Yes, There Will Be Armageddon: Government Goes Bankrupt (July 24, 2008)
One financial Armageddon is entirely, easily predictable: the bankruptcy of government in the U.S.A., at every level: Federal, State, County and City. The prediction follows from very simple mathematics: entitlements which grow at 8% a year cannot be supported by an economy which grows at 3% or less.
This simple truth is already playing out. San Diego is just one example. Here is a report which lays out the basis of San Diego's impending bankruptcy: structural deficits. The same can be said of California, which managed to increase state spending by 44% over the past few years even as the economy which must support those expenditures grew a total of less than half that rate.
This will sober you up, folks: CITY ATTORNEY ANALYSIS: CITY OF SAN DIEGO STRUCTURAL BUDGET DEFICIT
These benefits consisted of three rounds of retroactive benefits without funding which cost taxpayers $451 million. In addition, pension officials gave away 8,000 years of pension credits to city employees for free, at a cost to taxpayers of $146 million.Astute reader R. provides additional insight on public pensions:
I read the latest article. Are You Part of an Elite, and Don't Know It? (July 22, 2008).The mainstream media blames "the housing slump" for government shortfalls--for example: States Slammed by Tax Shortfalls.
The problem isn't a tax shortfall, it's a structural deficit between outlandishly generous pensions and healthcare benefits and what the economy can support.
I have often reprinted this little chart to graphically illustrate what bankruptcy looks like. We all read these mind-numbing numbers--unfunded Medicare obligations, $43 trillion, and so on--and then move on to sports or celebrity gossip or the latest bread-and-circus political "news."
That structural deficit can only be resolved by complete bankruptcy of government at all levels. You can't fund $60 trillion with tax increases, or hope that some Oil Exporting Nation's sovereign investment fund will loan us $60 trillion (the Medicare shortfall alone is $43 trillion, but let's not forget all those other promises to pay pensions and healthcare made by Federal, local and state governments).
That Medicare expenses outstrip the growth of the underlying economy can be seen in this chart:
As I have documented elsewhere, Medicare costs continue to climb at a rate far above the growth rate of the U.S. economy, and there is virtually no evidence to support the fantasy that adjusting a few parameters of payments or services will do anything to change that.
Medicare now costs over $500 billion a year, larger than any expense except Social Security (which is supposedly self-funding via the FICA payroll taxes) and the defense budget (fighting two wars, global war on terror, etc.). The trends are inescapable: Medicare will soon surpass defense spending, and then keep right on going.
Will anyone accept a reduction in their "right" to entitlements? Heck no. Remember, "I earned this" and "it's my right" and "I paid my taxes, I deserve this." Ahem. Yeah, sure. Whatever.
There is no way to gracefully cut off entitlements, and politically it is impossible. That's why it's easy to predict bankruptcy is the only outcome: a point will have to be reached when the government simply can't tax or borrow enough money to meet its obligations.
At the Federal level, that will be reached when interest rates skyrocket and the interest on the Federal debt (National Debt) exceeds all expenses but Medicare. The interest is already pushing $300 billion--yes, half as large as the entire Social Security budget--and it takes little imagination to see it doubling and then tripling as money becomes dear globally and our non-U.S. friends who have purchased all our debt finally tire of supporting our free-spending ways.
After all, every dollar they waste, oops, I mean invest, in U.S. bonds and mortgages (debt) is a dollar not invested in their own nations' well-being. Eventually their own people will demand that the surplus be invested in their own nation rather than propping up The Empire of Debt, a.k.a. the U.S.
At the local and state level, bankruptcy will become inevitable as soon as revenues are dwarfed by expenditures and pension/benefit promises. The city of Vallejo has offered us the template which will be followed hundreds of times in the coming decade: recalcitrant public unions demand more taxes to cover the structural budget shortfalls and complain "the money's gotta be here somewhere," and after cutting services to the bone the city finally declares bankruptcy.
Look for this play to come to your town, city, county and state soon.
There will be plenty of half-measures and fantasy "solutions" along the way, of course; here in California, the latest installment is a drastic pay cut for some state workers: Governor plans to slash state workers' pay.
It's not politics, it's math. As I noted in Is the U.S. Alcoholic, or Merely Schizophrenic? (July 15, 2008), we as a nation are in deep, inpenetrable denial about our fiscal binges and addictions to "borrowing our way out of debt," i.e. "the hair of the dog that bit us."
Open a spreadsheet and enter two columns of data. Take $100 and calculate its growth over 20 years at 3%. Now calculate 8% growth for 20 years.
The economy and tax revenues rose 75% in 20 years to $175. The entitlements/pension /Medicare costs more than quadrupled to $431.
No spin, no politics, nothing fancy: that's how expenditures outrun revenues to the point that bankruptcy is the only possible endpoint. Call it whatever you want--"structural deficit" has a nice, clinical sound--but anyone claiming there won't be financial Armageddon should fire up his/her spreadsheet and do the math. There will be Armageddon, as sure as 2 + 2 = 4.
Astute reader Mary R.H. recommended this Vanity Fair article on the Bear Stearns collapse: and offered this comment:
See page 7 of the article, about 1/3rd down, where it says "At one point, Paulson had to sign a document confirming that, yes, in the event Bear defaulted on its securities, the American taxpayer would pay the tab." I absolutely froze when I read this. I had to reread it several times to let the full weight of that message sink in. We the common people who apparently have no rights left in this country and no say in legislated federal usury are going to pay for the ruling class to remain wealthy and in power. "A GOVERNMENT FOR THE PEOPLE AND BY THE PEOPLE"... I don't think so, not any more.I would also suggest this absolute gutting of Fannie Mae and Freddie Mac by Paul Gigot: The Fannie Mae Gang (Wall Street Journal)
New Readers Journal Essay:
Back in the Village
Three articles by Charles Hugh Smith this year have garnered my attention. The first was When Belief in the System Fades which struck a harmonized note for me as a former officer in the military reserve who had served in Iraq and recently resigned my commission.
The next two were The Art of Survival, Taoism and the Warring States and Where the Rubber Meets the Road. I had really liked the Survival + theme in both articles with the emphasis on building human relationships within a small community and strengthening personal skills over the retreat to the isolated bunker filled with gadgets and guns.
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