More Than $1 Million per Taxpayer Owed – and Climbing

It seemed tragic back in October 1981 when the federal debt reached $1 trillion. How would we ever pay back $1 trillion?

The real tragedy, though, is what’s happened since then

In early December, the federal debt is expected to exceed $20 trillion. More troubling, though, other unfunded U.S. government debt obligations now total $107 trillion, according to the U.S. Debt Clock.

The cost of unfunded liabilities is difficult to estimate. Unknowns such as future interest rates, inflation, population growth and mortality rates must all be considered, so estimates range from around $80 trillion to more than $200 trillion. These unfunded liabilities come from programs we’re written about in recent weeks – Medicare, Medicaid, Social Security and government pensions.

Economics professor Antony Davies and James R. Harrigan, CEO of Freedom Trust, noted recently in U.S. News & World Report that total U.S. government debt exceeds even the approximately $120 trillion in debt you get by adding the federal debt to the cost of unfunded liabilities. They estimate the total at $135 trillion.

“U.S. state and local governments officially owe $3 trillion and have another $5 trillion in unfunded liabilities themselves,” according to U.S. News & World Report. “Federal agencies and government sponsored enterprises owe another $8 trillion, which is not included in the federal government’s numbers.”

To paraphrase the late Senator Everett Dirksen, a trillion dollars here, a trillion dollars there, and pretty soon you’re talking about real money.

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No Hope and No Change

Finally, the candidates are no longer presumptive.

American voters and their delegates have chosen, yet somehow we’ve ended up with candidates from both parties that almost no one likes. Both are liars. Both are power-hungry narcissists. Both have questionable morality. Most of us would use the term “sleazy” to describe actions both have taken to add to their personal wealth. Few of us would trust either of them enough to buy a used car from them.

But come November, barring a third-party candidate, a coup or an act of God, we’ll be choosing either Hillary Clinton or Donald Trump as president. If our founding fathers were alive today, they might be thinking that a monarchy doesn’t seem so bad after all. Never has the phrase “lesser of two evils” been so literal.Hillary

So which candidate is the greater lesser?  Or, more to the point, which candidate should get your vote?

One way to decide is to review the platforms each party passed at this year’s convention. A party’s platform, of course, is just a guide. Either candidate, if elected president, may ignore the party platform. Congress will have an influence, too, even if the next president follows President Obama’s precedent and pretends that Congress doesn’t exist.

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Now Bad News Is Bad News

With the end of quantitative easing due to take place next month, reality may once again have an impact on financial markets.

Since QE began more than five years ago, markets have soared on bad news and dropped on good news.  That’s because investors believed that bad news would prolong QE and good news would make it unnecessary.

And there’s been enough bad news over the past five years for the stock market to repeatedly surge to new record levels.20140911_claims

With QE ending in the U.S., but probably soon beginning in Europe, the Federal Reserve Board needs a different tool to manipulate the markets.  While Chairman Janet Yellen and others have been talking about “macroprudential supervision” as the next step, that line is selling like old fish, because no one has explained what Ms. Yellen means by “macroprudential supervision.”

The good news is that good news should finally be good news.  Fundamental performance and economic recovery should mean something again.

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Spending Our Way to Prosperity

Focusing on the government shutdown is like rearranging the deck chairs on the Titanic while drawing closer to the iceberg.

The iceberg in this case is the massive government debt that will be made worse by the implementation of the Affordable Care Act.

Later this month, Congress will need to lift the debt ceiling from its current $16.7 trillion to keep the government solvent and enable the U.S. to continue paying its massive bills.  In the meantime, as a result of the negotiations that led to sequestration, Congress had until the end of September (the end of the fiscal year) to reach a spending agreement.Yield Curve

It didn’t, of course, and now the government has shut down.  But what does the shutdown really mean?

The shutdown affects only “nonessential” services.  That means 85% of government services are still being funded and 63% of federal employees are still working.  Mail is being delivered, military personnel are still keeping us safe, and payments are still being made for Medicare, Medicaid, Social Security, the Supplemental Nutrition Assistance Program (SNAP) and the countless other programs that we can’t afford.  Amtrak trains will continue running, so if your train is late, don’t blame it on the shutdown.

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Get Back to Work

Labor Day has passed.  It’s time to get back to work … or at least think about work.  Work, or the lack of it, is what the economy is all about.  When Americans are working, they spend money.  When they spend money, the economy grows.

