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Posts Tagged ‘Depression

The Pentagram Loop of Economic Doom

with 11 comments

What’s in everybody’s face, especially in America, is inflation, but there’s far more than that going on in their economy, and basically the global economy.

And none of it’s good.

But let’s look at inflation first, in particular the stuff that chews into your wallet every day rather than the somewhat tame measure of CPI.

Gasoline for cars is, for Americans, the most in-your-face aspect of this; for historical and psychological reasons it seems to grind them more than food prices. Of course the joke is that in 2008 Democrat suckhole media like the LA Times was boasting about “The joy of $8 gas.

You’d think the Democrats would therefore be happier right now.

Companies are trying to trick people as they did back in the 1970’s by shrinking the size of the products they sell “for the same price”. I don’t think it works.

The official CPI for May surged to 8.6%, but if it was being calculated as it was in 1980 it would be 17% (see the graph above). Moreover the month-on-month inflation is not stopping but itself increasing; in other words inflation is not going away any time soon. Good to see that one of Biden’s numerous idiot hires, Treasury Secretary Yanet Yellen, is now publicly regretting saying that inflation in 2021 was “transitory”. Of course she’s not alone as the US MSM have desperately tried to prop up Biden and the Democrats on this issue for a year now.

On top of all this is the fact that wage growth is rapidly slowing, which means that wages are actually going backwards, the highest negative since 2006 actually.

Add in the problems of the stock market – which is also shrinking American’s wealth, starting with pension funds, plus a possible crash in the housing market – and you’re looking at big economic problems across the board. This has business people starting to also get on edge:

Why is there so much doom and gloom though? Recessions happen regularly and we’ve seen inflation and even stagflation before and survived them. There are two answers to this question.

First, what’s different this time is the number of major factors coming together, each of which has caused recessions in the past on their own:

  1. The business cycle.
  2. High energy prices.
  3. Inflationary pressures other than energy (supply chain problems plus $6 trillion of unneeded US government spending in the last two years)
  4. Excessive debt-funded speculation.
  5. Secular shifts in the economy.

That last one needs explanation:

Examples include: new global competition (1970s); currency devaluations; costs of cleaning up decades of pollution (1970s); financialization (1980s to the present), geopolitical shifts in alliances, social disorder, demographics (aging of the workforce, mass retirement) and sea changes in the distribution of income and power to labor and capital.

It’s a perfect storm and it’s built on the back of two decades of poor economic policies.

Second, the normal paths of getting out of factors 1 and 3 – high interest rates to crush inflation and massive Keynesian-style state spending – are now hemmed in by the massive amounts of debt the US has created in the last twenty years, both public and private. In fact it’s increasingly hard to tell the difference between the two, so dependent upon cheap created credit from the Federal Reserve have the markets – especially Wall Street and the housing market – become.

The higher interest rates will slow the economy and cause unemployment. It will also swallow up tax revenue as the government has to pay interest on its massive debt. But more critically, it will increase the rate of default on home mortgages. Those defaults will make mortgage-backed securities less valuable and more unpredictable. That’s how the 2008 housing market seized up. 

In 2008 the US housing crisis was solved by having the Federal Government and the Federal Reserve buy trillions of dollars of mortgages and Mortgage Backed Securities that had become nearly worthless. But having re-created that situation what are they going to do now (factor 4)?

The energy crisis is also not going away because high fossil fuel prices are seen as the way to “transition” the economy to the world of renewable energy. If that’s your goal then it’s a logical play – but it will kill consumers (in some cases literally), kill the politicians intent on crashing through the wall of such massive energy change – and that’s assuming it’s even possible, which it isn’t (42 Inconvenient Truths on the “New Energy Economy”) and possibly kill the economy.

Two years ago I playfully predicted The Great Crash of 2034, but allowed that it might come later – or sooner.

Brace for impact.

Written by Tom Hunter

June 13, 2022 at 7:41 pm

The Stupid Party strikes again

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It’s an entirely standard attack line of the Left that their Right-wing opponents are stupid: lacking in IQ points, ignorant, religious, inclined to conspiracy theories – like the one that Trump colluded with the Russians to win the 2016 election.

Oh wait, that was Hillary Clinton and the Democrats circa 2016-2018, with some still bitterly clinging to their Steele dossier and their windmills.

Nevertheless, the thing that the US Left in particular might be amused to know is that Republican voters actually do often refer to their own party as “The Stupid Party”.

The rationale behind their epithet is entirely different of course. It refers to the fact that the GOP, once they have gained power in the House, Senate or Presidency, promptly ignore the reasons they were elected and worse, start implementing Democrat ideas.

