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In yesterday's post, "Declining Empire, Banana Republic, or Failed State?" the
commentators I quoted cited America's profligate ways and growing dependence
on borrowed money, especially from lenders based overseas, as one reason for
pessimism about our current and future standing. In "Our Drunken Uncle" Investor's Business Daily adds to concerns about the destructive path our nation is on:
Spending: According to two
separate Government Accountability Office scenarios, America's long-term fiscal outlook is "unsustainable." No surprise, since Uncle
Sam is spending like a drunken sailor.
The GAO, Congress'
in-house think tank, warns that in "little over 10 years, debt held by
the public as a percent of GDP" will hit a record high, exceeding the
debt-to-GDP ratio seen after World War II. Then it will "grow at a
steady rate thereafter," according to the government forecasters.
"Social Security
cash surpluses, which have been used to help finance other government
activities, are projected to turn to cash deficits by 2016," the GAO
warns.
The agency's fall
update of its "Long-Term Fiscal Outlook" adds that "the Social
Security trust fund will be exhausted in 2037, 4 years earlier than estimated
last year." The Medicare trust fund's day of reckoning, meanwhile,
"was also moved forward by 2 years to 2017."
The GAO used two
simulations, an optimistic one making the assumption of historically
lower-than-average nonentitlement spending and higher-than-average tax
revenues, and a second model assuming that spending and revenues would keep
to historical averages. But "both simulations show that the federal
government is on an unsustainable fiscal path."
The non-optimistic
simulation "shows persistent annual budget deficits in excess of 7% of
GDP — levels not seen since the aftermath of World War II." Under
that scenario, "roughly 92 cents of every dollar of federal revenue will
be spent on the major entitlement programs and net interest costs by
2019."
Even if revenue
remains constant at 20.2% of GDP — higher than the historical average
— by 2030 there will be little room for "all other spending,"
which includes "national defense, homeland security, investment in
highways and mass transit and alternative energy sources, plus smaller
entitlement programs such as Supplemental Security Income, Temporary
Assistance for Needy Families, and farm price supports."
It sounds like
doomsday. But the politicians who run Washington are ignoring the dire
warnings.
This week, House
Speaker Nancy Pelosi is convening a gaggle of ideologically friendly
economists with the aim of getting cover for yet another stimulus —
even though the last one of $787 billion made no discernible dent in
unemployment, which threatens to reach double digits.
And Sen. Ben Cardin,
D-Md., appearing on Fox News Wednesday, spoke for lots of his fellow liberals
in blithely proposing a brand-new, massive entitlement in the form of a
government-run health scheme, claiming that "a public option helps bring
down the costs."
Also appearing on Fox
Wednesday, Sen. Judd Gregg, R-N.H., after accusing Democrats on the Senate
floor of a "Bernie Madoff approach to (health care) funding,"
warned that when disguised funding is tallied up, the true cost of Congress'
proposed government health takeover — even without the public option
— is $1.8 trillion.
Government spending
is burning our children's futures to the ground, yet our "leaders"
in Washington think it's time to spray the kerosene of still more spending on
the fire.
But it is not just
those who lean to the right who are worried about the consequences of
excessive spending and borrowing, ostensibly in the name of returning things
to "normal." Whatever the failings of the rating agencies, which
includes the fact that they enabled many of the excesses that helped create
the mess we are in today, they still know a bit more than most people about
evaluating creditworthiness. With that in mind, the following report from Reuters, "Reducing
Deficit Key to US Rating: Moody's," suggests the fiscal train wreck
now in motion is more than just a Republican talking point:
The United States, which posted a record deficit in the last fiscal year, may lose its
Aaa-rating if it does not reduce the gap to manageable levels in the next 3-4
years, Moody's Investors Service said on Thursday.
The U.S. government posted a deficit of $1.417 trillion in the year ended Sept. 30 as the deep
recession and a series of bank rescues cut a gaping hole in its public
finances.
The White House has
forecast deficits of more than $1 trillion through fiscal 2011.
