The Financial Circumstances of the U.S. Federal Government

The Financial Circumstances of the U.S. Government are much much worse than can be comprehended.

The IMF says the U.S. is irreparably bankrupt:

“The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.... closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” - section 6 of above link

This from Bloomberg:

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

You just can't make this stuff up. The Keynesian nit-wits on the Left were, in fact, assisted by some rather small brains on the Right (War on Drugs, surging prison populations, disastrous wars...) to put us in the soup.

I swear to you that with every fiber of my being that I am convinced that there is no macro solution for this (or none that will be effected within the time period required). And not knowing the irrational, knee jerk(0ff) policy responses or their unintended consequences we cannot know when, exactly this current deflationary will turn into the inflationary blow off.

What a shame that our founders were unable to secure the nation sound money... and what a shame FDR was ever born.

The Moral Hazard of Hiroshima & Nagasaki

"Government is force, and politics is the process of deciding who gets to use it on whom. This is not the best way to solve problems." – Richard Grant

Every year at this time the world recognizes the horror of the nuclear destruction of the inhabited cities of Hiroshima and Nagasaki. Time will not heal this wound. As time wears on the political costs of burning 140,000 non-combatants will continue to pile up - irrespective of the fact that 140,000 people are killed every 44 months or so on U.S. highways in car accidents, or per month smoking cigarettes. The only reason more people were not killed had to do with population density - it could have easily been millions.

The justification is ALWAYS the same:

"By nuking these cities LIVES were saved. American lives." (Of course, if my son were on a ship about to invade a place like imperial Japan I might be willing to nuke a hundred cities to bring him home alive... but we are speaking objectively here). It then follows that any nation-state - China, India, Russia, Indonesia, Japan, Israel... - may use nuclear weapons to murder countless non-combatants by detonating a nuclear device over a city IF it will force the hand of the opposing government to the desired policy - especially if it will save the lives of the nuclear initiating nation-state's military personnel. Do I have that reasoning right?

Think about that for a minute. That means that Israel is justified in nuking Tehran at any moment, doesn't it? China can nuke Taiwan. Russia can nuke Washington, D.C., New York, and L.A. I mean, come on... how close did the Soviet Union and the U.S. come to blowing each other up during the Cuban Missile Crisis? Am I the only person to connect this incident with Hiroshima and Nagasaki? Do you really think the Russians didn't look over at the smoldering ruins of Hiroshima when dealing with their counterparts in the U.S.? You really don't think that that made them much more likely to launch a first strike in a dispute like that? REALLY??!!

Truman left the U.S. in the cross hairs for a subsequent nuclear strike by claiming the use of these weapons against cities was a legitimate tactic to gain a desired policy response. A threat we shall live under forever more. Harry Truman as Tony Soprano.

Truman should have been hanged as a war criminal (just making a point; I reject the death penalty) here in the U.S. By not doing so, and showing the rest of the world that international murderers will not be tolerated, the U.S. has left itself permanently at risk for nuclear attack. Did Truman really save American lives? Tim will tell.

Oh, there were other justifications:

"The Japanese would never have surrendered. They thought their emperor was G-d for pity's sake!!" You mean to tell me that the Shinto Japanese believe a mortal man is the living G-d? And Christian's don't? (On another note... I am pretty sure that if Jesus of Nazareth was on hand, he would take a very, very dim view of the bombings of Hiroshima and Nagasaki.) Oh, and by the way.... over 1/3 of the Japanese population is Buddhist... and they do not believe the emperor was a god, nor were they persecuted for this by emperor or his minions.... in fact, the Japanese marry across this religious line with great ease.

And;

"The Japanese had it coming. They pilloried China and Korea for years... and bombed Pearl Harbor. They murdered prisoners of war. They were a warlike culture and needed to be pacified." All true, and the perpetrators should have been punished. What does that have to do with a 3 year old girl and a five year old boy playing in front of their house in Hiroshima on August 6, 1945?

Regular commentator "Publius" had this to say in my second post on this subject:

"Libertarians and even many non-libertarians believe that individuals have rights that are separate from the actions and crimes of their governments."

Let us use a recent incident... The U.S. government does something horrible (horrible is in the eye of the beholder) to a family, village, ethnic group, country... you get the idea. That group then flies 747's into the Trade Towers on 9/11 in retaliation, murdering nearly 3,000 people.

WTF??!!

We were outraged - and rightfully so! The victims of 9/11 had nothing to do with policies implemented by the U.S. government. In fact, nearly half of them might have voted against the proponents of any particular policy that motivated the attackers. These were innocent, non-combatants, murdered while going about their business and trying to provide for their families... as were the young mothers of Hiroshima and Nagasaki.

If you see a difference, read my forthcoming book.

I will be posting chapter 2 of my book here on the AEC Blog this week.

Matt Simmons has Died

Matt Simmons, author, investment banker, and noted Peak Oil Theorist has died.

Whatever Matt said that seemed to be outrageous regarding the Horizon spill, he is off the hook with me.

I had corresponded with the man by email over the years and had a pleasant lunch with him in Boston some years back so I can't say that I knew him well, but what little I did know led me to believe he was a courteous gentleman with a keen interest in his personal intellectual pursuits.

I am saddened to hear of his passing.