Some examples:

  • John McCain regularly talked of terrible border control policies in his border state of Arizona and how tough he was going to be on strengthening the border, up to and including things like walls and fences. But once re-elected he always got guilted and shamed by the Democrats about The Wretched Of The Earth and stayed with the status quo.
  • The Tea Party effectively got the GOP re-elected in 2010 to the House when all had seemed lost in 2008, based on the demand for a serious approach to fiscal spending, especially after the 2008 insanity around GFC measures such as the TARP legislation and eight years of Bush gleefully pushing general spending. But once elected the GOP House merely kept the status quo chugging along with spending extensions – the wonderfully named Continuing Appropriations process. The excuse was that without holding the Senate and Presidency nothing more could be done.
  • When all that power miraculously fell into the hands of the GOP with the 2016 elections, almost the first thing they did was pass gigantic spending bills stuffed with Democratic goodies. It was so bad that Nancy Pelosi and Chuck Schumer gloated about it in public, rubbing the face of the gormless “policy wonk” Paul Ryan in the muck and making him look like anything but Speaker of the House, the third most powerful political position in the US government. Ryan’s pathetic excuse was that all that stuff needed to be cleaned out of the way so the GOP and Democrats could get down to fighting over truly meaty fiscal issues. Having got almost everything they wanted Pelosi was still laughing weeks later.
  • They did not repeal Obamacare, although to be fair that was down to one Senator, John McCain again, who went back on all his previous votes just because he was in a personal war with Trump and wished to snub him.
  • As a result of all this, the US budget, deficits and debt continued to relentlessly rise, almost as if the Democrats had never lost power.
  • The GOP did hold back on spending for a few things – like refusing to appropriate money towards Trump initiatives like the Southern Border Wall because the “Free Trade” (Cheap Labour) wing of the party still refused to admit that most Trump voters (and more than a few Democrat voters) hated the idea of a border open to illegal immigrants.

Sure, they did pass some serious tax cuts, and curbed (temporarily) the growth in spending, at least compared to the avalanches of the 2007-2011 Democrat Congresses, but that was it.

It thus came as no surprise that they got turfed in 2018, as GOP voters reached their “what’s the point” threshold. Naturally the GOP is relying on the “But-the-Other-SIde-is-Worse” argument to get back into power in 2022.

They better be careful though, because recent events show that it’s happening again, this time with the godforsaken “infrastructure” bill.

The Act is a $1.2 trillion, 2702 page spend up that, upon close inspection, has little to do with the real infrastructure of roads, bridges and such, but everything to do with pork barrel politics, as the WSJ helpfully details. As well as that the damned thing extends Federal, centralised control to yet more government actions that are supposed to stay with local government at the state and city level, as per the original vision of the USA.

No Lindsey! Increasingly large portions of the Republican base and even many independent voters do not need to see the Senate do “big” things because big legislation invariably leads to a bigger, more intrusive government, as well as…

But seventeen GOP Senators voted for it.

Even more stupid was the fact that no sooner had they done this than Joe Biden very publically threw them under the bus:

President Biden’s big gaffe was not his threat to veto a $1.2 trillion infrastructure deal he had just reached with Republicans. It was accidentally saying out loud what everyone in Washington knows, but most Americans do not: that he has not compromised on infrastructure at all — and does not intend to do so.

In other words he would get all the stuff the Democrats “compromised” on in the infrastructure bill, instead placed in the $3.5 trillion dollar Democrats-only reconciliation bill, and he would only sign the former if he knew the latter would pass, which it can with just 50 Senate votes. At that point, none other than Graham declared that Biden had made him look like “a fucking idiot.

No, no! Joe Biden – Joe “Bivalve” Biden – had made all seventeen GOP Senators look like fucking idiots.

Yet, after some toing and froing and yakking and sort-of-apologies for making them look stupid in public, the Democrats kept the seventeen on board.

This is very much a pattern with centre-right parties across the Western world; their idea of bipartisanship and compromise in the name of avoiding the dreaded polarisation of the nation, is to merely stop the Left from doing all the things they want right now. Then the Right-Wing party toddles back to its voters to say, “didn’t we do well, vote hard for us again”.

Undoubtedly they’ll be the usual bribery reasons; the Senators thinking they’ll be able to return to their states with all that juicy, “free” government money for their voters. But that strategy has diminishing returns in the face of ordinary voters increasingly wondering about robbing their kid’s futures:

Last September, the Congressional Budget Office (CBO) predicted the federal debt wouldn’t hit $29 trillion until 2028. Just short of a year later, the national debt stands at $28.6 trillion and is set to surpass $29 trillion within weeks.

That does not include these spending bills. Every time I think the US debt is bad it just gets worse – now aided by these profligate idiots in the GOP. As that article points out, $50 trillion by 2030 is now not out of the question. As you can see it’s basically falling off a cliff.

Then there’s the fact that an economy recovering from a government-imposed recession, unlike a normal recession, merely needs the brakes to be let off. A government that thinks it’s Keynesian time again (for the Left it’s always Keynesian time) and wants to blow trillions of dollars into an already recovering economy, especially one with all sorts of supply problems arising from the Covid-19 response, is going to discover inflation sooner or later. And wadda ya know.

There’s also the slowly rising political power of the Millennial and Gen-Z voters, who understand that they’ll be on the hook for all this shit at the very same time that government institutions like Social Security and Medicare may not be there for them as it was for their Boomer parents, or at least not as sumptuously.

Whether they’ll vote for The Stupid Party to fix it is questionable.

See also:

$5,630,859,000,000

The Great Crash of 2034

This is not going to get better.

Written by Tom Hunter

August 24, 2021 at 6:00 am

Inflation you say?

with one comment

Why are people surprised?

