The Grace Commission: Good Advice Ignored

I've often heard the Grace Commission mentioned in various articles, so decided to look it up. From Wikipedia:

The Grace Commission

The Private Sector Survey on Cost Control (PSSCC), commonly referred to as The Grace Commission, was an investigation requested by United States President Ronald Reagan, in 1982. The focus of it was waste and inefficiency in the US Federal government. Its head, businessman J. Peter Grace,[1] asked the members of that commission to "be bold" and "work like tireless bloodhounds. Don't leave any stone unturned in your search to root out inefficiency."[2]

The report
The Grace Commission Report[3] was presented to Congress in January 1984. The report claimed that if its recommendations were followed, $424 billion could be saved in three years, rising to $1.9 trillion per year by the year 2000. It estimated that the national debt, without these reforms, would rise to $13 trillion by the year 2000, while with the reforms they projected it would rise to only $2.5 trillion.[4] Congress ignored the commission's report. The debt reached $5.8 trillion in the year 2000.[5][6] The national debt reached 13 trillion after the subprime mortgage-collateralized debt obligation crisis in 2008.

The report said that one-third of all income taxes are consumed by waste and inefficiency in the federal government, and another one-third escapes collection owing to the underground economy. “With two thirds of everyone’s personal income taxes wasted or not collected, 100 percent of what is collected is absorbed solely by interest on the federal debt and by federal government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services [that] taxpayers expect from their government."[4]

Congress was warned. They had the chance to do something about it, and did nothing. We The People, let them do it. Now we are living the consequences.

Mr. Grace, a Democrat Businessman, was an interesting fellow:

J. Peter Grace

[...] In the Kennedy administration, J. Peter Grace was head of the Commerce Department Committee on the Alliance for Progress.[5] President Reagan, in announcing the selection of J. Peter Grace to lead The Grace Commission on waste and inefficiency in the Federal government, said:

We have a problem that's been 40 years in the making, and we have to find ways to solve it. And I didn't want to ruin your appetites, so I waited till now to tell you this, but during the hour we're together here eating and talking, the Government has spent $83 million. And by the way, that includes the price of your lunch. [Laughter] Milton Friedman is right. There really is no such thing as a free lunch. The interest on our debt for the last hour was about $10 million of that.

In selecting your Committee, we didn't care whether you were Democrats or Republicans. Starting with Peter Grace, we just wanted to get the very best people we could find, and I think we were successful.

I'll repeat to you today what I said a week ago when I announced Peter's appointment: Be bold. We want your team to work like tireless bloodhounds. Don't leave any stone unturned in your search to root out inefficiency.[6]

Mr. Grace, a Democrat, was asked what he would say to the campaign theme of Walter Mondale, the 1984 Democratic Presidential candidate, that higher taxes would be required to ease the deficit regardless of who wins the November election.

"I'd tell him he's nuts," Grace said. "He's wrong. He's wrong."[7] [...]

   

A country without an operating budget

It's US. Since 2009:

1600 Pennsylvania Avenue and 1600 Days Without a Budget

[...] So here’s a little primer on the fiscal State of the Union.

According to the US Debt Clock, we are $16,970,000,000 in debt. The US Debt Clock is an unofficial tally of our excessive spending.

The federal deficit increased by $146 billion in August, as reported by the CBO four days ago. Yet this conflicts with reports from the Treasury Department.

Yet as reported by CNSnews, “According to the Daily Treasury Statements that the Treasury publishes at 4:00 p.m. on each business day, the debt subject to the legal limit has remained at exactly $16,699,396,000,000–or about $25 million below the legal limit–every day since May 17.”

This makes 118 days, with the September 12 report being the most current, that the debt has stayed at $16,699,396,000,000.

Why is this important? The current debt ceiling limit is $16,699,421,095,673.60. According to the debt clock, however, and if CBO reports for June, July, and August were added to the Treasury statements amount since May 17th, we would be way past the debt ceiling limit. In fact, August alone would have crossed the threshold. So what is our current debt?

Incidentally, the reason why Congress even has to consider the question of funding the government or shutting it down past September 30 (the last day of the fiscal year) is that there is no operating budget. The last time the Senate passed a budget was April 29, 2009. Nearly the entirety of Obama’s time as President has been this way. For the Senate to abrogate its basic fiduciary responsibilities in such a major way is unconscionable. [...]

Is "unconscionable" becoming the new "commonplace"? How can the Treasury just "stop" the debt clock at May 17? It makes their daily statements completely meaningless. Ditto the inflation index, which no longer includes the cost of food or fuel. And all this phoney talk about the "approaching" debt ceiling, when we have already passed it. What happened to reality? How many people are actually paying attention?

A household or a business without a budget gets into trouble quickly. Why should a country be any different?
     

"The psychological pain will be much greater than the Great Depression, even though the physical conditions will be much better."

That's a quote from an author selling a book about the coming burst of the "dollar bubble", and what changes it will bring to life in the USA.

I've posted previously about dangers to US currency, about various scenarios such as a complete collapse of our currency similar to (or even worse than) the hyper inflation of 1920's Germany.

But what if, the actual consequences were not as bad as any of those? Or even as bad as the Great Depression of the 1930s? Authors of a new book make a similar claim, but they also say it's going to SEEM worse to us, because we've gotten so used to easy money and credit for so long.

Their book is called "Aftershock":

Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown

From the Inside Flap
From the authors who accurately predicted the domino fall of the conjoined real estate, stock, and private debt bubbles that led to the financial crisis of 2008 and 2009, now comes the definitive look at what is still ahead in 2012 and beyond—and what investors can do right now to protect themselves.

Based on the authors' unmatched track record of precise predictions in the two landmark books America's Bubble Economy and Aftershock, this Second Edition of Aftershock updates the original book by more than 35 percent with fresh analysis of the latest economic developments, plus offers new in-depth advice for how readers can prepare now for protection and profits in the next global money meltdown.

The second edition of Aftershock shows readers:

Why the latest actions by the U.S. Federal Reserve will eventually damage the dollar and hurt investors worldwide

How future rising inflation and interest rates will harm your specific investments, and what to do about it

The future fall of China's bubble economy, as well as current and future problems with European debt

Detailed investment advice about real estate, retirement, annuities, life insurance, and much more

What's next for stocks, bonds, currencies, commodities, and other assets

How to buy and own gold and silver before, during, and after the coming Aftershock

O.K. fine, another one of THOSE books. They all seem to say "buy gold", which is fine if you got plenty of spare cash lying around. Sorry, none of mine is spare or lying around, it's all working. Then they usually offer advice about managing your stock portfolio, your 401K, and other things I don't even have.

I haven't read this book, so I don't know if it's like that. I don't even know if I would buy it. So why am I writing about it?

Because, the authors claim that their publishers made them delete a chapter from the book, that talks about what life is going to be like in the USA after the currency bubble bursts, on the grounds that it was "too grim".

Well, that did make me curious. And it turns out, they have made that 20 page chapter available as a free download on their Amazon page:

More to Explore: Bonus Chapter
Read a bonus chapter (PDF)--available exclusively on Amazon.com--which details the authors' predictions and recommendations for a post-dollar-bubble world.

