Category: Debt and Deficits

Gotterdammerung for America

George Noga
Recent developments have sealed America’s fate; it is only a matter of time until some event (perhaps minor) triggers a crisis – forever changing the United States.
Gotterdammerung for America
By: George Noga – February 25, 2018
      Gotterdammerung is the final opera in Richard Wagner’s Ring Cycle. It means twilight of the gods and is marked by a catastrophic and violent societal collapse. It was the final performance of the Berlin Philharmonic on April 12, 1945. It is an apt choice for the above headline because, for the first time ever, I believe America has crossed the point of no return on its way to gotterdammerung. The climax of the crisis  is years away but we have crossed the Rubicon and jacta alea est – the die is cast.
       I was not this apocalyptic when I wrote the February 11 and 18 posts. The February 11 post identified the three root causes of the fiscal crisis as health care, Social Security (pensions) and interest on the debt. Because of recent developments, these root causes plus defense now will suck up the entire federal budget (and then some) by 2020 – much earlier than I believed scant weeks ago.
       The February 18 post showed the public debt/GDP ratio surpassing 90% within 5 years. No nation has escaped from a ratio that high without societal upheaval and a lost generation. Subsequent to that post, things have gotten worse. Congress’ budget deal increased spending $150 billion/year and permanently raised the baseline for all future spending. Add another $200 billion for infrastructure plus billions more for higher interest on the debt and there are trillion dollar (and bigger) deficits forever. The US now will reach the critical 90% ratio much earlier than I believed on February 11th.
       We were lucky until recently. The 2013 budget sequester restrained spending; we are in the ninth year of an economic expansion; and interest rates have been at historic lows. These factors delayed our fiscal death march to Gomorrah. Meanwhile, the demographic time bomb keeps ticking as health care and pensions spiral out of control. Now, the sequester is busted, interest rates are exploding and a recession is due soon.
       There is no way out of this fiscal rathole. Slashing spending requires cuts of 25% and must include health care and pensions – sowing the clouds of civil unrest. Raising taxes also requires a 25% increase and kills economic growth leading to stagnation and lives of quiet desperation. Other possibilities such as runaway inflation and repudiation of the debt also would rent the country’s fabric. All possible solutions are nihilistic.
       Most politicians, however venal, are not stupid. They fully understand everything in this post. They do not attempt to halt America’s entropy because they know voters will not support drastic action unless there is an existential crisis. Speaker Ryan wanted to tackle entitlements but he would be demagogued to death merely for trying. Nothing will happen until it is far too late and then it will be only quarter-measures.
     Charles Murray, one of the titans of our time, recently said: “the American experiment in self-government is essentially over“. Hamilton said it well: “The only path to a subversion of our country is by flattering the prejudices of the people and exciting their passions, jealousies and apprehensions, to throw affairs into confusion  and bring about civil discord.” That describes America today, dithering over identity politics and playing to peoples’ fears and prejudices, while ignoring existential threats.
       With profound regret, I now must concur with Charles Murray. I fear our beloved republic of 230 years has passed the point of no return; I hope and pray I’m wrong.
Next in 3 days: Special Posting on the Parkland school shooting

Point of No Return: 90% Debt/GDP

George Noga
When a nation’s debt reaches 90% of its GDP, it crosses a bright red line after which recovery is nigh impossible. We explain why that is true.
Point of No Return: 90% Debt/GDP
By: George Noga – February 18, 2018

       Our last post (Fiscal Gorillas) was a lead-in; if you missed it, try to read it first here. It is accepted economic wisdom that once a nation’s debt exceeds 90% of its GDP, there is no recovery. Is 90% an arbitrary ratio plucked from the ether? No. Governments have been borrowing money for 600 years and not one has recovered from a 90% ratio without experiencing social and economic upheaval and a lost generation. Why is this so and why is 90% the magic threshold?

       We begin with some numbers. The US public debt is now $14.8 trillion (total debt is $20.5 trillion) and GDP is $19.7 trillion. This makes the public Debt/GDP ratio 75%. The total Debt/GDP ratio is 104%, but that is not the relevant metric, as the $5.7 trillion difference between public and total debt consists mainly of non-interest bearing intra-government debt. If GDP grows at 2% (it is growing faster, but we must factor in recessions) and if debt grows at 5% (its current rate), the ratio will reach 90% in 2023 and 100% in 2027. Even if my assumptions are off, it is clear the US is on a trajectory to breech 90% and then 100%  in about 5 and 10 years respectively.

