The Federal Government and Enron Accounting

I've blogged stories before about the questionable accounting used to tally the US federal budget deficit. A USA Today story is suggesting that even those more realistic assessments of the deficit (usually in the neighborhood of $700b) are far too low. They reached a similar number ($760b) just by applying some basic business accounting rules. But that assessment still does not account for social security and medicare liabilities. Standard corporate accounting practices require such liabilities to reported at the time they are incurred rather than when they come due. Using that system our annual budget deficits run around $3.5 trillion! By these measure the US should have reported $40t in losses over the past 9 years. The first step to solving a spending addiction is to admit you have a problem...

Deficits Matter

Here's a brief update on how we've lost control of our own interest rates, and now sacrifice our economic welfare to fund the federal deficit.

Fiat Currency, Dollar Dominance, and the War on Terror

Texas congressman Ron Paul attempts to tie all the pieces together (and I do mean ALL the pieces). It's bit on the sketchy side, but there could be something to it... If nothing else, there's probably a top-selling novel in it.

Sidenote: I love this blog (the source of this link).

Greenspan Barks at the Moon

Alan Greenspan appeared before the House Budget Committee today and declared that the current budget management was fiscally destabilizing, warning of economic stagnation and urging tax increases and spending cuts. Yeah right, Mr. Chairman. Dick Cheney says deficits don't matter. Who the hell do you think you are?

More Questions on the Dollar Decline

There is a fascinating article on Asia Times by W Joseph Stroupe predicting doom for the dollar. I'm not sure who the guy is, and his web site looks pretty sketchy. But he throws out a ton of data, I just wish he would have cited his sources. Some of the interesting bits apparently come from this Japan Times story, but even there are only cited back to Morgan Stanley analyst Stephen Roach. So, while I take little of this at face value, the article suggests a number of interesting points to investigate.

• Stroupe asserts that the Fed is printing $1.5 trillion per year. This seems like an absurd amount of money. Is it true? How much does this vary from traditional levels?
  
• Stroupe adds $44 trillion in obligations to Social Security, Medicare, Medicaid, and other government spending to the existing $7 trillion national debt to come up with a "total national debt" of $51 trillion. He cites this number to Fortune magazine. I posted a story here some time back about a treasury department study (initiated by Paul O'Neill, before he got the boot) which found that the US had $44 trillion in unfunded obligations over the next four decades or so, which is probably where the $44 trillion comes from. This is a frightening number, but it strikes me as unfair to count long term obligations directly as existing debt.
  
• The article states that including off-budget items the current federal deficit is nearly $1 trillion per year. That sounds high to me. My impression has been that this number would be somewhere in the $500-700 billion area.
  
• Mentions heavy investment ($180 trillion) in derivatives as unstable investments. I have no idea what he's talking about here, but I'd like to find out.
  
• The article states that US consumer debt is $8 trillion. I was searching for this number myself a couple weeks back, without success. I'm curious where he got it.. Also what is the level of US commercial and business debt?
  
• Then there's the quote from Stephen Roach stating that the US currently has $38 trillion in debts. What exactly is being counted in this number?
  
• The article states that Warren Buffet has mostly pulled out of the US stock market. I know that he published an article a couple years back explaining, in great depth, why he was for the first time investing outside the US, citing many of these concerns about debt and the trade deficit. But has he really pulled out all of his US investments?
  
• One of the best parts of the article was the discussion of Russian economic policy. Here he talks about the possibility (which has been discussed here before) that the global oil market may shift from dollars to euros, with disatrous effects on the value of the dollar. Stroupe makes assertions about statements by Vladimir Putin hinting that this change is imminent. I should certainly like to see those statements. He also asserts that Russia has substantially shifted their currency reserves out of dollars. It would also be nice to verify that..
  

Anyway.. there are some very powerful numbers and assertions here, and if this guy is not a complete nut (which it's quite possible he is), disaster may be nearer than I expected.. There are also numbers published in another Asia Times story showing US personal savings as a percentage of income dropping over 15 years from about 7% to 0.2% (again without any cited source). Consumer spending may have kept our economy afloat so far, but that ride looks to be nearing its limit. We live in interesting times...

Update: I went hunting for more info on Stephen Roach's $38 trillion figure, and while I didn't find it, I did find an insightful recent column by Roach analyzing the economic prospects for the Bush administration's second term.

Re: Spending Addicts

I was not surprised at the news Congress was raising the debt ceiling, as that was a necessary consequence of the policies the Bush administration and the Republican Congress agreed to long ago (and it was not the first time in the last four years we had to raise the debt ceiling). What concerns me more is the fatalism with which most politicians approach the spending glut.