Now of course I know this is a promotional device for selling the book. Duh. But that doesn't mean that some of the ideas expressed aren't interesting. Lets have a look at a few excerpts and see:

[...] When the dollar bubble collapses, the huge government debt bubble will fall, too. That means the falling value of the dollar will have caused enough foreign investors to become concerned enough about the value of their dollar-denominated investments that they will no longer be willing to buy U.S. government bonds at a reasonable price. This means the government will not be able to refinance its debt (just like a company that loses the faith of its creditors) and instead the government will have to resort to inflation, tax increases, and budget cuts to deal with the situation (see Chapter 3).

Like a family without their credit cards, the U.S. government will be forced to live within the constraints of its actual income, which at this point will be a rapidly declining tax base, much like what California is now facing, but far worse because the U.S. government became very comfortable receiving so much income from deficit financing. Inflation would normally be an additional tool for the government to raise money, but inflation can only be raised so far without destroying a modern industrial economy, such as that in the United States. The amount of inflation the government can feasibly run was discussed in Chapter 3 (about 50 to 100 percent).

That means the government will not be able to create any big stimulus packages or tax cuts or anything of the sort. It will have to cut, cut, cut spending so it can live on its income. Some may see this as a refreshing change—a government that lives within its means. But it will not feel very refreshing. Many things we take for granted, like large pensions, will have to be curtailed. We have gotten very comfortable with a government that always has money and never has to worry about running out; a government that never has to raise taxes to fund wars or stimulus packages; a government with unlimited credit. That’s over.

Even during the Great Depression the government’s finances were rock solid and it could certainly borrow money, if needed. But, in the post-dollar-bubble world, the government will be like the rest of us, only worse. It will have its credit cards cut off and a much lower income while still having a massive debt that it can’t possibly make payments on or even pay interest on, and eventually it won’t make principal or interest payments. So, it will have to live within its means.

[...]

Key cuts will hit both the "guns and butter" of the government budget. Cuts in military spending will be much larger than contemplated today and will focus disproportionately on the Navy and Air Force.

On the "butter" side, the most important cut will be to make Social Security means tested, making Social Security essentially a welfare program. For those who have little or no income or assets, Social Security will definitely be there to help. However, for those who have income or assets, forget it.

In addition, Medicare (medical care for older people) reimbursements to doctors and hospitals will be reduced. Since huge numbers of unemployed people and retirees with no more retirement money will qualify for Medicaid (medical care for poor people), Medicaid will explode in size so reimbursements to doctors and hospitals will have to be cut from their already abysmally low levels, and there will be tougher rules on what gets reimbursed. A large percentage of doctors today won’t even accept Medicaid payments because the reimbursements are too low. But Medicaid will grow to be so important that doctors won’t have any choice but to accept its payments. Essentially, in a post-dollar-bubble world, Medicaid will become our national health care program.

High inflation will do much of the dirty work in cutting budgets. Remember, when inflation is high, budget cuts are accomplished simply by not raising budgets to match inflation. So, inflation will be blamed for much of the government budget cutting. [...]

It goes on to describe huge "progressive" tax increases, why they are unavoidable, how they will play out, etc. All important and interesting but too much for me to excerpt here.

There is lots more, but I'm going to skip to a few highlights:

[...] The high unemployment and high bankruptcy rates of the post-dollar-bubble economy, combined with a greatly pared down government will, for a while, create an unusual set of economic conditions. For example, in such a chaotic economic situation, there will be little incentive for people to pay their mortgages or other debts. Many of their creditors will be insolvent and there will be no significant market for selling the properties. Much of the management of these debts will be handed over to an overwhelmed government with little interest in foreclosure. Even if it did foreclose, who would it possibly sell the properties to? And there will be no serious financing available for buyers at that point, anyway. Certainly, the government won’t be able to provide financing.

A good decision for many people will be to simply stop paying their debts. Even rent may not be worth paying as evictions could become increasingly politically difficult for elected sheriffs to carry out. Plus, it will be difficult for landlords to find good tenants to replace the bad ones. Debt repayment will become a bit lawless during this period.

Businesses will follow a similar path as individuals. They will stop paying mortgages and other debts and even limit the rent they pay to what is needed to fund basic utilities and maintenance. They won’t be making much money and if they have to pay rent above basic costs, in many cases, they will go under—something the landlord doesn’t want to see either since there are no good tenants to replace them.

As a result of all this, squatters will be increasingly common for business, and even more common for individuals since it will be politically difficult, and of little economic advantage, to throw tenants out. Local governments will have very tight budgets and won’t have the resources to spend on throwing people (and voters) out of their homes so that the landlord can have a vacant property with no prospects of rental. This situation will not last forever, but in the meantime, people will take advantage of it.

[...]

Pension fund investments in stocks, bonds and real estate will plunge in value. Government contributions to pension funds will also plunge along with falling tax receipts. Government unions may protest, but the reality will be a lack of tax revenue and there will be little ability or interest in raising taxes to fund payments to employees who aren’t working while governments have to massively cut the number of employees who are working.

Yes, there may be lots of legal challenges, but in the end, the bottom line will be the bottom line. Also, since inflation will be high, the easy way to cut pensions will simply be to raise them less than inflation. If pensions are not inflation adjusted, they are easy to eliminate. If they are inflation adjusted, expect the laws to be changed so that they are no longer inflation adjusted.

Yes, there will be court fights, but the money simply won’t be there anymore. Even federal pensions will go the way of state and local pensions. So, clearly there will be will be no federal government bailouts of state and local pensions.

[...]

FDIC insured savings accounts are a bit different. There will likely be some sort of needs based payment for small insured accounts. Clearly, there won’t be full payment, but the government may be able to pay with inflated dollars some portion of FDIC insured savings when banks fail. Since so many banks will be failing, the government can’t possibly pay accounts that are above the insured level, but it could pay some amount of money on accounts under the maximum level of insurance, currently $250,000.

The government will also be able to maintain a payments mechanism so that there will be no problem conducting transactional banking business, such as writing checks or using debit cards. The government will also be able to support banks in making asset- based loans on items such as inventory and receivables. However, the government won’t be able to support banks to make mortgage loans, non-asset based business loans, commercial real estate loans, loans to buy businesses, credit card loans, etc.

[...]

No New “New Deal”

While some people now say they are worried about drifting toward socialism or "sharing the wealth," in fact there won’t be much wealth to share. Instead of the rich funding the poor, the middle class will shoulder most of that burden by paying very high taxes to fund nearly all of the enormous number of people on welfare. Instead of shared wealth we will have "shared poverty".

With the government essentially in default on its loans, it will have no way to raise money for its welfare programs, other than through taxes. And since there will be so few wealthy people left to tax, that leaves only the middle class and the much smaller upper-middle class to carry the load. Still, working and paying very high taxes, perhaps as high as 50 percent, will be better than not working at all.

[...]

The most important difference in the post-dollar bubble world from the pre-dollar bubble world won’t be lower stock or real estate prices, but interestingly, jobs. On a day-to-day level, the lack of jobs will be what affects people the most. Many people lucky enough to have jobs will move down the ladder, not up. For example, a former senior accountant at an accounting firm might have to take a job as a bookkeeper or very junior accountant at a business, and at much lower pay, rather than at an accounting firm Employees will work longer hours for less pay and in less appealing conditions. Benefits will be gone or reduced and competition for jobs will be fierce. Just about everyone will know they could be easily replaced.

However, it won’t be anything like the Great Depression of 1929 because of two important differences:

1. The nation will be much wealthier, so few will suffer like they did in the Great Depression.

2. Paradoxically, because we are much wealthier, unemployment will be much higher, likely in the 40- to 60-percent range, when counting the discouraged unemployed.

