
UK debt
The UK national debt, including debt from financial interventions, is £2238.6 billion as of March 2011, and the yearly deficit, including from financial interventions, was £75.0 billion in the fiscal year ending March 2011. Excluding the financial interventions, the yearly deficit was £100.9 billion, down from 107.3 billion the previous year.
Source: http://www.hm-treasury.gov.uk/d/psf.pdf
A better measure which I like to use, is the ratio of debt to revenue. In the fiscal year ending March 2011, the UK had 508.9 in revenue. Thus the ratio is 4.4, which is lower than the US.
Source: http://www.hm-treasury.gov.uk/d/psf.pdf
A better measure which I like to use, is the ratio of debt to revenue. In the fiscal year ending March 2011, the UK had 508.9 in revenue. Thus the ratio is 4.4, which is lower than the US.
Updated Medicaid Entitlement Costs
This is an update of a previous post.
My assumptions are:
1. Medicaid costs through 2019 will be as stated in http://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf.
2. Healthcare costs will increase by 8.3% thereafter.
3. A 4.5% discount rate is used, based on the 30 year bond rate of 4.375%.
4. A 50-year horizon is used.
5. The US government will be responsible for all Medicaid costs, even though these are actually split between the federal and state governments.
Based on these, the total cost under the old law for the 50-year period of 2010-2059 would be 59.5 trillion. The total cost under the new law for the 50-year period of 2011-2060 would be 67.4 trillion.
These numbers can be manipulated based on the inputs. However, they shouldn't be ignored simply because they are taken from the general revenue stream instead of having a dedicated funding source. Instead, this makes it even more of a cause for concern.
My assumptions are:
1. Medicaid costs through 2019 will be as stated in http://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf.
2. Healthcare costs will increase by 8.3% thereafter.
3. A 4.5% discount rate is used, based on the 30 year bond rate of 4.375%.
4. A 50-year horizon is used.
5. The US government will be responsible for all Medicaid costs, even though these are actually split between the federal and state governments.
Based on these, the total cost under the old law for the 50-year period of 2010-2059 would be 59.5 trillion. The total cost under the new law for the 50-year period of 2011-2060 would be 67.4 trillion.
These numbers can be manipulated based on the inputs. However, they shouldn't be ignored simply because they are taken from the general revenue stream instead of having a dedicated funding source. Instead, this makes it even more of a cause for concern.
2011 Medicare Trustee's Report
According to this, the unfunded liabilities for Medicare over the next 75 years are only 3.0 trillion for HI (Part A), and Parts B and D have no unfunded liabilities because they are covered by general revenue.
Anyways for a fair comparison, this is how it reads:
Unfunded liability over 75 years as of 2011:
Part A - 3.0 trillion
Part B - 13.9 trillion
Part D - 7.5 trillion
For parts B and D, those numbers are the amounts that are covered by general revenue.
Friday, May 13, 2011
$1 trillion of minerals in Afghanistan
See http://management.fortune.cnn.com/2011/05/11/jp-morgan-hunt-afghan-gold/?section=magazines_fortune
"To Hannam, chairman of J.P. Morgan Capital Markets, Afghanistan represents a gigantic, untapped opportunity -- one of the last great natural-resource frontiers. Landlocked and pinioned by imperial invaders, Afghanistan has been cursed by its geography for thousands of years. Now, for the first time, Hannam believes, that geography could be an asset. The two most resource-starved nations on the planet, China and India, sit next door to Afghanistan, where, according to Pentagon estimates, minerals worth nearly $1 trillion lie buried."
"To Hannam, chairman of J.P. Morgan Capital Markets, Afghanistan represents a gigantic, untapped opportunity -- one of the last great natural-resource frontiers. Landlocked and pinioned by imperial invaders, Afghanistan has been cursed by its geography for thousands of years. Now, for the first time, Hannam believes, that geography could be an asset. The two most resource-starved nations on the planet, China and India, sit next door to Afghanistan, where, according to Pentagon estimates, minerals worth nearly $1 trillion lie buried."
