State Pensions Owe $5.17 Trillion – Total US Debt at 700% of GDP

March 31, 2010 · Posted in Government · Comment

Recently I posted something about the phenomenon of private credit contraction being more significant than public credit expansion.

In there in noted:

I’m also not sure to what extent other municipal and state pensions are covered in the flow of funds number, but I rather doubt they are included at all.

Now I came across some numbers:

Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension obligations the way the bond markets value debt. They put the number at $5.17 trillion.

After the $1.94 trillion set aside in state pension funds was subtracted, there was a gap of $3.23 trillion — more than three times the amount the states owe their bondholders.

“When you see that, you recognize that states are in trouble even more than we recognize,” Mr. Rauh said.

That same article also points out something interesting about past patterns of debt blow ups throughout history:

Professor Rogoff, who has spent most of his career studying global debt crises, has combed through several centuries’ worth of records with a fellow economist, Carmen M. Reinhart of the University of Maryland, looking for signs that a country was about to default.

One finding was that countries “can default on stunningly small amounts of debt,” he said, perhaps just one-fourth of what stopped Greece in its tracks. “The fact that the states’ debts aren’t as big as Greece’s doesn’t mean it can’t happen.”

Also, officials and their lenders often refused to admit they had a debt problem until too late.

“When an accident is waiting to happen, it eventually does,” the two economists wrote in their book, titled “This Time Is Different” — the words often on the lips of policy makers just before a debt bomb exploded. “But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

This is important: What will break the federal and state governments’, and ultimately of course the taxpayers’, backbone, won’t be the officially declared debts, but the ones that are off the books.

So based on this, the total debt count in the US so far:

Total private+public debt as per flow of funds report: $52.5 trillion
+ Social Security & Medicare obligations: $43 trillion
+ State pension obligations: $5.2 trillion
= $100.7 trillion total debt or about 700% of US GDP.

“When an accident is waiting to happen, it eventually does …”

Amen to that!

Tags: pensions, public debt, state pensions

When the Bills Come Due – Public Debt Interest in 2010 and the Following Years

March 2, 2010 · Posted in Government · Comment

For the longest time the federal government has been able to run up debts and postpone the burden of payments for immediate purchases of goods and services. Interest payments on public debts have stayed somewhere around $100 billion, or at least below $200 billion per year.

In 2009 the interest paid on federal public debt was $187 billion, about 8% of the total of $2,100 billion in tax money collected. That means around 8% of the taxes you are currently paying are going to interest payments for expenditures made in the past.

Recent estimates from the GPO predict a rather drastic change:

From now through 2015 the interest paid on the federal debt is estimated to rise to as high as $570 billion. In other words, it is estimated to triple within the next 5 years. This is up from 8% to then 27% of our current tax burden.

To put things in perspective: The last time this number was a third of what it is today was in 1983, 27 years ago!

So what used to take 27 years to get us to today’s levels, could now happen in as little as 5 years. If this is not explosive growth, then I don’t know what is.

By the way, the GPO estimates in that same budget that the federal government’s tax receipts will rise year by year over the next 5 years to reach an impressive $3,600 billion in 2015. If people trust such rosy numbers, it is understandable that the interest portion can still be sold as justifiable.

Where that tax money is supposed to come from is not really clear to me. I understand that politicians will say that exciting and fundamental economic growth will be the driver for this. I would like to submit that this is, as always, rather laughable.

I suggested some very broad and basic estimates for the years to come in terms of tax collections, and was then already closer to the actual numbers than the official estimates.

The president’s budget estimates tax receipts of $2.2 trillion, $2.4 trillion, $2.7 trillion, and $3 trillion for 2009, 2010, 2011, and 2012, respectively. These estimates are laughable. My projections for tax receipts, as I explained in The Coming US Tax Receipt Shortfall:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012.

Meanwhile there is no indication that government expenses will fall. Even with the current, now completely obsolete, budget estimates for government expenses, the Federal deficit would develop as follows:

$850 billion for 2009

$1 trillion for 2010

$1.3 trillion for 2011

$1.7 trillion for 2012

These are very optimistic figures. It wouldn’t be surprising if actual figures turned out to be around double or triple those numbers, unless a true change in policy were to occur.

Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

$1.65 trillion for 2009

$1.6 trillion for 2010

$1.95 trillion for 2011

$2.2 trillion for 2012

Even if a fall in tax receipts were to flat out in 2012 and tax collections were to begin rising again, i still don’t see how collections should reach a number as high as $3,600 billion under current circumstances. I think the government could be happy if by then they were back to just below what they are collecting today by then!

This is all of course assuming that no drastic changes in the tax code occur, which is of course completely predictable:

If President Obama keeps spending like this, and really wants to cut the deficit in half by 2013, he will at one point be faced with no other choice but to raise taxes on all Americans, rich, middle class, and poor.

Actually, the rich will always find ways to not pay taxes, which leaves the two former groups as those who will be bearing the heaviest burden.

Yes, as sure as night follows day, the bills for decades of profligacy, corruption, wars and destruction, favoritism and coerced unionism, in other words for big government, are coming due. And those who will be paying the bills won’t be the people who enjoyed the benefits of and asked for all this spending, it will be you and your children, who were never and will never be asked.