Unemployment can be much higher when the nation is wealthier because people don’t have to have jobs. Unemployed people can live with parents, children, relatives, or friends. Plus, there will be a solid safety net of welfare from the government, although people who are used to today’s prosperity will consider the net abysmally low.

In the Depression, if there were a job paying pennies for picking oranges (as in The Grapes of Wrath) you’d take it because you had to. In our much wealthier society, the people who do have jobs will be much better paid and will help support friends and relatives who are unemployed.

[...]

With unemployment in the 40- to 60 percent range, GDP will also drop by a similar amount, but again, even with a 50 percent drop, that would still be a $7 trillion economy in today’s dollars. That’s still pretty big bucks. However, it won’t feel like big bucks. And that is another big difference between the post-dollar-bubble world and the Great Depression: The psychological pain will be much greater for us today.

[...]

As mentioned earlier, This is because expectations were so very high prior to the Bubblequake; much higher than before the Great Depression. Real estate had gone up phenomenally, stock values had gone up phenomenally, and money was easy, not only in the United States but overseas, as well. It seemed like a new billionaire was born every minute. [...]

There is lots, lots more. How small businesses, student loans, education, banks etc. are going to be affected. And of course a pitch to read the whole book.

I'm not saying I think it's all true; but I can see the logic of many of the arguments. Anyway it's food for thought, in the interesting times we live in. Read the whole thing and see what you think.

Whether or not it's a glimpse of the Brave New World ahead of us, remains to be seen. At any rate, we shall see.
     

Who sucks, S&P or our Government?

I'd say, our overspending government:

Ouch! U.S. booted from Triple-A debt club

[...] On Friday, S&P downgraded the United States to AA+, an investment grade level just one notch below triple-A. It marked the first time the world's largest economy has been downgraded, since Moody's first gave the country a credit rating in 1917.

S&P cited estimates that U.S. government debt would balloon to 79% of the size of the entire U.S. economy by 2015, and 85% by 2021 -- a level S&P says is consistent with AA+ rated countries.

In comparison, estimates from the International Monetary Fund show triple-A rated Canada's debt is likely to only rise to 34% of its economy by 2015, and Germany's is forecast to rise to 52%. (The IMF does not publish forecasts out to 2021).
Your money in a AA-rated U.S.

The debt of Belgium, another AA+ rated country on S&P's list, is expected to grow to 85% of GDP by 2015, according to the IMF. [...]

If the growth of debt as a portion of GDP is the criteria they use for assigning ratings, and we are on a par with Belgium, which is also rated AA+, then isn't the changing of the rating for the United States justified? People and nations who over-extend themselves by borrowing too much, lower their credit ratings. Sad but true.

Yet, I know there are other nations on that 15 member AAA list that are having financial troubles too. The article didn't mention all their Debt as a portion of GDP growth projections, I'd like to see those.

Meanwhile, we are going to have to deal with the repercussions of this:

Dollar Weakens to Record Versus Franc as S&P Lowers U.S. Rating

[...] “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended the debt-ceiling impasse which had pushed the Treasury to the edge of default. Moody’s and Fitch also said downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

S&P’s move “highlights the much-less advanced pace of fiscal consolidation in the U.S., relative to Europe and the U.K.,” John Normand, the London-based global head of foreign- exchange strategy at JPMorgan Chase & Co., wrote in a report to clients.

Haven Rally

Foreign exchange strategists at Barclays Capital said in a note to clients that S&P’s move may initially lead to a rally in assets and currencies perceived to be a haven, such as the franc and yen, while causing currencies of economies that are depend on commodities to weaken. The dollar may also benefit from the “risk impact of the shock,” though longer-term U.S. “fiscal problems are likely to mean a weaker dollar.”

“S&P had been very clear about what it wanted to see in order for the U.S. to maintain its AAA rating, and the agreement reached last week had not met those criteria,” Paul Robinson, a strategist at Barclays in London, wrote in a note to clients. “Commodity currencies look most vulnerable in the short run, again because of the risk element.” [...]

This is what happens when you keep spending money you don't have. It's not politics, it's MATH.
     

"... don't give up on America"

The deal disappoints, but don't give up on America

Derbyshire, England (CNN) -- Tucked away here at a family reunion among rolling hills, one can easily drift into another, more pleasant world, but the old realities keep intruding. Time and again, English relatives have gingerly but worriedly asked, "What is to become of America after this debt struggle?"

How to answer? The truth is that none of us knows, and deep insights are especially elusive at this distance.

I try to tell them that the United States is going through a rough patch: the rise of lots of problems that we have allowed to fester over the years now coming to a head just when our politics are polarized, poisoned and paralyzed. Moreover, there is almost no one in high places who commands the full trust of the country -- from the White House to Wall Street, from Congress to the media.

But, I hasten to add, don't write off America -- we are usually at our best when we are down. These are the toughest tests we have faced since the 1930s and '40s, but remember how well we pulled together then.

[...]

Still, this is a deal that deserves only one hand clapping, not two. It fell far short of a "grand bargain," a dream scuttled by the tea party as well as the White House. In particular:

• With at least $10 trillion in new deficits expected over the next decade, it cuts only a little more than $2 trillion. The grand bargain called for $4 trillion.

• It solves neither of our biggest fiscal problems: reform of Medicare, Medicaid and Social Security and reforms of taxes that are not only fairer but bring in more revenues, especially from the affluent.

• It does not provide for an equal sharing of burdens: The middle class and working people are likely to bear the most.

• It fails to provide an extension of payroll tax relief and jobless benefits into next year, which are so needed in this economy.

• It could well weaken the economy in the near term and, given the debates that will now arise in this congressional committee, will set off a flurry of lobbying and uncertainty in a business community that desperately craves a clearer sense of policy and regulation.

• And it threatens to savage the Defense Department with cuts that will force the United States to pull back from its leadership role in the world and reduce the pay and benefits of those in uniform.

With the fight over, it is like waking up to a bad dream and realizing that much of the nightmare is still here.

The markets recognized that hard realities still persist on Monday after the deal was done -- stocks sank at the end of the day -- and the rest of us will likely get our dose Friday with new unemployment numbers. The politicians will immediately turn their attention to jobs, but they seem to be mostly out of ammunition and so is the Fed. (QE 3 anyone?) [...]

QE3? I sincerely hope not. QE1 & 2 have only created more problems, and devalued our currency. Why would QE3 be any different? Why keep doing what doesn't work? Unless you WANT to collapse our currency and destroy our economy?

I've resisted the temptation to blog on all this; it's been such a dog and pony show. And if doing things like balancing the nations budget and living within our means are now considered to be radical, dangerous "fringe" ideas, I can only say, "Where are all the grown-ups?". If this is what America has become, then I can only wonder if it can, or even should, survive? I only say that because, Nature does not tend to favor the foolish for survival.

No, I've not given up yet. But it's hard not to feel pessimistic as we continue following policies that are failing us. Also, it's taken a while for us to get in this mess; I suspect getting out of it will not happen in a hurry either.

The author of the article ends his piece by saying: "Can Gabby Giffords just show up a few more times this summer? She surely reminds us that no one should ever give up on America." That's a nice sentiment, but we are going to need a lot more than that. We are about to see if we have what it takes.
     

Are voters really that dumb, or is it spin?