Wednesday, May 11, 2011
Total Unfunded Liabilities
I had to do this to follow up on the prior post. This is my best estimate of unfunded liabilities, ignoring the other debt. The Medicaid data comes from my prior post. Blogger is screwing up the table formatting so I am just using text:
Category 2010 2009
======== ==== ====
Fed pens 5720 5284
OASDI 7947 7677
Med A 2683 13770
Med B 12901 17165
Med D 7229 7172
Medicaid 121377 105022
======== ==== ====
Total 157857 156090
Category 2010 2009
======== ==== ====
Fed pens 5720 5284
OASDI 7947 7677
Med A 2683 13770
Med B 12901 17165
Med D 7229 7172
Medicaid 121377 105022
======== ==== ====
Total 157857 156090
Medicaid Entitlement Costs
I can't find any good data on Medicaid entitlement costs so I am presenting my own. First, the threshhold question - is Medicaid an entitlement? Strictly speaking no. It has no trust fund or dedicated revenue stream. The funding for it comes from the general revenues on a yearly basis. However, as a practical matter, eliminating Medicaid or even cutting it slightly would cause recipients and medical providers to howl bloody murder, that you are killing poor people. From that standpoint, it is more of an entitlement than even Social Security. So it is financially imprudent to ignore the cost of it.
So how much does it cost? As a starting point I am using data from Table 5 of the Estimated Financial Effects of the “Patient Protection and Affordable Care Act of 2009" (i.e. Obamacare). I am assuming that healthcare costs will increase by 8.7% a year, which is the same assumption that that document uses. And I am using a discount rate of 3%, which is somewhat arbitrary and may be too low. I am also assuming a 50-year horizon which is less than what is usually used when estimating entitlement costs. I also include both Federal and State costs as it seems disingenuous to ignore costs on the basis that State governments will pay for them when the State governments are close to insolvency and may get bailouts from the Federal government. The 2019 numbers are 893.2 under the prior law and 979.7 under the new law. So in other words, Obamacare is expected to increase Medicaid spending by 86.5 in 2019.
Here are the results I came up with:
1. The present value of the Medicaid entitlement under the prior law over the 50 year timeframe of 2010-2059 using a 3% discount rate is 105,022.
2. The present value of the Medicaid entitlement over the 50 year timeframe of 2011-2060 using a 3% discount rate is 121,377.
3. Since Obamacare claims to have cut Medicare by trillions, it is only fair to point out that it has also increased the cost of Medicaid over 50 years by 16,354.
And, yea, the numbers are in billions. Which means that we have an unfunded liability for Medicaid of $121 trillion. This is the amount of money you would have to put in a bank account today earning 3% interest in order to pay for Medicaid for the next 50 years.
Ok, you can go back to putting your head in the sand and hope the problem will go away. Or we can have an honest discussion about fixing Medicaid. Maybe I have made an error in my calculations and if so I would be happy to correct it, but until then I stand my this number. And I ask how any rational human being can believe that this is a sustainable situation.
================
Edit: Just so I am comparing apples to apples, I also want to include prior year comparisons. The best info I have is that in 2008, total Medicaid costs were 343 and in 2009 they were 374.
The unfunded liability for Medicaid using the same assumptions in 2007, for the time period of 2008 to 2057 using the 3% discount rate was 94.2 trillion.
The unfunded liability for Medicaid as of 2008, for the time period of 2009 to 2058 using the 3% discount rate was 99.5 trillion.
================
Update: A better number for the increase in Medicaid costs is 8.3% as stated in https://www.cms.gov/ActuarialStudies/downloads/MedicaidReport2010.pdf . Also, an updated document on Obamacare costs is at http://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf . The current rate on 30-year US bonds is 4.375%, so probably 4.5% is a better number to use for a long-term discount rate.
So how much does it cost? As a starting point I am using data from Table 5 of the Estimated Financial Effects of the “Patient Protection and Affordable Care Act of 2009" (i.e. Obamacare). I am assuming that healthcare costs will increase by 8.7% a year, which is the same assumption that that document uses. And I am using a discount rate of 3%, which is somewhat arbitrary and may be too low. I am also assuming a 50-year horizon which is less than what is usually used when estimating entitlement costs. I also include both Federal and State costs as it seems disingenuous to ignore costs on the basis that State governments will pay for them when the State governments are close to insolvency and may get bailouts from the Federal government. The 2019 numbers are 893.2 under the prior law and 979.7 under the new law. So in other words, Obamacare is expected to increase Medicaid spending by 86.5 in 2019.
Here are the results I came up with:
1. The present value of the Medicaid entitlement under the prior law over the 50 year timeframe of 2010-2059 using a 3% discount rate is 105,022.
2. The present value of the Medicaid entitlement over the 50 year timeframe of 2011-2060 using a 3% discount rate is 121,377.
3. Since Obamacare claims to have cut Medicare by trillions, it is only fair to point out that it has also increased the cost of Medicaid over 50 years by 16,354.
