Financial Repression

At the darkest hour of the crisis, I can see the state confiscating all IRA, 401(k) and private/corporate pension assets and transferring them into Social Security.
Financial Repression
By: George Noga – November 11, 2018

     If the term financial repression is new to you, get used to it! You already are experiencing it and it will get much worse as the spending crisis ratchets up. Financial repression is government action that insidiously transfers wealth from the private to the public sector and, in particular, facilitates government financing of its massive debt.

        Repression is already here; thus far, we have seen only less virulent forms: (1) artificially low (zero) interest rates that savaged savings and deferred the consequences of the government’s debt binge; (2) multiple bouts of quantitative easing, driving up prices of government bonds and suppressing interest rates; (3) regulations for banks to hold more government bonds to meet capital requirements; (4) increases in bank reserve requirements; and (5) early salvos in the war on cash. Following are the top five forms of repression you can expect as the spending crisis goes thermonuclear.

1.  Negative Interest Rates and the War on Cash  These go hand-in-hand; negative rates won’t work if citizens can hold cash as they are much better off with cash than negative rates. In Japan, the sale of safes soared when rates went negative. Europe wants to ban the 500 Euro note and the US the $100 bill. Canada, Singapore and many other countries have phased out large denomination notes. Cash can protect citizens from an overpowering state and that is precisely why the state has declared war on cash.

2. Currency and Capital Controls  As the spending crisis heats up, citizens are better off moving all or some of their funds to other countries. There is no doubt the government will put a stop to this with currency controls – as have all other nations in similar straits. Government also will regulate the flow of capital and capital markets by various means including taxation, regulation, prohibitions and mandates.

3. Bail-Ins During the spending crisis, banks will fail. Governments have established bail-in provisions requiring depositors of such banks to make the banks solvent by confiscating a portion of their deposits. Recently, Cyprus proposed taking 9.9% from every depositor. The state may palliate this by proffering worthless equity or bonds in the failed bank as compensation. Again, this ties into the war on cash; bail-ins won’t work unless citizens are forced to keep their money in banks or other institutions.

4. Seizure of IRA, 401(k) and Pension Assets Throughout history, pension funds have proven the quickest and easiest for politicians to steal. In recent years, Poland, Hungary, Bulgaria, Ireland and France have, through one artifice or another, seized money from personal, company and/or public pension accounts. Currently, there is $30 trillion of pension assets in the US; if you believe these are safe, you also believe in the Tooth Fairy. The Obama Administration once prepared a working paper outlining how government could seize 25% of Americans’ assets in IRA and 401(k) accounts.

5. Debt Restructure The state can forcibly restructure its debt, which can take many (or multiple) forms: (1) lengthen maturities; (2) impose a haircut, i.e. writedown of principal; (3) lower the interest rate – even to a negative rate; (4) require rollover; (5) delay or prevent redemption; (6) conversion to other securities; and (7) repudiation.

         Opportunities for financial repression are limited only by the imagination. More than likely, government will use all five of the forms of repression listed supra. I can see the state requiring IRA, 401(k) and private/corporate pension plans to own a mandated amount of government debt. At the darkest hour of the crisis, I can see the state taking over all (by then $50 trillion) private pension assets and converting them into highly politicized government pensions that revert to the state upon death.

       Government created this problem. Its ham-handed attempts to fix it will destroy America as we know it and create a lost generation of unfathomable desperation. That is why we passionately believe America needs more liberty and less government!

Don’t miss our special Thanksgiving posting – next from MLLG.

Debt Crisis Timetable Accelerating

When Titanic struck the iceberg, it remained afloat and the disaster was not yet apparent. However, its fate was irreversible from that moment; so it is with a 90%  debt/GDP ratio.
Debt Crisis Timetable Accelerating
By: George Noga – August 1, 2018

       I have a recurrent nightmare about an endless train, brimming with passengers and priceless cargo, slowly but inexorably hurtling along its tracks toward a bottomless abyss. The engineers, conductors, passengers and observers all know the train is going over the cliff; however, instead of trying to stop the train they are opening the throttle to speed it up. When I awake, I realize it is no nightmare; it is happening right now to the United States of America. Following are data just released by CBO and SS.

  • Social Security begins devouring reserves this year, 4 years earlier than projected last year. Reserves will be depleted in 15 years and benefits would require a 25% cut.


  • Medicare will be unable to pay scheduled benefits in 8 years; just during the past year this shortened by 3 years. What does that say about the integrity of the data?


