Quick Link: Learning from History

David Walker, U.S. Comptroller General from 1998 to 2008, wrote an interesting piece called What the Past Tells Us:

Perhaps because we are a young country, Americans tend not to pay much attention to the lessons of history. Well, we should start, because those lessons are brutal. Power, even great power, if not well tended, erodes over time.

How many people today could describe the fall of the great empires of the past, I wonder. Are we truly any different?

I love to read history books for the lessons they offer. After all, as the homily goes, if you don’t learn from history, you may be doomed to repeat it. Great powers rise and fall. None has a covenant to perpetuate itself without cost. The millennium of the Roman Empire – which included five hundred years as a republic – came to an end in the fifth century after scores of years of gradual decay. We Americans often study that Roman endgame with trepidation. We ask, as Cullen Murphy put it in the title of his provocative 2007 book, are we Rome?

Think we'll last 500 years? I don't. At least not in any form our founding fathers would recognize.

Food for Thought: Total Debt to GDP Ratio

A previous post normalized government debt by GDP. If you add in private (consumer, corporate, etc) debt you get an even nastier picture:

Man, there is just nothing good you can say about a chart like that.

The fact that banks, foreign governments, and other "friendly" folks with savings are willing to continue to lend us more money when we're already in over our head should not be construed as evidence that we can actually handle the debt -- It only means that they feel we have sufficient (future) tax-levying power to pay interest on this debt (no principal, of course) for as long as it exists.

Plenty of homedebtors in the last 4-5 years found out that "qualifying" and getting a huge loan didn't mean they had the wherewithal to pay it back. They lost their downpayment and their house. What might we lose?

Quick Link: Government Deficits

RealClearMarkets - On Government Spending, America Has a Candor Gap

We have a massive candor gap, led by President Obama but also implicating most leaders of both parties. The annual budget necessarily involves a bewildering blizzard of numbers. But just a few figures capture the essence of our predicament.

First, from 2011 to 2020, the administration projects total federal spending of $45.8 trillion against taxes and receipts of $37.3 trillion. The $8.5 trillion deficit is almost a fifth of spending. In 2020, the gap is $1 trillion, again approaching a fifth: Spending is $5.7 trillion, taxes $4.7 trillion. All amounts assume a full economic recovery; all projections may be optimistic. The message: There's a huge mismatch between Americans' desire for low taxes and high government services.

That last line sums it up: We want lots of government but aren't willing to pay for it.

Second, almost $20 trillion of the $45.8 trillion of spending involves three programs -- Social Security, Medicare (health insurance for those 65 and over) and Medicaid (health insurance for the poor -- two-thirds goes to the elderly and disabled). The message: The budget is mainly a vehicle for transferring income to retirees from workers, who pay most taxes. As more baby boomers retire in the 2020s, deficits would grow.

Third, there is no way to close the massive deficits without big cuts in existing government programs or stupendous tax increases. Suppose we decided to cover all future deficits by raising taxes. Taxes would rise in the 2020s by roughly 50 percent from the average 1970-2009 tax burden.

Clearly unsustainable...

Food for Thought: Debt to GDP Ratio

Politicians are very good at spending other people's money. Heck, we're all good at that! Give me a Best Buy gift card for Christmas and I suddenly need something from Best Buy!

Despite what politicians think about deficits, they do actually matter. Or at least, they matter when they all get added up and turned into debt someone else needs to service or -- shudder -- pay back. Okay, yea, you can stop laughing over that last bit. It's been a loooong time since any of the federal debt actually got paid back (don't get me started on using SS trust fund surpluses to make the general fund deficits look smaller).

It can be dangerous to just look at debt levels without normalizing by something. Usually the federal debt is normalized (divided by) the U.S. Gross Domestic Product (GDP) yielding a chart of the debt something like this:

The optimist looks at this chart and says "See, it's been higher before, what are you so worried about?"

The pessimist notes a couple of things:

• GDP includes all goods and services produced or consumed in the country in a given year. Given that large deficits allow consumption way beyond the natural level, and we are consuming much more than we produce these days, it's not hard to get a little worried that normalizing debt with debt-driven consumption (rather than true production and income-producing activity) doesn't yield much happy factor.
• The previous peak was during a World War: Fighting for survival, all young men to the front, buy war bonds, that sort of thing. This peak (and it hasn't peaked yet, not by a long shot) is a year or two into a recession following an long period of peace and prosperity (fueled by debt, but prosperity nevertheless).

Color me pessimistic. I see the federal debt with nowhere to go but up. I ran in to this chart the other day. Seems pretty optimistic to take a clearly accelerating up trend in debt/GDP and suddenly flatten it for 8 years!

In a future post I'll talk about what countries do when their debt becomes impossible to service.

It's All Good! ... Right?

I hear that phrase, "It's All Good," from a lot of younger folks these days. I'm not sure where it comes from, but it occurs to me that its use -- and overuse -- might be a symptom of something unhealthy in our society and the way it admits and deals with problems. So, for a first real post on my newly-christened blog, I thought I would start to explore some of the reasons I cannot share in the confidence inherent in the phrase "It's All Good" when it comes to our economy, our freedoms, and our future.

I'm worried. Scared, even. From where I sit, knowing what I know and believing what I believe, I don't think things are "good" now, nor do I believe they are getting better.

Perhaps I've spent too much time read James Kunstler and his post-apocalyptic view of society in a decade or so if we don't face up to, address, and solve some really big basic problems (Peak Oil, poor city planning, etc). Perhaps I've read (and understand) too many posts by the folks at zero hedge railing on the lack of regulatory oversight and the incredible power Goldman Sachs (aka the vampire squids) have over our legislative and executive process. Perhaps I actually understand the role of incentives and moral hazard in causing people to act the way they do, and how continuing bailouts of firms who bet badly simply encourages them (and others) to make different, but equally bad, bets. (Heck, the folks involved get paid their bonuses based on the number and size of their bets without needing to wait to see how they work out! Good work if you can find it...) Whatever it is, I don't see it as All Good or Mostly Good or even Bad But Getting Better. I see it as Bad and Getting Worse.