Mathematics of a 100% Debt /GDP Ratio

      I discovered a simple but gripping way to look at the Debt/GDP ratio. When the ratio is at 100%, i.e. debt and GDP are equal, it is easier to grasp the crisis. In 2027 both GDP and public debt are projected to be $24 trillion. When these metrics are equal, the economy must grow at an identical rate as the debt to prevent a death spiral.

     If GDP increased only 2%, we would have to limit the debt increase to the same 2% merely to maintain the ratio at 100%. However, if debt continues to grow 5%, there would be added debt of $720 billion per year (compounded) and the ratio would skyrocket. Given our aging demographic, out of control Social Security and pensions along with exploding health care costs, we will be lucky if debt grows only 5%.

     GDP historically has grown about 3% – but much less in recent years. The debt is growing at 5% and that is under highly sanguine economic conditions. When we have the inevitable recession (we are now in the 9th year of an expansion), GDP growth will turn negative and debt will balloon to 8% of GDP or even higher. It doesn’t take advanced econometrics to quickly see this is a recipe for disaster.

      Then there is the matter of interest rates on the national debt. As the US slouches toward a 100% Debt/GDP ratio, buyers of Treasury bonds will require ever higher interest rates to compensate for the greater peril. The historic average composite rate (across all maturities) on Treasury debt is 6%; if that went to just 7.5%, it would mean interest on the debt would constitute $1.75 trillion per year, or over 30% of the budget. Long before that happened, the Minsky Moment (point of no return) would have passed and the United states would begin to resemble Greece, Zimbabwe and Venezuela.

      The only possible ways to avert default are: (1) massive spending cuts on the order of 30% which would shatter the social contract; (2) draconian tax increases which would halt economic growth; (3) runaway inflation, the cruelest tax of all; and (4) repudiation of the debt. The ensuing crisis would not be limited to the economy. We will be lucky to maintain the rule of law and America as we know it will disappear.

    The World Bank asserts that the Debt/GDP tipping point is reached at 77%. No nation has ever escaped a 90% ratio. The United States of America today stands at 75% and will reach 90% circa 2023. The clock is ticking but the band plays on.

Our next post February 25th revisits Antifa and fascism.

The 900-Pound Fiscal Gorillas in Our Midst

George Noga
America’s crisis of spending, debt and deficits is a slow motion train wreck; we are sleepwalking into a fiscal death spiral and are near the point of no return.
The 900-Pound Fiscal Gorillas in Our Midst
By: George Noga – February 11, 2018

       During this year I will write more about the crisis of spending, debt and deficits; this primer identifies the 3 root causes of the impending train wreck. The trigger will be a fiscal crisis when the debt bomb explodes, rendering the US insolvent; however, the crisis will rapidly transmogrify into civil chaos and jeopardize the rule of law.

Health Care – Root Cause #1

       It is impossible for any society to pay for all health care demanded if it is free or heavily subsidized. It must be rationed in one form or another. Private insurance rations it by cost, while government rations it by denying care, lengthy waitlists and death panels. The problem is exacerbated by third party payments; when government pays, costs skyrocket. If we eliminated or reduced third party payments, as is the case with dentistry, laser eye surgery and cosmetic surgery, costs would be stable. The only hope for controlling health care costs lies in free markets; all else is doomed.

       Medical progress is astounding. In 1900, infectious diseases caused 37% of deaths; today it is 2%. People over 65 were only 18% of deaths; now it is 75%. We have gone from conquering disease to managing chronic conditions; half of Medicare patients have multiple chronic diseases – any one of which once would have killed them. Of all medical spending, 80% is on four chronic ailments: cancer, heart disease, Alzheimer’s and diabetes. One-third of all Medicare spending is in the final six months of life. Federal health care spending has ballooned from 3% 50 years ago to 30% today.

Social Security and Pensions – Root Cause #2

     Social Security faces myriad problems. (1) It is caught up in a demographic time bomb; as the population ages, there are ever fewer workers to support ever more retirees. (2) Life expectancy keeps rising, from 60 when SS began to nearly 80 today. (3) Chronically low bond yields have savaged SS. (4) Congress is gridlocked and refuses to act. SS is now 25% of the budget and heading for the stratosphere.

    Social Security is but one part of the pension bomb. State and local pensions are vastly underfunded. Mushrooming pension costs (due to public sector unions) threaten future retirees. The goosed up spending on pensions (and health care) has crowded out infrastructure spending; our roads, bridges and airports are a disaster. Health care and pensions suck all the oxygen out of the budget, leaving behind only chump change.

