Greenspan: US 'Way Underestimating' the National Debt

Don't listen to me, but absolutely hear out Alan Greenspan.  Not because he was the former Fed Chairman, but precisely because he is no longer the Fed Chairman and can now speak the truth.

http://www.newsmax.com/Finance/StreetTalk/alan-greenspan-national-debt-social-security-trust-fund/2015/06/07/id/649228/

On America's Generous "Patriotic Millionaires" Who Just Can't Wait To Pay Down The US Debt

http://www.zerohedge.com/news/2012-11-12/americas-generous-patriotic-millionaires-who-just-cant-wait-pay-down-us-debt

Debt forecast: U.S. will look like Greece by 2021

As I've repeatedly stated, the CBO is neither independent, nor accurate in forecasting government finances.

And as bad as the official debt calculations are (currently $16 trillion and climbing), they are woefully understated, as I've repeatedly blogged about.  The actual debt, when applying GAAP accounting methods, is actually $222 trillion, according to Laurence Kotlikoff (Google it--I'm tired of blogging about it).

Why is there a huge discrepancy?

1) because official statistics come from the government.  And governments lie, despite claims to the contrary ("CBO is nonpartisan").

2) official debt calculations don't take into account future government liabilities (e.g. entitlement programs, such as Social Security, Medicare, Medicaid, and housing bailouts such as Fannie Mae and Freddie Mac).

http://finance.yahoo.com/news/debt-forecast-u-look-greece-040006789.html

The federal debt crossed the $16 trillion mark this week. What’s more remarkable than the number of zeros in that figure is that Washington somehow didn’t see this coming. The Congressional Budget Office is responsible for predicting the budgetary effects of policy changes. Politicians cite CBO figures when telling us what to expect in the future. But it turns out that CBO forecasts, taken out of a very limited context, aren’t very accurate.

Every January, CBO forecasts the U.S. economy for each of the subsequent 10 years. Since 1997, the agency has underestimated the yearly debt in 85 out of 110 tries.. Almost 80% of the time, the CBO produces (and politicians parrot) a ridiculously optimistic picture of the future.

Ten years ago, the CBO predicted that we’d be $7.6 trillion in debt by now. At $16 trillion, the reality is more than twice as bad. Unfortunately, that’s par for the course. Since 1997, the agency’s forecasts of the debt five or more years into the future have been 40% too low on average — even ignoring the 2008-2009 recession.

This financial house of cards was decades in the making, and it will take years to correct. Correcting the mess requires four ingredients: freer markets, sound money, restricted spending, and time.

When people are strapped for cash, they make tough choices. It’s time the government did too. We need a constitutional amendment restricting government spending to 20% of GDP or less.

As for the last ingredient, we have little time left. If our leaders do not address these matters quickly, the laws of mathematics will force a solution on us.

Just How Big is a Trillion?

On This Day In 2016

http://www.zerohedge.com/news/day-2016

Stop the Fiscal War Against Our Children Now: Laurence Kotlikoff

I've posited many times the US national debt exceeds $100 trillion, not the official $14.3 trillion figure constantly portrayed in the media.  Dr. Kotlikoff explains why the true number exceeds $200 trillion. 

http://www.bloomberg.com/news/2011-06-29/stop-the-fiscal-war-against-our-children-now-laurence-kotlikoff.html

US National Debt and Presidents

Click on image to enlarge.

Understanding the national debt (Sesame Street edition)

Click on Sesame Street's Elmo to enlarge.

http://www.zerohedge.com/article/guest-post-understanding-national-debt-sesame-street-edition

National debt is biggest threat to national security

http://www.executivegov.com/2010/08/mullen-national-debt-is-a-security-threat/

The national debt is the single biggest threat to national security, according to Adm. Mike Mullen, chairman of the Joint Chiefs of Staff. Tax payers will be paying around $600 billion in interest on the national debt by 2012, the chairman told students and local leaders in Detroit.

“That’s one year’s worth of defense budget,” he said, adding that the Pentagon needs to cut back on spending.

Debt panel

In the "speaking out of both sides of the mouth" category, Obama raised the national debt limit to $14.3 trillion, simultaneously proclaiming the creation of a debt panel to reduce budget deficits and debt levels.

http://www.reuters.com/article/idUSN0510452820100205

Deficit Reduction Commission

Obama is forming a "deficit reduction commission"--with the charter of trying to reduce our exploding federal budget deficit. We all know how this is going to end up.

