The US Deficit In One Picture

[abelenkpe]

The US Deficit In One Picture

http://jessescrossroadscafe.blogspot.com/2011/08/us-deficit-in-one-picture.html

I like this graphic for several reasons, but especially because it puts everything in proportion with regard to the US' current obligations.

One thing I would like to highlight is the large surplus funds in the Social Security Trust and others. These were 'invested' in a special type of intra-governmental Treasury note.

These funds are not 'gone' anymore than a Treasury bond is 'gone.' It is a sovereign debt holding. If the US defaults on its debt, then it defaults. But let's call it what it is.

The Trust Funds are not the money that the government 'owes to itself.' It is a Trust fund, that is, money held by the government in Trust for others. The Trustees invested it in a special category of Treasury bonds that do not trade on the open market.

So to somehow suggest that Social Security is bankrupt now because the government spent the funds on general obligations is to assert a violation of Trust, a fraud, and a selective default on the sovereign US debt.

(more at link)

-----------------------------------------------------------------------------------------------------------------------------------------
check out link for lovely chart. Enjoy!

[customerserviceguy]

1. And how do we pay back Treasury bonds?

Generally, by issuing more of them. And the debt can just keeps getting kicked down the road.

However, ordinary Treasury bonds and notes are fully liquid (still). They can be sold on an open market, and if rates go up, their prices go down. The same cannot be said of the specialized securities in that SS trust fund. They're as illiquid as Monopoly money.

Now, I suppose that we can replace the SS trust fund securities with real T-notes and bills, but hold on to your hat when interest rates skyrocket as a result. The reason that the SS trust fund securities are illiquid is to make sure that they have zero effect on the interest rates the government pays. They simply are a fiat currency that will never be redeemed, sort of like the checks Ted Williams wrote when he would dine out with friends and family. Ted would NEVER sign autographs, so that restauranteur would sell the check for more than the face value of the amount written on the check.

I don't think Social Security trust fund specialized securities will ever become collectors' items.

[girl gone mad]

2. The good news is that we have a sovereign fiat currency.

Our government can always pay back its debt obligations, including those issued to SS.

I have no idea why you believe the SS bonds need to be replaced with T-notes or why you believe this would put pressure on interest rates.

[customerserviceguy]

3. Yes, we do have a fiat currency

And if the government printed up trillions of dollars of it, we'd be Zimbabwe.

Regular Treasury securities are convertible to real money, and with Social Security paying out more in benefits than FICA taxes take in as far as the eye can see, we're going to need some real money to keep paying benefits. Also, if the trillions in the trust fund were refinanced all at once with fully negotiable T-bills or notes, it would be an overwhelming presence in the financial markets. The few hundred billion that we up the national debt by every few months is something that the markets can absorb for now, but the mega amounts in the trust fund are not trivial.

[Toucano]

9. What is this "real money" you speak of?

Every dollar you've ever touched was someone's debt under this fractional reserve banking system.

I think your "real money" is just scratchings in a ledger book somewhere, or more likely, bits and bytes in a database somewhere.

It's just a symbol.

[customerserviceguy]

10. Well, the stuff in my paycheck looks somewhat real

and when I use it to pay my creditors, they think it's real, too. I can get gasoline, and groceries, and auto insurance, and medical care, and just about every other thing I need with it.

The non-negotiable securities held by the SS trust fund are equivalent to a mortgage for twice what the house securing it is worth. Yes, it's still nominally there, but if you hold that mortgage, you're wholly dependent on the good graces of the borrower/homeowner to pay it back over the term of the loan, and not walk away just because he's underwater.

The only way those specialized securities get paid off is if we run budget surpluses or borrow the money from someplace else to pay them as they are needed to finance Social Security benefits for a rising tide of baby boomers whose best earning years are probably behind them.

[Toucano]

12. You and your creditors are merely passing debt around.

It comes in your paycheck, but how did it get there?

You employer's income?

The only way money gets into this economic system is through a bank, and they don't hand it out until someone takes a loan and agrees to pay it back with interest.

The Fed creates money out of this air, representing nothing other than ledger markings. It doesn't represent productivity or land or anything 'real'.

Pay no attention to that man behind the curtain.

[customerserviceguy]

13. Well, my employer gets it from selling a utility

While I do see your point that the world economy looks like a house of cards built on debt, if that house falls, we're back in the economic era before a functioning economy could generate prosperity through the use of debt.

How many people would be able to buy houses and vehicles without debt financing? If the answer is way less than the number today, ask yourself what happens to the construction and manufacturing jobs that debt financing make possible.

[girl gone mad]

16. Where did that money come from in the first place?

[girl gone mad]

17. We're not Zimbabwe.

The government actually did print up trillions in order to bail out the banks.

Where is the hyperinflation?

[abelenkpe]

4. You are so wrong

that it's not even worth trying to converse.

[customerserviceguy]

8. Well, that absolves you from having to explain anything.

Perhaps you can pick apart my arguments, rather than just declaring yourself right and me wrong. Or, maybe you can't.

[Yo_Mama]

14. Right

Those who think we can just print money and escape the debt bomb are indulging in magical thinking of a unique category.

The Fed bought 600 billion of Treasuries in QE2, beginning last year. The result was a rapid escalation in CPI, with the YoY NSA for CPI-W hitting 4.3% in August.
http://www.bls.gov/news.release/cpi.toc.htm

One of the current proposals to deal with this is to adjust SS not by CPI-W but by C-CPI-U, which is currently 3.6% over the last year.
http://www.bls.gov/news.release/cpi.t07.htm

C-CPI-U assumes a higher income than CPI-W (it's based off the CPI-U index). Essentially, this plan is to deflate individual's SS checks over time by jacking up inflation and increasing the checks less than the real rate of inflation. It's a fancy way of defaulting on retirees.