And, yea, the numbers are in billions. Which means that we have an unfunded liability for Medicaid of $121 trillion. This is the amount of money you would have to put in a bank account today earning 3% interest in order to pay for Medicaid for the next 50 years.
Ok, you can go back to putting your head in the sand and hope the problem will go away. Or we can have an honest discussion about fixing Medicaid. Maybe I have made an error in my calculations and if so I would be happy to correct it, but until then I stand my this number. And I ask how any rational human being can believe that this is a sustainable situation.
================
Edit: Just so I am comparing apples to apples, I also want to include prior year comparisons. The best info I have is that in 2008, total Medicaid costs were 343 and in 2009 they were 374.
The unfunded liability for Medicaid using the same assumptions in 2007, for the time period of 2008 to 2057 using the 3% discount rate was 94.2 trillion.
The unfunded liability for Medicaid as of 2008, for the time period of 2009 to 2058 using the 3% discount rate was 99.5 trillion.
================
Update: A better number for the increase in Medicaid costs is 8.3% as stated in https://www.cms.gov/ActuarialStudies/downloads/MedicaidReport2010.pdf . Also, an updated document on Obamacare costs is at http://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf . The current rate on 30-year US bonds is 4.375%, so probably 4.5% is a better number to use for a long-term discount rate.
Monday, May 9, 2011
Total US Debt
Here is another attempt at estimating the total US debt. It certainly is flawed and should be used only as a starting point for your own research.
Notes: The public debt line comes from the Treasury Dept. The next 6 lines come from the 2010 Financial Report of the US Government. The data for Fannie Mae and Freddie Mac come from their 10k's as of 12/31/10 and 12/31/09. I am including Federal Reserve data because it is all part of the same "system", and those number include total fed liabilities less assets invested in US Treasury securities to avoid double-counting. It is encouraging to see the total debt go down even if it is because of the Obamacare accounting trick.
| Category | 2010 | 2009 |
| Public Debt | 9023 | 7552 |
| Fed pensions | 5720 | 5284 |
| Other govt liab | 1576 | 1257 |
| OASDI | 7947 | 7677 |
| Med - A | 2683 | 13770 |
| Med - B | 12901 | 17165 |
| Med - D | 7229 | 7172 |
| Fannie Mae | 3224 | 884 |
| Freddie Mac | 2262 | 842 |
| Student Loans | 744 | 636 |
| Fed Reserve | 1433 | 1324 |
| ======== | ==== | ==== |
| Total | 54742 | 63563 |
Notes: The public debt line comes from the Treasury Dept. The next 6 lines come from the 2010 Financial Report of the US Government. The data for Fannie Mae and Freddie Mac come from their 10k's as of 12/31/10 and 12/31/09. I am including Federal Reserve data because it is all part of the same "system", and those number include total fed liabilities less assets invested in US Treasury securities to avoid double-counting. It is encouraging to see the total debt go down even if it is because of the Obamacare accounting trick.
Student Loans
In FY2011, there is projected to be a total of $116.4 billion in new direct student loans issued.[1] There were approximately $487 billion in FFEL loans outstanding at the end of FY2009, and $149 billion in direct loans outstanding at the end of FY2009.[2] In FY2010, there were issued $35 billion in new FFEL loans and $73.5 of new direct loans.[3]. Therefore, the total at the end of FY2011 should be $522 billion in FFEL loans, and $339 billion in direct loans, for a grand total of $861 billion (less whatever has been paid back over those two years).
I can't find a better number at this time, so that is what I will go with. My point is that $861 billion is a federal obligation and should be added to the total national debt.
[1] http://www2.ed.gov/about/overview/budget/budget11/justifications/t-loansoverview.pdf, page T-13.
[2] Ibid, page T-7.
[3] Ibid, page T-13.
I can't find a better number at this time, so that is what I will go with. My point is that $861 billion is a federal obligation and should be added to the total national debt.
[1] http://www2.ed.gov/about/overview/budget/budget11/justifications/t-loansoverview.pdf, page T-13.
[2] Ibid, page T-7.
[3] Ibid, page T-13.
Sunday, May 8, 2011
Obamacare saves $30 trillion!
The net obligation through the infinite future for all partipants for Medicare Hospital Insurance as of January 1, 2009 was $36.4 trillion. The net obligation through the infinite future for all partipants for Medicare Hospital Insurance as of January 1, 2009 was $6.3 trillion. The difference is because of Obamacare.