Interest on the National Debt – Root Cause #3

    The ratio of US debt to GDP is 104% for total debt and 75% for public debt. No country, in 600 years of government borrowing, has survived a public debt/GDP ratio above 90%. We will exceed 90% in a few years. Interest currently consumes 9% of the budget but is headed for 15% by 2020. When (not if) we experience another recession or higher interest rates, that number easily could snowball to 20% or even more.

The Fiscal Train Wreck in Our Future

     By 2020, Social Security will suck up 36% of the budget, health care 34% and interest 15%. That adds to a gobsmacking 85% and they will continue to burgeon after 2020. Defense is 12%, leaving only 3% for the rest of the government. During the 2020s, the three root causes will gobble up the entire budget and then some. It won’t stop until the train goes over the cliff. If something cannot go on forever, it won’t!

     America is sleepwalking into an existential crisis and a fiscal death spiral that is totally predictable. The train that is America is barreling toward a fiscal cliff. Almost everyone sees the train about to go over the cliff, but is inured to the terrible tragedy unfolding before their eyes – and there is no deus ex machina anywhere in sight.

Our February 18 post presents a unique perspective on debt and GDP.

Fake Solutions to Fake Problems

George Noga

America is facing economic stagnation, failed schools, a nuclear Iran and is fighting global Islamic terrorism. Progressives are fighting for men to use the ladies’ restroom.
Fake Solutions to Fake Problems
By: George Noga – October 2, 2016

      As we approach the election, we are bombarded from the progressive side with a panoply of phony issues to which they proffer equally phony solutions. They don’t have real solutions to real problems; all they can offer is maskirovka and rope-a-dope.

     The most serious issues America faces are: weak economic growth with income stagnation, radical Islamic terrorism, Iran as a nuclear threshold state, chronic debt and deficits approaching critical mass, and failed government schools. Progressives don’t want to discuss any of these issues; instead, they talk of climate change, gun control, a war on women, transgender restrooms, and environmentalism – all phantom issues.

     Climate change is fake because it is man-made in only an inconsequential way, if at all, as well documented in prior posts. It is a classic Baptists-bootleggers political coalition of true believers (environmentalists) and their fellow travelers (government) who stand to benefit. The latest fake solution is the climate deal signed earlier this year in Paris where politicians from 175 countries agreed to keep doing whatever they intended to do anyway and with no consequences for non compliance. In an ultimate irony, the fake climate deal to fight a fake enemy was signed in the same city where just a short while earlier a real enemy, Islamic terrorism, slaughtered 130 real people.

     Gun control is progressives’ go-to issue. We published a series, Guns in America, available at http:\\www.mllg.us which proves to any scient person there is no positive correlation between guns and crime and there likely is a negative correlation, i.e. more guns equals less crime. We followed that up with a Harvard study showing social, cultural and economic factors (and not guns) are the determinants of violent crime.

     Gun control is a phony issue for which progressives have proposed a long train of phony solutions. Not one proposed measure would have prevented any mass gun violence in America. Their most recent phony solution is the “no fly, no buy”  proposal to ban gun sales to anyone on the no-fly watch list. This is a small and notoriously inaccurate list that excludes all recent terrorists; it would have no effect on terrorism.

     A war on women and the campus rape culture likewise are imaginary issues. Duke, UVA and Harvard (The Hunting Ground) have been debunked. College campuses actually are safer for women than elsewhere. Women’s pay is equal to or higher than men’s when making proper adjustments for education, experience, danger, etc. Liberal solutions also are imaginary such as constant ongoing affirmative consent for sex. Progressives refuse to criticize the real war on women in Moslem countries, replete with, inter alia, genital mutilation, no driving, burkas and Sharia law. Go figure!

     Transgenders constitute .00006 of the population, making this issue a tempest in a teapot. Progressives insist anyone who self identifies as any gender can use any public facility at anytime. They demand young girls accept showering with men and that they simply get over any discomfort. Yet, they dictate transgenders not be required to use facilities conforming to their biological gender because it may cause them discomfort.

     Environmentalism is a totally ersatz issue. Every metric (100 of them) shows both human and environmental well being to be the best they have been in the past 50-75 years and getting better all the time. Their fake solution is to spend ever more and more money to eke out ever less and less imperceptible benefit and to elevate a tiny fish (delta smelt) over the well being of hundreds of thousands of real human beings.

     Take the real issues identified in this post and contrast them with the phantom issues and solutions put forth by progressives. They use misdirection, smoke, mirrors, and rope-a-dope for emotional appeals to low information voters. They never address serious issues with serious solutions. They choose instead to fight for transgenders against young girls but not for all Americans against radical Islam and a nuclear Iran.