Back in 1993 the newly installed Clinton Administration was mad keen on a “stimulus plan” that would revive the US economy from the “terrible” recession of George H W Bush. The plan was classic Keynesianism but it was strangled in the crib for two reasons.

First of all the recession, which was a fairly mild one starting in late 1990, had already finished by mid-1991, as is usually the case. Things like unemployment lagged of course, which was why the MSM was able to make such a meal of it. The crown in the jewel were TV scenes of a four-wide line of job seekers stretching around a city block in the snow in early 1992, applying for jobs at some new Chicago hotel. Had it been filmed in Black & White by Dorothea Lange it could not have been better.

As a result, by the time Bill became President in January 1993 the entire economy was really picking up a head of steam on all fronts, and it was obvious to everybody and their blind dogs that no “stimulus” was needed.

Incidently, having done it’s job up to the election in getting a Democrat elected, the MSM promptly began painting sunny headlines about how well the economy was doing under the youthful leadership of Bill, even while everybody again knew that no credit could be given to an administration that had not passed any legislation, let alone anything that could affect the economy in less than six months.

Second was that Bill made a crucial mistake in appointing Senator Robert Byrd to lead the stimulus bill effort in the Democrat-controlled Senate and House. In addition to being a former Grand Kleagal of the KKK (and whose death years later would result in an ecstatic eulogy by then Vice President Joe Biden), he was also known as the Porkiest of the Porkmasters of Congress. There was hardly a highway, courthouse, outhouse or doghouse in his state of West Virginia that didn’t have his name on it as a result of the money he’d extracted from Congress. Even Democrats rolled their eyes at what a stimulus package in Bryd’s hands would mean.

The effort rapidly faltered and that was a good thing for the USA, which economy did not need a “stimulus” from the Federal government: the 1990’s would go on to be one of the great economic times in recent US history.

But lessons are not learned. While there might have been some justification for the 2009 stimulus spending plans in the wake of a financial meltdown far worse than that of 1987 (which also led to another such failed effort by the Democrat Party in the face of Reagan’s opposition), it was obvious by the end of that year that it had not spiced up the economy. Obama regularly bemoaned the reports that landed on his desk showing only moderate improvements, bluntly asking his experts and fellow Democrats why all the spending was having no effect.

But in the face of a government-induced lockdown of a roaring economy there was never a need for the insane amounts of spending to continue as the Chinese Lung Rot pandemic waned and the lockdowns and other restrictions were lifted. All that was required was for the government to simply allow the economy to come back to life, as it had in 1992/93 and earlier recessions. Yet each of the subsequent recessions of 2001/2, 2008/9 and 2020 have been met with ever greater stimulus efforts.

Yet, far from helping, there’s good evidence that government efforts in 2021 have caused unemployment to stick in the face of massive welfare incentives not to return to work. Then there’s the rapidly rising inflation in the USA, as all that created credit chases products and services that are not increasing as fast as the tsunami of money. The incredible number of business destroyed by the Covid-19 pandemic response will not be magically re-created by Federal spending.

So we have that graph of US debt, piling onto trillions of already existing debt, even as the spending it allows fails to do its Keynesian job.

This cannot end well, and is already not going well. As the economist Hebert Stein once wrote: “If something cannot go on forever, it will stop.”

Brace for impact.

=================================

See Also:

Stagflation and Pretty Graphs – May 2021

This is not going to get better – Feb 2019

The Great Crash of 2034 – June 2020

$5,630,859,000,000 – August 2020

Written by Tom Hunter

July 17, 2021 at 3:00 pm

Stagflation and pretty graphs?

with 4 comments

For two decades after the end of WWII, economists, bureaucrats and politicians were pretty sure that they’d nailed the problems of controlling a capitalist economy.

The ruling theory was Keynesianism, named after the famous economist John Maynard Keynes, whose key insight in the 1930’s was that in times of economic recession, and especially depression such as The Slump of the 1930’s, governments should not cut back on their spending but increase it.

Prior to that governments had always taken the same attitude towards a shrinking economy that households and businesses did: you cut spending in line with your falling revenues, tax in the case of government. Keynes argued that this was the wrong thing for governments to do; they were different because they controlled the creation of credit so debt was not the same threat to them. They could go into debt, perhaps quite a lot of debt, and keep spending money to keep the economy afloat until the private sector came out of its shell and started investing and spending again. The idea was not so much to inflate the economy as to stop a blackhole effect where the shrinkage fed on itself.