Has anyone else noticed? Somehow I detect an accounting trick. Either that or Obama is the greatest President of all time!
For comparison sake, the total unfunded liabilities for Medicare and Social Security on an infinite time line were 75.0 trillion as of 1/1/2010. (From http://www.gao.gov/financial/fy2010/10frusg.pdf)
=================
Update: Aha, as I suspected it is an accounting trick. Basically what is going on is that:
1) Medicare is being gutted and Medicaid is being vastly expanded. (From https://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf, Medicare is being cut by $502 billion over 10 years, and Medicaid is being increased by $463 billion. Obamacare has other costs, and the total increase over 10 years is $310 billion).
2) The costs of Medicare is done on an actuarial basis whereas Medicaid is appropriated annually. If Medicaid were accounted for the same way, it would have an unfunded liability of $35.5 trillion. See http://leedsonfinance.com/2011/04/03/worthless-treasuries/.
So in conclusion Medicare is being cut by $30.1 trillion over the long run while Medicaid is being increased by $35.5 trillion.
Has anyone else noticed? Somehow I detect an accounting trick. Either that or Obama is the greatest President of all time!
For comparison sake, the total unfunded liabilities for Medicare and Social Security on an infinite time line were 75.0 trillion as of 1/1/2010. (From http://www.gao.gov/financial/fy2010/10frusg.pdf)
=================
Update: Aha, as I suspected it is an accounting trick. Basically what is going on is that:
1) Medicare is being gutted and Medicaid is being vastly expanded. (From https://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf, Medicare is being cut by $502 billion over 10 years, and Medicaid is being increased by $463 billion. Obamacare has other costs, and the total increase over 10 years is $310 billion).
2) The costs of Medicare is done on an actuarial basis whereas Medicaid is appropriated annually. If Medicaid were accounted for the same way, it would have an unfunded liability of $35.5 trillion. See http://leedsonfinance.com/2011/04/03/worthless-treasuries/.
So in conclusion Medicare is being cut by $30.1 trillion over the long run while Medicaid is being increased by $35.5 trillion.
Unfunded liabilities of $99 trillion
Here is an interesting speech from May 2008, before the financial crisis, when they were projecting a $48 billion surplus in 2012.
Richard Fisher noted that Social Security and Medicare had unfunded liabilities of $99 trillion at that time, with Medicare alone at $85 trillion:
It wouldn't be too hard to figure out the current numbers but I'm sure they are much higher. But no worries, right? The higher the debt the better, right?
Richard Fisher noted that Social Security and Medicare had unfunded liabilities of $99 trillion at that time, with Medicare alone at $85 trillion:
Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill.
It wouldn't be too hard to figure out the current numbers but I'm sure they are much higher. But no worries, right? The higher the debt the better, right?
Alchemy
I am writing this article as a thought exercise, and I am not necessarily advocating the position here. There is a lot to criticize but for the moment I will suspend my belief. I have written previous posts, here and here, with a similar theme.
So here is the theory: The US federal government is the source of all wealth. Through the process of alchemy, i.e. Keynesian spending, they can create money out of thin air. The debt of the government becomes an asset to the opposing party. Therefore, the government should go deeper into debt as this will create more wealth.
From an accounting perspective, of course it has to balance. Taxes pay for part of spending. The balance is borrowed, and it can be borrowed indirectly from the Federal Reserve. Any interest paid to the Federal Reserve is paid back to the Treasury so it has no cost. This quantitative easing by the Federal Reserve is not inflationary so long as the economy as a whole is deflating, like now. If the economy is inflating, then increases in the national debt are not a problem so long as they are less than the rate of inflation. Besides, a growing economy needs more money.
Other funds are borrowed from, let's call them "financiers". These financiers collect interest on the debt. With the interest they receive they will do one of two things: re-invest it or spend it. If they reinvest the money then this is a source of additional financing. If they spend it, then this will help the economy.
What about foreigners, specifically China? We send them worthless pieces of paper and they send us shiploads of stuff, so we benefit. The interest we pay them, they just reinvest. But what if they spend the money - this helps the Chinese economy not the US economy, right? Well, they have to exchange dollars for yuans, which makes the yuan more valuable, and weakens the dollar. This makes the US economy more competitive. So the trade deficit is self-correcting. And they have to do something with those dollars, and that something would be either buying US goods and services or buying US real estate, both of which help the US economy.
