Thursday, March 1, 2018

The Faster America "Grows", The Faster America Goes Bust

As of October 1st of 2007 (the start of the 2008 Federal Government fiscal year), federal debt stood at $9 trillion and 70 billion.  In the subsequent ten years and five months, the US federal debt has grown $11 trillion and 805 billion and now stands at $20 trillion and 875 billion (chart below).  Over the same period, US GDP grew $5 trillion and 169 billion.  Simply put, for every $1 of new federal debt undertaken, the US achieved $0.44 cents of economic activity or "growth".

However, as the chart below shows, the huge increase in federal debt (red line) was accompanied by a minimal increase in interest payable on all that debt (blue line).  The boxes detail the total debt incurred during each period against the annual increase in interest payments on that additional debt.  The Federal Reserve is primarily to thank for the cheapening of debt and encouragement to undertake all that debt, but many fear the same Fed is set to hike those interest payments with its ongoing rate hikes.

In five months of fiscal year 2018 (through Feb 28), the Treasury has already issued $630 billion in new debt.  The Treasury is on pace to issue $1.2+ trillion in new debt (2017 was a mere $672 billion increase).  But let's be conservative and assume the Treasury reins it in and "only" issues another $370 billion over the next seven months...for a nice round $1 trillion in new debt.  Big numbers are hard to comprehend, so I'll show just the added responsibility from the debt undertaken in 2018, per every full time employee in the US (there are 127 million FT US employees):

+$31 per work day
+$157 week
+$658 month
+$7.9 thousand annually

This would be in addition to the $163 thousand every full time employee is already responsible for.  But, sadly, this vastly understates the issue.  According to the Treasury's 2017 Financial Report of the US Government, the "total present value of future expenditures in excess of future revenues" is $49 trillion in addition to the federal debt!!!  Simply said, Social Security and Medicare require $49 trillion here and now to allow that money to grow at a compounded annual rate in conjunction with estimated future tax revenues to meet the present and future payouts that have been promised.

The US Treasury is telling you that between the federal debt and unfunded liabilities, the US is $70 trillion in the hole and despite record tax revenue, record stock and real estate valuations...the US is bankrupt.  Of course, the US can never "technically" go bankrupt as it will issue new debt at an accelerating rate to pay the old debt...but this has been the "end times" for every empire.  Debasement is the functional equivalent of national bankruptcy, the only means to pay even just the interest on the debt is creation of new debt at an accelerating rate.

So, a little focus on that $49 trillion unfunded liability (UL) portion seems due.  Charted below is the UL (maroon line), according to the US Treasury, from 2000 through 2017 alongside the federal debt (dashed red line), and Gross Domestic Product (black line representing market value of all goods and services provided, annually).

Clearly, UL's and federal debt are far larger and growing so much faster than economic growth represented by GDP.  Since '00, GDP has not quite doubled (+88%) while UL's have more than doubled (+157%) and federal debt has nearly tripled (+258%).  You may notice a dip in the UL from 2009 to 2010...a $15 trillion dip essentially overnight, when America's UL fell by a third?!?  This was the estimated impact of the ACA, aka Obamacare.
The UL is made up of four primary components; the OASDI (Old Age, Survivors, and Disability Insurance), Medicare Part A, B, and D.  The UL components are broken out below (again, according to the US Treasury Financial Report of the United States Government)...
  • The OASDI deficit has been growing consistently.
  • Medicare, Part A...the liability fell by 80% with the passage of ObamaCare and has essentially been unchanged since.
  • Medicare, Part B...the liability fell by 25% with the passage of ObamaCare, but has again been rapidly increasing.
  • Medicare, Part D...the liability has essentially been unchanged since 2000.
The chart below details the unfunded liabilities, by source, and federal debt.
To comprehend the magnitude of the growing unfunded liabilities,  I'll briefly explain what each is and show its revenues vs. expenditures on a net present value basis.

