Category Archives: Fiscal Policy

Nominal SSA/Medicare “Solvency” Dates Worsen Slightly; Journalists Apoplectic

Economics, Fiscal Policy, Healthcare, Socialism, Taxation, The Welfare State, Theory and Ideas

As I’ve thoroughly explained here and here, the whole Social Security “trust fund” issue is a joke. It’s an accounting gimmick designed to push the supposed date of concern out into the future.

When does Social Security become “insolvent”? Well, let’s look at what the word means:

adjective
not solvent; unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature.

Assets are a printing press, taxpayers, or the farce of a “trust fund” that contains nothing but promises to raid the printing press or taxpayers in the future. There is absolutely nothing tangible there. Nothing backs up the future liabilities of the system.

But the accounting gimmick is still there, and people still argue as to what year Social Security and Medicare will start running into trouble. They argue about this as a problem to be solved for the future, but those dates for both Social Security and Medicare are coming in a bit as the economy collapses:

The financial health of Social Security and Medicare, the government’s two biggest benefit programs, have worsened because of the severe recession, and Medicare is now paying out more than it receives.

Trustees of the programs said Tuesday that Social Security will start paying out more in benefits than it collects in taxes in 2016, one year sooner than projected last year, and the giant trust fund will be depleted by 2037, four years sooner.

Medicare is in even worse shape. The trustees said the program for hospital expenses will pay out more in benefits than it collects this year and will be insolvent by 2017, two years earlier than the date projected in last year’s report.

The trust funds — which exist in paper form in a filing cabinet in Parkersburg, W.Va. — are bonds that are backed by the government’s “full faith and credit” but not by any actual assets. That money has been spent over the years to fund other parts of government. To redeem the trust fund bonds, the government would have to borrow in public debt markets or raise taxes.

I credit this AP writer for pointing out the italicized text, and for hammering the point home later in the article. Very few journalists have understood or expressed the idea that the “trust fund” is not full of actual assets, only promises. This doesn’t mean the situation will be bad in another decade and only dire in the 2037 time frame; it means this situation is worsening every year.

To illustrate this [yet again], let’s pull out a business example. Let’s create a corporation, and we’ll call it Ubiquitous Spending & Aggravation, Inc. We’ll use USA, Inc. for short.

Let’s say USA, Inc. has three divisions. They have the General Products Division, the Depends Adult Diaper Business Unit, and the Viagra & Ensure Business Unit. As you’d expect, one is a general purpose spending group, another caters to the general needs of the elderly, and the final caters to the medical needs of the elderly.

So assume that the below are true:

Today:
USA, Inc. Today

So it looks to me like USA, Inc. is losing $20 Million per year, but two business units are profitable. Would you call that a healthy company? Would you invest in it?

Now, let’s project earnings into the future.

2017:
USA, Inc. 2017

So what’s happened here? The company is still losing $20M a year, and now the two previously profitable divisions are losing money, while the General Products division is actually earning money due to the CEO instituting his AMP – Advanced Mugging Policy. Does this now look like a healthy company? Does it now look investment-worthy? Unfortunately, you’re already invested, because their stock certificates are printed with the words “Federal Reserve Note”. And they’re going to be issuing new shares soon.

I’ve said it before and I’m sure I’ll say it again. This is all a shell game. As long as the government keeps borrowing money and the debt keeps going up, it doesn’t matter how the individual accounting entities are performing. They can raise payroll taxes, offset by a cut in the income tax, and if it’s overall revenue neutral, it doesn’t matter whether Social Security and Medicare are “saved”. About the only benefit to doing so would be that journalists could quit wasting ink arguing over whether 2016, 2017, 2137 or 2141 are the “important” milestones.

There are no “important milestones”. The feds are going to run a $1.8T deficit this year! The problems we have are far larger than a 4-year swing in projected “insolvency” of an entity that is completely insolvent right now. The only “assets” the Social Security administration has access to are the Federal Reserve printing press or our wallets, and you can be SURE they’re going to be reaching for both.

Brad Warbiany
https://thelibertypapers.org/

Richard Posner — The Bailout Saved The Economy!

Credit Crisis, Economics, Fiscal Policy, Government Incompetence, Government Regulation, Government Waste

Well, in my own mind, only until this bear market rally tanks, but I’ll get to that later. But here he goes:

The bailout worked. At a relatively modest, though by ordinary standards very large ($17 billion), cost to the government, the auto companies were kept out of bankruptcy until the acute psychological phase of the economic crisis had passed. Last December, and indeed until sometime in March, government officials, the media, and the public were understandably fearful that the economy was in free fall and might land somewhere near where the economy had landed in March 1933 (25 percent unemployment, output 34 percent below the GDP trend line, 18 percent deflation). Such a fear can constitute a self-fulfilling prophecy, because by causing consumers and producers to hoard cash rather than to spend, it can push the economy into a very deep downward spiral. That fear has now abated.