Or of course they could buy goods (read "oil") from another country with US dollars. The US dollar is effectively the currency for the whole world. This is good for us because we created those dollars out of nothing ("seignorage") and can continue to do so. And those dollars again, in the hands of the Saudis, either help finance the debt or help the US economy.
So interest on the debt is not a problem, as the money will come back to us either by financing the debt or by helping the economy. If interest is not a problem, then there are no theoretical restraints on borrowing. Therefore any discussion of budget cuts or fiscal austerity is unnecessary. Furthermore, any fiscal austerity is counterproductive as it will worsen the economy and reduce wealth. In conclusion, deficits and the increasing national debt are a good thing and not something to be worried about in any way.
Rebuttal?
================
Supplement #1 - Read this article: 2nd UPDATE: China SAFE: No Direct Forex Reserve Loss On Yuan Rise.
So China's obsession with saving dollars has actually hurt them from a financial perspective. Their sending stuff to the US in exchange for dollars has benefited us. Repatriating dollars in yuans will weaken the dollar thus strengthening the competitiveness of the US economy. If dollars aren't repatriated then they will be spent in the US thus helping us. It's a win-win-win situation for the US.
================
Supplement #2 - What about the Euro?
Could Europe do the same thing with the Euro and replace the reserve status of the dollar? The short answer is no. There is no such thing as European debt. Instead debt is issued by the individual countries, who don't have the ability to print more money to pay interest. Europe could at some point shift to a US-style model, with federal taxation and federal debt, but they are not there today.
You could say that this makes European debt a better investment as it is sure to be paid back (as long as it isn't defaulted on a la Greece) and you would be right. The US debt will never be paid back. But who cares if the debt is paid back so long as it keeps paying interest?
================
Supplement #3 - What about inflation?
Won't massive increases in the debt and money supply cause inflation? Yes, of course, but the dragon of inflation can be killed with the silver sword of interest. In the early 1980s the US had an inflation problem which soared to 13.5%. Paul Volcker, chair of the Federal Reserve, jacked up the federal funds rate to as high as 20%, which tamed the inflation rate. Also, inflation has a benefit in that it makes paying back the debt easier. So inflation isn't necessarily a bad thing as long as it doesn't get out of control.
So here is the theory: The US federal government is the source of all wealth. Through the process of alchemy, i.e. Keynesian spending, they can create money out of thin air. The debt of the government becomes an asset to the opposing party. Therefore, the government should go deeper into debt as this will create more wealth.
From an accounting perspective, of course it has to balance. Taxes pay for part of spending. The balance is borrowed, and it can be borrowed indirectly from the Federal Reserve. Any interest paid to the Federal Reserve is paid back to the Treasury so it has no cost. This quantitative easing by the Federal Reserve is not inflationary so long as the economy as a whole is deflating, like now. If the economy is inflating, then increases in the national debt are not a problem so long as they are less than the rate of inflation. Besides, a growing economy needs more money.
Other funds are borrowed from, let's call them "financiers". These financiers collect interest on the debt. With the interest they receive they will do one of two things: re-invest it or spend it. If they reinvest the money then this is a source of additional financing. If they spend it, then this will help the economy.
What about foreigners, specifically China? We send them worthless pieces of paper and they send us shiploads of stuff, so we benefit. The interest we pay them, they just reinvest. But what if they spend the money - this helps the Chinese economy not the US economy, right? Well, they have to exchange dollars for yuans, which makes the yuan more valuable, and weakens the dollar. This makes the US economy more competitive. So the trade deficit is self-correcting. And they have to do something with those dollars, and that something would be either buying US goods and services or buying US real estate, both of which help the US economy.
Or of course they could buy goods (read "oil") from another country with US dollars. The US dollar is effectively the currency for the whole world. This is good for us because we created those dollars out of nothing ("seignorage") and can continue to do so. And those dollars again, in the hands of the Saudis, either help finance the debt or help the US economy.
So interest on the debt is not a problem, as the money will come back to us either by financing the debt or by helping the economy. If interest is not a problem, then there are no theoretical restraints on borrowing. Therefore any discussion of budget cuts or fiscal austerity is unnecessary. Furthermore, any fiscal austerity is counterproductive as it will worsen the economy and reduce wealth. In conclusion, deficits and the increasing national debt are a good thing and not something to be worried about in any way.
Rebuttal?
================
Supplement #1 - Read this article: 2nd UPDATE: China SAFE: No Direct Forex Reserve Loss On Yuan Rise.