OASDI (Old Age, Survivor, Disability Insurance)
What - Federal program that provides earned benefits to retirees, their beneficiaries, and the disabled.
Eligibility - If you worked minimum of 10 years and are at least 62 years old (for partial benefits) or 65+ (rising to 67) for full benefits.  Presently, 61 million beneficiaries vs. 127 million full time employees.  Beneficiaries set to swell, quantity of full time employees likely to be little changed.
Unfunded Liability - UL is $15.4 trillion and set to grow rapidly as revenue stalls versus fast growing expenditures.
Medicare Part A

What - Hospital Care, nursing facility care, limited home health care, hospice care.
Eligibility65+ year olds receiving SS or those disabled (also those with ALS), typically no premium is paid.  Presently 44 million Americans enrolled in Medicare.
Unfunded Liability - With the passage of the Affordable Care Act (aka, Obamacare) in 2010, it was estimated that the gross costs of the ACA would be more than offset by reductions in Medicare spending, increased revenue, etc.  The massive Part A UL was estimated to have been reduced by 80%.    
Medicare Part B
What - Outpatient care, preventative care, ambulance services, durable medical equipment.
EligibilityIf eligible for Part A, you are eligible for Part B plus paying a premium.
Unfunded Liability - The UL is huge and growing faster than any other liability.
Medicare Part D
What - Prescription drug coverage.
Eligibility If you are eligible for Part A and/or Part B, you are eligible for Part D.  Monthly premiums and out of pocket expenses help subsidize prescription drugs, premiums vary by plan.
Unfunded Liability - I only have full data back to '04 for Part D...but apparently the UL is large but stable?!?

The problem areas should be fairly easy to see; Federal Debt, OASDI (SS), and Medicare Part B.  I have major questions regarding the assumptions going into these and the validity of these numbers?  Big questions regarding the assumptions of reduced costs via the ACA,and the potential impacts of an Obamacare repeal on the unfunded liabilities?  I have detailed why this situation is only going to worsen, (HERE) because of decelerating population growth among the young and surging growth among the elderly.  But still, the above is the governments baseline from which they are working and I think it's important to at least know that.

In every previous "crisis" in which the US undertook large increases in deficit spending and suffered the resultant rising debt to GDP ratio, once the war or "crisis" was over...the deficit spending ceased and debt to GDP was "repaired".  The chart below shows debt to GDP and annual population growth (black line total population, yellow line population growth among the under 65yr/old population) from 1790 to present.

In the present case, the "crisis" ended no later than 2012 but the crutch of deficit spending and magnitudes larger unfunded liability increases (which essentially did not exist prior to 1970), continue in a ridiculous effort to maintain a falsely high rate of economic growth from a nation that continues to see its population growth decelerate.  (The decelerating population growth means decelerating growth among the consumer base in a consumer driven economy with large trade deficits, to boot).  If the above federal debt were inclusive of the unfunded liabilities (again, which didn't exist prior to 1970), the true present debt to GDP would be in excess of 300%, nearly tripling the post WWII high water mark!!!.

But in search of higher economic growth rates, the US federal government is again running huge deficits in a vain attempt to grow its way out of the hole it finds itself.  In hopes of hitting a growth "home run" and achieving 3.5% GDP (or about a $700 billion annual increase in economic activity via debt fueled deficit spending), the federal government will undertake $1+ trillion in new debt plus $2 to $3 trillion increase in unfunded liabilities.  If a more realistic 2% GDP growth is achieved, that's a $400 billion "growth" on a net increase of $3 to $4 trillion in federal debt and UL's.

The chart below shows annual GDP "growth" minus just the annual federal deficit incurred (not counting UL's) to achieve the growth, from 2000 through 2017.  Plus estimated "growth" through 2025 assuming one trillion dollar deficits to achieve 2% GDP "growth"?!?  Even if the US were able to consistently hit a 3.5% growth rate (which is essentially not possible organically, outlined HERE), the net result would still be moving America backwards every year!

And no one sees a problem with this math???  Said more simply, the faster America "grows", the faster America functionally goes bankrupt (detailed HERE).  There is no feasible mathematical path for America to outgrow it's debt.  A restructuring or bankruptcy is now in order if America is again to be a meritocracy and land of opportunity (particularly for the young).

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.