The Debt and the Republicans

I saw an announcement from the Obama Administration that the Federal Deficit for 2011 would be $1.7T. This morning I see big headlines about a momentous fight in the House over cutting $60B from the next budget. The article called it a massacre and suggested that it was the biggest cut in history! This is absolutely part of the big lie, from all concerned. The Republicans, and everyone else, know that $60B in one years budget is a rounding error. It is meaningless. The American public is being sold another big lie.

Also, historically in these things, these really aren’t cuts, but a reduction in the new spending levels. In other words, making up an example, if the spending on these areas last year was, say, $600B, and the new level is $700B, the actual level, after the great cuts by the Republicans, would be $640B, or still an increase of 6.67%. In typical fashion, the news article does not make it clear what has been “cut”.

What are we to make of BO’s announcement that the deficit will be $1.7? HA! As I noted in my recent post on the debt, last years deficit was announced as $1.7, but in fact the increased debt on the Treasury’s balance sheet was $3.3T. So, two things: First, it is unlikely that the deficit will only be $1/7T. The government will overspend and under collect. Employment will not improve as predicted and Social Security and Medicare will require more cash from the budget. Interest rates will also probably be higher than predicted. The deficit will be much wider than his public statement. Second, the “off the budget” obligations will further balloon the actual debt, which, after all, in reality, is what will soak up any real savings the public accumulates. In spite of all the posturing and back patting, the Republicans will have done nothing to keep us out of a depression. Who will tell them?

Treasury Grab of Retirment Assets: So Far

As far as I can find, there has been no public comment or action from the government regarding this issue since the hearings last September. The IRS, in its December annual statement about planned new regulations, etc., included annuities and pension plans in its list, without any indication as to what it has in mind.

The news reports about the combined Treasury and Labor Departments’ hearings last September do not mention any discussion regarding the fears that I and others have voiced. Our fears is that the Federal government will soon try to take some action that will force Americans to place our retirement savings in U.S. Treasury Bonds. The government need not take our savings, just control where we put it. Putting our savings into Treasuries will reduce our potential retirement income flow, remove more money from the productive economy, and further destroy our freedom of action. If, as I expect, interest rates on Treasuries begins to climb, the size of our investment portfolios will shrink.

There were two sets of themes in the testimony during the hearings. Those who are self-styled experts on retirement focused on what they perceive as the failure of American’s to properly prepare for retirement. They are concerned that people will not make good choices about their savings after retirement and that retirees will run out of money. They regard a guaranteed lifetime income option as vital. I doubt that these people were confronted with the question of forcing the poor, misguided Americans to place their savings in lifetime income vehicles. That is really the question. Somehow, the thinking seems to be, just having the option will be the solution. Later, the experts will discover that the option isn’t being used, at least sufficiently, and the experts will cry that further measures need to be taken to take care of us.

The other theme was the concern of industry representatives, almost entirely members of the insurance industry. Beginning in the mid-90s, critics of the insurance industry, including many regulators, have attacked the industry for putting annuities within pension plans and IRAs. In the critics’ view, pension plans and IRA’s provide tax deferral, which annuities also provide. The criticism was that there were cheaper investment vehicles than annuities to put into a 401(k) or Simple Plan. Critics, such as Susie Orman and the industry regulators, claimed that the only reason annuities were sold were much higher commissions and profits. These complaints ignored the actual commission rates of the majority of mainstream insurance companies (as well as other issues). These critics also tended to ignore features of annuities that weren’t provided by other investment vehicles, such as the lifetime-income feature and the insurance element.

The comments of the insurance representatives at the Treasury and Labor Departments’ hearings was that these criticisms had to be addressed. Their companies would not participate if they were exposing themselves to legal harassment, even if the harassment was ultimately baseless. I expect that the criticisms of annuities by regulators is the primary reason why annuities aren’t available in 401(k) plans now. It is also possible that the government will use the intent of private insurance companies to profit from their business as a justification for creating a government annuity, thus fulfilling the fear that all of this is just a ploy to force retirement plan money into funding the U.S. government.

I saw no mention of any consideration of what kind of annuity that should be offered, e.g., fixed (like a bank CD) or variable (which allows investments in stocks and bonds with in the annuity). If the intent is to put more money into Treasury Bonds, variable annuities would not be allowed. Nor did I see any mention of the interest rates that would be paid on a fixed annuity. With the Federal Reserve Board forcing interest rates to be very low for long periods of time, the income available to an annuity holder would be very small. For someone who lived a long time, an income resulting from a low interest rate would suffer financially, especially if there were any level of inflation, even 1%. Fixed annuities only make sense in a gold standard, where even a low rate of interest would provide a growing standard of living.

We are now left waiting for Treasury and the Labor Departments to take the next step, if any. It may be that the next step would be to propose a law for Congress to consider. It is another shoe that we are waiting to hear from.

Debt and Depression: Our Present and Future

In my last post I tried to be as clear as I could be regarding inflation in the U.S. To reprise: Inflation isn’t here now, even though some prices of important products in our economy are rising. We may get inflation, but don’t get excited about it until it happens (which doesn’t mean that we shouldn’t get excited and angry about actions taken by BO, the Treasury, the Congress, and the Fed that will lead to inflation).