The loss in the foreign-exchange assets held by the People's Bank of China is "shocking" once the fall in the dollar against the yuan is taken into account, Zhang Anyuan, director of the fiscal and financial policy department at the Economic Research Institute under the National Development and Reform Commission, said in an essay published in the latest edition of Caixin magazine.
If the yuan continues to appreciate to a level of CNY6.0 against the dollar, the accumulated losses may climb to $578.6 billion, Zhang wrote in the essay.
SAFE said that the currency fluctuations only reflect a change on the book value, which is not an actual loss, and doesn't affect the forex reserves' real purchasing power. An actual gain or loss in China's foreign exchange reserve assets will only occur when they are exchanged for yuan, but China doesn't have need to repatriate forex reserves massively, it said.
So China's obsession with saving dollars has actually hurt them from a financial perspective. Their sending stuff to the US in exchange for dollars has benefited us. Repatriating dollars in yuans will weaken the dollar thus strengthening the competitiveness of the US economy. If dollars aren't repatriated then they will be spent in the US thus helping us. It's a win-win-win situation for the US.
================
Supplement #2 - What about the Euro?
Could Europe do the same thing with the Euro and replace the reserve status of the dollar? The short answer is no. There is no such thing as European debt. Instead debt is issued by the individual countries, who don't have the ability to print more money to pay interest. Europe could at some point shift to a US-style model, with federal taxation and federal debt, but they are not there today.
You could say that this makes European debt a better investment as it is sure to be paid back (as long as it isn't defaulted on a la Greece) and you would be right. The US debt will never be paid back. But who cares if the debt is paid back so long as it keeps paying interest?
================
Supplement #3 - What about inflation?
Won't massive increases in the debt and money supply cause inflation? Yes, of course, but the dragon of inflation can be killed with the silver sword of interest. In the early 1980s the US had an inflation problem which soared to 13.5%. Paul Volcker, chair of the Federal Reserve, jacked up the federal funds rate to as high as 20%, which tamed the inflation rate. Also, inflation has a benefit in that it makes paying back the debt easier. So inflation isn't necessarily a bad thing as long as it doesn't get out of control.
Saturday, May 7, 2011
Presidential Coup?
An article by a mysterious Ulsterman claims that the President didn't know of the action against Bin Laden until it was well underway. Instead, the decision to go after OBL was made by Leon Panetta, head of the CIA, with the support of Hillary Clinton, Robert Gates, and Bill Daley.
Quotes: "The CIA director initiated the 48 hour engagement order. At this point, the President of the United States was not informed of the engagement order - it did not originate from him, and for several hours after the order had been given ... Daley successfully kept Obama ... insulated from that order."
"I have been told by more than one source that Leon Panetta was directing the operation with both his own CIA operatives, as well as direct contacts with military - both entities were reporting to Panetta only at this point, and not the President of the United States. ... The operation was at this time effectively unknown to President Barack Obama or Valerie Jarrett and it remained that way until AFTER it had been initiated. President Obama was literally pulled from a golf outing and escorted back to the White House to be informed of the mission."
"In my initial communication to you of these events I described what unfolded as a temporary Coup - initiated by high ranking intelligence and military officials. I stand by that term."
Wow - this is scary stuff. Is President Obama being controlled and manipulated by unelected bureaucrats who are actually running the show while he plays golf and occasionally delivers a speech that has been written for him?
Quotes: "The CIA director initiated the 48 hour engagement order. At this point, the President of the United States was not informed of the engagement order - it did not originate from him, and for several hours after the order had been given ... Daley successfully kept Obama ... insulated from that order."
"I have been told by more than one source that Leon Panetta was directing the operation with both his own CIA operatives, as well as direct contacts with military - both entities were reporting to Panetta only at this point, and not the President of the United States. ... The operation was at this time effectively unknown to President Barack Obama or Valerie Jarrett and it remained that way until AFTER it had been initiated. President Obama was literally pulled from a golf outing and escorted back to the White House to be informed of the mission."
"In my initial communication to you of these events I described what unfolded as a temporary Coup - initiated by high ranking intelligence and military officials. I stand by that term."
Wow - this is scary stuff. Is President Obama being controlled and manipulated by unelected bureaucrats who are actually running the show while he plays golf and occasionally delivers a speech that has been written for him?
The flaws in the CBO's projections
The CBO projects that tax revenue will increase from 14.8% of GDP in 2011 ($2228 B) to 19.9% of GDP in 2014 ($3442 B). This is an increase of 54% in nominal dollar amounts in only 3 years.
