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Sunday, July 31, 2011

OK, So SS IS Going To Be Cut Significantly

Yeah, yeah, I know that there's nothing in the announced deal about Social Security cuts, but the problem is that the failure to reach a meaningful deal forces SS cuts later:

Some data:

This is GDP, latest including the downward adjustments. As you can see, we managed to inflate but (cough) it came at the price of suppressing real growth.

This one's in dollars, current and chained (real). Jaggedy blue line is nominal; red is real.

To make it a little clearer - s
ame data, but now we are looking at percent change over the year:

I thought I heard the pilot of the FedMoneyHawk whistling the Mash theme as he flew over.

Suicide is painless..... Like hell. Pretty tune, daft meaning if you are not a narcissist. That's what we got going. Nutty cowardly narcissism. Oh joy.

Just to hammer in the nails:

This hyah graph is the same data, scaled to first quarter of 2008. Crapola!

One thing we all have to remember is that tax revenue is strongly pegged not just to real GDP, but real GDP PER CAPITA. Ya don't want to look at those numbers! However I do seem to remember Snarky Mark putting up one like that. Maybe he'll be kind and give us a link. YES HE DID.

It is clear that no measures to deal with the debt were adopted because it is truly difficult to deal with the debt. When you raise tax revenue as a percentage of real GDP, you do tend to suppress economic growth.

However, this means that Congress is indeed planning to default on the SS debt. Because:

US population pyramid. Retirement costs as a percentage of GDP have to go up.

But tragically, we have run out our ability to pay them as scheduled, or even 80% of benefits scheduled.

We've got nominal GDP in current dollars. We've got real GDP in chained dollars.

We've got a light blue line arcing up over real GDP, and that line is gross US debt. Gross US debt includes such minor bagatelles as the SS fund, the Medicare funds, federal retirement pensions.... Money that we have promised to borrow later.

See Treasury Direct Debt to the Penny. That 4.6 trillion? Uh-huh. It's debt, not assets.

Only Angry Saver can believe it's money. Sad. Maybe too much drugs? That's definitely DU's problem.

Now let's look at fundamental ratios:

I've added in an adjustment for the missing debt not in the Treasury figures. It's accumulated deficit that will promptly show up as soon as Congress votes and staggers out of steamy Washington. They won't linger to enjoy the applause of the crowd!

These are ratios. The dark blue top line is Gross Debt/Nominal GDP. We have reached the magic 100%.

The light blue line (bottom) is Public Debt/Nominal GDP. That's why no one's worried yet. We can borrow about 3 trillion more before the money taps are turned off. And, it will stun you to know, we will have borrowed that three trillion by 2014. After that, the jig's up.

The red line is really the most important. That is Debt Held By The Public/Real GDP. Two things about that. First, we appear to be very close to the tipping point of 80%. Second, after the risible performance in DC, we can all be sure that Congress has no plan not to get to that point. We could be at that point in a year, given GDP data.

The reason why this is such an awful picture is that currently, there is no consensus in Washington about doing what can be done. It would require a real change of direction, because our ability to raise taxes is limited so only the growth options remain, and the growth options require dismantling a lot of legislation Congress has passed over decades. We'll reach the point at which we do it, but not until we are forced to pay considerably higher interest rates, and at that point, we'll be forced to cut social spending quite sharply.

I'll discuss more about those options in a later post. This is long and grim enough.

This is now purely a matter of math. If you are growing at a rate of 2% or below in real GDP, and debt held by the public is 80% of real GDP, then an average interest rate of 5% gives you 4% of real GDP each year in debt service costs, which is double the real growth rate. You can't hold the line doing that even if your primary budget is in balance (expenditures - interest = income). Well, the entire plan for retirements involved borrowing, so we darned sure aren't in primary balance.

So if you then raise taxes by 2% of GDP, you cut real growth. And if you don't want to do that, and you try to inflate your way out of it, the Fed has just proven that you will cut real GDP. An economy that is over 70% consumer, as ours is, is acutely sensitive to inflation. What happens is that either tax revenues drop (if they are pegged to inflation) or we shed jobs, which drops tax revenues, raises social spending and cuts real growth.

So we are in a depression, and the only way out is an IMF-like restructuring of our economy.

We aren't going to pay SS benefits as scheduled, because the creditors who have already borrowed want their money, and we were planning to borrow the SS funds, but the creditors won't lend the money to us.

Deflation is the only way out. And it will work, but boy it's gonna hurt. Minimizing the pain should be our goal.


When you speak this way, I get tremendously worried because you are the last person to talk in sensationalistic undercurrents. The fact is, the Debt Limit Deal is a complete Cluster_ _ _ _ for this country. 1 Trillion is cuts over 10 YEARS - with $150 Billion of that projected projected savings on lower interest payments? Only $20B of spending cuts before 2013? This is a complete joke and fraud.

We are in our final leg of financial purgatory before significant hell breaks loose.
This is definitely going to be momentous.

Not in a good way, though.

What really gets me is the belief that seems to be out there that we can't even go into a recession again (much less a depression). It's too soon.

That's the theory anyway.

My word verification is intifish.

I think it is a "Darwin Fish" variant. The "Integer Fish" understands depression math and is currently calculating survival odds.
M_O_M, when you say we will have added $3T in debt by 2014, is that using CBO scoring? 'Cause their numbers are required under law to be completely out to lunch. Knock down their growth assumptions to something reasonable, and we'll have borrowed another $3T by mid-2013.
Neil, no, I don't rely on their figures. I'm just going from current revenue patterns combined with current spending patterns, adjusted for the poorer economic outlook, and current baseline.

Then we get to 2014, and a whole new entitlement....
Cut too much now and the economy goes into
A tailspin. Don't cut enough and we Run out of money.
At this point default would have been the best option
for the long run.

I'll post a real GDP per capita growth chart at some point today (Monday). If I have done one in the past it would be too outdated to matter.

(I'm not on my own computer right now so I can't easily check my files.)
The deal announced Sunday shows that the only " problem " with the Tea Party was that it's victory wasn't large enough in 2010. What we really need is a law that absolutely forbids ex Congressman from receiving any income other than their pension once they leave Congress.

As it stands now, people like Bart Stupak ( who brought in the last 6 votes needed to pass Obamacare ) simply walk away from the catastrophe they create, and immediately take up where they left off before their retirement, except now they continue the destruction as lobbyists paid multi-million dollar incomes. And the voters tolerate it, as long as those Congressman keep the bennies and goodies flowing from the treasury to their pockets.
yeah, it's going to get ugly all right. I have read many books on the Great Depression. I sure am not going to claim to be an expert. It always concerns me when I see problems with many economies world wide. It's a real scenario for depression. And you simply can't convince people how serious that is. I guess the one thing that seniors can hope for is to hang onto their houses. Sleeping under a bridge is tough if you are old.
For seniors to stay in their homes, we'd need to see great forbearance on the part of local governments. Property taxes are going to eat up their retirement savings in a hurry.
The pols kept kicking the can down the road until they finally kicked the can over the cliff. How far will this deal take us? All the way to the scene of the entitlement crash ...
WSJ - I don't truly see the way forward.

I am haunted by the irony that President Obama's real legacy will be the undoing of FDR's.
You'd have to do something major on taxes to keep seniors in their homes. Our county had so many homes going into foreclosure over taxes that they gave people an extra month to come up with the money. (And it's possible they gave them more time - that's when I stopped following this story!)

It's cheaper to keep people in their own homes, rather than in nursing homes. Somehow, I think that will be overlooked in Obamacare.
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