Unbelievable:

Lawmakers snipe, Wall St. frets as deadline nears

[...] Despite McConnell's assertions that the debt problem belongs to Obama, fresh polling from Quinnipiac University suggested voters would be more apt to hold Republicans responsible than Obama, by 48 percent to 34 percent, if the debt limit is not raised. The same survey showed voters were about evenly split on whether they're more concerned about raising the limit and increasing government debt, or seeing the government go into default and damaging the economy.

"The American people aren't very happy about their leaders, but President Barack Obama is viewed as the best of the worst, especially when it comes to the economy," said Peter Brown, assistant director of Quinnipiac's Polling Institute.

That helps explain why McConnell put forward a plan that would give Obama new powers to overcome Republican opposition to raising the debt ceiling.

The proposal would place the burden on Obama to win debt ceiling increases up to three times, provided he was able to override congressional vetoes — a threshold Obama could manage to overcome even without a single Republican vote and without massive spending cuts. Conservatives promptly criticized the plan for giving up the leverage to reduce deficits. But the plan raised the prospect of combining it with some of the spending cuts already identified by the White House in order to win support from conservatives in the House.

In an interview with radio talk-show host Laura Ingraham, McConnell described his plan in stark political terms, warning fellow conservatives that failure to raise the debt limit would probably ensure Obama's re-election in 2012. He predicted that a default would allow Obama to argue that Republicans were making the economy worse.

"You know, it's an argument he has a good chance of winning, and all of a sudden we (Republicans) have co-ownership of a bad economy," McConnell said. "That's a very bad positioning going into an election." [...]

What the hell is "Quinnipiac's Polling Institute"? Never heard of them. Just some university poll being used for White House spin? Gallop polls are more widely recognized, see what they say:

U.S. Debt Ceiling Increase Remains Unpopular With Americans
More are concerned about higher level of spending than risk of economic crisis

PRINCETON, NJ -- Despite agreement among leaders of both sides of the political aisle in Washington that raising the U.S. debt ceiling is necessary, more Americans want their member of Congress to vote against such a bill than for it, 42% vs. 22%, while one-third are unsure. This 20-percentage-point edge in opposition to raising the debt ceiling in Gallup's July 7-10 poll is slightly less than the 28-point lead (47% vs. 19%) seen in May. [...]

Sounds more believable to me. But a whopping 1/3 "unsure"? That's scary.

Even with 42% of voters against raising the debt ceiling, the Republicans will still allow Obama to do it, IF he also agrees to significant spending cuts. But he just can't (or won't) do it.

The press frequently called Bush "divisive", even as he frequently gave in to Democrats. But this president gives in to nothing, demonstrates no flexibility, and somehow, he's supposed to be a "uniter"? I'm not seeing it. And that's too bad, because a uniter is what we desperately need.

Gallup also said this:

On Deficit, Americans Prefer Spending Cuts; Open to Tax Hikes

PRINCETON, NJ -- Americans' preferences for deficit reduction clearly favor spending cuts to tax increases, but most Americans favor a mix of the two approaches. Twenty percent favor an approach that relies only on spending cuts and 4% favor an approach that uses tax increases alone.

[...]

Responses on both sides to a large degree reflect the arguments political leaders are making. Two of the most common, and arguably the dominant themes of the open-ended responses, are concerns about the effect that not raising the debt limit will have on the economy versus concerns that raising it will not sufficiently address government spending. In the same poll, Gallup asked Americans which of these two risks concerned them more, and the public expressed greater concern about raising the debt ceiling without a plan for major cuts in future government spending (51%) than about the potential harm to the economy if the debt ceiling is not raised (32%).

Implications

Government spending seems to be the primary worry for Americans when their opinions are probed about raising the debt limit. Government leaders appear to be listening, as party leaders are proposing major cuts in future government spending as a way to persuade members of Congress to vote for an increase in the nation's debt limit. In terms of deficit reduction, Americans seem to generally back an approach that relies more on spending cuts than tax increases. A key question to be answered in the days ahead is whether an agreement to raise the debt ceiling will include any tax increases. This is something many Republican members of Congress oppose, but most Americans do not seem to share this view. [...]

Large cuts in spending, along with some tax increases, would be a compromise that most Americans would accept. A true compromise would have to encompass both. The Republicans won't be able to budge from their position, unless Obama agrees to huge spending cuts. The President needs to take the lead in getting us there, but I doubt that he has what it takes.
     

Confidence is slipping as debt grows...

Last month it was US bonds. Now, this:

S&P cuts long-term outlook for US debt to negative

WASHINGTON – Standard & Poor's Ratings Service downgraded its outlook Monday on U.S. government debt, expressing unprecedented doubts over the ability of Washington to bring the massive federal budget deficits under control.

The agency lowered the long-term outlook to "Negative" from "Stable," saying there is a one in three chance the United States could lose its top investment rating on its debt in the next two years.

S&P said it has little confidence that the White House and Congress will agree on a deficit-reduction plan before the fall 2012 elections and doubts any plan would be in place until after 2014.

The government is on pace to run a record $1.5 trillion deficit this year, the third consecutive deficit exceeding $1 trillion. President Barack Obama and congressional Republicans are sparring over how to reduce the nation's red ink. Their differences over where to cut have put a crucial decision over raising the nation's debt limit in jeopardy.

"We see the path to agreement as challenging because the gap between the parties remains wide," said Standard & Poor's credit analyst Nikola G. Swann.

Stocks plunged after the rating agency lowered its outlook The Dow Jones industrial average fell more than 200 points in afternoon trading.

S&P reaffirmed its investment-grade credit ratings on the U.S. long- and short-term debt itself. But it said the U.S. government is in danger of losing the top ranking if it doesn't come up with a credible plan for reducing its debt. [...]

Time is running out. It never should have been allowed to get this bad.
     

Is the Tea Party's approach to debt flawed?

At first I assumed that this article was just another hit piece against the Tea Party. But I think it's more subtle, and on reading it, I think it does bring up some interesting points:

National debt: Where the Tea Party is wrong

NEW YORK (CNNMoney) -- First, let's give the Tea Party props for thinking critically about how much money the government should spend -- energizing the debate about the national debt.

Now for the fact check: Some of the Tea Party arguments for how to address deficits are just plain misguided.

Here are four assertions Tea Partiers make that don't pass the sniff test.

1. To kill debt, cut spending but don't raise taxes: A staple Tea Party promise is to cut spending and keep taxes low.

"[Americans] want spending cuts now, not in ten years. They don't want more job-killing tax increases," Rep. Joe Walsh of Illinois said in a recent statement.

Walsh went on to say that the $100 billion in spending cuts that many in the House GOP wanted to make over the next seven months "is what tackling the deficit looks like."

Not quite.

For starters, the cuts proposed by the House GOP primarily hit non-defense discretionary programs, which make up less than 15% of the total budget

Budget experts on the left and right say successful debt reduction can only occur when spending is cut across all areas of the budget.

And excluding revenue increases from the mix is the equivalent of one hand clapping: ineffective given the size of the country's debt.

Ronald Reagan, often revered as the king of small government and low taxes, signed into law some of the biggest tax cuts in modern history. But Reagan also approved some of the biggest tax increases, too. And he did so to help reduce swelling deficits.

Reagan raised more revenue not by raising tax rates but by making it harder to evade taxes and by reducing the number of tax breaks on the books. [...]

Read the whole thing, which contains embedded links and a video too.

I could nit-pik some things, but there are some relevant points made. Because we already are in debt, we have to manage the existing debt, while simultaneously trying to reduce it. So many things are interconnected, if you suddenly cut off some things, there will be chain reactions in other areas. It's almost like we have to back our way out of some things, before we can start cutting them.