This is based mostly on assumptions that the 2011 2% payroll tax cut will expire, that any provisions limiting the scope of AMT end on 12/31/11, and that extensions of the lower Bush tax cuts end on 12/31/12.
I agree that the 2% payroll tax cut is likely to expire; however, the CBO is projecting that unemployment will suddenly drop to 5.3% on 1/1/13, which is unlikely. In any event, this expiring tax cut will provide only an additional $112B.
The CBO projects that the AMT will suddenly dramatically expend in scope. "The current version of the patch will expire at the end of 2011. As a result, the number of taxpayers affected by the AMT will jump from about 4 million in calendar year 2011 to about 33 million in 2012 ... and receipts from the AMT will almost quadruple ...". The truth is that the AMT is very unpopular and Congress has passed one year "patches" for the last ten years in a row, and they will likely do so again in the future.
As for the Bush tax cuts, Obama wants to continue them for lower and middle-class taxpayers and he wants them to end for the "rich", defined as individuals who make more than $200,000 and couple who make more than $250,000. If I understand this right, then this means those in the 33% and 35% brackets would have their taxes raised to 36% and 39.6% respectively. I doubt that a 10% increase in taxes on a limited group of people would raise revenues by 34% in one year (from $1128B in 2012 to $1516B in 2013).
So, in conclusion, the CBO revenue projections are very unrealistic and it is much more likely that revenue in 2014 will be only $2711B (my projection) instead of $3442B.
This is based mostly on assumptions that the 2011 2% payroll tax cut will expire, that any provisions limiting the scope of AMT end on 12/31/11, and that extensions of the lower Bush tax cuts end on 12/31/12.
I agree that the 2% payroll tax cut is likely to expire; however, the CBO is projecting that unemployment will suddenly drop to 5.3% on 1/1/13, which is unlikely. In any event, this expiring tax cut will provide only an additional $112B.
The CBO projects that the AMT will suddenly dramatically expend in scope. "The current version of the patch will expire at the end of 2011. As a result, the number of taxpayers affected by the AMT will jump from about 4 million in calendar year 2011 to about 33 million in 2012 ... and receipts from the AMT will almost quadruple ...". The truth is that the AMT is very unpopular and Congress has passed one year "patches" for the last ten years in a row, and they will likely do so again in the future.
As for the Bush tax cuts, Obama wants to continue them for lower and middle-class taxpayers and he wants them to end for the "rich", defined as individuals who make more than $200,000 and couple who make more than $250,000. If I understand this right, then this means those in the 33% and 35% brackets would have their taxes raised to 36% and 39.6% respectively. I doubt that a 10% increase in taxes on a limited group of people would raise revenues by 34% in one year (from $1128B in 2012 to $1516B in 2013).
So, in conclusion, the CBO revenue projections are very unrealistic and it is much more likely that revenue in 2014 will be only $2711B (my projection) instead of $3442B.
Friday, May 6, 2011
Its the end of the world as we know it
I don't necessarily buy this but this is what one guy thinks a treasury default would look like:
- "it would only take 30 days for all [Social Security] checks to stop"
- "Medicare ... would also default. Hundreds of thousands would die"
- "the cost of everything we import would triple in a very short period of time"
- "equity markets would collapse. A loss of 50% would be a good outcome"
- unemployment would reach 25%
- "there would be no credit available"
- "every mortgage borrower would " default
- "all municipalities would default"
- "all infrastructure repairs would stop"
- "there would be no real estate market"
- other countries would also default
- "there would be no US military ... pirates would rule"
I don't want any of these things to happen, but if the system is so fragile that it would fall apart in 30 days if politicians don't vote a certain way then there is something seriously wrong with it. If the debt limit is raised to avoid the catastrophe then what about next time or the time after that?
- "it would only take 30 days for all [Social Security] checks to stop"
- "Medicare ... would also default. Hundreds of thousands would die"
- "the cost of everything we import would triple in a very short period of time"
- "equity markets would collapse. A loss of 50% would be a good outcome"
- unemployment would reach 25%
- "there would be no credit available"
- "every mortgage borrower would " default
- "all municipalities would default"
- "all infrastructure repairs would stop"
- "there would be no real estate market"
- other countries would also default
- "there would be no US military ... pirates would rule"
I don't want any of these things to happen, but if the system is so fragile that it would fall apart in 30 days if politicians don't vote a certain way then there is something seriously wrong with it. If the debt limit is raised to avoid the catastrophe then what about next time or the time after that?
Another projection
Here is another projection, based partially on data from http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.