There is no free fiscal lunch. If we print money in any way, the results will show up in a lower dollar and higher prices for commodities, which not only produce inflation but impact the lower-income households far more deeply. When the Fed inserts money into markets and shoves down long rates, just about the only place left for the money to go is into commodities and equities.

So the good news is that the Fed can fight deflation, but the bad news is that it can only do so by driving down the real incomes of most households, which in the long run is an acutely deflationary gambit. And the Fed is also forcing an increasing rate of savings for retirement, because it is shoving bond yields down so far. It is also forcing higher financial costs on the average consumer, because banks offer free or partially free services paid for by the difference in the rates they pay the consumer and the rates they get lending long. When long rates are so extremely low in an historical sense, the result is that the value of consumer deposits is very little and so fees to consumers must rise. Bank NIMs are going to plunge over the next year from the Fed's actions, and they were low already:


So all those that are arguing that you don't know what you are talking about are ignoring real-world experience. Just pretending that the market doesn't exist, or that the US lives in a bubble all of its own, and that only monetary effects exist leads to a model fascinatingly out of sync with the real world. The net effect of the Fed's two QE ventures has been to cut Real Personal Incomes:


Imposing austerity upon most US households is going to have the long term effect of cutting employment and real wages, because most US jobs are in services. If you go to this link, edit the above graph and look at the graph since 2000 you'll see that growth in real disposable personal incomes slowed and then leveled out by Q2 2011. But the change in real personal incomes is masked by the FICA cut - so in fact we are in even worse shape than that graph shows:


If you go to this link and edit that graph and look at the recent trajectory, you can see just how bad it really is:
http://research.stlouisfed.org/fred2/series/RPI?cid=110
The actual effect of the Fed's actions have been to drop real personal incomes in the US! Failing to fund our retirements is hardly a workable long term solution. But if we restore FICA taxes we are in a world of pain. This is all a short-term shell gain; the US Debt Held By The Public is skyrocketing - it's currently 10.126 trillion, and at the beginning of 2009 it was 6.369 trillion. By the end of this year we will have added about 4 trillion over three years, and our current plan is to add more than a trillion next year. We are very close to fiscal collapse. As soon as Europe resolves its problems in two or three years, the US will have its date with fiscal destiny.

Pension fund valuations are going to be clobbered next year, which is going to lead to another round of increased contributions next year.

[customerserviceguy]

15. Thanks

You seem to have a really good grip on the numbers. Would you agree with me that projections on when the trust fund will run dry are wildly optimistic?

[Yo_Mama]

18. It's too soon to tell

DI is projected to be wholly exhausted by 2018, so if money is moved from OAS to cover DI, then 2035-2036 seems realistic. That was in the Trustees special letter this year:
http://www.ssa.gov/oact/tr/2011/709letter_DI_Senate_2011.pdf

CBO estimated that DI would run out in 2017, not 2018.

A lot depends on the economy. And on wages. Given everything going on right now, I am not very optimistic that the time will extend beyond that and it could be shorter.

The trust funds, however, are meaningless at this point. At the rate we are adding debt, the trust funds will be worthless long before 2030. At this point, a lot of projections have our Debt Held By the Public/GDP ratios going over 100% by the early 2020s, and after that point we won't be able to borrow. And the only real asset in the trust funds is the legal authority to borrow money. After the European sovereign debt debacle, people are just not going to be buying US bonds when the ratios get around 100%.

That's one of the reason I have come to regard the President's jobs plan as so unrealistic. By borrowing so much more now, he is likely to end up forcing cuts in retirement benefits by 2020. He says he is paying it back through the general fund, but the general fund just credits the money to the OAS and DI funds. Since the trust funds are IOUs not floated on the open market, if Treasury cannot sell bonds at a reasonable price when the money is needed or the tax revenues are not there, then the trust funds have no value.

Federal retirement funds are invested the same way, so they have have a nasty shock coming as well.

As of today Debt Held By The Public is 10.126 trillion and Total Debt is at 14.8 trillion. If we were to go out and actively roll those special treasury notes out to the public, the Trustees could get their money. But the government would be almost at its borrowing limit - as of Q2 nominal GDP was only 15.012 trillion, and REAL GDP was 13.271 trillion. Thus, if you assume that the trust fund special treasury instruments are real, our government debt is 111% of GDP right now - very close to Italy's at about 119%. Italy's 10 year is currently yielding over 5.5%, so you can see that those debt loads are frightening investors.

In short, Mr. Market is not taking those "special Treasury instruments" seriously. Mr. Market will respond very differently if we actually try to float them on the market.

[PETRUS]

5. My version of "US Defecit in One Picture"

<img src="">

[Fire Walk With Me]

6. But...we NEED to fight never-ending wars against invisible enemies!

George Orwell said so! ;)

Cha-ching...See "Custer Battles" and "Halliburton $100 per bag of laundry"...

[sofa king]

7. Maybe we should ask the Indians how that guarantee worked out for them.

After fighting for twenty years to get the $100 billion the federal government held in trust for American Indians and tribes (which is what it would have been had the Bureau of Indian Affairs actually treated it as a trust fund instead of converting it to a Republican slush fund), they finally reached a settlement for around $3.4 billion.

Of course, the government is still appealing that decision, in the hopes that a few more Indians will die before they have to be paid.

You'll see.

[RegieRocker]

11. Picture