At least in the USA under FDR from 1930 on, and here in New Zealand under the First Labour government, the theory seemed to work although there were a few problems with the argument in that period:

  • The NZ economy was already recovering by the time Labour gained power in 1935 and its Finance Minister Walter Nash, although pushing big increases in spending, never let NZ go into the sort of debt Keynes proposed.
  • The US recovery stalled completely in 1937, with unemployment rising to 17% again. FDR’s own Secretary of the Treasury was appalled at the result after so much money had been blown. In the end it was the industrial powering up for WWII that got the economy growing and flattened unemployment.
  • Australia and Britain simply never took the Keynesian approach, yet there was no evidence that their depressions were any worse, nor their recoveries any slower than those of the US and NZ.
  • In 1946 Keynesian economists were terrified at the prospect of eleven million military men returning home to a nation where the government was already cutting spending in the form of ending huge military contracts for tanks, planes and guns. Their fears grew when a newly installed Republican House and Senate promptly cut spending even further in 1947. And from a GDP approach you could also see their point as it contracted by an incredible 11.6% in 1946 and another 1% in 1947. By contrast it shrank by 12.9% in 1932. But far from a second Great Depression the post-war US economy took off and kept powering away, with only occasional mild recessions for more than twenty years.
  • The so-called “neo-Keynesians” of the Kennedy Administration, figured that if Keynes theory could reduce unemployment down to 5% there was no reason why more Keynesian stimulus couldn’t soak up that last portion. An economy running at 100% all the time. BZZZZZTT: hitting-the-edge-of-the-envelope time again and Hello, late 60’s US inflation.

Still, the Keynesian theory settled in as Western governments coped with those mild recessions by following the formula of increased spending during a recession, as well as Central Banks dropping interest rates. It all seemed to work, even as Western Economies started to get changed by all this government intrusion.

What is neo-liberalism? Who are Reagan and Freidman?

To be fair to Keynes he always made it clear that when the economy started growing again governments should ease up on the increased spending and start paying down their debt in preparation for the next economic downturn. Suffice to say that those aspects have been increasingly ignored.

From the mid 1960’s on, it all began to turn pear-shaped. In the USA inflation began to take off with the impact of all the spending on the Vietnam War and LBJ’s Great Society programs (also Kennedy’s neo-Keynesians mentioned earlier). The Federal Reserve tapped the interest rate brake, government spending under Nixon slowed slightly – and caused a mild recession in 1970. Releasing the brakes on both factors, the economy started growing again, but so did unemployment and inflation, something that was not supposed to be able to happen together. It got worse when recessions hit again and inflation and unemployment kept climbing through the 1970’s, with only occasional and temporary drops.

Thus was born the word “Stagflation”, followed by people paying less attention to Keynes and more to the monetary theories of Milton Friedman, as well as the economic control critiques of Friedrich Hayek from decades earlier, together with the associated politics of Reagan and Thatcher (and here in NZ, Roger Douglas, Australia with Bob Hawke) as they tried to reduce government influence in the economy.

It must be pointed out that despite all the privatisations, de-regulations and fighting over those issues, when it comes to the Big Basics of government spending and debt, it’s as though nothing has changed.

Certainly with the rise to power in the 2000’s of the likes of Bush, Blair and others, plus the shocks of things like the NASDAQ crash of ’99/00, the 9/11 attacks and of course the Great Financial Crisis of 2008, the world of Big Government spending has returned in full force.

The Great Chinese Sinus AIDS pandemic of 2020 just added rocket fuel to it all.

Amidst all this – and I’ve covered much of it already in these posts…

This is not going to get better – Feb 2019

The Great Crash of 2034 – June 2020

$5,630,859,000,000 – August 2020

… the fact was that in each of these situations in the last twenty years inflation did not take off, and while the economy recovered far more slowly than the stimulus spenders of Obama’s time had hoped for, it did at least grow, and unemployment kept going down while inflation was nowhere to be seen. These happy times became even happier under Trump as the economy boomed through 2018/19 before hitting the Covid lockdowns.

With the slow (too slow) unlocking of the economy many people figured that things would get back to normal rapidly. Yes, the Cassandra’s were still harping on about the fantastic increases in government spending, government debt and government credit creation – but we’d heard all that before.

In the case of the GFC it appears that much of that credit creation did not get into the pockets of consumers, being swallowed up by the banks instead – who did actually manage to pay Uncle Sam back for the TARP program, with interest too. Noted Keynesian economist Paul Krugman was angry that the 2008-9 stimulus programs were so small: he argued for programs in the range of $2-3 trillion and for it to go straight into the pockets of consumers.

It took a decade but that’s exactly what the $2.2 trillion CARES Act did in early 2020, followed by smaller ($900 billion) spending programs in late 2020. Then came the $1.9 trillion American Rescue Plan under Biden.

There may be more to come, with the proposed $2.3 trillion American Jobs Plan and the $1.8 trillion American Families Plan.

Krugman must be beyond joy at this moment.

Of course the thing about Cassandra was that she was telling the truth, and so in the Year of Our Lord 2021…

CNBC

Dow Jones estimates had been for 1 million new jobs and an unemployment rate of 5.8%.

New jobs were 266,000 and unemployment rate rose to 6.1%.

NASDAQ news:

The consumer sentiment index unexpectedly crashed to 82.8 in May from 88.3 in April. The decrease surprised economists, who had expected the index to rise to 90.4.

“Unexpectedly”! I always love that. Perhaps if those economists had paid a visit to a US timber yard or looked at the incredible increases in commodity prices across the board they might not have been so surprised about consumer confidence. Massive and rapid increases in prices tend to do that, of which the M2 chart above is merely one indicator. Here’s a better one.

Too much money chasing too few goods: supply vs demand. The oldest rule in the economic theory book. The only question is whether the US is going to add to the demand with those spending programs?