Tags: public debt, public debt interest, taxes

Schiff @ Freedomain Radio

January 29, 2010 · Posted in General Economics · 2 Comments

While Fox, CNN, and MSNBC discuss why independents’ favorability toward Obama during his State of the Union address went up by 3% during the 10th and 11th minues of his speech, and why Republicans disliked the 15th minute, it’s time for a well deserved dose of truth:

Tags: Government, health care, peter schiff, peter schiff for senate, public debt, srefan molyneux

Congress Increases Debt “Limit” to $12.4 Trillion

December 27, 2009 · Posted in Government · Comment

In yet another predictable move, Congress has increased the debt limit by another $290 billion:

Congress’s move to lift the federal government’s borrowing limit by $290 billion — enough to last about two months — sets the stage for a contentious debate early next year on government spending.

The Senate on Thursday approved the increase in a 60-39 vote that was largely along party lines. The House passed the measure last week.

The additional $290 billion in borrowing ability lifts the total public debt the federal government can hold to about $12.4 trillion and will allow the government to keep borrowing through February.

Treasury officials had warned that the current limit of $12.1 trillion was close to being breached. Congressional leaders scrambled to raise the ceiling before they began the holiday recess.

An increase in the debt ceiling is largely symbolic as it represents money already spent by the U.S. government. In the unlikely scenario where it was ever breached, however, there would be significant consequences for the financial markets. The federal government would be forced to default on its obligations, and could lose its top credit rating, having to pay much higher interest rates as a result.

Just two weeks ago, several senior Democratic lawmakers had said they were close to reaching an agreement on an increase in the debt limit of $1.8 trillion to $1.9 trillion, enough to support the federal government’s borrowing needs through 2010. That would have avoided the need to take up the issue again next year, when many Democratic lawmakers are expected to face tough re-election battles.

But when it became apparent there wouldn’t be sufficient support in the Senate for that, Democrats scaled back their ambitions and moved forward with the more modest increase.

That leaves Congress facing another debate on the issue before the end of February. Senate Majority Leader Harry Reid (D., Nev.) said this week that would be the first order of business the Senate deals with when lawmakers return Jan. 19.

Republicans are hoping to tap into the public’s anxiety about the federal government’s finances to make gains in the polls next November.

When the Senate takes up the debt issue in January, Republicans plan to hold votes on a number of measures that would seek to restrain the federal government’s ability to spend. These include discretionary spending caps, a move to strip out already-committed funding from the fiscal 2010 budget and the creation of a commission to investigate longer-term solutions to the debt issue.

I love the part about “creating a commission to investigate longer-term solutions to the debt issue”. This is precisely what we can expect from Congress. More commissions, debates, talk, surprises about this or that shortfall, and so on and so forth.

Every month someone from some party says we have to deal with the debt issue, reign in spending, cut expenses and return to fiscal discipline. Yet, when it comes to actually voting on the single measure that matters in this regard, they are rather quick to approve more of the same.

Note that the official debt numbers are a sham anyway. Total US debt is not at $12 trillion. The Treasury itself estimates that total government obligations for Social Security and Medicare are at $43 trillion, as I noted before:

The SOSI provides additional perspective on the Government’s long term estimated exposures and costs. However, it should be noted that the Government’s financial statements do not reflect future costs implied by any current policy, such as national defense, the global war on terrorism, and disaster relief and recovery. Table 3 shows the Government’s estimated present value of future social insurance expenditures, net of dedicated future revenues for the programs reported in the Statement of Social Insurance (SOSI), projected to be $43 trillion as of January 1, 2008 for the ‘Open Group’6. While these expenditures are currently not considered Government liabilities, they do have the potential to become liabilities in the future, based on the continuation of the social insurance programs’ provisions contained in current law.

A liability, or debt, is simply “the obligation of one person or group to provide future goods to another person or group.” Thus, for the discerning economist, it is rather irrelevant if the government “considers” or “officially calls” them liabilities. As far as their impact on human action is concerned, and thus all that economics cares about, they are debts.

This brings the total US government debt up to $55 trillion, an implicit mortgage burden of $491,000 per US household. Anyone in Congress wanna deal with THAT?

Of course not, they will continue to push the boundaries, and of course they will raise the limit once again, come February.

Remember:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

The public should not be deluded into thinking that such thing as a “limit” exists in the minds of their representatives.

May I ask: If all Congress keeps doing is to raise the debt limit quarter by quarter, why not get rid of the damn thing altogether?

Tags: debt, public debt, public debt limit

US Treasury Accepts Donations to Help Pay Off Public Debt

November 17, 2009 · Posted in Government · 1 Comment

In case you were wondering what to do with your money (or what’s left of it) this Christmas … the US Treasury’s Bureau of the Public Debt is accepting donations, this is NOT a joke as you can find on the Treasury’s own website:

How do you make a contribution to reduce the debt?

Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept G
Bureau of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188

Believe it or not, people do send checks:

According to Treasury spokesman Kim Treat, people do send checks. In the last fiscal year they added up to a little over $3 million, which was the highest total since at least 1996.

