Detroit

The sad fall of a once great city can blame no one but itself.  For the last several years, it has spent $100 million more per year than it brought in.  The city has a long term debt of $14 billion.  All the projects meant to reinvigorate the city instead left it further in debt without spurring the economy.  The city is now in bankruptcy (there is some dispute on that).  One lesson is that the city could not spend its way out of an economic downturn.  Perhaps this could be noted by other politicians.

Of greater note, Detroit is rated as the most liberal big city in the United States.  It's last Republican mayor left office in 1961, when the population was 1.6 million.  Today, 52 years of Democratic rule, the population is 710 thousand, crime is the worst in the nation, the economy has collapsed, 40% of the street lights don't work, the city can't afford to demolish condemned buildings, and it takes nearly an hour for the police to respond to a call vs. the 11 minute national average.  There should be another lesson in this: Democratic policies lead to bankruptcy and ruin.  We are on the same path as Detroit on a national level.  This is where it leads.

Credit Card Mathematics

Let's suppose I have a credit card.  I have a $10,000 limit on my credit card.  Now, I make a minimum payment each month, which is a small fraction of what I have charged.  However, month after month, the amount I am carrying on the credit card is rising until it finally hits my $10,000 limit.  Now, if I try to charge anything else on that card, it will be refused.  Have I defaulted on my credit card?  Have I defaulted on all my bills unless I can somehow convince the credit card company to raise my limit?  No, obviously not.  I just can't continue to spend beyond my means any longer.

That is the same situation of the Federal Government.  The credit card limit has been reached.  It doesn't mean the country is defaulting on its debts.  It can still pay the minimum payment but charging beyond income must be curtailed.  However, President Obama is demanding the credit card company (in this case, the Congress) raise the spending limit.  Regardless of any current bluster, the Congress will do exactly that in return for nothing.  But it should not be viewed as 'responsible' to raise the Debt Ceiling.

 

Let's go back to the credit card example.  Let us suppose that I have an income $24,675 a year.  I spend $35,405 a year.  My credit card balance is currently $165,000.  Moreover, I have promised to pay $1,222,670 to friends and neighbors who have given me money over the years to invest for their retirement.  Luckily, I just got a raise of $600 a year.  Am I in a good financial position?  Take those same numbers and multiply by 100 million and you have the current position of the government.  The $600 raise is the tax hike from the Fiscal Cliff, which should give some indication that overspending is the problem.

 

These numbers aren't secret.  Anyone who cares to know can look them up.  President Obama didn't just pass a massive new entitlement so he could turn around and slash spending to meet income.  He will push the debt for the next four years and let the next president clean up the mess.

Object Lesson

Greece has reached the limit of borrowing. The country allowed for very generous retirements, universal health care, all that any Greek could want. Everything was just great. Sure, the debt grew year in and year out, but that was fine. Debt can be financed. Well, the bill has come due. Now, austerity is the word of the day and the country is going to have to spend within its means. Who knew? It's so unfair.

Greece is our future. The US is currently more than $12 trillion in debt, roughly 90% of GDP. Social Security and Medicare are doomed as all Ponzi schemes are doomed. While debt-ridden Greece has been instructed to privatize its health care, the US has moved to socialize it. Oh, but we'll do it right so that it works. The economic infeasibility of our current course has been obvious for decades and yet none have dared to change path. The iceberg is clear as day and yet, with health insurance reform, we have accelerated to ramming speed.

Apre Moi, Le Deluge

“Addressing the country’s fiscal problems will require difficult choices, but postponing them will only make them more difficult." Ben Bernanke, Fed Chairman

Wow, that is amazing timing, Ben. Did this looming fiscal disaster only just occur in the last few days? No, this has been brewing for decades and this year Social Security pays out more than it collects. Last year's deficit broke a trillion dollars! The country has been on a glide path for fiscal disaster for a long, long time but now Ben suggests tough decisions need to be made. Where have you been for the last year, Ben, when the country was pondering a new entitlement that would exacerbate the problem? No, a month after President Obama signed the bill into law, Ben comes out and warns that the country can't spend like this. What, you only figured that out AFTER the bill passed?

If a private company practiced the fiscal shenanigans of our government, the CEO and board of directors would be sent to jail under existing laws. Social Security is a Ponzi scheme that dwarfs Bernie Madoff but no one is going to jail. And Medicare is worse! Interest payments on the debt will quadruple in the next decade. This should be news to no one, especially not the Federal Reserve Chairman.