The notion that Democrats are the tax-and-spend party should be laid to rest--unless one is making the point that when Democrats spend, at least they have the courtesy of taxing to pay for it.

Michael Kinsey of the Washington Post crunched some numbers a few months back to explode the myth that Democrats are the bigger spending party.

I also came across this graph showing the national debt across presidential terms. I have no idea whether the data is reliable.

Glad to see a post from you, Ryan!

Spending addicts

I am now convinced that the whole of Congress needs to be admitted to a rehabilitation program for spending addicts. They have just agreed to raise the debt limit for the government by another $800 billion, making the total allowable debt a whopping $8.18 trillion. Meanwhile, Mr. Greenspan is warning that the continuing trade deficit is likely to have dire consequences for the US economy and recommends reducing the federal budget deficit as a key component in stabilizing the economy. Not that his opinion matters; he is only the chairman of the Federal Reserve Board. Interestingly, the Democrats now appear to be taking up the cause of fiscal responsibility in asking for pay-go rules.
Apparently all of this extra spending is necessary to secure the American people in the war against terrorism. It looks like economic security has been left out of the equation.

Building On Quicksand

Business Week, a magazine I'm becoming more and more impressed with recently, has a column by London Business School Dean Laura D'Andrea Tyson questioning the staying power of the current recovery. She cites the Bush tax cuts as having infused a significant amount of money into the economy which has temporarily inflated economic growth numbers without producing the sort of employment and compensation gains that should be typical at this stage of a recovery and which are critical to building a strong economic cycle. She also mentions the increasing dependency of the US economy on foreign investors to suck up the massive debt load, and questions how long this can be sustained in the face of increasing US fiscal weakness.

Re: Oh, the outrage

The Post has a great editorial on the issue. They disagree with Greenspan's assertion that the tax cuts should be made permanent, but commend his efforts to bring the issue of social security's long-term solvency into the national discussion. They also scold the President and his opponents for blowing off Greenspan's concerns. The Post concludes: "But at least Mr. Greenspan -- unlike the president and his allies -- acknowledges the need for trade-offs. Mr. Bush won't admit that something's got to give; his Democratic rivals seem determined to compete in fiscal dishonesty. And they all pretend to offer leadership."

As to the prospects of Kerry and his Clintonistas fixing the deficit, I'm considerably less than optimistic. There were three basic reasons why Clinton was able to balance the budget. 1) A substantial tax hike (which Kerry won't do), 2) a substantial reduction in military spending (which Kerry won't do), 3) the dot-com boom (which won't happen again). I fail to see any way that Kerry can either cut spending or increase revenue enough to even dent the deficit.

Oh, the outrage...

Alan Greenspan testified on Wednesday before the Committee on the Budget of the House. He addressed the fiscal health of the nation, pointing out what seems to be obvious, but what most of our politicians do not want to address. Greenspan expressed concern over the rising budget deficits, particularly in the face of the looming crises in social security (SS) and medicare when the baby boomers begin to retire (only 4 years away, incidentally). As possible solutions, he proposed extending the current tax cuts to continue economic growth, also noting that it is easy to start government programs and nearly impossible to shrink or end them. He then goes on to say that corrective measures will be needed in social programs. Whereas much of the press seemed to immediately quote Greenspan as advocating a reduction in SS benefits, they might have done a better read of the transcript. Greenspan is actually proposing to stabilize the ratio of retirement-to-working. Because people continue to live (but not work) longer, the expenses of SS continually rise relative to revenue of working years. This is in addition to the problem of a rather large generation coming through the ranks.

Unless we are going to restructure the SS system (for instance creating personal accounts), this seems like a reasonable idea. Yet Greenspan was immediately rebuked across the board, most notably by Bush, Kerry, and Edwards (it reminds me of when Dean mentioned raising the retirement age - a similar result). Edwards stated that "it is an outrage for him to suggest that we should extend George Bush's tax cuts on unearned wealth while cutting Social Security benefits that working people earn." I would counter that it is an outrage that none of our representatives seems to have the will or the foresight to begin addressing problems that may devastate this country economically. They all rebuke Greenspan's ideas, and yet none of them has offered a plan to fix the budget deficit and these looming fiscal disasters.

The only disappointment I had in Greenspan's testimony was the scant mention of defense spending. This is an enormous chunk of our GDP. The fact that it is so much greater than any other nation suggests to me that our priorities are not well placed. Instead of talking about limiting retirement benefits or other social programs, why is there rarely mention of limiting the bloated Pentagon budget?