Recall the formation of the Department of Energy (DOE) by the Carter Administration back in the 1970's, in the midst of the Arab oil embargoes. It was created to reduce America's dependence on foreign crude oil. More than thirty years later, imports from oil-producing countries has more than doubled percentage-wise--from both friendly and not-so-friendly exporters. The DOE has obviously failed, as America is more vulnerable than ever to geopolitical supply shocks. Yet, the DOE has now grown into a multi-billion dollar cost center. It is a penultimate example of bureaucratic largesse.

In the same breath, Congress is planning to boost the national debt limit another $1.9 trillion, after raising the limit on December 28 (see zerohedge blog) to barely keep our country above water. The irony is deafening.

http://www.zerohedge.com/article/democrats-seek-stunning-19-trillion-increase-debt-ceiling-143-trillion

US is broke

Are there anymore skeptical Polyanna's who don't believe the US government is on the brink of bankruptcy? Read this tidbit on the national debt and the ability to fund it.

http://www.zerohedge.com/article/us-avoids-technical-default-three-days

Warren Buffett on inflation

This author needs no introduction, and his concerns need no preamble.

http://www.nytimes.com/2009/08/19/opinion/19buffett.html?_r=2&adxnnl=1&ref=opinion&adxnnlx=1250679809-vkyiY4/BtTu6cDDesIMy4w

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

As much as I agree with Mr. Buffett on the abovementioned scenario, I do disagree with this statement:

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

Actually, studies have been performed on the thresholds of deficits and debts as precursors to inflation and currency crises. See my previous blog on this topic.

http://gregnguyen.blogspot.com/2009/10/tipping-point-for-hyperinflation.html

Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has studied all the major cases of hyperinflation since 1980. His conclusion: The tipping point occurs when a government’s deficit exceeds 40% of its expenditures.

Guess what? The U.S. will hit the 40% mark in 2009.

Mr. Buffett may be wrong on the existence of researched hyperinflation data, but he is in agreement that the US is in danger of entering a period of uncontrolled deficit spending and eventual banana republic-style inflation.

Bond Peddler Geithner

Last week, I anticipated Treasury Secretary Tim Geithner's bond-selling trip (or perhaps more appropriately, begging mission) to China. He will have the unenviable task of trying to convince Chinese leaders that they should continue to buy US Treasury bonds, even while he, Bernanke, Obama et al, continue to trash the dollar. My prediction: one lie begets another lie.

Mr. Geithner will reassure the Chinese leadership that US Treasuries are still safe, and that US leaders are committed to reducing our national debt and curtailing our deficits. Sounds good and well, but actions speak louder than words.

In turn, the Chinese will respectfully nod their heads in agreement, all the while stockpiling their reserves with hard assets like commodities, precious metals, energy, and base metals--in a diversification away from dollar-denominated assets.

Good luck, Tim--you're going to need it.

Foreshadowing

I watched a news segment last night on First Lady Mrs. Obama leading a group of kids in starting a garden on the White House compounds. The White House chef staff recommended they garden so they can grow their own vegetables.

It was a good Kodak moment, capturing a bunch of kids turning green and helping the First Family become nutritionally self-sufficient.

But the underlying message was crystal clear. Mr. Obama is not stupid. He knows these trillion dollar spending bills and bailouts, and pumping the economy with even more trillions can only lead to inflation. Food prices will soar within the next several years, if not sooner. More people will turn to gardening for emotional, environmental, and financial reasons. The Obamas are only giving us some subliminal propaganda. Grow your own food, because the prices you pay at the checkout register will be exorbitant.

President Obama and Congress know they are backed into a corner. In order to service our huge national debt, they have two options: inflate or die. They are choosing the inflation option. Families should be wise to protect their declining purchasing power.

Seminal Event today

The equities and bond markets celebrated today, as they rallied when the Federal Reserve Bank announced they were going to purchase over $500 billion of mortgaged-back bonds and $300 billion of 10- and 30-year US Treasury bonds. Bond prices spiked up, as yields plummeted, in tandem with equities leaping forward. Main Street celebrated also, as mortgage rates, tied to interest rates, dropped to 4%.

However, this is premature celebration, because this will negatively impact our economy and financial systems long-term. What? Has Greg gone crazy?

