Posts Tagged ‘Budget Deficit’

Sequestration: The Crisis Du Jour

Friday, February 22nd, 2013

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.

(more…)

Tags:, , , ,
Posted in Deficit, Federal Budget, Sequestration, The Economy, U.S. Congress, U.S. Debt | No Comments »

Fiscal Cliff Turns Into Fiscal Bluff

Friday, January 4th, 2013

“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.

(more…)

Tags:, , ,
Posted in Deficit, Fiscal Cliff, Taxes, The Economy, U.S. Debt | No Comments »

From Goldfinger to Groundhog Day

Friday, December 21st, 2012

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.

On the other side, Republicans are dead set against raising taxes, and want spending cuts, tax reform and entitlement reform.  Medicare, Social Security and government employee pensions have created unfunded liabilities of more than $86 trillion, but the chances of working out a rational reform before the end of the year are about the same as the chances of winning Powerball.  Maybe less.

Tick.  Tick.  Tick.

Congressman Boehner’s “Plan B,” which would have raised taxes on millionaires, did not even make it to a vote.  He could go through the entire alphabet and the results would likely be the same.

Republicans in Congress would rather go over the fiscal cliff than approve taxes on the wealthy, who are viewed as job creators.

Democrats would rather go over the fiscal cliff than approve major spending cuts, as spending is viewed as an economic stimulant.

Tick.  Tick.  Tick.

Maybe Gary Cooper in “High Noon” provides a more appropriate comparison.  The clock on the wall ticks down and you know that confrontation is unavoidable and blood will be spilled.

Take a look at the futures market and you’ll see that it’s already spilling.  Last night, S&P 500 futures dropped from 1437.25 to 1391.25 as soon as Congressman Boehner’s plan was scrapped.  The value of the dollar also tumbled, as witnessed on the EUR/USD, which pairs the dollar with the euro.

Tick.  Tick.  Tick.

Another movie that comes to mind is “Groundhog Day,” where Bill Murray’s day is endlessly repeated until he gets life right.

The déjà vu is appropriate to today’s negotiations.  Consider the U.S. Macro Surprise Index, which quantifies the extent to which U.S. economic indicators exceed or fall short of consensus estimates.  This year’s path is almost identical to last year’s, when Congress put off making tough decisions by extended tax breaks for another year.

Then again, “Groundhog Day” had a happy ending.  Maybe “The Day the Earth Stood Still” is a better comparison.

Tags:, , ,
Posted in Fiscal Cliff, The Economy, U.S. Congress, U.S. Debt | No Comments »

So This Is Compromise?

Friday, November 30th, 2012

“We are both heading for the cliff.  Who jumps first is the Chicken.”

                                                                                                      – Rebel Without A Cause

Post-election, both Democrats and Republicans have promised to compromise and avoid the fiscal cliff.

So what would you consider a compromise?  A little tax increase, perhaps, along with some spending cuts, then call it a day?  That’s not happening.

Apparently, by “compromise,” they mean not giving an inch.  With the end of the year just a month away, both parties seem to be digging in and playing a game of chicken.

President Obama doubled down by calling for a $1.6 trillion tax increase – twice the increase that will take place if no action is taken and we go over the fiscal cliff.  Media has focused on a couple of Republicans who have said that they will break their pledge of no tax increase … but mostly there has been talk and no concrete plan for avoiding the fiscal cliff.

Remember the scene in “Rebel Without a Cause,” where two cars race toward a cliff and the first driver to jump out of the car is “the Chicken?”  The winner went over the cliff and died in a fireball as his car slammed into the ground.

Real life is resembling that 1955 film, but this time when the car goes over the cliff we will all be along for the ride.

Tags:, , ,
Posted in Deficit, Fiscal Cliff, Taxes, The Economy, U.S. Debt | No Comments »

Looking Over the Fiscal Cliff

Tuesday, November 27th, 2012

You’ve heard plenty about the fiscal cliff.  But little attention has been paid to what’s beyond it.

What’s beyond it is another higher, steeper cliff.

The federal debt now exceeds $16 trillion and Congress will need to vote shortly to raise the debt ceiling in order to keep the government operating.  We’re running an annual budget deficit exceeding $1 trillion, so the debt will only get higher.

