THE END IS NEAR

boblonsberry.com ^ | 03/01/10 | Bob Lonsberry

[infowarrior]

Before a nation goes financially bankrupt, it must first go morally bankrupt.........................

Taken a good look at what passes for "culture" lately? I have, and it isn't pretty. Our society, as a whole, has become largely morally bankrupt, so financial bankruptcy becomes a more looming reality by the day...

the infowarrior

[qwertypie]

The combination. Real people owe that total sovereign and personal debt, and they are struggling mightily with their personal one alone.

[GOPJ]

...raising rates means that the big hunk of bonds we need to sell to roll over and service debt just got bigger. Those are the trends that worry me.

Worries me too...

[Reeses]

What do you consider insurmountable about $8 trillion in publicly held debt at average interest rates under 3%, in a nation whose households own $54 trillion more than they owe and earn $14 trillion a year and rising?

The 2009 US Government Financial Statement shows $2.7 trillion in assets, $14.1 trillion in liabilities. If that were a company's financial statement wouldn't they declare bankruptcy? The balance sheet doesn't include the unfunded liabilities of $100 trillion.

[Nuc1]

No argument there.

[ShadowAce]

I understand the hard work. We had a tractor, but every other piece of equipment was horse-drawn model the we converted for tractor use. We didn't have a baler--we stacked hay loose and put it in the barn loose. We cut our firewood by hand. Heck, we even butchered our first cow ourselves. Not pleasant.

I understand what you're saying, though. However, I really think we will go that direction shortly. There will be a major population reduction due to hardship.

I believe we've been cursed with the old Chinese curse--"May you live in interesting times."

[vanilla swirl]

“Such things must be experienced to be understood.”

I have such respect for you. I am not young enough to work that way anymore either. I grew up just wealthy enough I didn’t have to do such manual labor when I was young and I am poorer for it. I can’t depend on this generation to work like that either.
I fear we will return to pre-1900 but the problem is nobody knows how to survive that way anymore so in reality it will be more like the dark ages.

[JasonC]

In 2009, total interest expense was $383 billion. That is down from $451 billion in 2008, on lower average rates. Total interest expense was $364 billion in 1998, 12 years ago, and $344 billion in 1996, 14 years ago. The price level is up by 32% and 36% since those years, and GDP is up by 60% and 80% respectively. Federal interest expense is 2.65% of GDP right now, and it was 4.3% and 4% in those years. In the cycle peak year, 2008, interest expense was $451 billion, which was 3.14% of GDP.

You don't go broke with interest expense under 3% of income, especially with an income that rises 6-7% a year on average. The average American homeowner spends 16% of income on debt service, and the average renter (counting rent) 25%. And they aren't broke either, with a $54 trillion net worth overall.

It might make some sense to worry about debt service costs if long term interest rates were 8-9% - meaning, 2-3 times current levels and above the rate of growth of the overall economy. But in the nature of things, that could not and would not be sustained.

The immediate cause of the current high deficits is the recession, and not debt service costs. Federal receipts of all forms fell from a peak annual rate of $2.683 trillion in the 4th quarter of 2007, to $2.188 trillion in the 3rd quarter of 2009, the last for which full figures are available. That is a $500 billion drop in revenue, or an 18.5% "tax cut". At the same time, transfer receipts to households (government benefits paid to them, including state and local) have increased by $400 billion, from $1.772 trillion to $2.175 trillion, all at annual rates.

A $500 billion tax cut and a $400 billion increase in handouts blew the original deficit hole. Unnecessary additional "stimulus" spending, plus some one-off TARP stuff that is accounted for as a current item rather than a capital item, account for the remainder. The unnecessary stimulus stuff should certainly be stopped and the TARP expense allowed to reverse as loans are paid back and the like. But the idea that it is the cost of servicing the debt - interest - that is causing our fiscal stress, is completely wrong.

The change in interest expense since the late 90s is less than $50 billion a year. The change in tax income just since 2007 is 10 times as large. The change in transfer payment spending is also 10 times as large, and together they are 20 times as large.

In short, its the economy, stupid...

[JasonC]

No, because they don't practice one entry accounting.