No, I am not crazy--I am a student of financial history. This so-called "quantitative easing", or "monetizing the debt", is fancy-speak for "creating dollars out of thin air". This is a desperate attempt by the Fed to artificially suppress interest rates to aid in the economic recovery. The short-term result is that we will have a mild recovery as credit is loosened and liquidity is injected into the economy. But just like the real estate bubble, this will be false prosperity, as it is debt-financed. In other words, it is what got us into trouble in the first place, and this Fed action only exacerbates the problem, and prolongs this recession.

It satiates the general population because it provides a floor for our 401K's and the value of our home prices, but it is an artificial floor, and will delay the bottoming out process.

But let's look at the other side of the ledger--our nation's liabilities. This increases our nation's debt by at least another trillion dollars. This will obviously dampen future gross domestic product growth. But the most insidious unintended consequence is hyperinflation. We will now have too many dollars chasing too few resources. The proof is that the price of gold shot up $50 in a matter of minutes within the Fed's announcement.

Our parents taught us that there is no free lunch, and that we had to work for everything we received. We will all learn this lesson going forward. You can't just create dollars out of thin air and not pay the price.

My prognosis? Expect markets to rally on the short-term news. But expect future economic growth to be choked off for years. Expect inflation to soar--think the 1970's decade, when we had stagflation--stagnant growth, high unemployment, an anemic economy made worse by high inflation (and decreased consumer purchasing power). Investors lost money in equities and bonds, as inflation soared as did interest rates. Savers, investors, and retirees living on a fixed income will get crushed by inflation. Perversely enough, debtors will be rewarded, and 30-year mortgage borrowers will benefit due to deflated dollars servicing that debt. Of course, the United States is the largest debtor nation in the world, so there is one silver lining with inflation. But sovereign funds holding US Treasuries in their reserves won't be too happy left holding the bag on a declining asset.

As much as I disagree with our government's fiscal and monetary policies, I have prepared for this day for several months. I am long gold, silver, oil, commodities, and will short 30-year Treasury bonds again. Equities will rally short-term, but will decline again. That's why I am only long one biotech company that I believe will explode later this month. Otherwise, I will avoid stocks until I see blood in the streets, which I expect sometime in the future. Long-term (2-5 years out), expect rising inflation, and a bull market in hard and soft commodities.

This will put the Fed in a pickle, as they will have to raise short-term interest rates to stifle inflation. But the political will to do so will be absent, as raising rates will inhibit economic growth before it can even have a chance to recover. My prediction is that they will have to let inflation soar to aid growth and reduce the burden of our huge national debt (inflation lessens that debt level because it is paid back in the future with deflated dollars). High interest rates make that debt harder to service. Inflation becomes the lesser of two evils at that point, as inflation becomes a hidden tax on unknowing consumers. Some of you wiser (i.e. older) folks probably remember gas lines and soaring inflation in the 70's. That is a best-case scenario for us today, unfortunately.

Eventually 30-year Treasury bonds will plummet in value in the biggest bubble, as long-term interest rates soar. The Fed influences short-term interest rates with policy, but the long-end of the curve cannot be manipulated long-term. Bond markets anticipate inflation--or lack thereof. If a bond investor anticipates higher inflation, he/she will demand a higher yield to offset that inflation. Higher yields mean a lower price for that bond. That is exactly what the Chinese sovereign funds are worried about, as they hold almost a $1 trillion of our IOU's.

The effects of Fed intervention like we saw today are temporary. The short-term effects of the Fed buying US Treasuries is stimulative, but long-term, it ironically achieves the exact opposite, stoking inflation and forcing those same interest rates higher.

One can profit from this populist, but wrong-headed move by the Fed, but I will not celebrate it. Our elected government officials have doomed our economy for several years, if not for a decade.

Our government really only has two options: Inflate, or die. Obviously, they have chosen to inflate. But this option has unintended consequences down the road. Be like the Boy Scouts. Be prepared.

This chart says it all...

This chart by Chris Martenson compares total debt (or “credit”) in the U.S. to GDP (or Gross Domestic Product) on a percentage basis. Current total credit-market debt stands at more than 340 percent of total GDP.

As we can see on this chart, the last time debts got even remotely close to current levels was back in the early 1930s, and that bears a bit of explanation. The debt-to-GDP ratio back then didn’t start to climb until after 1929 (blue arrow), because debts remained relatively fixed in size, while it was the GDP that fell away from under the debts. With the exception of the Great Depression anomaly, our country always held less than 200 percent of our GDP in debt (green circle). In 1985 we violated that barrier and have never looked back.