Saturday, April 2, 2011

What's Truly At Stake On Budget Battle

As the politicians in D.C. debate budgets, fighting over a few billion here and there, we here from one side that anything more than a ten billion dollar reduction would cause starvation and draconian consequences. The other is trying for one hundred billion reduction. Both are silly, inconsequential numbers against our 1.7 trillion dollar deficit for just this year.

We are hearing from the Republicans that we will be seeing real deep reductions across the board, not just in discretionary spending in their new budget they will be proposing yet this month. We better hope that they are serious. One thing or sure the Democrats and Unions will be going full court press fighting every dime planned to be reduced.

It is past time for a drastic life saving diet for our Federal government. The patient is critical and without a massive change may well be terminal.

Where are we financially? Is it our national debt, or entitlements that are about to kill us?

Federal Debt: 9.1 Trillion.

Unfunded Social Security: 7.9 Trillion.

Unfunded Medicare: 22.8 Trillion.

Medicaid: 35.3 Trillion.

75% of the budget is non-discretionary and entitlement based.

Just with Medicare, Medicaid and Social Security we have $1 trillion deficits. Once dominated by defense spending, these three categories now account for 44% of total Federal spending and are steadily rising. Even after defense and interest payments on the national debt are excluded, remaining discretionary expenses for education, infrastructure, agriculture and housing constitute at most 25% of the 2011 fiscal year federal spending budget of $4 trillion. You could eliminate it all and still wind up with a deficit of nearly $700 billion! The only chance of recapturing our budget is through entitlement reform.

If we pretend that the $65 trillion of entitlement liabilities were fully funded in a “lockbox,” much like Social Security is falsely thought to be. Actually,then the interest expense on the $75 trillion total debt would equal $2.6 trillion, close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual “lockbox” tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP!

The assumption that we can grow our way out of this debt burden, might be possible if it was only the $9.1 trillion in Federal debt. That would be 65% of GDP and well within reasonable ranges for national debt burdens. However others such as Pete Peterson of the Blackstone Group and Mary Meeker, have shown, the true but unrecorded debt of the U.S. Treasury is not $9.1 trillion or even $11-12 trillion when Agency and Student Loan liabilities are thrown in, but $65 trillion more! This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500%of GDP!

In an article titled "USA Inc" by Mary Meeker, and recommend by Paul Volcker and Michael Bloomberg, said if the USA were a corporation, then it would probably have a negative net worth of $35-40 trillion once our “assets” were properly accounted for. However closely estimated that number might be, no lender would lend to such a corporation. Because if that company had a printing press much like the U.S. to print more money at will, that lender/saver would have to know that unless there were massive entitlement cuts that the loan would be defaulted in at least one of these ways:
1) outright default.
2) By accelerating higher inflation.
3) By a declining dollar, which is happening in front of our eyes.
4) By manipulating policy rates and Treasury yields far below historical levels.

William Gross, founder and manager of PIMCO who manages over 1 trillion dollars in securities has advice for Americans below.

“I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden.
Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates. Our clients, who represent unions, cities, U.S. and global pension funds, foundations, as well as Main Street citizens, do not want to be shortchanged or have their pockets picked. It is incumbent, therefore, in order to preserve the integrity of the U.S. Treasury market along with its favorable global interest rates, and to promote a stable U.S. economy, that entitlement spending be reduced, and that future liabilities be addressed in terms of healthcare and Social Security cost containment. You must attack entitlements and make ‘debt’ a four-letter word.”

William H. Gross

The Republicans promise us that they are going to be serious in reducing or entitlement spending on the budget we will see next month. First of all, let's pray that they are serious. Second, we must all get behind them and help champion these cuts to everyone we know, family, friends, and coworkers, because everyone will have things removed that they want to keep. If the Republicans are defeated, or frighted off from trying to gain control of our deficit spending, our out of control budget, then all will be lost.

This is going to be our generations American Revolution, we are fighting a monster who wants to eat us, we must defeat it and push the debt down.

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