Clearly, difficult choices need to be made. Is anybody out there willing to make them?

The CBO: Obscuring the Problem

The Washington Post is running an editorial today clarifying some of the CBO's recently released deficit numbers. Due, they say, to legal requirements on their projections, the CBO ignores significant costs and calculates the Social Security surplus as part of revenues. The actual numbers for the next 10 years are far more grim. The deficit is likely to reach $1 trillion per year by 2014, and the increase on the US national debt (the present level of which the CBO also grossly misrepresents) would increase multiple times what the CBO has estimated. They also point out that both Bush and the Democratic candidates don't appear poised to do much about this situation. Great editorial, wish people were paying attention.

Alan Greenspan, Evil Mastermind?

Here's a bit of a guest column, Hank's response to the email with the review of Financial Reckoning Day, posted yesterday:

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Just thought I'd give an update on my economy watching (and throw in an opinion about Alan Greenspan).

My crackpot theory about Alan Greenspan is that he is doing all of this quite deliberately. I think that he realized twenty years ago that the American financial situation was already intractable. He wanted to put the world back onto a sound financial footing, but realized that this could not be done without ruining the American economy. He realized, in a very Machiavelian turn of mind, that the extreme exploitation of the existing system, which he thoroughly despised, could simultaneously make America tremendously wealthy and precipitate a financial collapse that would stand in perpetuity as a warning against the excesses of fiat money. Thus Greenspan's primary virtue would be his ability to dramatize. He has convinced the American people that the final boom of the twentieth century was real; and he has convinced the IMF and the world's central banks that he is working to protect their interests, while quite obviously working to the contrary.

Thus we get to the point that we are at today. The world's central bankers have finally begun to put the question to the U.S.: "What the hell do you think you're doing?" On the surface they seem stern, but deep down they're terrified that they might already know the answer. The European Central Bank has finally expressed concern about the declining dollar. This expression of concern indicates a likelihood that the ECB will take action against the plummeting dollar, such as lowering European interest rates (already at the lowest rate since immediately after WWII: 2%). Of course this lowering of interest rates would not stop the dollar's actual fall, but merely pressure the Euro to fall with it.

While the ECB and the BoJ (which, having already established zero interest rates, must exchange Yen for Dollars in massive quantities [the cap on borrowing for this purpose has been increased dramatically for the coming year] in order to pull off their own intervention) scream for the U.S. to normalize its finances, and former treasury secretaries Paul O'Neil and Robert Rubin openly criticize our current economic policies, Greenspan and the current administration continue to laugh off their concern. Their levity is understandable. The White House can laugh because they're insulated enough to ignore the criticism, ignorant enough to fail to understand it if they listened, savvy enough to realize that responding to the criticism would be politically untenable even if they understood it, and wealthy enough to not suffer even if the criticism proves correct. Greenspan can laugh because he knows that Europe, Japan, and China are foolish enough to give us everything they own (via the mechanism of their "export driven economies") in a vain attempt to prevent the U.S. from defaulting on the debt (via inflation, a mechanism that prevents them from ever laying claim to the goods we bought from them with their own money, for technically we will pay the debts, with extremely debased money) which constitutes the entirety of their savings. The inconceivable response of these foreign powers to our debonair fiscal policy is to accelerate their lending.

Hence we see the wisdom of Greenspan's approach. Terminating this cycle would be a painful and shocking process, nothing is more onerous to the politician. As the status quo makes Americans more wealthy there is no reason for our politicians to bear the terrible burden of ending it. Instead we will simply exploit our position to the fullest until the time that foreign pols are able to overcome their shortsighted constituents and bring about the correction that would put them back on an even footing with the U.S. The only potential downside to this strategy is that after the system collapses America's credit with the world will be ruined; but by then there will be nothing left for us to borrow anyway, as they will have already given it all to us. The only alternative is to pay the debt off legitimately; this policy would be ruinous.

Anyway, the recent show of concern by the ECB with regard to the dollar's decline has brought that decline to a halt. The anticipation of European action has induced hesitation as to the Euro's future prospects. Currency speculators who had invested their money in gold as a hedge against the declining dollar have pulled out en mass bringing about a 15$ decline in the last two days. Of course this statement by the ECB changes U.S. economic prospects not at all. The dollar's decline against the Euro may slow but this does not mean that the dollar is strengthening, it simply indicates that the only major currency that had remained aloof from the devaluation has decided to participate. After all, the dollar isn't falling because the European interest rate is too high, but rather because the U.S. interest rate is to low. The result of any change in ECB monetary policy will merely be competitive currency devaluations, an environment that would enhance the value of holding
gold. Thus I would say that this current decline in gold should be a good buying opportunity (which should prove serendipitous for mom).