The next post in our 2016 election series addresses political correctness.

Into the Eye of the Debt Hurricane

George Noga

Update on the Crisis of Spending, Debt and Deficits
By: George Noga – September 20, 2014

     By some metrics the debt storm has abated. Compared to earlier deficit projections published herein, the USA is slightly better off, with the difference due entirely to the massive Obama tax increases. The deficit this FY ending September 30 is $500 billion, equal to 3% of GDP; meanwhile GDP is increasing around 2%, meaning the deficit is growing only slightly faster than the economy, a marked improvement. However, great damage already has been done; moreover, we are merely in the eye of the debt hurricane – it may appear sunnier at the moment, but the deficit storm will soon resume with even more ferocity and we will all be blown away.

The Seen and the Unseen

     The US economy already has sustained massive body blows. The reason we don’t clearly see the damage is due to the difference between the seen and unseen – or, more to the point, the difference between the reported and unreported.

  • In past recoveries following major recessions, the US economy has grown by an average of 5% for the subsequent 5 years; this results in a compound growth rate of 27.6%. Instead, we have experienced 2% compound growth yielding only 10.4%. The difference of 17.2% is the growth deficit. Simply, the average American today is 17% worse off than he/she should be; but we don’t see what should be; we only see what is. Nevertheless, the reality is that every American has been impoverished by 17% just during the past 5 years.
  • We see the increase in federal tax revenue and the concomitant reduction in the deficit. Unseen are the massive tax hikes that produced the revenue. Individual tax brackets increased with the top rate going to 39.6 % – a 13% increase. Investment related taxes were savaged with capital gains rates going from 15% to 23.8% (59% increase) and dividends from 15% to 43.4% (289% increase). Medicare taxes increased 62% and the upper limit was removed. There was a new surtax on investments of 3.8% and the death tax went from zero to 40%. New individual and employer Obamacare taxes took effect along with scores of other Obama tax hikes. The 35% corporate tax rate (world’s highest) is responsible for shifting jobs and investment abroad and businesses keeping $2 trillion overseas. The unseen effects of these massive tax increases will hobble the economy until abnegated.
  • We can see the reduction in the official unemployment rate; what is unseen is the jobs disaster that is America today. There are 12 million out of work, 12 million on disability and nearly 50 million (one in 5 households) in breadlines – err, on food stamps. The labor force participation rate hit a 35 year low. All (net) jobs being created are part time; there are legions of 29ers and 49ers. The true rate of unemployment is 15%, not the 6.2% reported.
  • We see Social Security and Medicare meeting their current obligations but we do not see the demographic time bomb looming for both programs. There is nothing on earth as certain as demographics; 77 million more boomers will retire (10,000 every day) and begin Social Security and Medicare. Spending on both these programs will grow by 8% compounded – doubling every 9 years. Within 10 years we will spend our entire budget on entitlements and interest on the debt leaving nothing left over for defense or for the rest of the government.
  • We see interest rates on federal debt hovering around record lows costing only $225 billion currently. We blissfully do not see what the interest would cost given a return to average interest rates, i.e. interest cost would increase $500 billion per year to $725 billion, or triple today’s cost. And that’s the rosy scenario. This is a no-win situation: keep rates low and the economy is grotesquely distorted and savings and investment are savaged or raise rates where they should be and the budget deficit goes thermonuclear.
  • We see government regulation exploding, uncertainty rampant and the scepter of Obamacare hanging over all of us like the sword of Damocles. We do not see the stultifying effects of all these on job creation and the economy.

     Looking at the gestalt paints a funereal picture. Average Americans already are 17% poorer over the last 5 years than they would have been in a normal economic recovery – and they will continue to get relatively poorer and poorer each year without any end in sight. The tax and regulatory burden, particularly on investment, has skyrocketed, halting new investment and job creation. Behind the “official” 6.2% unemployment rate lays a dystopian jobs nightmare; we are turning into a country of part time workers. We are reaping a demographic whirlwind still in its early stage. We are living on the razor’s edge regarding interest rates; we have a Hobson’s choice: ballooning interest costs or maintaining negative real interest rates. Finally, all this exists within a milieu of hyper-regulation, vast uncertainty and, of course, Obamacare.

