Wednesday, December 26, 2012

Government Insiders: The True U.S. Debt Couldn't Be Paid Off Even If We Taxed All Income Over $66K by 100%

This post may be the most important post you read going into the new year, relative to how serious the U.S. government financial situation is.

Chris Cox is a former chairman of the House Republican Policy Committee and of the Securities and Exchange Commission. Bill Archer is a former chairman of the House Ways & Means Committee and is a senior policy adviser at PricewaterhouseCoopers LLP. In a recent op-ed at WSJ, they provide important insight into how big the U.S. debt problem really is.

They write:
[...]the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. How else could responsible officials claim that Medicare and Social Security have the resources they need to fulfill their commitments for years to come?

For years, the government has gotten by without having to produce the kind of financial statements that are required of most significant for-profit and nonprofit enterprises. The U.S. Treasury "balance sheet" does list liabilities such as Treasury debt issued to the public, federal employee pensions, and post-retirement health benefits. But it does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.

As a result, fiscal policy discussions generally focus on current-year budget deficits, the accumulated national debt, and the relationships between these two items and gross domestic product. We most often hear about the alarming $15.96 trillion national debt (more than 100% of GDP), and the 2012 budget deficit of $1.1 trillion (6.97% of GDP). As dangerous as those numbers are, they do not begin to tell the story of the federal government's true liabilities.[...]

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.[...]As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion[...]In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected.
They then go on to make a very important point I have been warning about for years:
In exchange for the payroll taxes that aren't paid out in benefits to current retirees in any given year, the trust funds got nonmarketable Treasury debt. Now, as the baby boomers' promised benefits swamp the payroll-tax collections from today's workers, the government has to swap the trust funds' nonmarketable securities for marketable Treasury debt. The Treasury will then have to sell not only this debt, but far more, in order to pay the benefits as they come due.
Will the government simply be able to raise taxes to cover the shortfall, as an alternative? Cox and Archer explain the math:
When the accrued expenses of the government's entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit. 
Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws. 

In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities.
In other words, the Treasury is going to have to borrow, but from whom? Cox and Archer explain this problem:
 When combined with funding the general cash deficits, these multitrillion-dollar Treasury operations will dominate the capital markets in the years ahead, particularly given China's de-emphasis of new investment in U.S. Treasurys in favor of increasing foreign direct investment, and Japan's and Europe's own sovereign-debt challenges.
Bottom line: Two things are going to happen. Social Security and Medicare payments are going to get cut way back. And the Federal Reserve is going to be a major, major buyer of Treasury debt, trillions annually. This will ultimately mean massive price inflation.

That is the math of the situation. Don't believe any politician's talk to the contrary or that of any government bought and paid for economist. There's no way this doesn't end up as a major financial crisis in a few years. There is no other way out. Get prepared now: gold, silver, nickels and guns.


  1. If the Treasury will be the buyer of last resort for years to come, and rates rise, what will happen with the debt service?

    Robert I said this to you over 3 years ago and you blew me off. I said that the Fed would keep rates low and continue to buy treasuries. Up and to the point that the Fed is the ONLY buyer. Other Central Banks will not want the paper and the debt service, exasperated by the deficits,will be funded through Fed printing.

    A snake eating its tail.

    Each time that you called for a rise in rates, starting back in early-mid 2009 (remember Mike in Alaska who posted often on falling interest rates?) I commented that rates would be kept low as the Fed would be needed to fund the deficits.

    Not saying you should make a call on a forward date for rates to rise, we all know that rates will rise some day. Predicting a date when there are so many factors is useless (your analogy of the kids playing around the house of cards with the open window was perfect!). I am just saying that this entire fiat system will collapse before rates rise. A complete world-wide reset of the current monetary system must happen because the debt/deficit problem is too large.

    Models and history don't apply here. No country has had their fiat currency as the world's reserve currency.


    1. Good point Craig. I do wish some of these Austrian economists would withhold any attempt predicting when this or that happens. We're in uncharted territory now and it would be impossible to pinpoint precisely when a rise in interest rates will occur before the collapse of the system, if at all.

  2. I would add the caveat that how much would the fed need to monetize to keep rates that low? It's hard to imagine the fed being able to do this to keep rates low indefinitely, countries would abandon the dollar, and it would collapse not necessarily taking the financial system with due to the fact other countries already trade outside the dollar.

    1. I stated that my belief is that the Fed will monetize all of it. And I also agreed with Wenzel that rates will not stay low indefinitely. Only until there is a reset of the entire financial system.

      I also stated that other countries would abandon the dollar. But do you believe that the US would go away quietly. The military presence already encompasses the globe.

      When the system resets everyone will be impacted. Some more than others.

      This is inevitable.


    2. Oh I agree it would hurt the world, & the empire wont go quietly, but long before the dollar finally kicks I think it's abandoned as the world reserve currency. Which I think will off set some of the impact on other countries like mine, Canada.