Just as it took time to get this messed up, it's going to take some time to get out. But thrashing about wildly could be just as bad as paralysis. We need to find that middle path that works, with minimal time wasted and optimal damage control. It may mean some compromises for an interim period. I pray that Congress is up to the task. They must be.

I think this would be the best approach for Congress to follow:

Budget cutting, the REASONable way

It's workable, and makes sense in so many ways.
     

World's biggest bond fund dumps US debt

Pimco's Gross dumps U.S. debt

NEW YORK (CNNMoney) -- Pimco's Total Return Fund (PTTRX), the world's biggest bond fund, slashed its exposure to U.S. government debt to zero last month.

It's the second month in a row that well-known fund manager Bill Gross has drastically reduced Pimco's exposure to U.S. government debt.

Gross has been very vocal about his feelings toward U.S. interest rates, saying in January that they were "robbing" investors and that U.S. government debt should be "exorcized" from investors' portfolios.

The Total Return Fund held about 22% of its holdings in U.S. government debt as recently as December, but reduced those holdings to about 12% in January.

[...]

Gross's comments typically carry considerable influence on investors because his Total Return Fund is by far the world's largest bond fund with more than $240 billion in assets under management. It's also the best-performing bond fund for the last 15 years, according to Morningstar.com.

In his February newsletter, Gross said he believes U.S. Treasuries are trading at a yield of 1.5 percentage points below where they should be historically, making them an unattractive place to invest for the time being. Gross also reiterated that stocks and bonds may struggle this summer when the Federal Reserve ends its second quantitative easing program. [...]

And what affect will this have on people's confidence in US bonds? It's not hard to guess.

There were warnings last year that the Bond Market won't wait much longer for us to get our house in order, to balance our budget. Is that what's coming to pass now?
     

Does America's No. 1 creditor, China, hold the ultimate weapon? Would they use it?

China's Debt Bomb

'He who pays the piper calls the tune": That old saying captures perfectly America's growing dependence on our No. 1 creditor in the world, Communist China.

By their carelessness Congress and the Obama administration are steadily handing over control of America's economic and financial future to a handful of Chinese officials and generals in Beijing. Those who think the Chinese won't use that control if they feel they have to are ignoring history -- and the Chinese.

The ancient military strategist Sun Tzu said that the best strategy was to render an opponent's army helpless even before the battle began. America may still have the biggest and best military in the world.

But many at the Pentagon are starting to realize that, thanks to our growing fiscal irresponsibility, we may be surrendering control of America's destiny to a rival superpower -- and all without a shot being fired.

[...]

History shows that nations that can't control their economic fortunes don't control much else. Debt freezes destinies -- as every credit-card holder knows.

Europeans discovered that after World War II, when they lost the power to make major decisions without first checking with their lender-in-chief, the United States. At that time, we used our economic dominance to rebuild Europe, not reduce it to impotence.

On the other hand, If US-China relations continue to deteriorate -- over arms sales to Taiwan, Internet freedom issues, Chinese industrial espionage and a Chinese military build-up that looks more and more like it's directed at challenging US power in Asia -- our lenders-in-chief in Beijing may not be so scrupulous.

Indeed, back in 1999, the Chinese literally wrote the book on how to use economic asymmetries as a blunt instrument, entitled "Unrestricted Warfare."

It draws no meaningful distinction between military, economic and political force (including using cyberspace) as means to defeat an enemy. Instead, it shows how a nation can dominate its opponents not with planes, ships and soldiers, but with foreign exchange rates, trade embargoes and armies of computer hackers.

Suppose that in retaliation for some slight China decides to stop buying Treasury bonds, forcing our debt to cost us even more. A furious US Congress hits back with trade sanctions. China then responds by driving up the price of the dollar, crippling US exports -- or, alternately, it crashes the dollar by dumping its foreign reserves, even as Chinese computer hackers slow down our banks' ability to respond to the crisis.

No one will call this a war. But it will certainly fit the classic definition of war as politics by other means. And the Pentagon knows it.

Last March, the Pentagon held its first-ever economic-warfare war game, with China as the putative opponent and with economists and bankers (including from UBS) helping out.

Details of what unfolded are still classified. However, sources told Fox Business News that the scenario played out as planned. That was the good news.

The bad news is that China won. [...]

So what's it all mean? Read the whole thing, and connect the dots.

And yes, it also mentions reasons why China would be reluctant to do many of these things. The question is, what changes in circumstances would make them less reluctant?
     

Budget cutting, the REASONable way

Reason.tv: Budget Chef Presents: How to Balance the Budget W/O Raising Taxes!

Using just a big piece of pork, a large knife, and a small knife, the budget chef shows how to balance the federal budget by 2020.

As a special treat, he does it without raising taxes from the current Bush-era rates!

It seems like a complicated preparation at first, but it's so simple that almost any elected official should be able to pull it off like a pro!

Domestic and foreign investors will love this, and it will also help create a stable environment conducive to long-term, sustainable economic growth.

Between 2011 and 2020, the Congressional Budget Office estimates that total federal outlays - for defense, agriculture subsidies, Medicare, Social Security, you name it - will total a whopping $42.1 trillion (in 2010 dollars). To bring outlays down to revenue, we need to cut a total of $1.3 trillion in total expenditures over the next 10 years.

That sounds like a really tall order until you realize that it cutting just 3.6 percent a year for each of the next 10 years. To put it in dollar terms, it means cutting about $130 billion a year from budgets that will average over $4 trillion.

That's not so hard now, is it? By making small, systematic cuts to a federal budget that is larded up with more fat than an Ponderosa buffet, we can balance the budget without even nicking essential services. [...]

The video is just a summary. It's based on a much more detailed article:

How to Balance the Budget Without Raising Taxes
The 19 Percent Solution

A value-added tax, a soda tax, a gas tax, banning earmarks, freezing a portion of federal spending at "pre-stimulus" levels - there’s no shortage of ideas being thrown out to fix the country’s disastrous balance sheet, which threatens not just near-term economic recovery but the possibility of long-term growth. Like last week's report from the president's Commission on Fiscal Responsibility and Reform, most of the current plans to fix the country's finances rely more on increases in revenues than on cuts in spending. In part due to its heavy reliance on revenue hikes, the commission, charged with balancing the budget by 2020, failed to win enough votes of its own members to present its recommendations to Congress.

Which raises the question: Can America really reduce its debt and deficit without raising taxes to job-killing rates or cutting essential services to developing-world levels? The answer is not simply yes, it's that we have to.

Raising government revenue - taxes - substantially is not only bad policy, it has proven difficult and ultimately unsustainable for any length of time in the past 60 years. Since 1950, annual government revenue, as a percentage of Gross Domestic Product (GDP), has averaged just below 18 percent despite every attempt to jack it up or tamp it down. Our post-World War II experience shows that if the government is going to live within its means, it can't spend much more than 18 percent of GDP. Period.


Which is one reason to be happy that the debt commission's recommendations won't be presented to Congress anytime soon. The report assumes revenue equal to 21 percent of GDP and struggles to get spending to "below 22% and eventually to 21%" of GDP. That’s a recipe for disaster that would guarantee deficits and red ink.