"The Aaa rating
of the U.S. is not guaranteed," said Steven Hess, Moody's lead analyst
for the United States said in an interview with Reuters Television. "So
if they don't get the deficit down in the next 3-4 years to a sustainable
level, then the rating will be in jeopardy."
Moody's has a stable
outlook on the U.S. rating, which indicates a change is not expected over the
next 18 months.
Earlier this year,
financial markets were spooked by concerns about the risk of the United
States losing its top rating after Standard & Poor's revised its outlook
on Britain to negative from stable, indicating the risk of a downgrade.
Hess said that reducing
the budget deficit would be a challenge.
"Raising taxes
is never popular and difficult politically so we have to see if the
government can do that or cut expenditure," he said while adding it
would be tough to reduce expenditure.
That said, while efforts
to boost revenues won't go down well, harsh fiscal realities -- and a quick
read of history -- suggest that it won't be long before the urge to raise
taxes becomes overwhelming and widespread. One look at the following chart,
included in a June Clusterstock post,
"Look What Happens To Tax Rates When Debt And Deficits
Balloon," and it's hard not to concede that Washington will be
looking to garner a bigger share of what people earn to compensate for a
yawning gap.
In the meantime,
despite the inevitable public uproar, those who run the country will also be
forced to slash spending however they can, which may be even more problematic
than boosting taxes given that some of the biggest beneficiaries of
government largesse (e.g., the elderly) are a political force to be reckoned
with. Nonetheless, it probably won't be long before we start seeing
"studies" and other such efforts like the one detailed by Britain's BBC News in "Call to End Middle Class Benefits":
Benefits for the
middle classes should be taken away to avoid higher taxes, a centre-right
think tank has suggested.
Reform says payments
including maternity pay, child benefit, the winter fuel allowance and TV
licences for the elderly could be scrapped.
It says the UK spends £31bn a year on such benefits, equivalent to an extra 8 pence on the basic
rate of income tax.
In a report, it also
argues that flexible savings accounts should be set up to replace pension
contributions.
Chancellor Alistair
Darling has predicted that public borrowing will reach a record £175bn
next year.
Reform says while
times are hard, the leanest welfare system focused on the most needy, is all
the UK can afford.
It defines middle
class as a household where the total income equates to £15,000 a year
for each adult and £5,000 per child.
The message is
provocative and reignites the long running debate about the scope of the
state, says BBC social affairs correspondent Sue Littlemore.
Small print
In its report, The
end of entitlement, Reform suggests the "middle classes are being bribed
with their own tax money".
It says there is a
political consensus for limited aspects of welfare reform but to deliver real
benefits the UK needs a radical plan.
Reform says recent
proposals by the Conservatives did "not go far enough" as they
promised to keep many middle class benefits in place.
In his conference
speech, shadow chancellor George Osborne was wrong to pledge to keep winter
fuel payments, free TV licences for the over-75s and child benefit for middle
class families, it says.
Reform argues his
plan to means test child trust funds and abolish tax credits for people on an
annual income of more than £50,000 would only save £700m a year.
At the same time, the
welfare system also has to improve for the poorest, the report says.
Reform says rules on
social enterprises and other organisations providing welfare-to-work services
are too tight for them to make a real difference to the unemployed.
Director of Reform
Andrew Haldenby said: "The middle classes need to read the small print
of the welfare state."
"They may think
that benefits and subsidised higher education are a good deal. In fact they
will cost an extra 8p on the basic rate of income tax in the next Parliament
because of the hole in the public finances." [Hat tip to ff.]
Yet even if attempts
to boost revenues and cut expenses prove somewhat successful, the sheer scale
of the fiscal holes now opening up, as well as the political and social costs
associated with trying to fill them in, suggest that our government will
ultimately have little choice but to go down the the same road that many of our similarly constrained predecessors did -- that is,
inflating their way out of it.
Michael J. Panzner
Editor, Financialarmageddon.com
Also
by Michael J. Panzner
Michael J. Panzner is a 25-year
veteran of the global stock, bond, and currency markets and the author of
Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.
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