I used its data on revenue through 2012, but then assumed that revenue will only increase 3%/year. I mostly used its data on outlays except for 2012-2014, which I considered low because in one year it projects outlays to decrease from the prior year, which is extremely unlikely.
As you can see, this is slightly more positive than my last projection as it shows the system limping along until 2022, back where I started from, thus the name of this blog. A notable difference is that here I am doubting the CBOs revenue projections and mostly accepting its outlay projections, whereas earlier I was accepting its revenue projections but doubting its outlay projections.
Update: 6/19/12. This is model C-2, and is too pessimistic.
I used its data on revenue through 2012, but then assumed that revenue will only increase 3%/year. I mostly used its data on outlays except for 2012-2014, which I considered low because in one year it projects outlays to decrease from the prior year, which is extremely unlikely.
Projected deficit
Year Reve Outl Defi Total
==== ==== ===== ==== ====
2010 2162 3456 1294 13562
2011 2228 3708 1480 15042
2012 2555 3819 1264 16306
2013 2632 3934 1302 17609
2014 2711 4052 1341 18950
2015 2792 4202 1410 20360
2016 2876 4491 1615 21975
2017 2962 4691 1729 23704
2018 3051 4885 1834 25539
2019 3142 5185 2043 27581
2020 3237 5451 2214 29796
2021 3334 5726 2392 32188
2022 3434 6012 2579 34767
As you can see, this is slightly more positive than my last projection as it shows the system limping along until 2022, back where I started from, thus the name of this blog. A notable difference is that here I am doubting the CBOs revenue projections and mostly accepting its outlay projections, whereas earlier I was accepting its revenue projections but doubting its outlay projections.
Update: 6/19/12. This is model C-2, and is too pessimistic.
Monday, May 2, 2011
Rare Earth prices soar
Neodymium, a rare earth necessary for a range of products including headphones and hybrid electric cars, now fetches more than $283 a kilogram ($129 a pound) on the spot market. A year ago it sold for about $42 a kilogram ($19 a pound).
Samarium, crucial to the manufacture of missiles, has climbed to more than $146 a kilogram, up from $18.50 a year earlier.
The high prices for rare earths reflect turmoil in the global industry that mines and refines them. China, which controls more than 95 percent of the market, has further restricted exports so as to conserve supplies for its own high-tech and green energy industries.
http://www.nytimes.com/2011/05/03/business/03rare.html?hpw
Samarium, crucial to the manufacture of missiles, has climbed to more than $146 a kilogram, up from $18.50 a year earlier.
The high prices for rare earths reflect turmoil in the global industry that mines and refines them. China, which controls more than 95 percent of the market, has further restricted exports so as to conserve supplies for its own high-tech and green energy industries.
http://www.nytimes.com/2011/05/03/business/03rare.html?hpw
Good news
There has been a string of good news lately. The impasse over the debt ceiling, while it won't last, has forced the government to slow down spending. The Royal Wedding of Will and Kate was a fantastic event. And the killing of Osama Bin Laden gave an enormous boost to US morale.
Much as 9/11 marked the real start of Millenial decade, the dual Royal Wedding and the demise of UBL marked the real start of the Teens.
I'm feeling so positive, I am almost tempted to shut down this blog and say that it was much ado about nothing.
However, before I do that, here is what I want to see: an average annual rate of increase in the national debt of less than 7%. If that were to happen, then it would take more than 10 years to double it. And it may even be manageable indefinitely at that rate.
So where are we today? As of 4/29/11, the total debt was 14.288 trillion. One year prior, on 4/29/10, it was at 12.853 trillion. The increase was only ... 11.2%. So we are not quite there yet. But it does look like the debt on 9/30/11 will be far below the 15.16 trillion I last projected.
Much as 9/11 marked the real start of Millenial decade, the dual Royal Wedding and the demise of UBL marked the real start of the Teens.
I'm feeling so positive, I am almost tempted to shut down this blog and say that it was much ado about nothing.
However, before I do that, here is what I want to see: an average annual rate of increase in the national debt of less than 7%. If that were to happen, then it would take more than 10 years to double it. And it may even be manageable indefinitely at that rate.
So where are we today? As of 4/29/11, the total debt was 14.288 trillion. One year prior, on 4/29/10, it was at 12.853 trillion. The increase was only ... 11.2%. So we are not quite there yet. But it does look like the debt on 9/30/11 will be far below the 15.16 trillion I last projected.
Sunday, May 1, 2011
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