The Federal government has an income stream of over $2 trillion a year from all taxes.

On average, this income rises by 6% or 7% per year. It fluctuates violently - up to 20% in a few years - when the economy goes into recession and in booms - but around that trend growth rate.

Guess how much you can safely borrow against a $2 to 2.5 trillion income, when you pay 3% average interest rates? Investment grade in the corporate world means covering debt service 3 times. Top rating happens if you can cover it 4 times, using average incomes over 3 years. Answer, about $21 trillion. The US is 2.5 times lower than a highest grade corporate bond level of protection.

As for the "unfunded liabilities", those don't include the income stream from payroll taxes, either, and are again one entry accounting. Guess what the discounted present value of $2-2.5 trillion per year growing 6-7% a year is, discounted at 3%?

Infinity. Twice.

[JasonC]

The American people are (1) $54 trillion in the black on their combined net worth statement, net of their own debt (2) have a disposable income, after taxes, of over $11 trillion per year (3) are "leveraged" a not exactly dramatic 5 to 4, with $67.5 trillion in owned assets and $14 trillion in liabilities against them (4) are struggling so mightily with $400 billion more a year in government transfer payments being handed to them by the government than in 2007 before the recession began and (5) are struggling so mightily while paying the government $500 billion a year less in all taxes combined than in 2007.

The people are borrowing their government's credit rating, not paying a fifth of their normal taxes, and instead getting whopping huge new handouts to maintain their income (overall, not down at all since 2007) despite 10% of them not working. They also just stiffed their bankers for $2-3 trillion in bad debt that said banks wrote off and the deadbeats walked away with.

Never have such collosal whining ingrates bitten so hard on the hand that is feeding them.

Don't get me wrong, this doesn't mean I am in favor of things like extending unemployment benefits to 3 years, or foreclosure mortoriums, or criminalizing lending, or bailouts for unions. And surely the taxpayers not taking anything and paying such of the freight as is actually being paid, are getting shafted by all of the above.

But spare me the whining snot nose brat crap about how hard it is all over. I gave at the office, forty times over.

My message to the American people is: Stop whining, get off your collective backside, pull your pants up, turn your hat around, and get a fricking job!

[Reeses]

On average, this income rises by 6% or 7% per year.

At most the income rise should track to inflation plus population growth. Anything higher is feeding an unsustainable bubble. If the adjusted government growth rate is 2% per year and if total taxes are 35% of income now, taxes will grow to 100% of income in 54 years. There is increasing worker productivity (really automation) which should boost employee pay, but shouldn't there also be increasing productivity in the government sector so that government needs to spend less every year to deliver the same level of services? American government is growing at an unsustainable rate and when that bubble bursts it won't be pretty.

[JasonC]

No, no no no no. Oh god.

Inflation is a mere change in prices, it runs 3% a year or so. More like 4% from WW II to the early 80s, more like 2% from the late 80s to now, but around that much.

Population growth is 1% a year pretty much forever.

The economy grows more than both combined. It is called, say it with me now, real economic growth. It is caused by, all together higher productivity. Meaning, each hour worked produces a greater real value of goods and services than in the past, because people are working smarter, using better tools, using vastly more complicated and powerful capital equipment, etc.

Total taxes at all levels of government are 25.6% of GDP, not 35%. In 1980, total taxes at all levels of government came to 28.9% of GDP. Government's share of GDP is not higher now than then. But real GDP is way higher - 5 times higher in nominal terms, and 2 times higher adjusted for changes in prices. Population is 35% higher. Income per person in real terms is 46% higher.

[Reeses]

Total taxes at all levels of government are 25.6% of GDP

The total taxes on my personal GDP are much higher than that. I must be doing something very wrong. Anyway, I appreciate your take and bits of education.

[JasonC]

The old pay little in taxes. The young pay little in taxes. The poor pay little in taxes. The temporarily unemployed, who may not be any of the above, pay little in taxes while unemployed. Everybody else necessarily pays more than the average in taxes, since "average" includes those paying less in the denominator.

[eleni121]

“only the good die young”.

Soros is an avil horrid little international pimp...expect him to last a while doing his evil deeds.

It’s up to the sheep to wake up.