Similarly, former Sens. Bill Bradley, John Danforth, and Gary Hart, working with the Committee for a Responsible Budget, have offered up a plan to balance the budget by 2020 that relies on revenue hitting 20.8 percent of GDP, a level that hasn't been achieved once in the past 60 years. Republicans have not advanced any realistic near-term plans. Rep. Paul Ryan's (R-Wisc.) Roadmap to the American Future does not balance the budget until 2063. The pre-election GOP’s Pledge to America is worthless since it fails to provide specifics (and to the extent it does, it is no good).

The current situation is a bipartisan disaster that requires immediate action. Since Bill Clinton left the White House in 2001, total federal spending has increased by a massive 60 percent in inflation-adjusted 2010 dollars. In fiscal year 2010, which ended September 30, the federal government spent $3.6 trillion, or 25 percent of Gross Domestic Product. That’s the most spending, in terms of percentage of GDP, since 1946. Likewise, last year’s $1.5 trillion deficit, as a percentage of GDP, was the largest deficit since 1945.

Most economists talk about a debt-to-GDP ratio of 60 percent as a trigger point that makes investors very nervous about a country's ability to pay its obligations. The debt to GDP ratio was 63 percent this year and the Congressional Budget Office (CBO) projects it will be 87 percent in 2020. Just three years ago, it was 36.5 percent. Not good signs.

So, what would it take to bring federal spending into line with plausible levels of revenue?

The CBO, the non-partisan agency charged with estimating the effects of legislation on government costs, has produced a long-term budget outlook in which Bush-era tax rates remain unchanged. Their conclusion is that over the next decade, "government revenues would remain at about 19 percent of GDP, near their historical averages." That's actually a bit higher than the historical average, but is within the bounds of reason. [...]

There's a lot more. Read the whole thing, the original article also has many embedded links too. It's so refreshing to read about real, actual, REASONABLE solutions!

     

Brits, Americans, and cutting budgets

Can the Brits teach us something about it? Yes, and no:

Lessons from London
The British Tories have demonstrated how a newly elected party can deliver a program of radical spending cuts.

Deficit hawks are flying high in Washington.

With rediscovered virtue, Republicans are vowing to rein in government spending and cut the deficit. Incoming House speaker John Boehner argues that voters want “a smaller, less costly” government, while Republican senator-elect Pat Toomey says that “the government has overreached dramatically. . . . Spending has been wildly excessive.” Even Democrats are singing a new tune, with Senate majority whip Dick Durbin saying that his party will be looking for compromises: “We’re going to be giving on spending, I’m sure.”

But restoring fiscal sanity won’t come easily. The Republicans’ $100 billion in promised spending reductions will hardly make a dent in last year’s $1.29 trillion deficit. To make a difference, would-be cutters will have to convince a skeptical electorate — polls consistently show that most substantial, specific spending cuts are unpopular — and navigate a treacherous two-year electoral cycle.

Across the Atlantic, however, the British Tories have demonstrated how a newly elected party can deliver a program of radical spending cuts. The coalition government, led by Conservatives and supported by Liberal Democrats, aims to cut spending by £81 billion and departmental budgets by 19 percent over five years, eliminating the U.K.’s structural deficit. It is a strikingly bold plan: An estimated 500,000 public-sector jobs will be lost; higher-education spending will be reduced by 40 percent; and departments will be cut by up to 51 percent.

These dramatic cuts illustrate the kind of action the U.S. will eventually have to take. The U.K.’s fiscal context is roughly analogous to America’s: The current budget deficit totals 11 percent of GDP in the U.S and 10 percent in the U.K., while the national debt is 66 percent of GDP in the U.S. and 69 percent in the U.K. (2010 figures). In many ways, however, the Conservatives’ success at tackling the deficit illustrates the roadblocks that Republicans face en route to implementing such policies. [...]

It goes on to describe the reasons why the Brits have a good chance of success... and why some of those reasons will NOT apply to American conservatives, due to differences in political structure and dynamics, and election cycles. It makes for an interesting comparison. America will have to find it's own way.

     

National Debt: What the Founder's said about it

Our national debt would horrify the Founders

[...] There is no doubt that George Washington, our first president, Alexander Hamilton, our first secretary of the treasury, and Thomas Jefferson, drafter of the Declaration of Independence and our third president, would be horrified by the present financial condition of the federal government. Public debt was anathema for Washington, who in his Farewell Address admonished us to "cherish public credit," noting that "one method of preserving it, is to use it sparingly ... avoiding likewise the accumulation of debt." Washington warned that one generation could spend itself into great debt, then "not ungenerously throwing upon posterity the burthen. ..."

Hamilton's greatest service to the nation was his management of the federal government's assumption of states' debt accumulated during the Revolutionary War and under the Articles of Confederation. He knew firsthand the devastating effects of growing public debt on every sector of a society. As historian David Barton notes, Hamilton's most succinct advice to his countrymen was that they always remember "to avoid as much as possible the incurring of any new debt."

Jefferson was Hamilton's great nemesis in the political world, but the two adversaries agreed on the evils of public debt. As evidence of their agreement on this issue, Barton points to Jefferson's statement in an 1816 letter to John Taylor of Caroline: "The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." [...]

How far we have come from our roots. And in our over-reaching upward, how far we have to fall.
     

Our economy: when will inflation begin?

Perhaps as soon as next year? 5.5 percent inflation, or higher:

Angry Voters Are Right: Growing Debt Can Slow the Economy

[...] Anyone who ponders the question of why voters are so hot about public sector debt will quickly discover that otherwise diverse voters are relatively united in their apprehension that ballooning sovereign debt threatens our economy.

Are voters right to be so worried about how rising debt threatens their economic future, or are some politicians and most pundits right that, once again, the voters’ emotions have won over their reason?

Well, it turns out that the voters are right, if new research from Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University stands up under academic scrutiny. Reinhart and Rogoff study the relationship between rising debt levels, inflation and economic growth rates for 44 developed and developing countries. Their dataset contains 3,700 annual observations across a wide range of political and economic settings.

What did they find? For the period 1946 through 2009, developed countries (which includes the United States) grew at an annual rate of just shy of 4 percent when debt was no greater than 30 percent of GDP. For debt burdens above 30 but below 90 percent, economic growth slowed down but remained, on average, around 3 to 3.5 percent per year. However, a debt burden of over 90 percent of GDP was associated with a significantly slower economy: the average growth rate is negative and the median rate is just at 2 percent.

When Reinhart and Rogoff focused just on the U.S., the association of high debt burden and economic slowdown becomes even more pronounced. They use data from 1790 through 2009. When debt rises to 90 percent of GDP, both the average and the median economic growth rates are negative and the inflation rate skyrockets to above 5.5 percent.

What makes this research so telling is the commonly accepted prediction that U.S. sovereign debt is on its way to 100 percent of GDP and doing so quickly. The International Monetary Fund predicted that total U.S. government debt would reach that level in 2015, just four years from now. The Congressional Budget Office forecasts that debt will be above 90 percent by 2020. If one adds in the debt U.S. government agencies owe one another, the U.S. debt could be above 100 percent next year. [...]

That may go a long way in explaining some of the grim financial forecasts for next year. Is it true? We shall see soon enough.


Also see:

Our true national debt: $130,000,000,000,000.
     

Our true national debt: $130,000,000,000,000.

What!?! Isn't it supposed to be "only" 14 trillion, instead of 130? Not if you use REAL accounting practices, like real businesses have to do.