So if the economy is truly recovering, as many pundits suggest, then the unemployment rate should be dropping.  So is it?  Maybe. Gallup

On the One Hand

In today’s report, the U.S. Bureau of Labor Statistics reported that during the month of August, nonfarm payroll employment increased by 169,000, bringing the unemployment rate down from 7.4% to 7.3%.  That’s not a significant change, but it beats the 8.1% rate of a year ago.

In addition, the Institute of Supply Management reported this week that its manufacturing index edged up to 55.7 from 55.4 in July.  That’s also not a significant change, but economists had been forecasting a modest decline.  Instead, it was the third straight month of growth, as any reading above 50 indicates growth.  In addition, the new orders index jumped nearly 5% to 63.2.

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Sequestration: The Crisis Du Jour

It’s crisis time again in Washington, D.C.  Having just barely avoided a swan dive off the fiscal cliff, the leaders of our country are now locked in battle over the pending sequestration.

“Locked” is the operative word here, as the deep freeze that’s hit New England this week is likely to thaw well before the freeze in progress over sequestration.

If nothing else, this standoff has added to our vocabulary.  “Sequestration,” as we’ve learned, is a procedure that triggers automatic spending cuts.  It also means “the seizure of property for creditors,” as in, “China will begin sequestering U.S. property if we can’t control our debt and pay our bills.”  That definition may be more appropriate in years to come, but for now, let’s concentrate on the immediate future.

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The Incredible Shrinking Economy

Only in today’s America would a shrinking economy cause the stock market to rise.

The federal government reported this week that the U.S. economy contracted by -0.1% in the last quarter of 2012. That helped the stock market finish its best January performance since 1994, with the Dow Jones Industrial Average up 7% since November (it was the best performance since 1989 for the S&P 500).

As the chart shows, S&P 500 performance since November has been eerily similar to last year’s performance at this time.

So why did a shrinking economy produce a rising stock market?  Because it all but guarantees more quantitative easing (QE), as well as resistance to federal spending cuts, which would reduce gross domestic product (GDP).

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The End of QE?

The Fed’s quantitative easing program has been like that endless tub of popcorn or vat of soda that those with large appetites buy at the theater.  It goes on and on, but at some point, enough is enough.  Are you really ever going to refill that?

The Federal Reserve Board has gorged on bonds for years now and some board members are finally losing their appetite for continuing, according to minutes from the last meeting of the Federal Open Market Committee.

The supersized QE3, the third round of quantitative easing, was supposed to continue until the unemployment rate dropped to a reasonable number.  The only problem is that buying bonds doesn’t produce jobs.

Even accounting for Storm Sandy’s impact, job growth remains stalled, with the unemployment rate stuck at 7.8%.  While the rate is significantly lower than it was in 2009 (9.9%), it is nowhere near the 5.0% rate of 2007.  More troubling, much of the rate drop is due to people either dropping out of the workforce or taking low-paying part-time jobs.

That doesn’t mean that quantitative easing is without consequences.  The sudden nervousness of some Fed members reflects the fear that buying $85 billion in Treasuries and agency paper will destroy the dollar.

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Fiscal Cliff Turns Into Fiscal Bluff

“What’s a five letter word for ‘cliff’?“ an editorial page cartoon asked.  The answer: “Bluff.”

To bluff is to mislead and that’s an appropriate summary of the fiscal cliff agreement, which will raise taxes and spending, while failing to consider the country’s growing debt crisis.

The market reacted positively, with the Dow Jones Industrial Average initially up more than 2% and markets in other parts of the world showing similar gains.

The market reaction was not, we suspect, because a well-crafted agreement that benefits America had been negotiated, but because the “fiscal cliff” had been avoided at the last possible second.  Consider what the agreement does – and what it doesn’t do.

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From Goldfinger to Groundhog Day

Tick.  Tick.  Tick.

It’s like that scene in “Goldfinger,” where the seconds are ticking down and James Bond is trying to defuse the bomb.  He succeeds, of course, just in time.

Of course, John Boehner is not James Bond and real life is far more complicated than the movies.

Tick.  Tick.  Tick.

The real problem is not a cliff, but a chasm.  The degree of separation between Democrats and Republicans in Congress has never been wider.

On one side, President Obama and his Democratic supporters are hell-bent on raising taxes on the wealthy, which may not do much to tame the deficit, but may achieve the goal of moving toward class equality.  Democrats believe that more spending is needed to stimulate the economy, even though spending is at an all-time high and the economy is still in dismal shape. read more

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