Of course, looking at this history of the last twenty years, it may not actually make any real difference to the path the USA is on, except possibly to act as a trigger point. As always the question is whether we’ll know that the trigger has been pulled. Mixing metaphors, we can be certain that a fuse has been lit.

Written by Tom Hunter

May 17, 2021 at 10:43 am

$5,630,859,000,000

with 24 comments

That’s what the US government has spent in the first ten months (October to July) of this fiscal year.

It hardly needs to be said that this is the largest amount of money that the government has ever spent.

The good news is that they collected $2,823,564,000,000 in taxes, also a record.

That’s also the bad news because of course it means that they’ve set a record deficit so far. Those “trillion dollar deficits” of the early Obama years?

HA! This year’s deficit is $2,807,295,000,000: a $2.8 trillion deficit. They’ll likely beat the $3 trillion mark before the fiscal year ends Sep 30.

The big spending components were:

  • $1,005,897,000,000 – Department of Health and Human Services
  • $ 915,775,000,000 – Social Security
  • $ 540,442,000,000 – Department of Defense spent
  • $ 309,415,000,000 – Net Interest

The following graph of inflows and outflows shows that this is an exceptional year, as it is for all nations, with that huge “Income Security” payout to try and compensate workers for their jobs being shut down by order of the fifty state governments – the extent of shut down differing by state. But even taking that element out we’re still talking record deficits and ones that will likely continue for years now.

The proponents of Modern Monetary Theory don’t see a problem with this of course, and it makes arguments about it almost a moot point, since the USA is effectively practising it right now. But they can only do this because, unlike a little nation like New Zealand, their currency is basically the world’s currency.

I don’t see how this can go on. But then I’ve been saying that for years now and somehow it does. Perhaps the figures just don’t mean anything to ordinary people any longer? Perhaps they don’t think it will affect them: that when the day of payment comes they’ll simply refuse and allow the institutions of federal government in far-off Washington D.C. to collapse?

See also:

The Great Crash of 2034

This is not going to get better.

Written by Tom Hunter

August 16, 2020 at 9:21 am

Winter is here

with 49 comments

Winter is coming?

No! Winter is here, and in more ways than one.

From Stats NZ today:

Gross domestic product (GDP) fell 1.6 percent in the March 2020 quarter, the largest drop in 29 years, as the initial effects of COVID-19 restrictions impacted on economic activity, Stats NZ said today.

Breaking it down by sector:

  • Agriculture -1.9%
  • Mining +4.3%
  • Manufacturing -2.4%
  • Construction -4.1%
  • Retail Trade/Accom -2.2%
  • Transport -5.2%

And remember that this is a quarter almost entirely not under lockdown; only six days under Level 4 and two under Level 3.

What the hell is the GDP figure going to be like for the June quarter?

 

And this is where Visible Death vs Invisible Death is going to come into play – and for years to come.

The impact of making us poorer:

In other words, if real per capita GDP in New Zealand falls by ten percent due to the lockdown and other effects associated with Covid-19, life expectancy would be predicted to fall by 1.4 years.

That’s the equivalent of 8,750 dead people.

And as I pointed out in that article that’s before we look at the deaths that will arise in the short-term because of the impact of healthcare delayed or missed due to the lockdown, which has happened in every other country so must be happening here as well:

Matt Hancock, the [British] health secretary, refuses to give a figure for the potential non-Covid fatalities from this catastrophe but the cabinet was told it could be up to 150,000 avoidable deaths.

At least the British government asked the question of their public health experts.

Oh – and Australia’s 1st quarter GDP drop was just 0.3%.

Readers should also take a look at this article written by Alex Davis at The Emperor’s Robes, Both of New Zealand’s Post Covid19 Futures are Bad, where he looks at two futures:

Future 1: Covid19 is not eliminated and breaks out or returns

Future 2: New Zealand eliminates Covid19 and becomes a South Pacific Prison for its Citizens

 

From that second future:

Whatever hope we may have to eradicate Covid19 in New Zealand one thing is certain – it will not be eliminated from the rest of the world. So, what then? New Zealand is confronted with a lose:lose scenario. We can lower the draw bridge and let the world back in but if we do so it is highly likely we will reimport Covid19

it is highly likely someone, somewhere will slip through.

That was written on June 4, but it actually was not a hard prediction to make. Alex wraps up the detailed piece with his own pick for out future:

Eventually however whoever is in power in New Zealand will have to accept the inevitable: they will *have to* re-open the borders and watch Covid19 do what it has done everywhere else: slightly shorten the long lives of a small number of already very sick old people. Their deaths will be tragic and very public (unlike those for example of cancer sufferers whose treatment was delayed by lock down). The ship of New Zealand will come to rest exactly where it would have otherwise, Covid19 will be among us causing little harm to all but a handful, but we will be vastly indebted, causing harm to many.

One final point is that this is also another example of how crap New Zealand is at collecting and processing statistics compared to other OECD nations. It’s been two-and-a-half months since the end of the March quarter, so that means we’re not likely to see the June quarter stats until mid-September, for which the government will be grateful with the election on September 19.

Written by Tom Hunter

June 18, 2020 at 1:25 am

The Great Crash of 2034

with 12 comments

One of the first things I wrote about here at NoMinister was an article on the disastrous debt situation in the USA, This is not going to get better.