The Other National Debt

[...] Accountants get a bad rap — boring, green-eyeshades-wearing, nebbishy little men chained to their desks down in the fluorescent-lit basements of Corporate America — but, in truth, accountants wield an awesome power. In the case of the federal government, they wield the power to make vast amounts of debt disappear — from the public discourse, at least. A couple of months ago, you may recall, Rep. Henry Waxman (D., State of Bankruptcy) got his Fruit of the Looms in a full-on buntline hitch when AT&T, Caterpillar, Verizon, and a host of other blue-chip behemoths started taking plus-size writedowns in response to some of the more punitive provisions of the health-care legislation Mr. Waxman had helped to pass. His little mustache no doubt bristling in indignation, Representative Waxman sent dunning letters to the CEOs of these companies and demanded that they come before Congress to explain their accounting practices. One White House staffer told reporters that the writedowns appeared to be designed “to embarrass the president and Democrats.”

A few discreet whispers from better-informed Democrats, along with a helpful explanation from The Atlantic’s Megan McArdle under the headline “Henry Waxman’s War on Accounting,” helped to clarify the issue: The companies in question are required by law to adjust their financial statements to reflect the new liabilities: “When a company experiences what accountants call ‘a material adverse impact’ on its expected future earnings, and those changes affect an item that is already on the balance sheet, the company is required to record the negative impact — ‘to take the charge against earnings’ — as soon as it knows that the change is reasonably likely to occur,” McArdle wrote. “The Democrats, however, seem to believe that Generally Accepted Accounting Principles are some sort of conspiracy against Obamacare, and all that is good and right in America.” But don’t be too hard on the gentleman from California: Government does not work that way. If governments did follow normal accounting practices, taking account of future liabilities today instead of pretending they don’t exist, then the national-debt numbers we talk about would be worse — far worse, dreadfully worse — than that monster $14 trillion–and–ratcheting–upward figure we throw around. [...]

This article goes on to show, point by point, using real accounting principles, what the actual debts are that will be coming home to roost. And along the way, explaining the political reasons as to how and why it's been allowed to happen.

More proof that government is not only not the answer; it's often the problem. Of course we need government, but we also need BALANCE. Especially on the balance sheet, as every real accountant knows.

     

National Debt, Deficits and our National Security

Deficit Balloons Into National-Security Threat

[...] The U.S. government this year will borrow one of every three dollars it spends, with many of those funds coming from foreign countries. That weakens America's standing and its freedom to act; strengthens China and other world powers including cash-rich oil producers; puts long-term defense spending at risk; undermines the power of the American system as a model for developing countries; and reduces the aura of power that has been a great intangible asset for presidents for more than a century.

"We've reached a point now where there's an intimate link between our solvency and our national security," says Richard Haass, president of the Council on Foreign Relations and a senior national-security adviser in both the first and second Bush presidencies. "What's so discouraging is that our domestic politics don't seem to be up to the challenge. And the whole world is watching."

In the 21st-century world order, the classic, narrow definition of national-security threats already has expanded in ways that make traditional foreign-policy thinking antiquated. The list of American security concerns now includes dependence on foreign oil and global warming, for example.

Consider just four of the ways that budget deficits also threaten American's national security:

• They make America vulnerable to foreign pressures.

The U.S. has about $7.5 trillion in accumulated debt held by the public, about half of that in the hands of investors abroad.

Aside from the fact that each American next year will chip in more than $800 just to pay interest on this debt, that situation means America's government is dependent on the largesse of foreign creditors and subject to the whims of international financial markets. A foreign government, through the actions of its central bank, could put pressure on the U.S. in a way its military never could. Even under a more benign scenario, a debt-ridden U.S. is vulnerable to a run on the American dollar that begins abroad.

Either way, Mr. Haass says, "it reduces our independence."

• Chinese power is growing as a result.

A lot of the deficit is being financed by China, which is selling the U.S. many billions of dollars of manufactured goods, then lending the accumulated dollars back to the U.S. The IOUs are stacking up in Beijing.

So far this has been a mutually beneficial arrangement, but it is slowly increasing Chinese leverage over American consumers and the American government. At some point, the U.S. may have to bend its policies before either an implicit or explicit Chinese threat to stop the merry-go-round. [...]

It goes on to give many more examples of the threats this is creating to our sovereignty and our national security. Yikes. What ARE we doing? And what should we be doing differently, to stop or reverse this trend?

More on that theme follows, in this interview with David Walker, author of the book "Comeback America: Turning the Country Around and Restoring Fiscal Responsibility." Here is an excerpt of the interview:

What Every American Should Know About the National Debt

[...]

Q. Who do we owe the money to?

A. Fifty percent is owed to foreign lenders. China is number one, Japan is number two, a block of oil producing nations comes next.

Q. Do you think that affects our foreign policy toward China?

A. Yes, it does. It's already been manifested because one of the reasons American tax payers now guarantee $5 trillion in Fannie Mae and Freddie Mac debt is because the Japanese and the Chinese demanded it.

Q. Is there a point at which China could say, 'We've decided to stop lending you money?'

A. What's more likely is that China will say, 'We're not going to lend you money unless you pay us higher interest rates.'"

Q. What should people expect their elected officials to do if they're acting responsibly and taking care of the country?

A. In the short term the deficits are going to be high because of the recession, because of two wars, because of unemployment, but what we need to deal with is the structural imbalance. Once the economy recovers, once unemployment gets down, and the wars are over, we still have large and looming deficits. That's what threatens the ship of state.

President Obama says he wants to freeze a part of discretionary spending for three years. That's a good first step, but we're going to have to do a lot more than that. He supports pay-as-you-go rules, but there are big loopholes in the pay-as-you-go-rules. Thirdly, he talks about creating a fiscal commission that would make recommendations on tougher budget controls, Social Security, Medicare and tax reforms. We clearly need to do that to engage the American people and to get a vote in Congress in 2011. That's very, very important to maintain the confidence of our foreign lenders...if we lose the confidence of our foreign lenders, we're in deep trouble.

Q. What does trouble look like?

A. That means the dollar will drop dramatically, interest rates will go up, unemployment would go up dramatically and you'll have something much worse than a recession. It would be ugly. The important thing is we can avoid that and that's what the book's about. [...]

More and more this is becoming obvious. When will the the politicians in D.C. "get it?" Walker has written a book about solutions, it's not as if there aren't any. We need to start applying those solutions NOW.
     

Social Security Insecurity: an Orchestrated Crisis

Social Security's Unexpected Deficits Show Urgent Need for Reform

Starting this year, Social Security will spend more in benefits than it will receive from its payroll taxes. This is somewhat unexpected as just last year, the 2009 cash surplus was predicted to be about $80 billion. Even in May of this year, the program's actuaries predicted a roughly $19 billion surplus. However, they failed to allow for the full effects of the recession, and the soaring unemployment both reduced tax collections and increased the number of workers who were forced to take early retirement.

This is very bad news for taxpayers, but worse is yet to follow. The 2009 deficit of about $10 billion will be followed by a 2010 deficit of about $9 billion. If there is a strong recovery--which is questionable at best--the program could briefly return to surpluses. But by 2016, deficits will return and continue permanently. A far more likely scenario is that Social Security will run deficits from this point on.

The Reality of the Trust Fund

These deficits do not mean that benefits will be cut, but they do increase the burden on taxpayers to pay them. On top of the $1 trillion-plus deficit predicted for this year to pay for the Obama Administration's programs, taxpayers will have to find still more money to pay Social Security's deficits. [...]

