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Wednesday, January 26, 2011

Marc Faber On Bloomberg TV

See, all the fluff about Obama being so wonderful has come to this. Laughing foreigners talking about a dishonest president.

It is embarrassing. And when you embarrass the Kool Kidz in the press, they do not forgive you.

Plus, President Yoda has to present a budget in a month. What do we all think that is going to look like?

Spork commented that the budget will be ignored. But there is one group that will not ignore the budget, and that group are those who buy treasuries.

Today CBO released its 10 year projection based on current law. This was done as a result of the "compromise" worked out in the lame duck session. Text version, pdf version.

CBO's baseline, which assumes that the two-year deal will expire to current law, that the cuts to Medicare mandated in the health care reform law will be implemented at the end of 2011 (they won't), that alternative minimum taxes will not be indexed to inflation, and that funding for discretionary spending will be frozen to an inflation-adjusted steady rate (not going to happen according to the SOTU speech) is:
Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government's annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.
CBO goes on to explain what would happen if current planned policy were to be enacted, because absolutely everyone knows that the assumptions CBO used to project the above estimates are bogus:
As a result, the baseline projections understate the budget deficits that would arise if many policies currently in place were extended, rather than allowed to expire as scheduled under current law. For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, and 2009 or that modified estate and gift taxation were extended (rather than allowed to expire on December 31, 2012), and the alternative minimum tax was indexed for inflation, annual revenues would average about 18 percent of GDP through 2021 (which is equal to their 40-year average), rather than the 19.9 percent shown in CBO's baseline projections. If Medicare's payment rates for physicians' services were held constant as well, then deficits from 2012 through 2021 would average about 6 percent of GDP, compared with 3.6 percent in the baseline. By 2021, the budget deficit would be about double the baseline projection, and with cumulative deficits totaling nearly $12 trillion over the 2012–2021 period, debt held by the public would reach 97 percent of GDP, the highest level since 1946.
Obviously interest payments would rise to considerably more than 3.3% of GDP. In fact, because at that point our debt would be high risk, either all our debt would be short term or interest would be more like 5% of GDP. The federal government's share of GDP as taxes has averaged around 18-19%. We don't seem to be able to get it above 20% for long, because if we hike tax rates further, people start avoiding taxation, which cuts revenue.

So you can see that my estimates earlier are not that different than CBO's. I incorporate a somewhat higher unemployment rate and a somewhat lower rate of growth.

In any case, everyone should read this and realize that our current policies are unsustainable. By 2023, we will not be able to pay Social Security as planned plus pay Medicare.

Angry Saver told me I was an idiot for saying that Social Security was in danger, because it was funded. It isn't. The "funding" is only real if we can borrow the money, and I can assure you that we won't be able to borrow the money with public debt that high.

CBO's conclusion, which looks suspiciously like Paul Ryan's conclusion last night:
Beyond the 10-year projection period, further increases in federal debt relative to the nation's output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades. Specifically, spending on the government's major mandatory health care programs—Medicare, Medicaid, the Children's Health Insurance Program, and health insurance subsidies to be provided through insurance exchanges—along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years. If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt. To prevent debt from becoming unsupportable, policymakers will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches.
Add in even 3% for interest payments, and you are at 19% which is pretty much your maximum sustainable federal revenue level. That leaves nothing for defense or anything else.

Neil thought this article was overstated. Neil reasons that we still have the knowledge and desire to make things and innovate. That's true, but we won't have the capital. Federal spending at planned levels will suck all the money out of our economy and inevitably cause a decreasing private sector GDP.

All this talk about stimulus is misguided. Raising GDP one percent now only to subtract three percent in ten years is not a workable policy.

Nor is it a Democratic policy. When we reach the limits of our ability to borrow, the lower-income population will take the majority of the impact. The working/middle class will take most of the rest of the impact.

It will be ignored.

Sporkfed - the people may ignore it, the politicians may ignore it, but the market will not ignore it.
"By 2021, the budget deficit would be about double the baseline projection, and with cumulative deficits totaling nearly $12 trillion over the 2012–2021 period, debt held by the public would reach 97 percent of GDP, the highest level since 1946."

"Obviously interest payments would rise to considerably more than 3.3% of GDP."

I tend to believe that but I'm not 100% convinced. Soros has a saying about the obvious. Money is made by discounting the obvious and betting on the unexpected.

Measuring Worth: Interest Rates

Interest rates were extremely low throughout the 1940s.

What if the entire world catches Japan's disease?

I cringe at the thought of what Japan's debt will be 10 years from now but just look at those rates.

Japanese Government Bonds

It's the "gift" that just keeps on giving. Sigh.

At 0%, I suppose we could borrow an infinite amount. Talk about messed up. We sort of tried that experiment with housing but nobody truly got a 0% rate. Based on three month treasury bill rates, the government pretty much has. They are not getting a rate like that on 30-Year bonds though. At least not yet.

