2010 March 27 Saturday
CBO Says Even Bigger 10 Year US Deficits
The Obama Administration and Congress strive to thumb their noses at the capital market. Only girly men try to be fiscally prudent. Manly men in charge of the US government throw caution to the wind - just like in Latin America.
In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president's budget would generate a combined $9.75 trillion in deficits over the next decade.
That $9.75 trillion on top of the debt the US government has already accumulated could put federal sovereign debt at about 90% of GDP - and that's assuming economic growth in a business-as-usual fashion. Throw in Peak Oil and the debt will hit well over 100% of GDP (likely 130-150% in my view). At that point the US will suffer a sovereign debt crisis. The US is on course to set a new yearly budget deficit record. Don't you like setting new records? Boldly going where no man has gone before. There's a frontier quality to America's fiscal trajectory.
Also, under the president's budget debt held by the public would grow from $7.5 trillion or 53 percent of GDP at the end of 2009 to $20.3 trillion, or 90 percent of GDP, at the end of 2020, about $5 trillion more than under the assumptions underlying the baseline.
But the debt will be $500 billion worse that even the CBO is saying because the CBO is required to make unrealistic assumptions about the fiscal effects of the health care bill.
That's only at the federal level. The recently passed ObamaCare health care bill sticks the states with new big entitlements requirements. These new burdens on state governments will inevitably force higher taxes at the state level and worsen the financial shape of state governments.
In California, policymakers estimate they will have to come up with an additional $500 million a year to make necessary increases in payments to Medicaid providers.
Across the country, state officials are wading through the minutiae of the health care overhaul to understand just how their governments will be affected. Even with much still to be digested, it is clear the law may be as much of a burden to some state budgets as it is a boon to uninsured consumers.
States with the largest uninsured populations, like Texas and California, might be considered by its backers the biggest winners to emerge from the law, because so many additional residents will have access to health insurance. But because those states are being required to significantly expand their Medicaid programs, they are precisely the ones that will face the biggest financial strains, in many cases magnified by existing budget shortfalls.
Lower tax states are able to be lower tax states in part because they hand out less free health care. But those states have just lost considerable leeway for deciding how much to spend on state-funded health care. Therefore the health bill just passed by Congress will make it harder for citizens to flee high tax states for low tax states.
"Only girly men try to be fiscally prudent." Does low testosterone positively correlate with caution, timidity, and fiscal prudence? Does high testosterone positively correlate with boldness, seductive power, and financial wildness? Does the girly man tend to worship God, while the macho man tends to worship Satan?
Couple of weeks ago I got a tour of NYNEX. (They put my name on the big board!)
My host was the principal of a firm trading options on oil futures. He knows the business backwards, forwards, and sideways. He has a seat on the exchange -- current cost I think around $4m (was too polite to ask).
Standing around with my host and a couple of seasoned traders, I asked about peak oil. They didn't get my meaning, thought I meant the price peaks that now & then happen. The phrase "peak oil" seemed not familiar to them. When I explained what I meant, they pooh-poohed it. "Never happen..."
For every peak-oil gloomster you can find guys like these. Does anyone actually have a clue?
The government deficit spending is needed for two reasons:
1) To compensate for the foreign trade deficit
2) To compensate for the fact that the lower classes (below average income groups) lose their money to the upper class (above average income group).
But for many decades, the annual trade deficit has been significantly higher than the annual government deficit spending, and so finally the government deficit spending had to overshoot in order to make up for the previous lack of compensation for the trade deficit.
Thus the minimum annual government deficit spending has to be at least as large as the foreign trade deficit, which is over $500 billion per year these days.
Whence the only way to stop the government deficit spending is to stop the foreign trade deficit.
Peak Oil is really easy to understand and expect: Peak Global Discovery was in 1964. It was not until 1981 that yearly Global Consumption surpassed yearly Global Discovery. At that point we had a huge backlog of discoveries to work off. We've been working off those discoveries for 30 years. Current global consumption is about 31 billion barrels per year . Average global discovery in recent years has been running 10 billion per year. The occasional discovery of a 6 or 8 billion barrel field in deep water isn't changing that much. Tupi, Jack 2, and similar finds aren't getting the discovery rate back up to the consumption rate.
I always want to say: Remember the boy who cried wolf? The wolf finally came. The boy who cried wolf in 1980 or thereabouts was ignorant of discovery and consumption rates. Somewhere between 2015 and 2020 is the right time to cry wolf.
Charley Maxwell (77 year old energy economist at Wedeen & Co) is predicting 2015. Henry Groppe (even older energy economist) says we are going to go thru recessionary cycles with repeated oil price peaks as the world economy keeps slamming up against permanent oil production constraints. I'm playing those cycles quite profitably I might add.
And it is even worse than just global peak oil production. Step thru these 4 facts:
1) Peak Oil.