Current CBO Projections for Spending, Debt and the Deficit

     Recently (July) the CBO released its latest forecast. The CBO alternate baseline forecast (its most realistic) assumed the average middle class family’s tax burden doubles over the coming generation; it also assumed no more recessions, wars, terrorist attacks, natural disasters and that interest rates remain low perpetually. Despite these horrific (taxes doubling) and grossly unrealistic assumptions, the results are disastrous. The deficit increases by over $100 trillion and the CBO stops forecasting because it can’t conceive of a functioning economy under those circumstances. And all this, dear readers, is based on an uber-optimistic forecast; the reality is much, much worse!

     We have been grazing on the fiscal commons for a long time; the pasture is about to give out and the spring lambs are doomed to a life of quiet desperation. We can muddle through for a few – perhaps several – years with temporizing and half measures. Soon enough time will run out and the ineluctable tipping point (Minsky Moment) will be reached. It will get ugly for an extended period, i.e. a lost generation., Eventually, when we emerge from the rubble, we may get it right again – only because there are no other choices – and America will again enjoy more liberty and less government!

When Debt Becomes Equal to GDP

George Noga

By: George Noga – June 10, 2013

     Having blogged extensively about the crisis of spending, debt and deficits, I am constantly alert for new perspectives to present the crisis in terms easier to understand. I have discovered one compelling new way to do this and it is presented herein.

       First however, the media have widely reported the  decline in the projected federal deficit which normally would be welcome news. Please note I referred to the projected deficit; the actual deficit continues its inexorable march to oblivion. The decline is due to two factors: (1) higher tax collections in late 2012 in advance of the Obama tax increases; and (2) payments from Fannie Mae. Both are one-time phenomena. So you may wonder, won’t the tax increases permanently shrink the deficit? If you believe thusly, you have forgotten Hauser’s Law which teaches tax rates may rise or fall, but the overall percent of revenue to GDP remains unchanged.

The Special Mathematics of a 100% Debt/GDP Ratio

    Now for the fresh perspective. As the Debt/GDP ratio approaches 100%, some simple but gripping mathematics come into play. First, a few numbers. GDP now is $16 trillion and the public debt is $12 trillion (75% ratio). At the end of Obama’s term GDP will be $17 trillion, assuming a perhaps optimistic 2.0% compound growth rate. The public debt also will be right at $17 trillion based on continued annual structural deficits of just under $1 trillion combined with the frightening demographics and high annual compound growth of Medicare, Medicaid, Social Security and ObamaCare. Please note I use public debt and not total debt; this is because we must pay interest only on the public portion – a key distinction to bear in mind as you read on.

    When the interest-bearing public debt equals GDP, the math gets interesting. Historically, the average maturity of US government debt is 5 years, while the average interest rate is 6%. When public debt equals GDP in 2016-2017, we can make the following observations.

“When debt and GDP are the same, the economy must grow at a rate  equal to the composite rate on the debt to prevent a death spiral.”

    First, the economy must grow at the same rate as the overall interest rate on government debt to keep from exploding interest costs and the deficit. If interest rates revert to the historic average of 6% while GDP grows at 2%, this will, ceteris paribus, result in a 4% larger deficit. At $17 trillion, the annual debt service (interest) will be over $1 trillion with 4%, or $680 billion, resulting from the gap between GDP growth and interest rates. Note: Interest now consumes less than 1% of GDP because of historically low interest rates – which will not last.

    Second, if (miracle of miracles) the interest rate becomes equal to GDP growth, the entire benefits of the expansion of the US economy are offset by and consumed by higher debt service. To put it straight: the US economy never can grow net of interest. One can only imagine the impact of this on unemployment and every other measure of economic well being.

“If both GDP growth and interest rates were at their historic averages, there would be a differential of -2.7% , adding $400 billion a year to the deficit.”

    Third, again using historic data, if the US economy grew at its average post WWII rate of 3.3%  (phat chance) and also experienced its average interest rate of 6%, that would result in a  differential of -2.7%, i.e. debt service would explode by nearly $400 billion more each year compounded. Even if economic growth was high at say 3+%, interest rates would be higher given the concomitant strong economy. Thus, even under such sanguine conditions, debt service would grow much faster than the economy resulting in a debt death spiral.

    I hope the above perspective helps readers better understand why countries whose Debt/GDP ratios blow past 90% of their economies rarely, if ever, recover. These United States of America are headed toward a 100% Debt/GDP ratio by the end of the current presidential term. The only alternatives are: (1) massive spending cuts on the order of 30% which will wreck the social contract; (2) Draconian tax increases which will tank the economy further; (3) runaway inflation; (4) repudiation of the debt; and (5) a lost generation much like Greece is experiencing today. In fact, we are likely to experience several of the aforementioned perils. Avoiding widespread civil unrest and maintaining the rule of law will be no small feat.