Amidst the charts of tax revenue vs rates and the vast, unfunded liabilities that lay in America’s future, courtesy of Social Security, Medicare and Medicaid – “these three giant machines running on automatic” – I wrote the following:

The good news is that government revenue is increasing, likely hitting 16.5 percent of GDP this year, increasing to 17.4 percent in 2025, and 18.3 percent of GDP in 2029. Of course this is all built on economic models and we know how those go with assumptions of economic growth rates and so forth. For all the talk about econometric models the reality is that they’re often little different to the spreadsheets ordinary people put together. So they’ll contain smooth changes from month-to-month or quarter-to-quarter. But did anybody throw in even a bog-standard recession, something just on the order of the 1990-91 deal, with a couple of % GDP foregone?

And here we are. And we’re not looking at a 2% GDP drop but probably something much worse courtesy of government reactions to the Wuhan Flu.

You can look at that old article to see the histories of US income tax revenue vs the highest income tax rate or corporate tax revenue vs corporate tax rates, but here I want to focus on US spending and then debt, starting with this chart published just last year in 2019.

Note the sidebar of assumptions underpinning this already frightening scenario: “no more wars, no recessions”, and so forth. Note also that the biggest increase in spending comes from non-discretionary spending, courtesy of the Big Three Machines mentioned earlier.

At the same time there was an article published that looked into a future much closer than 2049, The National Debt Death Spiral:

According to the U.S. Treasury Department’s Office of Debt Management, the U.S. government is just five years away from the point of no return.  With the national debt spiraling quickly out of control, there are only a few years left before every single dollar the government borrows will go toward funding interest payments on the national debt.

Interest payments only: not for paying the debt down. This is Ponzi Scheme territory. More specifically it’s the tipping point for when the scam starts to collapse. It’s also why you can look forward to a temporary future of near-zero, zero or even negative interest rates: “temporary“.

And that’s just the Federal situation. There are a number of territories and smaller cities that have already plunged through this event horizon :

In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.

Almost 75 percent of the city’s general fund is now spent solely on the police and fire departments, according to a Reuters analysis of city bankruptcy documents – most of that on wages and pension costs.

Larger cities like Chicago are rapidly approaching the same point, with their debt now rated at Junk Bond levels, and the state of Illinois unable to help because they’re in the same shape.

And then there’s the wider economic problem that derives from the government spending priorities:

A couple of years ago there was somewhat of a kerfuffle in the more sober precincts of the MSM when a story circulated that after his economic advisors presented these post-2024 debt tipping point arguments and data to President Trump his response was (paraphrased): “I won’t be President by then so what does it matter?“.

Naturally the articles lambasted Trump for this selfish and cavalier attitude to spending and debt, but that outrage only lasted a day because everybody knew the terrible truth.

  • It’s a bi-partisan attitude in D.C;
  • almost every politician there (bar Rand Paul and a few House members) is in on it;
  • all of them are too terrified of the fallout that would happen from trying to fix it.

Trump’s 2020 budget produced earlier this year went on to prove the point, as this article demonstrated with comparisons of the MSM coverage of Trump’s budget and the actual forecast numbers. First the MSM headlines:

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Holy shit! Trump was proposing huge spending cuts in domestic programs? That’s great news!

If only it was true.

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This would be the same under any President and any Congress, courtesy of those screaming headlines. Nobody dares to cut spending; even the “cut” of $4.4 trillion noted above was merely a plan to spend less than the baseline spending increases assumed at the start of the budget process.

And remember that all of the above was before the latest economic crisis hit the USA, which has produced the following astounding graph from the US Central Bank, the Federal Reserve:

As you can see the Fed had only just started to finally rid its balance sheet of the debt piled up from the GFC before the Chinese Lung Rot hit the fan. As this article pointed out:

The federal debt had topped $24 trillion for the first time on April 7, 2020.

It then climbed another trillion dollars in just 28 days, topping $25 trillion for the first time on May 5.

Only 35 days had elapsed from when the debt topped that $25-trillion threshold on May 5 to yesterday, when it topped $26 trillion for the first time.

It took about two hundred years for the USA to pile up $2 trillion in Federal debt, hitting that figure in 1983.

Now it has taken just 63 days.

The following chart shows how the debt load is not only increasing but even the rate of acceleration, as is the case with Ponzi schemes. No private business would see this as anything than the stuff of sleepless nights between daytime nightmares.

I’ll finish with this quote from John Stossell, which I especially like because it takes my original article title of “This is not going to get better” and sharpens it:

“We have piled deficit upon deficit, mortgaging our future and our children’s future,” warned Ronald Reagan. “We must act today to preserve tomorrow.”

Bill Clinton said, “We’ve got to deal with this big long term debt problem.”

Barack Obama called driving up the national debt “irresponsible” and then proceeded to do exactly that.

Donald Trump complained that Obama “doubled” the nation’s debt. But now, under Trump’s presidency and the new CARES Act, our debt will grow even faster.

This will not end well.

Even a so-called V-shaped economic recovery would not change this very much.