  • Deficits average $1.5 trillion (total $15 trillion) over the next 10 years (based on current policy), raising the public debt/GDP ratio to 105% per the latest CBO estimate.


  • Interest on the debt will triple to just under $1 trillion per year within 10 years per the June 2018 CBO report. Debt service will soon overtake defense spending.


  • The really bad news is that the projections cited above, by government agencies, are wildly optimistic. None assumes a recession during the coming decade, while it is nearly certain there will be one or possibly even two. Recent projections made by private sector economists (Fortune Magazine, Cato Institute) are much worse.

       No one cares! For most Americans the problem is too abstruse; they are tired of hearing pundits cry wolf; and there is no discernable impact on their daily lives. For politicians, tackling the issue has no upside; it is all downside, including possible electoral loss. No constituency exists for reining in benefits, cutting spending or raising taxes; the political apparat favors the opposite. Each year that we dithered, the problem became more intractable and costly; now, finding a solution is virtually hopeless.

        Economists believe the point-of-no-return is a public debt to GDP ratio >90%; the World Bank says 77%. The US already is at 77% and will reach 90% much earlier than believed only months ago. The crisis doesn’t begin when we exceed 90%; it just means there is no going back. The Titanic remained afloat a long while after it struck the iceberg and the crisis was not immediately evident to those aboard. Nonetheless, the moment Titanic hit the iceberg, its fate became irreversible; so it is with a 90% ratio.

       As my nightmare continues, nothing happens until after the train goes over the cliff and we are subsumed by crisis. Panicked politicians impose a VAT, modest at first, but rapidly ramped up to European levels of 20+%. Income taxes skyrocket. Only token changes are made to entitlements. Economic growth tanks. Defense is compromised. There is a 15-25 year lost generation as we morph into a European-style welfare state. People lead lives of quiet desperation and the USA, as we know it, ceases to exist.

      There are two certainties about the impending debt crisis: (1) if something cannot go on forever, it won’t; and (2) excess debt ultimately must be purged from the system. The debt can be purged only via higher taxes, less spending (especially entitlement spending), hyperinflation or repudiation; there are no other options.

      By the time the crisis hits, a combination of new and higher taxes and spending cuts totalling $1.25 trillion per year in today’s dollars (25% of the budget) for 15 straight years will be needed just to get back to today’s 77% debt/GDP ratio. That should give you some perspective about the devastation that purging the debt will wreak on America – as well as the reason for my recurrent nightmares.

Our next post on August 10th documents great causes turning into rackets.

Point of No Return: 90% Debt/GDP

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

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.

The Panacea of Economic Growth

By: George Noga – November 1, 2014
       Throughout its 238 years, the US economy has grown by over 3.0% annually, although data for the early years are problematic. For the 60 years from 1940 to 2000, the US economy grew at a rate of 3.6%. For the following 14 years from 2001 to the present, GDP grew by 1.8%, exactly half that rate. If growth remains tepid, Americans will not recover the ground they lost and their children and grandchildren will, for the first time, be worse off than the previous generation.
        America has transmogrified into Europe which is in permanent recession due to its failed economic policies. Even stalwart Germany is beginning to stagnate. France is destroying its economy in a fit of socialistic angst. Italy has a lower GDP per capita than it had 15 years ago. Meanwhile in Brussels, Jean-Claude Junker continues to strangle EU countries with bureaucrats and regulations. In Europe a 2% growth rate is seen as optimistic, 1.5% as acceptable and no growth as possible. The average European in one generation fell 25% behind the average American due solely to differences in GDP growth. As I wrote last month, just in the past 5 years, the average American has been impoverished by 17% due to the low growth rates coming out of the recession compared to the historic growth rates in similar times. In short, we already have become like Europe although Europe continues to plumb ever new depths. We are well along in suffering a lost decade on the path to a lost generation; our progeny, like Europeans today, will lead lives of quiet desperation.
“Failure to grow America’s economy is a choice; decline is not inevitable.”
        Failure to grow our economy is a choice; decline is not inevitable. It is a choice made by our political leaders solely because they prefer to demagogue inequality, class warfare and corporate profit for perceived electoral gain. It is a choice made by the media because they are lazy, economically illiterate and prefer to flog dead camels. It also has been a choice made by ordinary Americans in the voting booth for all of the aforementioned reasons advanced by politicians and the media. There are strong signals however that ordinary Americans now are beginning to want economic growth.
Economic Growth as the Panacea