He’s following what some might call the “voodoo magick” economics, what Reason is alluding to is the “animal spirits” economics, and the general world knows as Keynesian economics. Centering around the understanding that we live in a credit-based economy entirely resting on fiat currencies and fractional reserve banking, the old question of MV=Py becomes very important. Posner is suggesting that because V was already in trouble, the bankruptcies in October/November of last year would have been devastating, but that today they’re much less significant.

He’s suggesting that the economy is based on confidence (as it’s been said all confidence games are), and that to allow the firms to go bankrupt when confidence is low is far worse than allowing it to happen when confidence is high. And it makes sense, if we’re in a recovery. But if we’re in a bear market rally, as I believe, and if you accept some of the negative impacts of the terms of the bankruptcy packages, I think the harm is yet to be felt.

So where are we? Do we take a DJIA that’s rallied to 8400 points from the March lows, largely on the backs of a financial sector rebound, as a sign of a recovery? I doubt the news from the Stress Test that banks need to recapitalize to the tune of $75B should be seen as good. In fact, Bill King writing for The Big Picture blog suggests that this is playing out according to Wall Street & Geithner’s plan, but that once they get a hold of that capital, the next shoe drops:

It is crystal clear that the scheme over the past two months has been to drive financial stock prices higher so banks could raise capital. Mission accomplished!

The Fed and the solons have accomplished the task of providing an environment, with ample patsies, for banks to raise needed capital. But once banks have procured that capital, watch out.

…

If Wells Fargo needs to raise $15B, it is far cheaper to raise it at $25 then $7. So once again solons via crony capitalism and smiley-faced fascism utilize massive rigs with taxpayer funds to bailout the elites.

Stocks are at their most overbought level since September 2007 as measured by the Commodity Channel Indicator (moment indicator). And S&P 500 stocks are at their most overbought level since 2006 as measured by percentage of stocks above 50-day moving averages (92%, 460 S&P 500 per Bloomberg).

So where are we headed from here? I can’t say, but look at something that Posner said:

…government officials, the media, and the public were understandably fearful that the economy was in free fall and might land somewhere near where the economy had landed in March 1933 (25 percent unemployment, output 34 percent below the GDP trend line, 18 percent deflation).

Now, count the months from October of 1929 to March of 1933, and then count the number of months from October of 2008 until now. If this thing is going to get worse to 1933 levels, it’s unreasonable to think it would have occurred this quickly. Oh, and while we’re at it, look at what the Dow did over the beginning of that period:

DJIA

Gee, what does that look like, starting in Nov 1929 and ending in April 1930? A bear market rally.

And despite the common narrative, all during Herbert Hoover’s administration he was desperately trying to find ways and interventions into the economy that would stop the slide. He was rewriting the rules of the game surprisingly similar to the way that Obama is today, showing all investors that their gains or losses were due to their ability to play the political markets. He was disincentivizing investment by constantly changing the rules, and thereby the odds of success in any given market play.

So Barack Obama’s policies are antithetical to investment, antithetical to sound business planning, and ensured to kneecap any attempt at recovery that our economy hopes for. If you’re looking for reasons to worry about the future of this economy — looking for justification that this is not a recovery and a bear market rally — you simply have to combine a few facts:

  1. Fundamentally, the bull market of the late 90’s and early 00’s was partly due to an extraordinary increase in financial system leverage.
  2. This bull market was pumped up by fractional reserve banking and a completely unsustainable rise in asset prices that fueled the above leverage.
  3. We are now at a point where leverage is unwinding and asset prices are still declining.
  4. Government props have supported a rise in financial sector stocks, but fundamentally the stress tests prove that banks need to raise capital based on even mild financial shocks.
  5. Any continued weakness in the economy will skewer this current rally.
  6. Asset prices, foreclosures, and jobs data show no signs of getting better, only (at best) signs of slowing their decline.
  7. Obama’s financial system meddling (auto bailout, TARP shenanigans, etc) is sure to provide more weakness than expected.

Richard Posner, and all the other cheerleaders, believe that if only they keep confidence high, all the fundamental problems in the economy will dissipate and we’ll start a recovery. But the fundamentals aren’t going away. The economy is over-leveraged just like it was in the late 1920’s and early 1930’s, and that leverage must unwind before we can reach a recovery, a recovery based on saving and investment rather than spending and debt. Posner thinks the collapse has been avoided by slowing down the decline, but in essence we’ve only delayed and extended the inevitable.

Brad Warbiany
https://thelibertypapers.org/

Let’s Talk, Barack.

Activism, Fiscal Policy, Politics, The Welfare State

So Barack Obama has a few snide remarks for the tea partiers:

Asked about fiscal discipline and entitlements reform, Obama seemed to be repressing a smile as he jabbed critics of his spending plans.

“Those of you who are watching certain news channels on which I’m not very popular, and you see folks waving tea bags around, Obama said, “let me just remind them that I am happy to have a serious conversation about how we are going to cut our health care costs down over the long term, how we are going to stabilize Social Security.”

