Sunday, February 21, 2010

The Economic Mess That Changes Everything

Let’s start with a recognition of a basic fact: things that can’t go, on won’t go on. Pretty darned obvious, isn’t it? Nothing can go on forever. Let’s face it; infinity is a nice concept in Math, but it doesn’t exist in the real world.

Now look at this:

Notice the bottom line, the total “unfunded liabilities”. At the time of this writing, it’s somewhat north of 107 ½ trillion dollars (and I’ll use “ATTOTW” as an abbreviation for that phrase to save some typing as I go through this). This is money the .gov has promised to us citizens and is obligated to pay, but (using a method that would get any business in America thrown into prison) keeps “off the books”. If you or I did that, we would be room mates with bad men in heat.

The point of that is when you hear people talk about our national debt and our deficit spending, they almost never include those numbers. This can’t go on, so we can know it won’t go on. The big buzzword these days is unsustainable. When you look up “unsustainable” with an online dictionary, you should get a link to the debt clock.

The national debt, about 12.4 trillion ATTOTW, is financed largely through the sale of long term bonds. Note the line in the middle, “US Total Debt”; ATTOTW 54.8 trillion dollars – that’s the outstanding total of these bonds and other debt instruments. Just like your credit cards, we need to pay the interest on the debt, or 1.9 trillion.. There is much going on lately that says these bond sales are failing and will get worse soon. First off, think of how much money that is. With a deficit of 1.4 trillion year to date (again, ATTOTW), we have to sell around 280 billion in bonds per month. Who has the money to soak up that much in bonds? According to the 2009 CIA World Factbook, that’s more than the annual GDP of economies smaller than the 32nd largest economy of the world (South Africa). See: this list on Wikipedia which is pretty much the only kind of facts I trust to the Wikipedia. So who can continue to buy up that kind of debt? Things that can’t go on, won’t go on.

Now take a look at Social Security, bottom left of the debt clock. ATTOTW, the obligation is around 14 trillion dollars. If you’re older than your teens right now, you’re probably aware that people have said Social Security is going to go bankrupt out in the future. 2015, 2020; I’ve heard a lot of different years bandied about. Don’t look now, but the SS fund is running a deficit right now (see, for example, ) The economic collapse we are currently going through has caused many people that can collect SS to start collecting it.

Many people have written on the history of SS, how it was intended only as supplemental insurance for widows; how the age of eligibility was placed well beyond the average lifespan; how it started out with a large number of workers for everyone collecting it, and how when the baby boom retires, it will be one or two workers for every retiree. Whatever. What can’t go on, won’t go on. If you think that 20 year olds in 10 years are going to work at a dead end job and give large chunks of their pay to keep you in social security, you live in a different world than I do.

I am chagrined to say that I demographically belong to the baby boom. I don’t like to think of myself as part of that, but by the usual definition, I’m firmly in the boomer years. Unlike many of my generational cohorts, when I first became aware of the problems with SS, and started studying the problem, I reached the conclusion that I would probably never receive SS payments. Figuring there was no way that SS could go on, I started putting money into a 401k almost as soon as they started. I don’t know how it will be taken away, but I can imagine that those of us who have tried to prepare for our future will be excoriated as the “evil rich” and told we don’t need it. There could be means testing; if you have more than some threshold of retirement savings, your share of the SS pie goes to someone else (mmmmm…..pie…..). It’s possible the answer will be to just decrease everyone’s payout to such a small contribution that it’s useless for anything. This could be done by reducing benefits or by inflating the currency so much that the guaranteed payouts are meaningless. Think it can’t happen because of the laws linking the SS payout to the cost of living – the cost of living adjustment? They changed the method of calculating the COLA before, what makes you think they won’t do it again? Right now, cost of living numbers from the .gov don’t include food and energy costs – as if you can live without food or energy.

The stock market crash of ’08, with the concomitant collapse of many 401k plans, has given the .gov an excuse. There is talk of nationalizing our 401k plans – in not so few words – so that we can replace those “risky” plans with a gubmint guaranteed (but teeny tiny) yield. See, for example, this piece on Market Ticker There's a good reason to think this is coming; our unsustainable debt has to be financed by selling bonds. Now that the sales of bonds are failing internationally, the .gov can sell them by forcing them into our 401k accounts!

The same reasoning applies to Medicare, bottom middle of the debt clock. Medicare and Prescription Drug coverage (Medicare part D) together are 93.4 trillion dollars in unfunded liability. When do they go bankrupt? Pick an author, they’ll give you a guess. For all intents and purposes, it’s bankrupt now. We are funding it through the same process of selling bonds and running deficits. What can’t go on, won’t go on.

