It would probably be rather hard to find a single American that didn’t know the price tag of the stimulus bill. $787 billion has been included in nearly every news piece regarding the topic. What most people are not aware of, however, is that $787 billion only represents that amount of money actually put into the economy by the feds. It comes nowhere near addressing the actual cost of the program. A good recent example of this miracle of government accounting is the Medicare part D prescription benefit program. The price tag was $394 billion, but the cost is much higher – around $8.7 trillion and counting depending on which numbers you want to use. Granted this represents the net present value of the cost of these ongoing benefits over a 75-year period, but you get the idea.
Fortunately for taxpayers, the stimulus package is not an ongoing expenditure (yet), and as such consists of predefined outlays. Despite this, the total cost of the bill as compiled by the Congressional Budget Office is approximately $3.27 trillion. Amazing in this is the fact that we’ll pay nearly as much for debt service on the stimulus bill ($744 billion) as the measure was supposed to provide to the economy! Talk about sticker shock. The gory details are here.
The question now becomes one of return on investment. What exactly are we going to get for our $3.27 trillion? It had better be good too, because nearly all of it is borrowed from someone – either foreigners or the Fed. Unfortunately, such is not the case. Using the $3.27 trillion projected cost, the ROI for the stimulus bill stands at a whopping -415%. In the private sector, such a revelation would result in a project being killed instantly in the concept phase. Not so in the hallowed halls of Congress where the laws of economics and common sense do not apply.
Friday, October 30, 2009
Wednesday, October 28, 2009
The Obama administration released new deficit numbers last week, and they are more than three times the record deficit set last fiscal year. The deficit for Fiscal Year 2009, which ended Sept. 30, is a record $1.42 trillion. And the Office of Management and Budget predicts future deficits to total $9.1 trillion in the coming decade.
Since Social Security recipients will get no cost-of-living adjustment (COLA) next year, President Obama wants to give each of them $250, a move supported in principle by the Republican House and Senate leadership. However, this move is not only unjustified; it makes a fundamental change to Social Security's structure and starts the process of converting the program from an earned benefit funded by a worker's own contributions to a welfare program.
The United States must reduce its budget deficit and Asian nations must encourage more consumption in order to prevent a recurrence of the global imbalances that contributed to the financial crisis, Federal Reserve Chairman Ben Bernanke said Monday.
Bernanke, speaking at a conference on Asia and the financial crisis, attributed the global crisis in part to a long-standing pattern in which Asians saved too much and spent too little, while Americans spent too much and saved too little. As the global economy starts to recover, the Fed chairman said that "global imbalances may reassert themselves."
To keep that from happening, the United States must "increase its national savings rate," Bernanke said at the conference, sponsored by the Federal Reserve Bank of San Francisco. The best way to do that, he added, is to reduce the federal budget deficit.
Monday, October 19, 2009
What is $1.42 trillion (R10.4 trillion)? It is more than the US's total national debt for its first 200 years and more than $4 700 for every American man, woman and child.
It is also the 2009 US federal budget deficit, three times more than any other deficit before. Some economists warn that unless the government start to cut spending or raise taxes, it could sow the seeds of another economic crisis.
Treasury figures released on Friday showed that the government spent $46.6 billion more than it received in September, a month that normally records a surplus. That boosted the shortfall for the full fiscal year that ended last month to $1.42 trillion. The previous year's deficit was $459 billion.
As a percentage of US economic output, it's the biggest deficit since World War II.
Forecasts of more red ink mean the federal government is heading toward spending 15 percent of its money by 2019 just to pay interest on the debt, up from 5 percent this year.
President Barack Obama has pledged to reduce the deficit once the great recession ends and the unemployment rate starts falling, but economists worry that the government lacks the will to make the hard political choices to get control of the imbalances.
Friday's report showed that the government paid $190bn in interest over the last 12 months on Treasury securities sold to finance the federal debt. Experts say this tab could quadruple in a decade as the size of the government's total debt rises to $17.1 trillion by 2019.
Medicare benefits will be cut regardless of whether Democrats or Republicans have their way, says Michael Tanner, a senior fellow at the Cato Institute.
“Democrats would have us believe that they can cut $500 billion from Medicare spending over the next 10 years without anyone getting less of anything,” Tanner wrote in a Cleveland Plain Dealer opinion piece.
“They are going to save that money, the president says, by eliminating ‘fraud, waste and abuse.’ Undoubtedly that would be the same fraud, waste and abuse that presidents have been eliminating since at least, say, Ronald Reagan.”
The unsustainable growth of the national debt that has risen to about $120,000 per household is a significant threat to the value of the US dollar. Porter Stansberry from Daily Wealth argues that the debt could grow to $20 trillion in the next 8 years, which will lead to high inflation and destroy an unprecedented amount of wealth held in dollars.
At the end of last year, I began writing about what I saw happening as the Federal Reserve started assuming the liabilities of the investment banks and the federal government began deficit spending at an unprecedented pace.
I've been calling these changes the "End of America" because I believe the fiscal policies of the U.S. will result in a massive devaluation of the dollar and the end of the U.S. dollar as the world's reserve currency.
The interest on the national debt makes our future unstable. The exploding size of that burden suggests that, short of devaluing the dollar and taking a large bite out of the middle class through inflation and taxation, there is no way to ever pay down that bill, says Lawrence Kadish, a real estate investor and a trustee of the Claremont and Hudson institutes.
- As of Sept. 30, 2009, the national debt was almost $12 trillion and interest on that debt was $383 billion for the year, according to the Treasury Department's Bureau of the Public Debt.