This article and the following one make the claim that high unemployment is forcing people to take early retirement:

Social Security strained by early retirements

WASHINGTON (AP) - Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s.

The deficits - $10 billion in 2010 and $9 billion in 2011 - won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.

Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn't expect the increase to be so large.

What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security.

"A lot of people who in better times would have continued working are opting to retire," said Alan J. Auerbach, an economics and law professor at the University of California, Berkeley. "If they were younger, we would call them unemployed."

Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs.

Some have no choice. [...]

Where we live, there are plenty of jobs that nobody wants to do. At our local supermarkets, the "bag boy" is often a senior citizen old enough to be my mother or father. I've noticed a lot of jobs that used to be done by teenagers when I was a teenager, are now being done by seniors.

I did a post recently about working seniors. I think that those that have to keep working, take whatever they can get. Still others take what they can get, because they want to keep working.

As for these growing numbers of people taking early retirement, I have to wonder how many of them are doing so now, because they are afraid that if they wait, they won't get anything by the time they do retire?

It's obscene that our government is trying to create a massive new health care bureaucracy, when we don't even have the money to fund Social Security. If they can't manage existing government programs, what business do they have creating new ones? Yes we need health care reforms, but if they aren't sustainable, what is the point? To destroy what we already have, in order to orchestrate a crisis? To sabotage our government and economic systems, causing them to fail by deliberately overloading them, so they can then be replaced with something else?
     

Debt servicing, America's GDP, and inflation

From the Financial Times:

Exploding debt threatens America

[...] Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years. [...]

Inflation could lower the debt to GDP ratio, but would cause prices to rise. It could quickly become unmanageable.

The article says there is still time to reverse this. But does anyone in government have the will to do it?
     

Even in 2002 the Congressional Budget Office saw the unsustainable path we're following

And everyone in Washington knew. Maynard at TammyBruce.com had this recent post, about where the Congressional Budget Office said we are headed, even before the economic crisis kicked in:

Things to Come

[...] Take a look at this report from the Congressional Budget Office, "A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075". This report was prepared in 2002, before the budget went to hell. So this is a projection from a better day. Take it as an optimistic projection. (Fox just issued a report noting that Social Security and Medicare would go broke several years sooner than previously expected, and that many trillions of dollars would be needed to close the gap. Again, this is independent of the recent spending binges.)

Here's the key chart, based on spending patterns and demographics as of the good old days of 2002:

Federal outlays as a percentage of GDP
Two notes: First, overall expenses are rising steadily and dramatically from approximately now until the end of the graph in 2075, where it's at 40% of GDP and rising.

Second, the cause of the rise is Social Security, Medicare, Medicaid, and interest on the rising debt. Demographics will catch up with us, pushing claims through the roof.

In other words, the Federal Government has long been on autopilot to transform itself into a machine whose major function is to seize wealth from party "A" and hand it over to party "B". (And, with respect to servicing the national debt, our government's fundamental job will be to suck money out of our children's pockets and pay it to China.) None of the rise has to do with defense or infrastructure maintenance or any of what we would regard as legitimate functions of government. In fact, real government functions will get crowded out by the mandatory giveaway programs.

This other chart is also important. It's the projected graph of Federal income and outgo. As you see, the anticipated expenses rise but the income does not. That's because the taxation levels were projected to be stable. So the deficit heads skywards.

Federal revenues versus outlays as a percentage of GDP

So we were heading for a big problem as of 2002. And everyone in Washington knew it.

Then along came George Bush and Barack Obama, evil twins that decided the Federal Government hadn't made enough commitments. So they both grew the government and made more big, unfunded promises and are spending even more money.

On the revenue side, George Bush cut taxes for everyone. And Barack Obama promised to cut taxes for 95% of the people.

In other words, with disaster looming on the horizon, our political leaders have aggressively chosen the course that will magnify the problem and cause it to strike sooner.

How can this be happening? Have we gone mad? Am I saying anything here that is either unimportant or less than obvious?

Will we change course?

So where does this all lead? Obviously to some sort of unpleasantness on a grand scale. [...]

Maynard reluctantly speculates about where all this might go, and what might be done about it. Or not. I've done speculation of my own about what sort of "unpleasantness" this could be leading to, such as the collapse of US currency, or a growing vulnerability due to increasing military weakness and poor technology decisions without safeguards.

I hate all that depressing stuff. On the whole, I prefer to cultivate a positive outlook, and work toward improvement. But to be balanced, you also have to be aware of dangerous pitfalls, so you can avoid them. Sometimes ringing the alarm bell is enough to keep the ship from hitting an iceberg. Forewarned is forearmed, for those who are paying attention.

I don't know what is going to happen, but it does seem obvious that we are going down a path that is unsustainable. Something, somewhere, sometime, has gotta give, it just can't continue on like this.


Related Links:

Deep Impact: The Federal Deficit

Global Banking Crisis? Leading to...?

Is Obama compounding Bush's mistakes?

Can the Dow Jones Industrial Average and Age Demographics foretell Economic Depression?
     

What happens when Inflation returns?

Inflation WILL return once the economy starts to recover, because we will also have massive debt and compounded interest to pay on it. We are facing an unsustainable situation.

Obama sows seeds of demise

[...] Right now, Obama’s ratings must be pleasing to his eye. Voters like him and his wife immensely and approve of his activism in the face of the economic crisis. While polls show big doubts about what he is doing, the overwhelming sense is to let him have his way and pray that it works.

But beneath this superficial support, Obama’s specific policies run afoul of the very deeply felt convictions of American voters. For example, the most recent Rasmussen Poll asked voters if they wanted an economic system of complete free enterprise or preferred more government involvement in managing the economy. By 77-19, they voted against a government role, up seven points from last month.

[...]

For Americans to conclude that they disapprove of their president in the midst of an earth-shaking crisis is very difficult. But as Obama’s daily line moves from “I inherited this mess” to “There are faint signs of light,” the clock starts ticking. If there is no recovery for the next six months — and I don’t think there will be — Obama will inevitably become part of the problem, not part of the solution.

And then will come his heavy lifting. He has yet to raise taxes, regiment healthcare or provide amnesty for illegal immigrants. He hasn’t closed down the car companies he now runs and he has not yet forced a 50 percent hike in utility bills with his cap-and-trade legislation. These are all the goodies he has in store for us all.

Obama’s very activism these days arrogates to himself the blame for the success or failure of his policies. Their outcome will determine his outcome, and there is no way it will be positive.

Why?

• You can’t borrow as much as he will need to without raising interest rates that hurt the economy;

• The massive amount of spending will trigger runaway inflation once the economy starts to recover;

• His overhaul of the tax code (still in the planning phases) and his intervention in corporate management will create such business uncertainty that nobody will invest in anything until they see the lay of the land;

• His bank program is designed to help banks, but not to catalyze consumer lending. And his proposal for securitization of consumer loans won’t work and is just what got us into this situation. [...]

I think there are many on the hardcore Left who don't want to see the economy fixed; they would like to see capitalism, our consumer-driven economy, and the system of government that supports it, ruined, so they can replace it with something else.

Pat's been telling me that sounds to much like a conspiracy theory; that in reality they are just dumb Marxists who haven't got a clue what they are doing. That's quite possibly true. But either way, I think it's going to end the same; in a mess. Jimmy Carter Redux. Only this time, with trillions of dollars of debt and interest payments on that debt, which will ultimately mean... what?


Related Links:

The problem with the banks: illiquidity

Advice to the GOP: "Shut up and remain calm"