For all the talk of pandemics and now riots it is this story about the USA that should truly scare you. It is not Antifa or BLM or any other bunch of fanatics and idiots that will destroy the USA but the age-old problem of debt. Take your pick as to the crunch date, mine is 2034!

One of Adam Smith’s famous economic observations was made to a pupil concerned that the massive growth of debt in Britain during the Napoleonic Wars would ruin the nation. That debt would eventually reach 200% of GDP but Smith assured the student that “there is a great deal of ruin in a nation.“, and that proved to be the case, but not without a lot of pain being inflicted in the following two decades.

Same here via Rand Paul’s “Pennies Plan” alternative Budget, although I can’t help feeling that the USA is pushing the outside of the envelope awfully hard on Smith’s maxim.

Written by Tom Hunter

June 14, 2020 at 7:00 pm

This is not going to get better!

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The other day, Keith Hall, the Director of the Congressional Budget Office (CBO), dragged himself up to the US Senate for the usual sad recitation of simple financial facts that all the Senators, and the House members already know.

Well, some of them anyway.

Well, I’ll be a poor, sad bastard!

He had to sit in front of the U.S. Senate Budget Committee and talk about the CBO’s recently released report on the Budget and Economic Outlook for 2019 to 2029.

The good news is that government revenue is increasing, likely hitting 16.5 percent of GDP this year, increasing to 17.4 percent in 2025, and 18.3 percent of GDP in 2029. Of course this is all built on economic models and we know how those go with assumptions of economic growth rates and so forth. For all the talk about econometric models the reality is that they’re often little different to the spreadsheets ordinary people put together. So they’ll contain smooth changes from month-to-month or quarter-to-quarter. But did anybody throw in even a bog-standard recession, something just on the order of the 1990-91 deal, with a couple of % GDP foregone?

The reason that’s important is that the big factor for tax revenue is simply whether the economy is growing or not. Tax rates and tax types don’t actually have much of an impact, as the last 80 years of IRS stats will show, with regard to the top marginal income tax rate, which is a good proxy for lower-band income tax rates.

Basically, US tax revenue fluctuates around 20%, no matter what you do with “taxing the rich”. Same with Corporate Taxes:

What is a lot more predictable than revenue however, is government spending. It increases – relentlessly – and the only thing a recession in the model would do to such spending would be to increase it further and faster. That Keynesianism for you. According to the CBO, federal spending will increase from 20.8 percent of GDP this year to 23.0 percent in 2029, when revenue might be 18.3%. In other words, the already scary deficits are going to get scarier. We’re not far away from having a $1 trillion deficit each year – in a good economy.

The main drivers are “the aging of the population and the rising cost of health care,” which are hammering the three big welfare programs, Social Security, Medicare (healthcare over 65) and Medicaid (healthcare for low income). These three are giant machines running on automatic. Congress has discretion – control – over a small, and shrinking amount of the Federal budget. And even that portion has a lot of elements that are basically out of their control and just increase. A couple of years ago I saw one calculation that the actual portion of the budget truly controlled with decisions, amounts to about 17% – and will shrink to 7% in the next decade.

Medicare/Medicaid are the monsters. They took a couple of years to crank up after being made law in 1965 so spending figures are from 1967 to 2018 and in nominal dollars:

Medicare collects premiums and other revenue, hence the net figure. Still, that’s a growth rate for the two programs of 12% per year, for fifty one years. The US economy has never grown at that rate for even one year. There is no prospect of this changing so future payments are going to be difficult to meet. As explained by the Medicare Trustees:

“The present value of a future stream of payments is the lump-sum amount that, if invested today, together with interest earnings would be just enough to meet each of the payments as it fell due. At the time of the last payment, the invested fund would be exactly zero.” 

They calculate on a standard 75 year timeline and have that value at $33.5 trillion right now  – and there’s no cookie jar to raid. Other scenarios (infinite horizon) are argued to be more realistic, but the low-ball figure is scary enough.

Social Security has another $20+ trillion of unfunded liabilities on the 75 year time frame, but that can probably be managed, because the government controls both the revenue and spending. The last changes were in the 1980’s when President Reagan and Democrat House Speaker Tip O’Neill fought over, but ultimately agreed upon, myriad little changes to spending rates, adjustment rules, and the tax, to make it safe for another few decades. Such work will be required again soon, and should include the same gradual lift in eligibility age that other Western nations have implemented.

Medicaid‘s structure basically runs from year to year and the burden is shared with individual states, so unfunded liabilities are not its problem. But it too has to be paid for and while the Federal government has tried cutting rates paid for doctors and medical services, that’s just resulted in Medicaid patients finding no doctor, clinic or hospital to serve them.

Medicare has no such outlet: benefits cannot be specifically cut or even much changed, and there is no rationing system as with New Zealand Health or the British NHS – one other thing that the “Medicare-For-All” crowd never talk about. If it did have rationing it would become like Medicaid, which nobody boasts about. But even if such could be implemented – and Obamacare did cut Medicare rates over time – the Medicare Trustees warn of the result:

“By 2040, simulations suggest that approximately half of hospitals, roughly two-thirds of skilled nursing facilities, and over 80 percent of home health agencies would have negative total facility margins, raising the possibility of access and quality-of-care issues for Medicare beneficiaries”

Remember this roughly $50 trillion unfunded debt whenever anybody talks about the current Federal debt of $22 trillion. By the way, that infinite horizon analysis that’s endorsed by a large number of economists (incuding Nobel prize winners) produces an unfunded debt figure of $210 trillion.