It was easy for FDR, LBJ, Tip O'Neil, and others to kick the bankruptcy can down the road. They all knew the disaster - if one ever came - would occur long after they were dead. Like Louis XV, they could indifferently announce, "After me, the flood."

Social Security Flipping Point

When I was a senior in high school, I took a political science class. The instructor was Mr. Lindfors. One day, he called for a show of hands of those who thought there would be no Social Security when we retired. The result was a majority. Here, a bunch of 17 and 18 year-old kids knew in 1984/5 that Social Security was a Ponzi scheme which would rob us but never benefit us. And, unlike a Madoff-type Ponzi scheme, we were required to invest! Thanks to forced contributions, the system has been 'solvent' during the intervening 25 years.

During that time, the government has been able to get away with excessive spending by 'borrowing' from Social Security Revenues. Social Security has generated more tax revenue than it spent, which allowed the Feds to spend the excess while placing an IOU in the Al Gore's "Lockbox." This year, Social Security has generated less revenue than it spent. Now, instead of spending the excess, the Feds must start paying back those IOUs. The timing could hardly be worse. The government has just passed a new health care entitlement that needs funding and finds that the magic income stream from Social Security has reversed course. Hard budget decisions must be made soon. Those decisions have been exacerbated by the passage of Obamacare, a program that will make Social Security seem cheap by comparison.

Social Security has an unfunded liability of more than $14 trillion. Sadly, it is in third place among America's unfunded liabilities. George W. Bush's ill considered drug benefit is number 2 at $18.6 trillion. Medicare dwarfs them both, having an unfunded liability of $75 trillion. This is economy-crushing debt. It has been coming for decades. No one can be surprised. But as long as it seemed to be in the distant future, no one wanted to fix the problem. It has been a political third rail.

This is understandable. Those now benefiting from these programs had to pay for the previous generation to receive the benefits. "I paid for it, now it's my turn." I get that. However, I am currently paying for it and will never get it. I have viewed that money as gone the moment it left my pay check. Now that the time has come to ween the public from this unsustainable entitlement in order to save the Republic from bankruptcy, we have instead added a new entitlement.

Health Care Fiasco

I am amazed and distressed that the health care reform bill is now law. All the talk of it cutting the deficit is nonsense as anyone with any sense of history must know. Social Security and Medicare have both far exceeded their 'projected' costs but this time we should trust that the government has accurately estimated the future costs of this new entitlement. Fool me once, shame on you. Fool me twice, shame on me. This must be like the 45th fooling.

Let us ponder some of the 'great' things about this law. Insurance companies can't deny for pre-existing conditions. So, Bob shows up at Blue Shield and says he needs a heart transplant which will cost more than Bob will ever pay in premiums, even if he lives to 100, but Blue Shield can't deny him coverage. Well, that's not so bad. Surely, they have a cost limit? Nope, Blue Shield can't cut off coverage when a certain dollar figure it reached. Okay, well, that's only fair now that everyone is MANDATED to have coverage. The insurance companies will be rolling in cash thanks to that provision. Well, maybe not. Failure to buy insurance only incurs a $750 penalty, payable to the government, not the insurance company. So, unless the insurance companies are offering coverage for less than $750, many people - particularly the young and healthy - will opt to pay the fine. That means the sick will be draining the insurance coffers while the healthy are enriching the government through fines. Gee, where does that lead? Insurance is all about actuaries and the Feds have just made it illegal to make decisions based on the actuaries. This will not end well for insurance companies, which is the plan. When they start failing in a few years, government will have to save the day with a Public Option.

That aside, now was not the time to add another expensive entitlement to the federal budget. This year, Social Security is paying out more than it brings in. That is 6 to 8 years earlier than predicted. The debt stands at $12.7 trillion and is projected to add a trillion more a year for the next decade. Unfunded liabilities (Social Security, Medicare, and Prescription Drugs) stand at $108 trillion. Upon this already ruinous debt, Congress and the President have added a new entitlement. The numbers are dire:

http://www.usdebtclock.org/index.html

It doesn't take a genius to see economic catastrophe in these numbers. The spending will eventually stop. How it stops is the question: Bankruptcy or a return to fiscal responsibility?