The problems are not limited to the US Federal government – it extends to the states as well. State revenue and state debt is in the upper right corner of the Debt Clock. Even though states are not legally allowed to run deficits, guess what: they’re doing it. Most of us have heard of California’s problems, and paying state obligations in IOUs. The state IOUs can be thought of as their own monetary script. The state is printing its own money. When California goes into default, do you not think the Federal government is going to hold them up? Do you honestly think they are going to shut down everything in the state, fire all the government workers and let the whole state collapse into anarchy?

Don’t worry; it’s not that bad. It’s worse. Much worse. The same basic situation is going on all over the world. With our greater inter-connectedness, all world economies are depending on each other. No economy in the world is on a solid basis now. The vaunted Chinese have a bubble going in the Shanghai stock market as sure as any bubble has ever been. They have banking troubles that make ours “look like a sixth-grader's birthday party” (thanks to Denninger). The EU, the world’s number one economy, is in tatters thanks to the profligate spending of the “PIIGS”, and while they are begging to be bailed out by the rest of the EU (read France and Germany), the situation of there not being enough money in the world to bail them out raises its head here, too.

To quote Karl Denninger over in “The market is bigger than any one man or any one nation and it does not suffer arrogance lightly. Virtually everyone who has tried to tangle with it has wound up with their head between their legs after not only their head was chopped off but both arms as well.”

Perhaps the most worthwhile thing Barack Obama has said in his presidency was when a reporter asked him, “when do we run out of money” and he said (in a uncharacteristic moment of honesty), “we’re out of money now”. Exactly. Where we part company is that I believe the answer to facing tough problems is to face them, not kick them down the road. In cranking up spending, all they are doing is guaranteeing that we will eventually hit the wall. We either face economic collapse or a miserable economic quagmire. As someone has pointed out, the dollar is in collapse right now, it’s just in slow motion. Why do you think gold went from $250 an ounce in 2000 to $1100 now? The dollar is collapsing in value.

I can hear you saying, “so where are you going with this?”. The world has been on this path of borrowing and spending for a long time. A little debt to a government is like a little debt in your own life. It’s manageable if you account for it. The cost of that new computer, car, or whatever you want to buy seems low, but if you include the interest paid over the time it takes you to pay it off, it’s not quite as good a deal. If you get to where you can only make your monthly minimum payments, or you are borrowing from one card to pay another, your personal debt is unsustainable. We are virtually at that point as a nation. Our current path is unsustainable and that which can’t go on, won’t go on.

Peggy Noonan wrote in an October 2005 column ( here ) about a cocktail party story from Ted Kennedy’s nephew. “Everyone was laughing. Then, writes Mr. Lawford, Teddy “took a long, slow gulp of his vodka and tonic, thought for a moment, and changed tack. ‘I’m glad I’m not going to be around when you guys are my age.’ I asked him why, and he said, ‘Because when you guys are my age, the whole thing is going to fall apart.’

Mr. Lawford continued, “The statement hung there, suspended in the realm of ‘maybe we shouldn’t go there.’ Nobody wanted to touch it. After a few moments of heavy silence, my uncle moved on.”

Lawford thought his uncle might be referring to their family—that it might “fall apart.” But reading, one gets the strong impression Teddy Kennedy was not talking about his family but about . . . the whole ball of wax, the impossible nature of everything, the realities so daunting it seems the very system is off the tracks.”

The current course of our government can only be explained in one of two ways. Either they are unaware of how bad things are and that they can’t keep it from collapsing (i.e., they are not as smart as Teddy Kennedy) or they know it is going to collapse and are trying to benefit themselves and their friends as they collapse it. Perhaps they intend to collapse the country as a way to solve those intractable problems of hundred trillion dollar unfunded liabilities. The New States of Amerika would be able to say those obligations are gone, just as a bankrupt company can reorganize and pay pennies on dollars, paying its debt off.

What the next few years looks like, I can’t say. I’m reminded of the quote from the height of the cold war, maybe the ‘70s, “I don’t know what technology the next war will be fought with, but the one after that will be fought with sticks and spears”. We could go into a full tilt, great depression-style collapse, but with Ben Bernanke literally promising to drop currency out of helicopters to prevent it, a Weimar or Zimbabwe-style inflation is also possible. I just know that after it’s over, in – perhaps – 10 years, there will be more sanity in government finances. My hope is that liberty survives and that my kids, and their kids, can live in a place more like the Founder’s Republic.

1 comment:

  1. I agree that it can't go on, I'm betting that we (the U.S. of A.) will default -- even if it's a stealthy default. There's no way to pay the debt.

    Will we have German-style hyperinflation that cannot be hidden, or will there be some other way to do it that isn't so obvious? I dunno, there are some pretty slick operators running the show (slick != moral) so I am not sure how it will all play out.