The longer we try to maintain the status quo, the more difficult it will be to bring the debt back in line.  We’re reaching the point where every dollar in the federal budget will be needed just to service our debt.  That means your taxes will no longer go toward building new highways, helping the poor or protecting the United States.  They will be needed to pay off the enormous debt that the President and Congress have incurred.

The only way to keep the government functioning under those circumstances, even if we cut spending and raise taxes, will be to incur more debt.

The bigger issue, though, is the unfunded liabilities from government entitlement programs.  According to The Wall Street Journal, we have already incurred $86.8 trillion in liabilities for Medicare, Social Security and future retirement benefits for federal employees.  If we could freeze time and incur no further liabilities, we would still need to pay out $86.8 trillion.

Both Medicare and Social Security are “pay as you go” systems.  As baby boomers retire, payment for these two entitlements will come from those who are still in the workforce.  As they are a much smaller population than the baby boomer generation, they will need to pay more or both Medicare and Social Security will collapse.

But how much more will be needed?  A commentary in The Wall Street Journal, “Why $16 Trillion Only Hints at the True U.S. Debt,” includes the following glum assessment:

“When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually.  That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

“Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

“In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn’t be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities.”

Tags:, , ,
Posted in Deficit, Fiscal Cliff, The Economy, U.S. Congress, U.S. Debt | No Comments »

This Is Progress?

Friday, September 28th, 2012

Economic growth for the second quarter of 2012 officially has been revised down to 1.25%, which is below the lowest previous estimate.

In an effort to stimulate the economy, the Obama Administration and the U.S. Congress have added $6 trillion to the federal debt, with annual deficits exceeding $1 trillion.  The Federal Reserve Board meanwhile has announced its third round of quantitative easing, on top of Operation Twist.

Yet the unemployment rate remains over 8% and, as we stated earlier this month, could be as high as 19% if you take a true and accurate count of everyone who is not working.

Since the current “recovery” began, real income for the average American has dropped 5.7%, and while inflation as a whole remains in check, the price of essentials such as oil and food has soared.  At least we can credit quantitative easing with taming deflation!

This all sounds pretty gloomy, but cheer up.  Alan Krueger, who chairs the President’s Council of Economic Advisors, says “we’re making progress.”

It’s All Relative

Progress, of course, is relative.  It’s true that the free fall that began in 2008 created the worst economic conditions we’ve encountered since The Great Depression, but in the past the rule has been the greater the recession, the greater the recovery.

Not so this time.  Cumulative growth for the past three years has been just 6.7%, according to the Congressional Joint Economic Committee.  In comparison, the average for all 10 post-World War II recoveries is 15.2%.

In other words, the economic growth we’re experiencing is well under half of what it has been historically after past recessions, even though it should have been among the best periods of growth ever, given the severity of the recession.

Worse still, we can look forward to the long-term impact of today’s failed economic programs.  Someday, the debt we’ve accumulated will have to be paid back.  And quantitative easing may keep the country’s debt payments manageable today, but it weakens the dollar and boosts inflation.

And sooner or later interest rates could rise to the point where our current tax revenues will not be enough to pay the interest on our debt, let alone support government programs.

So what do we do when the current economic programs produce the same results as they have in the past?  Prepare for a multi-trillion dollar stimulus package?  QE3, the third quantitative easing program is open ended and can last as long as The Fed wants it to last, so at least we don’t have to worry about QE4.

Tags:, , , ,
Posted in Deficit, Inflation, Interest Rates, The Economy, U.S. Debt | No Comments »

Dancing With A Cow

Tuesday, July 17th, 2012

While Europe’s sovereign debt crisis has beaten down the U.S. stock market, it has helped the bond market.

Because the European bond market is in such poor shape, U.S. bonds are a relatively healthy investment.  Investors have been buying U.S. bonds, because they look good relative to European debt.  But that’s like dancing with a cow because your only other option is a pig.

U.S. yields are at record lows, even though U.S. debt has now reached $15.9 trillion, up from $9 trillion in 2007.  The 10-year Treasury yield, which has averaged 4.88% over the past two decades, hit a record low of 1.44% on June 1, down from its high for the year of 2.4% percent on March 20.