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My mom mentioned in the email regarding the article, that she may start to take some action on Henry's gold buying advice..

Put It On the Tab

We are just setting records all the time. All time highest budget deficit, highest government debt level, highest trade deficit, lowest valuation of the dollar vs Euro... And now the US has for the first time ever surpassed $2 trillion in consumer debt. Yay for us! Consumer debt levels have doubled since late 1994. In light of all these numbers, how people can think we are in the beginning of a real economic recovery is beyond me. It may be that we are starting to see the split occur between the US economy and the stock market which covers an increasingly internationalized portfolio. I think we've discussed this before, and it is also mentioned in the Brookings discussion. As multinationals become more internationally based, it allows the stock market to perform well even as the US economy goes in the toilet.

Fiscal Blues: Bleeding Red

I agree with Joe (More Fiscal Responsibility Blues, 1/8/04) that the fiscal status of the United States is currently our biggest crisis and one that needs to be addressed quickly. The IMF released a report this week (the overview can be read here) outlining the current fiscal problems that the U.S faces and the implications of not addressing these problems. Some interesting excerpts from the overview of the paper:

"The major tax cuts (as well as some spending measures) enacted in 2001 and 2003 have been estimated to have cost roughly $1.7 trillion over FY2002-FY2011.

There is little doubt that significant macroeconomic gains could be reaped from reforms of the U.S. tax code, with the Council of Economic Advisers (CEA, 2003) citing estimates of potential gains in the range of 2-6 percent of GDP.

As noted in CEA (2003), taxpayers are required to spend roughly 3 billion hours a year dealing with federal tax matters, and overall compliance costs are estimated at around 10 percent of total federal tax revenues.

Simulations reported in Section II suggest that a 15 percentage point increase in the U.S. public debt ratio projected over the next decade would eventually raise real interest rates in industrial countries by an average of ??1 percentage point.

The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years?an unprecedented level of external debt for a large industrial country (IMF, 2003b).

The results suggest that the fiscal imbalance [for SS, Medicare] is as high as $47 trillion, nearly 500 percent of current GDP, and that closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits."

The IMF overview gives a fairly clear summary of the problems we face. Our government has drastically increased spending in recent years, partly in response to terrorism. At the same time, it has decreased its revenue in the form of tax cuts in an attempt to stimulate the economy. While this has likely provided a short-term stimulus, it has also increased our debt and the likelihood of major programs (SS, Medicare) becoming insolvent in the next decade or two. Furthermore, the report states (above) that U.S. debt is projected to raise interest rates globally, which is likely to hinder or depress the global economy. In short, the perfect storm for fiscal disaster is arising.

Our government should be ashamed. These are major issues that need to be brought to the attention of the public (and the public needs to be convinced to care). Conversely, the voters should be holding representatives accountable for such poor fiscal management. We need to immediately begin balancing our budget, likely through a combination of tax revenue increases and spending cuts (for starters, get rid of missle defense). From reading the IMF paper, this should be complemented by reform of the tax system to make it more efficient and consumption based. Furthermore, I see no reason for the estate tax to be phased out. Finally, the paper calls for reinstating and reinforcing the Budget Enforcement Act to ensure long-term fiscal stability and goals.

In the end, our politicians need to be forced to make the tough decisions that individual tax payers make every day. If we want to cut taxes to stimulate the economy, then services or programs will have to be cut to account for it. Or, if one actually thinks long term, one establishes a "rainy day fund" to tap into while enacting tax cuts. As Joe pointed out, none of the presidential candidates (including the current president) seems intent on tackling this problem. Take, for example, our current president: In creating our current record federal budget deficit, the Bush administration has undertaken an arguably unnecessary war and subsequent reconstruction; it (with Congress) has enacted enormous Medicare drug coverage. These are but the biggest items among numerous other spending increases. But wait, there's more! We will now establish a human settlement on the moon and send a manned mission to Mars. I leave you with a quote from the Wash. Post article:

"Officials were unwilling to provide cost figures or details and would say only that Bush will direct the government to immediately begin research and development to establish a human presence or base on the moon, with the goal of having that lead to a manned mission to Mars."