2) Peak Exports happens before Peak Oil.
3) Exports will drop faster than production. Reason: demand is growing rapidly in Saudi, Iran, Venezuela and other big exporters. Cheap gasoline makes Hummers really popular in Caracas.
4) Asian demand is growing fast and their marginal value for each barrel is higher than ours. They are outcompeting us.
Jeffrey Brown and Samuel Foucher call items 3 and 4 the "Export Land Model".
Fifteen years ago the economy was booming and oil was $20 a barrel. Today the economy is coming out of the worst downturn since the Depression and oil is $80 a barrel. What do you think will happen to oil prices when the economy starts to actually add jobs?
"Today the economy is coming out of the worst downturn since the Depression..."
Which downturn since the Great Depression was worse? By which measure? Let me give you some measures to look at. A graph comparing recessions by percentage of lost jobs shows our current recession takes the prize among the post-WWII recessions. In US Senate testimony economist Mark Zandi says this really is the biggest downturn since the Great Depression:
This downturn will go into the record books as the longest, broadest and most severe since the Great Depression (see Table 1). The recession was twice the length of the average economic contraction, and it dragged down nearly every industry and region in the country. Its final toll in terms of increased unemployment and falling real GDP will be greater than that seen during any other recession on record.
I can plenty more where those links came from. Mercer is correct.
We need to adapt. Take a look at this article The Great Transition: http://www.scribd.com/doc/21656220/The-Great-Transition-Navigating-Social-Economic-Ecological-Change-in-Turbulent-Times
The problem is people cannot pay more in taxes than they earn.
Soon the debt service alone will be too great to pay for with the revenue collected.
Perhaps Hornady meant the idea that the economy was 'coming out of the downturn' was the hysterical part.
Yes, things are a little less worse than they were in November '08. And equities/commodities prices have gone up considerably since March '09. But none of the underlying reasons for the collapse have been removed - just hidden by a couple of trillion of extra government spending here and abroad.
Not only are we not out of the woods yet, there's a pretty good chance of a forest fire occurring while we're still wandering around lost.
Peak Oil has implications for the transportation sector only. We don't have a energy dense portable fuel that easily replaces Gasoline/Diesel. However, we can make a carbon bearing sythetic fuel similar to gasoline by using a Coal feedstock. (It is more expensive to make synthetic fuel than pumping oil out of the ground.) Human creativity is often discounted in Economic Projections. For example, Economists used to fret about supplies of Titanium, but now that Carbon Fiber has been invented, Titanium supply worries are diminished. Don't discount human creativity when parapunditing a future world.
Our biggest problem by FAR is our money system. It completely informs the parameters of our world, and our worldview. There is enough energy available in Geothermal, Nuclear, Coal, Photoelectric, Biomass etc. to keep mankind going for well into the future. We currently siphon off tremendous wealth to the rent seeking banker class and Government bureaucrats. That wealth could be better used by our average citizens (who are the real wealth producers) to structurally shift the economy to non oil sources of power. We have a temporary problem with the transportation sector(portable dense fuel), and we have a permanent problem with our money system. The money system hinders fixing other problems.
For example, all of our "debt" servicing is actually just paying interest. We never reduce the principle on our "loans" and hence we are perpetually in debt. Worse, the debt compounds over time, growing and growing. In this way, money wealth is siphoned off permanently as a structural condition - something like constantly paying rent but never owning. Soon we won't even be able to service the interest on our debt, as the debt continues to grow and becomes unmanageable. There are better money systems that we need to convert to, like Sovereign money, as invented by Benjamin Franklin. Economist Henry C.K. Liu calls it Chartalist money. Keeping our money with the real wealth producers, and better deploying it to serve our population's needs will solve a wide range of problems.
For example, if Women can afford to stay at home, then there are eyes on the streets. This means Kids can run around outside feeling safe. The dynamic of Society shifts, kids get less fat, and the population is less stressed out. A less stressed population has time for intellectual inquiry. The population can then also afford both the time and money to monitor our political, banking, and corporate class. If money is a stable source of value, then saving money is worthwhile, and that feeds a virtuous cycle of investment. If the average person has the ability to build wealth, they can deploy it in the capital markets, and prosper as the country grows. High savings can fund entrepreneurs with low interest long term money. Entrepreneurship will solve our energy woes, but entrepreneurship is served best when our money system isn't gamed with rent seeking usury like it is now. Rent seekers are parasites feeding off the productive, but in our bent over myopia we don't perceive their presence.
It serves the interests of the parasitical monied and government elite for all Americans to be doubled over in debt, and working as hard as possible. It serves their interests for us to be as ignorant as possible, especially of their machinations. All problems start with our money system.
The high tech revolution has revved up the industrial revolution. We are producing wealth faster than ever, yet we are getting poorer?