Wednesday, July 05, 2006

Best Case Scenario: 19 Year Financial Time Bomb


Figures released by the government, using as optimistic assumptions as one can reasonably imagine, project that government debt held by entities outside the United States Government will equal the entire Gross Domestic Product of this country in only 19 years. After that point is reached, the debt is projected to exponentially increase until it our national debt for the Federal Government alone is about three times our annual earnings.

The assumptions made to calculate the figures may be too optimistic becasue they assume that interest rates will remain at current levels- in fact those rates are just coming off 23 year lows and are likely to get higher as our debt/income ratio increases. They also assumed that government spending would be held to only the level of increase in the gross domestic product. In other words, government would not grow itself faster than earnings grow. Recent explosions in entitlement programs, such as the President's 400 billion a year in unfunded liabilities via the "Prescription Drug Program", guarantee that real government spending increases will be greater.

The figures also appear to exclued certain substantial debt that our government accountants also magically whisk away "off budget", as well as the "Social Security Trust Fund" that is really just a stack of IOU's held by the government backed by nothing but its ability to increase your tax burden.

11 Comments:

Anonymous Anonymous said...

You should check out the Charlie Rose interview with Miilton Friedman on google video (video.google.com). Dr Freidman discusses briefly and convincly why generic arguments on the impending economic failure are false.

The interview took place about 6 months ago, but is still timely. If you don't believe Uncle Milty then I don't know what to tell you.

8:15 PM, July 05, 2006  
Blogger Mark Moore (Moderator) said...

I might believe him, if I heard his arguments or you could explain them.

Other than that, I am not too much into the "argument from authority" position I.E. "Fed Smith is an expert with 10 PHD's so if Fred Smith says its good for children to be adopted by homos then it must be right."

9:19 PM, July 05, 2006  
Anonymous Anonymous said...

Do you know who Milton Friedman is? Go check out what he said:

http://video.google.com/videoplay?docid=-2963837673813979186&q=charlie+rose+friedman&time=45000

The content is a couple minutes into it, but the whole thing is worth watching. If you don't know who is then do a 5 minutes quick research.

PS: The argument from authority is only a fallacy when it is presented as absolutley true. It should be especially appropriate when it comes from a similar viewpoint as the audiance to pursuade and convince.

1:41 PM, July 06, 2006  
Anonymous Mark M said...

I know who he is. Under the influence of his Nobel Prize winning ideas, the dollar has lost 80% of it's purchasing power in my lifetime. I can still remember as a boy saying of the penny "at least it will buy a piece of bubble gum". I can remember when it went to two pennies. Now it is five. The dollar has lost 80% of its purchasing power in terms of bubble gum in my lifetime, and its loss of value is accelerating.

A dollar used to be valued by definition as purchasing 1/35th of an ounce of gold. That was in my lifetime or shortly before. It is now worth 1/625th of an ounce.

His first point is that it does not matter if we are letting foreigners buy more of us than we own of them because the assets produce roughly the same amount of income. In other words they may own 5 dollars of us for every two dollars of them that we own, but the income on both is 50 cents a year so we are even.

That just means they mostly own our Treasursy debt while we own their factories. They can sink the dollar anytime they want by selling those pieces of paper, and nationalize their factories to boot. Look at the chart again. Are they going to keep buying our paper indefinitely? RIGHT NOW central banks around the world are quietly unloading dollar-denominated assets.

Also I would wager that most of what "we" own of "them" is really owned by international companies which can be owned by foriegners even while technically an "American" company. Subtract that out, and also just look at the recent trend instead of the whole 30 year period when we used to still make stuff and I would suspect the picture is changining.

For the first 15 years we were buying them, for the last 15 they have been buying us, so we are "even". No, no we are not. The trend matters and it is not going our way.

8:02 PM, July 06, 2006  
Anonymous Mark Moore said...

O my. I can't believe it. He says there is no way forieners will ever dump our paper because it is "risk free". How in the world is someone who keeps borrowing more every year a "risk free" investment?

He then says the one thing that could cause this to happen is if the fed printed up too much money and brought on inflation. Man they are doing it already! It has been masked by outsourcing, but prices are inflating. The cost of everything that can't be outsourced to China is skyrocketing and soon even the outsourcing will not work.

The fact that the world has used dollars as a reserve currency has allowed us to print far more than we otherwise could get away with. When they get tired of that, and they are starting to in central banks and oil brouses, then the dollar will collapse- maybe not so much in terms of other inflated currencies, but in terms of commodities and real assets.

8:12 PM, July 06, 2006  
Anonymous Mark Moore said...

MF argues that a powerful rich prosperous Red China is good for us because we will have a better customer. Then he turns arounds and argues that their is a collision coming between their government and their economy.

He can't have it both ways. Why is it good for us to have a "better customer" that is going to go up in smoke just when we have re-geared our economy to service their needs?

Communist economies are not free market. We should not be inextricably ties to them, because when economic reality catches up to them they are going to go down. We should not be chained to them when that happends.

8:18 PM, July 06, 2006  
Anonymous Mark Moore said...

Still watching your video. He is a Chi-Com apologist. They can do no wrong in Mf's eyes. He says they have more economic freedom than India! It is a communist dictatorship!

He says Japan is going to go down because it is an aging country. Rose points out that China has had a "1 child " policy and Friedman hand waves it away.

Good grief! China is going to have a far worse Demographic collapse than Japan, it will just come a decade later.

8:25 PM, July 06, 2006  
Anonymous Mark Moore said...

He keeps saying that "the deficit does not matter, it is government spending."

Rose points out "but government spending is going up too". He still insists there is no problem even though the thing he just said to watch out for is happening!

8:29 PM, July 06, 2006  
Anonymous Mark Moore said...

"We never would have had the Great Depression without the Fed"- MF is right on with this.

But he seems to think they stated helping instead of hurting starting in 1982. I'd say that was an anomoly.

8:32 PM, July 06, 2006  
Anonymous Mark Moore said...

"Government spending was 10-12% of national income before WWII. It went up to 40% under Reagan and is still going up today" He said that, yet he still won't take off the rose colored glasses!

8:39 PM, July 06, 2006  
Anonymous Mark Moore said...

He does not like CAFTA! He says it is NOT FREE TRADE. That is right. It is just what our team has been saying.

He is right in theory, but why he can't apply his own theory to see our danger if we don't control government spending is strange.

He wants to legalize drugs? What is up with that?

8:44 PM, July 06, 2006  

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