The final cherry on top is the fact that as the debt rises, and as interest rates slowly return to normal, they’re going to drive up the federal government’s net interest costs, which this year sat at $364 billion. The Federal Reserve’s long-term average is about 5%: that translates to $1.1 trillion per year in interest payments alone.

And this is just the Federal level. I’ve not even mentioned the similar debts and unfunded liabilities of pension funds and healthcare schemes in the states, many of which are in poor shape, and some – like California and Illinois – frightening.

So where does all this end? It would be nice if the work started now, but the number of politicians willing to even broach these subjects in D.C., can be counted on the fingers of one hand. The rest don’t want to know and will continue to kick the can down the road. Admittedly the solution options are limited.

Forget just increasing taxes. The calculations already show that tax increases of 50%+ and spending cuts of 30%+ might produce enough money to plug the holes, but it’s highly doubtful that US voters would accept such unprecedented taxation or cuts, let alone both in concert.

And this is without considering some of the new doozies being dreamed up by D.C. politicians: the Green New Deal, a trillion dollars of student debt wiped, and of course, Medicare For All (MFA).

MFA won’t solve the problems unless it has rationing, and as the old British and NZ Labourites knew, that’s tough to do unless the government also owns the hospitals – and that assumes Americans will accept healthcare rationing. Moreover, there are already two such government owned and funded programs: Veterans Health Administration and the Indian Health Service. They’re both regarded as hideous disasters, so much so that laws have been changed to allow at least the VHA detainees to escape and spend their government funds on private providers.

In any case, it seems unlikely that the US government would spend more trillions buying out private hospitals and clinics. Nationalisation could be done but what sort of crash that would induce in stocks and bonds does not bear thinking about, and it would likely be killed by the courts. Very fine prescriptive controls over the private sector would require a huge bureaucracy, and would be even less effective than they’ve been in other industries.

Given the Federal nature of the USA, one answer may be to have many answers, with each of the 50 states allowed to experiment with different approaches. Some efforts have already been made with block grants for smaller welfare and healthcare schemes, but D.C. likes power so it’s questionable how far they’ll let states go. And the current problems in these areas in some states mentioned above, are not encouraging.

My crystal ball view is that while these systems are not going to collapse, they will be circumscribed at some point. Current estimates are that people in the 2040’s/50’s will get Social Security benefits at less than 80% of today’s pensioners. Medicare will certainly be below that. But that’s still better than nothing. At some stage – probably sometime in the 30’s/40’s – Gen Z and whoever follows them will realise the Ponzi nature of these Pay-As-You-Go schemes and have the voting muscle to override the remaining Boomers. They’ll ring-fence them for existing users and people about to retire, and force the development of private-public actuarial-based systems for both health and pensions.

This will all be very messy and clunky, but in a democracy there are no clean, one-shot solutions.

UPDATE I see one of our commentators has managed to use his lobed fins…

… to struggle on to land bearing some arguments that are worth addressing because of their prominence in Leftist mythology.

The budget could easily be reined in by reinstating taxes on the wealthy.

The long-term graph in the original article gives the lie to that BS, and that also applies to the other “wealth” taxes that applied at the time, on estates and such like, that I see Bernie is talking about bring back. Dear god, the old crank hankers for 1950’s America worse than Pat Buchanan.

The US “Defence” budget could be slashed 80% and that would still leave more than enough money for defence.

The 2019 US Defence Budget is $716 billion, so 80% of that would be $573 billion. Yowza!!! That almost pays for last years Medicare. The problem of course is that annual growth rate of 12% over the last fifty years. Let’s be generous and imagine that we can cut it to just 6% from now on. At that rate Medicare/Medicaid would eat up that annual increase in about 6 1/2 years.

Oh – and a defense budget of $142 billion would amount to about 0.6% of 2019 GDP, New Zealand is at about 1.1%. Modern warfare has long since wiped out the idea of massive cutbacks at war’s end and massive buildups when the next one starts. The stuff has to be there, ready to go or you lose.

Even at 0.6% GDP the sheer size of the US economy does buy more capabilities than NZ of course – but it would basically mean cutting the US military to the point where it could not defend the place, or sea trade routes, or anything overseas that it depends upon. And if your answer to that is an almighty cheer I invite you to think about what China, Japan, Taiwan, Indonesia and others would do in terms of military buildup as most of the US Navy and Air Force mothballed itself: I sure as hell would not want to be in those areas to find out, and I doubt the USA would escape the consequences. Still – it would lead to massive increases in Australian defence spending and increased taxes for you, so Yay!.

Lastly, for all the endless Lefty yammering about US defence spending, the fact is that it has changed little since the early 1950’s in constant dollars, and has had substantial cuts on four occasions.

It has also constantly reduced as a % of GDP (not to mention as a proportion of the Federal Budget).

None of those things are true of Social Security/Medicare/Medicaid.

Written by Tom Hunter

February 5, 2019 at 7:02 pm