Regardless, the cow may be turning into a pig.  Robert Auwaerter, head of Vanguard Group’s fixed-income group, predicted that unless the U.S. gets its debt under control within the next four years, U.S. bonds will become about as popular as the bonds of the five European countries that have seen borrowing costs soar as investors boycotted their bonds.

What Bloomberg called a Treasuries Doomsday isn’t on the Mayan calendar, but it could be as grim as those end-of-days predictions, at least from a financial perspective.  If yields were to rise back to 3.8% by December 2014, which is their average for the past decade, investors would realize loses of 10.8%.

Demand for U.S. bonds has enabled the Federal Reserve Board to keep borrowing costs low, and President Obama and Congress to fund a budget deficit that’s forecast to exceed $1 trillion for the fourth straight year.

However, Auwaerter said, “In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say ‘enough is enough.’ ”

Tags:, , , , ,
Posted in Bonds, Interest Rates, President Obama, Sovereign Debt, The Economy, The Federal Reserve Board, U.S. Debt | No Comments »

Is America Going Greek?

Friday, February 17th, 2012

The federal deficit of $1.327 trillion for 2012 marks the fourth straight year in which the deficit has exceeded $1.29 trillion.

The U.S. Debt Clock is now above $15.3 trillion, which comes out to just over $49,000 per American, but a whopping $135,776 per taxpayer.  If your family has four taxpayers, your total portion of the federal debt comes out to more than a half million dollars!

The Congressional Budget Office estimates that U.S. debt will double over the next decade to just under $30 trillion, so your family of four will become millionaires in reverse.

That figure does not include the estimated $56 trillion in unfunded obligations that The Peterson Foundation estimates is committed for Medicare and Medicaid, and pension obligations for government workers.  It also excludes trillions in state and local government debt.

Our total debt now exceeds our gross domestic product.  On an annual basis, it has exceeded 24% of GDP for each of the past four years, up from under 19% a decade ago.  At the same time, with a weak economy, tax revenues are below 16% for the fourth consecutive year.

As the chart from The Wall Street Journal shows, America is on target to become the next Greece.

Attempts at austerity measures in Greece have led to widespread rioting with buildings being burned to the ground.  Debt in Greece, Italy and a handful of other European countries had a bigger impact on the U.S. stock market than any other factor last year, even though Greece’s economy is about the size of the economy of the Dallas-Fort Worth area.

What impact will American debt have on the U.S. economy and the world economy when America becomes the next Greece?

Tags:, ,
Posted in Deficit, Sovereign Debt, The Economy, U.S. Debt | No Comments »

The U.S. Isn’t Greece – Yet

Tuesday, August 9th, 2011

If a “sovereign debt” crisis in Greece (population 10.7 million) can cause stock prices around the world to fall, what will happen to world markets if there is a similar crisis in the United States (population 307 million)?

The questions is relevant, given Standard & Poor’s decision to lower the U.S. credit rating from the perfect AAA it has held since 1917 to AA+. While some of the recent stock market drop – the worst since 2008 – can be attributed to other factors, such as sovereign debt in Europe and the continuing weak economy, the lower credit rating, has had a significant market impact.

The U.S. isn’t Greece – at least not yet – but it seems to be heading in that direction, in spite of the recent debt ceiling agreement, which cut $2.5 trillion from future spending.

Greece’s debt represents 155% of gross domestic product and is expected to reach 170% next year, according to The Wall Street Journal. In other words, the government is spending $1.55 for every dollar’s worth of goods the country produces.

Meanwhile, the U.S. debt-to-GDP ratio is approaching 100% – even though it excludes an estimated $61.6 trillion in unfunded obligations for Medicare, Medicaid and Social Security. In addition, state and local governments have trillions of dollars in unfunded debt obligations.

In addition to running a $1.5 trillion budget deficit, the U.S. government added $5.3 trillion in financial obligations in 2010 for off-budget items, according to USA Today.

Maybe we’re not so far away from Greece after all.

Tags:, , ,
Posted in Deficit, Stock Market, The Economy, Uncategorized | No Comments »