        As trumpeted by the headline of this blog post, economic growth is a panacea; indeed, it is the only solution for every problem (real and perceived) that we face today and for the coming generation. It is apropos that Panacea is the Greek Goddess of healing because strong economic growth will heal everything; to wit:

  • The crisis of spending, debt and deficits: A sustained period of strong economic growth (combined with some spending restraint) will enable the US to restore fiscal balance and to stabilize its debt thereby gradually lowering the Debt/GDP ratio to its long-term historical level of around 30%.
  • Climate change and environment: If in the distant future climate change causes some issues, the best antidote is a vibrant economy that will easily enable us to spend whatever is needed to mitigate any such problems.  Only countries with strong economies can afford to spend copiously on the environment.
  • National security: The single greatest asset (weapon) we possess for our national security is a growing, resilient economy. This enables us to spend whatever is necessary to deter any possible adversaries and to defend ourselves should that be necessary. Weakness invites aggression and fosters terrorism.
  • Jobs, poverty and inequality: It is economic growth, not government, that creates jobs. It is sustained growth that fulfills the American dream and eliminates poverty; moreover, growth is the great equalizer.
  • Unfunded mandates: The USA is facing $350 trillion (over one-third of a quadrillion) in unfunded commitments in the next 50 years for Social Security, Medicare, government pensions, Obamacare and other programs.   Absent  a high rate of growth, these promises not only cannot be kept but will require drastic reductions in programs.
Recipe for Economic Growth

      Okay, so economic growth is the panacea; what must we do to achieve it? The answer is straightforward and attainable. If we do the following  we will achieve vigorous, long-lasting economic growth.

  1. Political consensus: Probably the single most difficult hurdle for achieving growth is reaching a political consensus. Politicians and the media must agree to pursue policies that maximize growth and agree to stick with such policies for the long term. They can continue to argue over how to divide the wealth that results; that is what politics is about. Absent some consensus however, achieving sustained growth becomes problematic.
  2. Tax and fiscal policy: Taxes (personal and corporate) must be reduced, simplified and stable. People and businesses must be able to plan ahead and certainty about taxation is indispensable to investment and job creation. In the same vein, spending needs to be restrained.
  3. Eliminate uncertainty: Business hates uncertainty; it stifles planning and results in gridlock. There needs to be a broad and sustained political understanding about taxes, regulations and new initiatives.
  4. Sound money: The Fed should focus only on maintaining sound money and fighting inflation. A strong, stable and sound dollar are indispensable for a vibrant economy.
  5. Regulation: The economy is being strangled by regulation and litigation. We need to have a moratorium on new regulations while we gradually reform and roll back existing ones. Our tort system needs to be reformed.
  6. Energy: We should develop every possible energy source including ANWR, offshore and shale and natural gas on federal and state lands. We should export LNG immediately from many terminals and, of course, construct the Keystone XL Pipeline. Such a policy will create jobs, make us energy independent, stimulate the economy and, importantly, prove to be a potent weapon in keeping Putin and Russia in check.
  7. School choice: I include this because educated, trained workers are a potent economic resource. Further, school choice will bring about more equality and reduce poverty. It also is a panacea.
     The choice is ours. We can continue on our present slow growth trajectory which will condemn future generations to a downward spiraling economy and reduced living standards; they will experience untold miseries as the crisis of spending, debt and deficits culminates in a meltdown. They will inhabit a Clockwork Orange nation drowning in taxes, regulation and uncertainty. They will have part time jobs for low wages. At best they will collect 65% of the present Social Security benefits deferred until they are age 70; Medicare and Obamacare (also age 70) will be busted; health care rationed and long waits common for poor treatment. They will inherit a volatile, dangerous world where nuclear weapons proliferate, a revanchist, aggressive Putin-led Russia and all without the resources for adequate national defense.
       Or, we can make a different choice; we can choose to reject decline and to embrace high-growth policies. This would lead to a virtuous circle of better education, abundant and cheap energy, and to a far safer and more secure nation and world. It would result in fixing the debt crisis and funding all the promises we have made for the future. Most of all, it would help ordinary Americans. As year after year of high growth enriches America, the politicians can fight over how to best divide up this cornucopia – including addressing any inequality issues.
       Firstoff however, we must make the right choice. This gets us right back to the heart of Alexander Hamilton’s question: “Whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend on accident and force.” Is America today still capable of putting politics aside when self preservation is at stake? Or, do we heed the Siren song of politicians advocating failed ideologies, searching for Utopias and demagoguing political correctness, class warfare and inequality?

When Debt Becomes Equal to GDP

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.