- The Congressional Budget Office on Oct. 7 estimated the 2009 budget deficit to be almost $1.4 trillion (about 10 percent of GDP).
- In August, the White House Office of Management and Budget (OMB) estimated total government revenues at about $2 trillion; the revenue estimate included $904 billion from individual income taxes.
- This means the cost of interest on the debt represented more than 40 cents of every dollar that came in from individual income taxes.
Except for a few years in the late 1990s, for decades Washington has spent more than it has taken in each year and borrowed the rest, says Kadish. Taxpayer dollars that could have paid off debt each year have instead been spent on interest to finance debt. Unfortunately, that's a vicious cycle that will likely only get worse, says Kadish:
- The OMB projects deficits of about $9 trillion over the next 10 years.
- If that occurs, the national debt will be almost $21 trillion by 2019, however, the actual amount could be much higher.
- The OMB also optimistically projects $13.5 trillion of revenue increases over the next decade, while minimizing the inevitable rise in interest rates that will come with an expanding national debt.
Left unchecked, this destructive deficit-debt cycle will leave the White House and Congress with either having to default on the national debt or instruct the Treasury to run the printing presses into a policy of hyperinflation. It is against this background that Washington is now debating whether to create social programs it can't afford, says Kadish.
President Obama has once again proposed more spending that will increase our countries debt. In recent news Mr. Obama has suggested a $13 billion plan to pay seniors since they will not get a raise in their social security. This equates to about $250 each for 50 million elderly citizens. The problem with this is that added on to other high cost programs out national deficit is skyrocketing out of control. Proposed healthcare reform, tax increase, possible troop increases and other proposed or ongoing government programs are spending money as if we had an unlimited supply.
But the sense of relief has been clouded by growing fears about the future of the US dollar, as the massive growth in the US national debt fuels an exodus from the world's reserve currency.
The US dollar soared in the first months of the crisis, as investors flocked to what they saw as a safe haven. But since March it has fallen more than 10 per cent against other global currencies - and 30 per cent against the Australian dollar - as investors fear it will not remain safe.
As reported in Business Day yesterday, central banks globally added $US413 billion to foreign currency reserves in the June quarter, a six-year high. But 63 per cent of that growth was in euros and yen, and just 37 per cent in the US dollar.
High unemployment means more unemployment checks and less tax revenue, costing the government roughly $100 billion annually, said Stan Collender, a former congressional budget aide. Those costs will persist for the next couple of years, if economists are correct in predicting the jobless rate will average more than 9 percent through 2011.Unemployment compensation rose from $47 billion in fiscal 2008 to $120 billion in 2009, a 156 percent jump.
In order for our country to have a chance of prospering, we need the market
place and financial system to truly be free. Americans need the ability to
walk into any U.S. bank across the country and have an option of storing their
pay check in U.S. dollars, Canadian dollars, Australian dollars, Euros, Yen,
or any other currency in existence. There should be no foreign currency
transaction fees, it should be as simple as filling out a deposit slip and
checking off what percentages of your pay check you want to be deposited in
each currency. If you don't want a currency but instead you want real money,
you should be able to store your money at any U.S. bank in gold and silver.
You should also be able to withdraw any amount of any foreign currency, as
well as physical gold and silver, at any time from your bank with no questions
Monday, October 5, 2009
It is easy to get caught up in all the hype of the media pundits, Ben Bernanke, Joe Biden and Barack Obama that the economy is slowly but surely recovering from the worst recession since the 1930s. It’s not. And what is even worse is that we are deeper in debt with nothing good to show for it.
It was as if a fiscal tsunami struck and flooded the nation with red ink.
By the time the final numbers are in for the fiscal year just ended, the federal deficit will have hit an all-time high in the range of $1.580-trillion. That's 11.2 percent of the total economy (GDP). The previous year's deficit was – by today's standards – nearly inconsequential at $459-billion. That was only 3.2 percent of GDP.
Over the course of FY'09, the National Debt soared as well from $10.124-trillion on October 1, 2008 to $11,776,112,848,656.17 as of Tuesday, the latest figure from the Bureau of Public Debt. That's an increase of $1.652-trillion – the single largest increase ever in a fiscal year.
Most Americans -- 78 percent -- think the national debt is so large it is hurting the future of the country, including majorities of Democrats (64 percent), Republicans (92 percent) and independents (85 percent).
Moreover, nearly two-thirds (65 percent) think the Obama administration is proposing more government spending than Americans can afford. Some 29 percent disagree.
The political divide is striking: 90 percent of Republicans and 74 percent of independents think the Obama administration is proposing more spending than taxpayers can afford. Among Democrats, that number drops to 39 percent, while over half disagree (55 percent).
Well if this doesn't stop -- and I don't think it will -- we're going to discover that the rest of the world is going to want higher interest rates to lend money to the United States than it now is demanding. And a lot of this money that we're paying in interest basically leaves the country as opposed to, say, World War II -- where the deficits as a percent of the economy were much bigger, but we financed them pretty much inside the country so the interest payments that the government was making stayed inside the country and the money was recycled. And now it's going to leave. And that is not a good thing.
Thursday, October 1, 2009
In the latest sign the Social Security ticking time bomb is almost ready to explode, an unexpected spike in the number of early retirement claims will cause the entitlement program to run a deficit as early as 2010, nearly a decade ahead of earlier projections.
The system has suffered not only a 23% increase in early retirement applications, but the severe recession has resulted in the loss of 6.9 million jobs. In this negative feedback loop, older employees lose their jobs and thus stop paying into the system while applying for early retirement benefits when they are unable to secure a new job.