I'm just throwing it out there for debate.

I do not think any of this is sustainable over the ultra long-term. I'm simply suggesting that it could take far longer than anyone imagines.

September 6, 2007
Let Them Eat Cake!

"In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover. Yet Hayami was trying to force Japan Inc. to implement structural reforms. It didn't work and rates returned to zero in March 2001."

More than 10 years later we have this.

"In a widely expected decision, the Bank of Japan's nine-member policy board voted unanimously at a two-day meeting to keep the overnight call rate target at 0 to 0.1 percent."
My last link was broken. Let's try that again.

See here.
Mark - you can only be Japan if you have trade surplus, which, cough, we do not.

In any case, Japan is coming to the end of their run.

There are multiple components to interest rates. There is a risk component and a time value of money component.

For externally traded sovereign debt, the risk component is bi-modal - risk of nonpayment and currency risk.

Well, in a deflating economy there is virtually no time value of money. As long as risk of nonpayment is low, you are basically looking at one term out of the three - currency risk. And in a deflating economy, currency risk vs other currencies is at its conceptual lows.
The only thing that gives me hope that we can turn this ship around is that corporate balance sheets are generally in good shape. There is a lot of corporate cash ($1.9 Trillion is rumored) that could be put to work. What is needed is the CONFIDENCE that the government is not going to do any more stupid things like HCR or Cap and Tax. Obama's SOTU did not provide that confidence.

The House may be able to neuter HCR and get some medical tort reform. That would be a beginning. But we need bold action to inject confidence. If companies were willing to start using that cash to expand and grow, the jobs situation would start to change.

A lot of people are hurting, but households are paying down debt and not going further into debt. That means some stability, but the economy grows better when people are willing and able to spend more.

Of course it brings me back to my ever recurrent theme. Forget consumer spending, what we need is nuclear power plants, drill baby drill, more coal exports, logging, and lower obstacles to building factories. Obama could get the ball rolling on all those things if he wanted to, but his base would revolt even more than they are now. So, we will muddle along until, hopefully, we can elect someone who understands that the business of America is business and that reasonably priced energy is the life blood of our economy.
So ... by law the CBO is supposed to use the numbers that Congress gives it, but they also spoke up about what will actually happen if things actually go the way they must?

Are they defying their masters to tell us the truth? Or are they just tired of being played as fools by Democratic Party knaves?

And again, my continuing wishes for your good health (and the Chief's).
Mark's point about zero percent interest rates presents a real conundrum. I have been arguing for a while that the Bernancke policy of zero interest rates has bee a tremendous transfer of wealth to the banks from savers and owners of capital. Many of those savers are people on social security who planned to use the interest on their savings to enhance their retirement income.

Now, we are talking in terms of, in some manner, reducing Social Security benefits. But, with zero percent interest rates, where does that capital go to actually fund retirement? Should we all go back to buying the 8% tranch of MBS's? That should work out pretty well.

You are preaching to the choir on how I thought it would work. I've been a long-term stagflationist for nearly 6 years.

At some point I have to question my beliefs though. The deflationary forces may be underappreciated, even for a country with massive trade deficits such as ours.

All it takes is one variable in uncharted territory to mess up one's frame of reference. We seem to have many.

What if the entire world has caught (or will soon catch) Japan's deflationary disease? Then what?

That kind of knavery is bi-partisan, alas. The Bush tax cuts were justified in the same manner (passing laws with time limits that everyone knew would be extended but the CBO had to interpret as written).

I've been thinking something for the last month or two: that it's ironic that the Democrats said McCain would be "Bush 2.0", but that in many respects Obama has turned out to be Bush 2.0, but with extra flaws. His willingness to spend regardless of revenue and pretend that no accounting will come is exactly the same. His positions on civil liberties are almost exactly Bush's, as is his war policy, which is almost unchanged since the transition. His instinct is also, just as the Bush White House's was, to care more about the wishes of Big Finance than the economy as a whole.

Differences I see? Rhetoric, of course. Attitude to government regulation (the Obama white house is all for it). Willingness to sign, not veto, Democrat bills.
Mark - it's more like most the world has caught the inflationary disease!

December import costs in Germany rose 2.3% month-over-month, and 12% for the year. The fastest annual inflation since 1981.

Singapore 1.6%. US 1.1%. I've covered China before, India looks to be nearing 9%, more on company effects, Brazil is over 5.5%, etc.
PS to that last. The first three are December numbers; then the others are annualish figures.

All around the world many corporations are on the narrow edge of margins and raising prices.

You might be interested in this German gizmo.

You can calculate a "personal" inflation rate by changing the weights of items.

If you shift the balances, you can see that for many people around the world, we are back to fall of 2008.
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