My unhappiness with the inflation hawks is that their constant focus on inflation detracts from other issues. Inflation is not the only bad economic calamity that can afflict us. Right now the increasing level of debt being taken on by the Federal Government is a greater threat. As Yaron Brook has stated, the level of debt the U.S. Federal Government has taken on and will take on will likely result in an economic depression. The consequences will be no better than the results of the current recession or the 20C depression. Our economic and political leaders resist learning from experience. We will experience long-term suffering.

There are two recent bits of information that prompt me to write this post. First, I saw the news release that the Congressional Budget Office expects that Social Security, which is now running a deficit, will continue to do so. That is, Social Security will be a drain on the Federal Budget from now on. It was expected that Social Security would no longer produce a surplus for our Presidents and Congress to play with at some point but not for another few years. Because of the recession, and the very low levels of employment and consequently lower Social Security tax collections, deficits for that “entitlement” program began last year. Add to that the deficits in the Medicare system and you have reached the stage where the major entitlements are drawing on the general fund.

The other piece of information I learned was that the actual federal debt level is significantly higher than the figures that Washington bandies about. The figure they use is high enough, shamefully high, dangerously high. The reputed Treasury Debt, the amount authorized by law, which we will reach shortly, is $14.3T. When you add in bailouts, Fannie Mae, Freddie Mac, student loans and other “off-balance” sheet funding, it becomes $20.173T, which is 44.75% higher. Supposedly, the deficit for the last fiscal year was something like $1T, but when you look at the actual Treasury balance sheet, the obligations of the Treasury grew by $3.3T. In other words, our debt, which is threatening to put us into a severe depression, is growing faster than the politicians will admit. We look more like Greece than Germany.

Looking forward, we see that the spending programs that BO has pushed into law will continue to add piles of debt, that the growth of the numbers of Americans over 65 will require more and more spending (Medicare will be the biggest drain!), that the unfunded entitlement of retired federal workers pensions and medical benefits will add more demand on the federal budget, and there will be more disasters in the economy that the government will feel required to remedy by spending money it doesn’t have.

The damage that this debt exacts is two fold. First, it removes savings from the economy that could have gone to productive activities. We are being deprived of the possibility of improving our lives, or even maintaining our standard of living. When government officials admit that it could be years before employment reaches earlier levels, it is this drain on savings that is really the reason. Second, it will increase the amount of interest payments that the federal budget has to cover. Currently, and for the last few years, the Fed has done all it could to keep interest rates low, very low, often near zero. But the Fed is not omnipotent, although it seems to think that it is all knowing. As the U.S. Federal Government continues to need to sell more and more bonds to cover its obligations, the only way that it will be able to attract more savings will be to raise the interest rate it offers. Even the U.S. Government must compete for money on the market. Since the market is international, neither the Treasury nor the Fed can control the real interest rate that the market will demand. When interest rates go up, the drain and strain on the Federal Budget will be immense. The federal politicians and bureaucrats, who look no further than their own immediate whims and power, will be surprised, and will have no means of acting to counter (although some will want to push for higher levels of inflation, which will make things worse, of course). When interest rates go up, all of those who trusted the government and bought the Treasury Bonds that financed all of the spending, will see their beloved assets fall in (dollar) value. It will be a just reward.

Debt is the threat. Debt is the danger. And we are not focusing on it. We are allowing it to sneak up on us. Wake up and pay attention.

What to do? That is, what is the solution? First, what the politicians and bureaucrats propose isn’t a solution. We will be in worse shape with more laws, more regulations, more spending, and more made-up money by the Fed.

Many focus on the spending and suggest that we should stop spending on Social Security and Medicare, not to mention BO’s massive programs. While we will have to stop the spending, this battle is a very difficult one. Included in the resistance to this idea are all of those who are depending upon those programs. Part of the solution will have to be some way to avoid massive losses of older people.

I think that there are other things to do first. These steps aren’t easy either, in the political sense, but they don’t threaten to destroy people and the results will include the solution to our problems. What do we do? We free the economy. We get rid of regulations and government interference. We get rid of many government employees. I wrote about this before, so I won’t repeat myself. But the point is that with a productive economy, we can clean up the debt and find a way out of the obligations that the government has foolishly undertaken.

To achieve the goal of freeing up the economy to be productive we have to teach our fellow man the truth about capitalism, both its moral worth and its real success. That means we ourselves must know about it. Learn what capitalism is. Learn how it functions. Learn its history. Learn how the economy you live in works. We cannot teach what we do not know. I assume most of you have read and understood “Capitalism: The Unknown Ideal”. If you haven’t, read “The Capitalist Manifesto”. Read Hazlitt and Bastiat.  Read the great Austrian economists, von Mises and his predecessors.  Read “Meltdown” by Thomas Woods. Keep an eye on the debt, the money supply, and the prices you pay. Realize that there is no free market in the United States.  None.  Every market has elements of government controls and interference. Talk to your neighbor and the man in the street. Remind them that capitalism has been attacked and subverted for over a century in the U.S. Spread the word. Capitalism can save us. Only capitalism can save us. The others have tried and failed. Let’s return to our greatness.