More Fiscal Responsibility Blues

(part 1 of a 3 part tirade :P )

A Washington Post column on John Kerry, while intended to be sympathetic, brought to my attention for the first time his planned fiscal policies. While he refers to the current budget as "fiscal insanity", his grand master plan is to undo some of the Bush tax cuts and to reduce the deficit by half over four years. Half? And even this pathetic endeavour is fueled by what the column refers to as "overly optimistic" projections. That disgusts me.

The nation's fiscal future is currently our biggest crisis. Not terrorism, not health care, not education, not prescription drugs. We are sitting on an economic time bomb (as wonderfully described by a Robert Samuelson Post column) and in the confluence of a number of long term negative economic factors. This is facing up to be the greatest challenge to the union since at least World War II and possibly the Civil War. If nobody takes responsibility on this it is inevitable that the dollar will eventually collapse and hyperinflate, and we will be lucky to emerge from the ensuing slump after a decade or two. There will come a nexus point when our ongoing fiscal foolishness collides with our declining economic stature in the face of globalization and the crushing onrush of baby boomer dependency on government services. It won't be pretty. Who knows how global security would unfold in the wake of the collapse of the world's foremost power.

This is all right there staring us in the face. I don't think there are many people who would seriously dispute any one of the points that: a) Our current fiscal policies are totally unsustainable, b) Economic globalization will lessen the US's dominant economic position and will tend to disperse our concentrated wealth, c) The retirement of the baby boomers will cause a major economic crisis for the US. Is it so hard to put these ideas together and see where they lead? How can it be that this is not a part of our national dialogue? How can John Kerry believe that hopefully, if we're lucky, reducing the deficit by half over four years is a solution? I've been a bit discouraged by Howard Dean's positions on the deficit as well. Sure he says he's going to balance the budget, but he also says he's not going to touch military spending, social spending, education, etc, etc, and that he's going to increase homeland security spending. Doing all of that and balancing the budget would be a neat trick. I suspect that he, like Kerry, is figuring some absurd economic growth rate into his equations. However, Dean's gubernatorial record leaves me optimistic that when push comes to shove he'll do the right thing. He has a reputation of being fairly ruthless when it comes to balancing his budget, cutting services and social spending where necessary to get the job done. In any case the other candidates have not done much to make me believe in them on this issue.

I'm not sure if this is a problem that can be solved at this point. I'm not convinced that it isn't already too late to altogether avoid this crisis. But certainly if we start soon we can try mitigate it. And balancing the budget and paying down the national debt, getting our fiscal house in order, sounds like a good start to me.

(up next time: Democrats, have a clue on globalization)

Say It Ain't So, Wes

Wes Clark has been, in my opinion, the most palatable alternative to Dean among the Democratic candidates. However, yesterday he announced $30b tax cut plan. Is this man not aware of the $500b budget deficit we're running? Has it become necessary for every person who runs for office to announce a tax cut plan? Sure, he has some plans to pay for this, but as far as I'm concerned there can be no tax cuts until the deficit is covered and principal is being paid off on the national debt. Until that time comes I don't even want to hear the words "tax cut" pass a candidate's lips. I'm not giving up on Clark, but this is definitely a strike against him.

Is This Progress?

The release of this year's trade figures exposes the dark, seamy underbelly of the recovery. We've set a new record trade deficit to go along with our record federal budget deficit. Personal debt levels are also setting records. And based on our previous conversations I think we are generally in agreement that the dollar is substantially overvalued, generally speaking. To top it off, our good friends at the Heritage Foundation point out that the federal government has generated these record deficits despite a $247 billion/year windfall of reduced interest payments on the national debt due to low interest rates. Now, I'm still not sure how much of the mises.org fiat currency doom and gloom to buy, but it is absolutely clear to me that these trends are unsustainable. Given the general tendencies of economic systems (read massive feedback loops), I suspect when they reach the limits of their sustainability they will not sort themselves out gently. Particularly given the dire circumstances of the impending baby boomer retirements. Even if the political establishment starts to recognize this problem, public inertia and the rapid onset of fiscal catastrophe will likely prevent them from having the necessary impact. It is becoming difficult for me to see a scenario where we do not suffer a major economic meltdown sometime in the next 15-20 years. Maybe buying gold is not such a bad idea...

Article: Barry is on the Money

There is a story on BBC marking the descent of the dollar and pound against the Euro. Apparently investors don't realize the true impact of the upcoming $700b tax cut. It's a little known fact that the US debt clock only has 15 digits, so once it hits $10t it rolls back to zero. We're well on our way!

Update: there is now another article documenting the rise of the Euro.