Some include notes. Common reasons for donating include a sense of patriotism and immigrants expressing their thanks to the United States for giving them an opportunity, he said.

It might be helpful to explain what this really means: When the government (that group which exerts a monopoly on organized theft, aka taxation) takes money from creditors (incurs a debt), in particular the governments of China, Japan, or Saudi Arabia, it guarantees repayment of that money at some point. Where does this money come from? It comes from taxes imposed. Who pays those taxes? It is you!

So if you think it is patriotic or necessary to thank our dear government by helping to pay off the public debt, then you need not worry: Whether you send in donation checks or not, you and your grandchildren will be paying down the debt plus the interest plus the interest on the interest sooner or later.

Tags: public debt

Federal Government Revises Deficit Forecasts as Expected

August 26, 2009 · Posted in Government · Comment

In February I wrote:

The president’s budget estimates tax receipts of $2.2 trillion, $2.4 trillion, $2.7 trillion, and $3 trillion for 2009, 2010, 2011, and 2012, respectively. These estimates are laughable. My projections for tax receipts, as I explained in The Coming US Tax Receipt Shortfall:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012. (…)

Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

$1.65 trillion for 2009

$1.6 trillion for 2010

$1.95 trillion for 2011

$2.2 trillion for 2012

If President Obama keeps spending like this, and really wants to cut the deficit in half by 2013, he will at one point be faced with no other choice but to raise taxes on all Americans, rich, middle class, and poor.

Half a year later, this “surprising” and “unexpected” data finally makes it to government’s own accounting office:

In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America’s founding. And it says by the next decade’s end the national debt will equal three-quarters of the entire U.S. economy.

But before President Barack Obama can do much about it, he’ll have to weather recession aftershocks including unemployment that his advisers said Tuesday is still heading for 10 percent.

Overall, White House and congressional budget analysts said in a brace of new estimates that the economy will shrink by 2.5 to 2.8 percent this year even as it begins to climb out of the recession. Those estimates reflect this year’s deeper-than-expected economic plunge.

The grim deficit news presents Obama with both immediate and longer-term challenges. The still fragile economy cannot afford deficit-fighting cures such as spending cuts or tax increases. But nervous holders of U.S. debt, particularly foreign bondholders, could demand interest rate increases that would quickly be felt in the pocketbooks of American consumers.

Amid the gloomy numbers on Tuesday, Obama signaled his satisfaction with improvements in the economy by announcing he would nominate Republican Ben Bernanke to a second term as chairman of the Federal Reserve. The announcement, welcomed on Wall Street, diverted attention from the budget news and helped neutralize any disturbance in the financial markets from the high deficit projections.

The White House Office of Management and Budget indicated that the president will have to struggle to meet his vow of cutting the deficit in half in 2013 — a promise that earlier budget projections suggested he could accomplish with ease.

“This recession was simply worse than the information that we and other forecasters had back in last fall and early this winter,” said Obama economic adviser Christina Romer.

The deficit numbers also could complicate Obama’s drive to persuade Congress to enact a major overhaul of the health care system — one that could cost $1 trillion or more over 10 years. Obama has said he doesn’t want the measure to add to the deficit, but lawmakers have been unable to agree on revenues that would cover the cost.

What’s more, the high unemployment is expected to last well into the congressional election campaign next year, turning the contests into a referendum on Obama’s economic policies.

Republicans were ready to pounce.

“The alarm bells on our nation’s fiscal condition have now become a siren,” said Senate Minority Leader Mitch McConnell of Kentucky. “If anyone had any doubts that this burden on future generations is unsustainable, they’re gone — spending, borrowing and debt are out of control.”

Even supporters of Obama’s economic policies said the long-term outlook places the federal government on an unsustainable path that will force the president and Congress to consider politically unpopular measures, including tax increases and cuts in government programs.

“The numbers today portend the biggest budget fight we’ve probably had in decades in the United States,” said Stan Collender, a former congressional budget official.

The summer analyses by the White House budget office and by the Congressional Budget Office reached similarly bleak conclusions. The CBO’s 10-year deficit figure was smaller — $7 trillion — but that is because it assumes that all tax cuts put into place in the administration of former President George W. Bush will expire on schedule by 2011. Obama’s budget baseline, however, hews to his proposal to keep the tax cuts in place for families earning less than $250,000 a year.

Both budget offices see the national debt — the accumulation of annual budget deficits — as more than doubling over the next decade. The public national debt, made up of amounts the government owes to the public, including foreign governments, stood Tuesday at a staggering $7.4 trillion. White House budget officials predicted it would reach $17.5 trillion in 2019, or 76.5 percent of the gross domestic product. That would be the highest proportion in six decades.

And of course the public debt to GDP ratio’s increase to 76% should not come as a surprise either. In fact, I would be surprised if it didn’t blow right pass that. I shall conclude with more of what I already said a while back:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

There is an easy way to be on top of such developments: Don’t listen to what the government and all its apologetics tell you. Listen to your own logic and your own reason and you won’t need to be surprised as the inevitable truth comes out sooner or later.

Tags: budget deficit, federal government, public debt

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