Election Day

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I haven't been talking much about the election here this time.

Instead of making an endorsement, I am going to talk about the most salient fact of the election, and the rest of our lives until it is dealt with. Neither of the campaigns has made a big deal of this, but in a rational world would have been getting saturation coverage for the last year.

The debt clock.

The number that everyone obsesses about is the cast debt. $16.2 trillion and change as I am writing this.

Our government income is $2.4 trillion per year.
Our government will spend $3.5 trillion this year

We are borrowing $1.1 trillion per year.

Before we leave the debt clock, look at one more number: Last line of numbers, first one. Total of unfunded liabilities. This is money that our government is currently obligated to spend in coming years on various entitlements - money we have already promised to people. $121 trillion and change as I'm typing this. Social security, prescription drugs, medicare. In a rational world, we would have been setting the money aside as we accrued the liability.

Until the mid-1960s, we actually were. That's when President Lyndon Johnson and the Congress of the day chose to allow themselves to spend the Social Security (and Medicare) trust money. They put a "virtual" IOU in the Social Security - not even real bonds, just a promise of reimbursement someday - and spent the money. To be fair, every congress and every president since then has had the option of fixing this - all they would have to have done would have been return every penny that had been stolen from the trust fund and drastically increase revenue or decrease spending to match. In the early years, Social Security was running surpluses that were large by comparison with the rest of the budget. If those surpluses shrank in later years, the built up debt made it practically impossible. Today, the total unfunded liabilities are FIFTY YEARS of every penny the government takes in. That's right, we'd have to shut down the entire rest of the government for fifty years to pay that off - and that's if there was no interest.

Medicare and Social Security are now spending more than they take in. That money is now due to start being actually paid out. This money stream that Johnson and the Congress fifty years ago tapped into is now a drain on the budget - and it will be one forever. Even if we did shut down the government for fifty years to pay that liability off, we're still accruing new ones.

What would happen to a person in this situation? No matter how productive they were, the people with money would eventually cut them off. There would be no way they can repay their debts, and even if the alternative was losing every penny previously loaned, the lenders would decide that's throwing good money after bad, and stop.

This is the situation as it exists today. Wikipedia isn't the most reliable resource for information, but it's got the basic idea here.

The expression "QE2" became a "ubiquitous nickname" in 2010, when used to refer to a second round of quantitative easing by central banks in the United States.[58] Retrospectively, the round of quantitative easing preceding QE2 may be called "QE1". Similarly, "QE3" refers to the third round of quantitative easing following QE2.[59][60]

QE3 was announced on 13 September 2012. In an 11-to-1 vote, the Federal Reserve decided to launch a new $40 billion a month, open-ended, bond purchasing program of agency mortgage-backed securities and also to continue extremely low rates policy until at least mid-2015.[61] According to NASDAQ.com, this is effectively a stimulus program which allows the Federal Reserve to relieve $40 billion dollars per month of commercial housing market debt risk with no maximum amount or time limit.[62] Ratings firm Egan-Jones said it believes the Fed's decision "will hurt the U.S. economy and, by extension, credit quality." As a result the firm once again slashed the U.S. bond rating bringing it down to AA-. Federal Reserve chairman Ben Bernanke acknowledged concerns about inflation

It says the Fed is buying mortgage backed securities. What it's really buying is US Treasury securities, at auction. The share of new US debt being bought by the Federal Reserve is seventy percent, and they're being bought with fiat money, made up on the spot. Not only that, they're going on to the secondary market of existing treasury securities and buying those up.

Folks, if that's not the people with actual money cutting us off, I don't know what is.

So now the Federal Reserve is making up money - pretend dollars - to fund our continued borrowing.

But those brand new pretend dollars tap into the same pie of real world value as shared by all of the existing dollars. A known amount of goods and services - but now there is another $40 billion per month with claims on them. This means existing dollars are now worth less.

Furthermore, I cannot emphasize too strongly that the dollar is a fiat currency. Since 1973, there has been nothing providing value to the dollar but the perception that there is value there. The thing driving that is the productive capacity of the people who use dollars.

Tradition and a lot of hereditary factors from when the US was forty percent of the world economy back before most of us were born have enabled that illusion to continue to be strong.

But what happens if that perception changes? In short, what happens when the people with goods and services we want stop accepting dollars because they don't believe they will recover their value?

At that point, we have an instant crisis. A real crisis that we can't send the Marines to - they won't do any good, and they also need to be paid somehow in something they can actually use to feed their families with.

So at that point, we're going to have no choice. People are already moving their businesses offshore and even giving up US citizenship rather than pay our existing taxes. Try and increase them, and instead of paying those taxes, productive people will move their income generating activities out of the United States. Oh, not everyone. But enough so that income from taxes actually drops.

So we're going to have to cut spending. Nearly $100 billion of spending every month. $3 billion every day. And that's just so we're able to pay the bills. Scratch that. Those will be all the things we can pay for.

This is going to be politically very difficult. People demanding the government live up to what it promised it would do. People demanding the government continue things it has done for a very long time. And don't forget paying the people who run the government. The military has a lot of very powerful toys - I don't think they would turn them on the rest of us for their pay, but there's nothing physically preventing them from trying. And there just isn't money enough to go around. That's going to be damned difficult to deal with.

In the last four years, can you name me one time Barack Obama did something politically difficult?

Even when it was clearly the smart thing to do? When it would limit damage by accepting some pain now rather than more later?

Didn't think so.

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About this Entry

This page contains a single entry by Dan Melson published on November 6, 2012 7:00 AM.

I Almost Deleted This From My Spam Folder - Looks suspisciously like a 419 was the previous entry in this blog.

Lessons From Election 2012 is the next entry in this blog.

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