“But,” Obama continued, “let’s not play games and pretend that the reason [for the deficit] is because of the Recovery Act.”

Well, a few options… We’ve all written quite a few words here on healthcare and Social Security here. I’d welcome a serious conversation. But I don’t think Obama actually wants a serious conversation if it involves a discussion of the policy proscriptions I’d recommend. For healthcare, I support expanding the free market through severing the tax advantage of employer-based healthcare and thus returning to a model where the patient is typically both the insurance purchaser and payer, giving them a much wider choice of providers and plans than a typical corporate plan full of state-mandated coverages will offer. I think that will do a great job of bringing down costs. For Social Security, my first thought is means-testing the benefits. I’d forego guaranteed benefits in the future if it meant that my SS taxes dropped from 12% of my income to 6% of my income. The nice thing about means-testing is that if my personal investment and retirement plans don’t pan out, the SS plan would be a true “safety net” rather than “entitlement” program.

But his final challenge is worthy of its own response. Obama is projecting a $1.75T deficit. He inherited several hundred billion from Bush, and the economic collapse probably gave him several hundred billion more due to revenue drops. So let’s charitably call half of his deficit, roughly $900B, not his fault. The other $850B, though, is his fault. He’s taking a rough fiscal position for the government and throwing fuel on the fire. For those of us who already feel overtaxed, we know that the endgame of this spending must, by logical necessity, be increased direct taxation or increased indirect (inflation) taxation, probably both. The Recovery Act is a big portion of it. There is a factual argument to support blaming most of the obscene deficits on his spending proposals.

Now, your median tea party protestor may not be ready for this discussion. That protestor realizes simply that spending is going through the roof, and that spending will eventually need to be paid for — with money collected from taxpayers, not from Congress. That protestor may not have the time nor energy to devote to policy wonk analysis of healthcare or Social Security, nor of in-depth fiscal management of government. But that protestor knows that going from spending $3T to nearly $4T, while projecting a drop in revenues, leading to a deficit the size of the 2000 budget, will not end well.

But there are those of us out here who have been paying attention for the last 8 years and longer, and who know the score. Obama may believe that he can flippantly dismiss the grassroots protestors because they may not always be “sophisticated” enough and informed enough to stand and fight for their position. But any time Obama wants to have a chat with us (or more likely our intellectual forebears like the guys from the Reason Foundation or Cato Institute), tell him we’d love to have a “serious conversation”.

Hat Tip: Below the Beltway

Brad Warbiany
https://thelibertypapers.org/

It’s time for libertarians to start taking Federal Reserve issues seriously

Constitution, Credit Crisis, Economics, Fiscal Policy, Monetary Issues

For years, a lot of libertarians and paleoconservatives have focused a lot of attention on the Federal Reserve.  Some have gone overboard, blaming the Fed on virtually every lost freedom in America.  Others have focused too hard at the wrong time; I remember one person speaking at a gun show looking pretty foolish because he was talking about Fed issues while everyone in the audience was concerned about the upcoming passage of Clinton’s Assault Weapons Ban.

On the other side of the coin, our recent economic situation has raised a lot of issues about the role of the Federal Reserve, what alternatives there are to it, and how the system really works in practice.  Ron Paul supporters are particularly well-versed on these issues and the general public is becoming more interested in them, as well.

On February 26, Ron Paul introduced legislation to audit  “the Board of Governors of the Federal Reserve System and the Federal reserve banks” before the end of 2010.  While bills introduced by Paul are often disregarded by the rest of Congress, this one is starting to show some legs. According to Paul’s website, the bill now has 71 co-sponsors.

I’ve taken a lot of heat over the years for trying to protect the movement from being disregarded by mainstream Americans because of our internal kook factors.  When Ron Paul can obtain 71 sponsors for a bill, it’s time for hesitant libertarians to jump on board the Federal Reserve bandwagon.  You might start by contacting your Representative today.

UPDATE: Just received the following on Twitter:

If you don’t think the Federal Reserve issue is too arcane, then I’m up for it! Heard it for a while-can’t pretend I understand it. Freedom!

Stephen Gordon
http://stephengordon.com

Comment Of The Day

Comment Of The Day, Fiscal Policy, Government Waste

Yesterday, I linked an article about Obama “challenging” his cabinet to find $100M to cut from the budget. I suggested it would have to grow considerably to even be a drop in the bucket. One commenter named John suggested that he should do that every day for the rest of his term, and we might get somewhere. Akston suggested that might still not get us very far:

Actually at that rate (100 million a day), it’d take well over 100 years to compensate the recent 4 trillion in new spending. And that would only account for principal, not interest.

It’s one more point that shows just how foreign the entire concept of a trillion is.

I think it’s time to listen to some tunes…

Brad Warbiany
https://thelibertypapers.org/
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