Tuesday, October 2, 2012

Deficit Rose In FY 2012

This quote, in Dr. John Hussman's weekly market commentary, seemed particularly apropos to this thread (emphasis mine):

"Here in the U.S., the federal government is running a deficit approaching 10% of GDP despite suppressed interest costs. If addressing that deficit was just a political issue of doing the “right thing,” what would that right thing be? With total federal revenues at $2.3 trillion last year, and spending at $3.7 trillion, the gap itself represents more than half of total revenues and more than a third of total spending. That gap will not be closed even if lawmakers were to agree to an immediate repeal of the Bush tax cuts in their entirety. Assuming that all of the desired revenue actually showed up, the bump to revenues would only be about $100 billion a year - reducing the deficit by less than one-tenth. In the event of a recession (which we believe is already in progress), the increase in government debt - merely as a passive cyclical response to economic weakness – would swamp that effect even if all the tax cuts were repealed. Likewise, even in the current budget, less than $1.3 trillion represents discretionary spending that is negotiated between the President and Congress. The other spending represents mandatory outlays for Social Security, Medicare, military retirement, and so forth. Well over half of discretionary spending represents military spending. To balance the budget with spending cuts, Congress would have to wipe out discretionary spending altogether, including military outlays. Observers who believe that the fiscal cliff is simply a matter of political disagreement have vastly underestimated the depth of the challenges here."

Let the magnitude of that sink in! Think, for example, of the implications of the fact that our deficit is now equal to more than HALF of all revenues. If the politicians were serious about closing our deficits, they would have to nearly DOUBLE the income tax not merely on the wealthy, but on EVERYONE -- overnight! Are you willing to double your tax payments in order to sustain this level of spending? The whole "tax the rich" mantra is nothing but a useless ruse to distract us from an approaching disaster! It wouldn't make enough dent in our deficit to significantly reduce our debt accumulation or to stave of an economic disaster! Unfortunately, even the election of someone with the experience and economic know-how of Mitt Romney may not be able to save us from a rapidly-approaching day of economic reckoning! Still, I'd rather see him in the White House than the charlatan and master of beguilement and legerdemain who is there now!

Another important point Hussman makes:
Imagine that, folks! In our current state of affairs, entitlements are considered by politicians to be mandatory outlays, while defense and our military are considered to be "discretionary spending". How truly twisted is that? How ironic that the only one that is authorized in our Constitution as required is the spending for national defense, but the only item the politicians consider to be "mandatory" is entitlements. If that isn't an indicator of how topsy turvy things are in Washington, I don't know what is!

The point, of course, of Dr. Hussman's discussion about the magnitude of our debt and our "deficit gap" is that we are on an unsustainable path even in the short-term! I want to puke every time I hear someone say, "we're leveraging the future of our children and grandchildren", because it creates the false impression that this "day of reckoning" is one that is still perhaps decades away. It's not! We are very likely facing a calamity that would rival those stories in the Old Testament within the next 4-year presidential cycle -- NOT during the lifetimes of the young and not-yet-born! If we think we can evade having to deal with this crisis by kicking the can for a decade or two with the attitude that "as long as I get mine, what do I care?", then we are soon going to experience a very rude awakening to that mindset of lethargy and complacency!

You can read all of Dr. Hussman's weekly commentary by clicking on this sentence. It's worth the time it takes to read it! I consider it a must read every Monday morning! He is one of the leading economic writers and theoreticians living today. He studied with some of the best! He now runs a series of mutual funds. He's no mere ivory tower academic! (Did you read that, "Dr." Bernanke?)

Dr. Hussman, by the way, has also commented in recent months about the magnitude of inflation headed our way if the Bernanke Fed doesn't unwind its debt monetization scheme. He uses mathematical formulas to compute the kind of inflation that will ensue if the Fed doesn't "undo" what it has done before the velocity of money spikes. He estimated BEFORE the recent "QE to infinity" announcement by the Fed (a couple of weeks ago) that an inflation rate of 30+% would result from the Fed's QE1, QE2, and Operation Twist. Imagine the consequences of inflation of that magnitude! And Bernanke has only doubled down since!

If Bernanke thought he could fight that kind of inflation by raising interest rates to a level necessary, he would bankrupt the US Treasury with the interest costs on all of our debt! When we hit this debt brick wall within the next couple of years, it will impact every living American in ways that are both unimaginable and incalculable. We had best prepare ourselves! This brick wall may very well usher in what, in our future, we might very well refer to as the GREATER Depression, putting it into perspective with what Mr. Bernanke considers to be his special realm of study, what we have all come to know as the earlier "Great" Depression of the 1930s and 1940s!