Figures in this article are from here (.pdf) and here (.pdf) :
It is well known that government tax revenues are crashing, and costs are skyrocketing. One of my ongoing concerns has been the U.S.'s proximity to crossing the budgetary "event horizon", the point of no return, beyond which we are committed irrevocably to some catastrophic financial event. In case you didn't just notice, in my opinion we haven't yet had a genuine catastrophic event. I believe that "can" has merely been kicked down the road.
Until now I haven't bothered to take a quick look at the proposed budget, but the absence of any other published analysis of that budget raises my brow a bit, so here goes: a quick analysis of the White House Occupant's proposed FY2010 Budget follows. I am especially interested in the condition where we are borrowing merely to maintain mandatory spending. Deficit levels have a huge impact on the world's perception of the future status of the USD as reserve currency.
As it turns out, depending on how you define "mandatory spending", we've already crossed the event horizon.
"Mandatory" spending is listed as consisting of: Social Security, Medicare, Medicaid, TARP, and "Other Mandatory Programs". Defense spending is listed separately, but I consider defense spending to be non-discretionary. Why? Because of the dollar's status as reserve currency. The moment the U.S. fails to maintain its status as global power, the world will abandon the USD. The power of the U.S. in world affairs is no longer based on our productive economy; we are NOT the economic powerhouse we once were. Further, there is absolutely no indication of any intent by the U.S. to decrease defense spending. This is one critical area where the deflationists' comparison of Japan to the US falls apart.
Assumptions contained in the White House's budget are outright laughable, beginning with the title of the budget itself: "A New Era of Responsibility." Net receipts from taxes are shown to fall by 1.7% for FY 2008, and fall by 14.5% for FY 2009, but then a miraculous recovery (Green Shoots!) happens for 2010 and tax revenues increase by 8.2%, then increase again in 2011 by 15.1%, then again in 2012 by 14.5%. No L-shaped recession here! Believing these numbers requires you to believe we can borrow our way to prosperity.
Year | Gross Receipts | Delta Receipts (%) |
2005 | 2154 |
|
2006 | 2407 | 11.7455896 |
2007 | 2568 | 6.688824263 |
2008 | 2524 | -1.713395639 |
2009 | 2157 | -14.54041204 |
2010 | 2333 | 8.15948076 |
2011 | 2685 | 15.0878697 |
2012 | 3075 | 14.52513966 |
Federal outlays have got some green shoots going on themselves; Federal spending ramps up dramatically in FY 2009 and then actually falls in 2010, then remains stable for 2011 and 2012. Health care "reform" is included in these numbers.
Year | Gross Outlays | Delta Outlays (%) |
2005 | 2472 |
|
2006 | 2655 | 7.402912621 |
2007 | 2729 | 2.787193974 |
2008 | 2983 | 9.307438622 |
2009 | 3998 | 34.02614817 |
2010 | 3591 | -10.18009005 |
2011 | 3615 | 0.66833751 |
2012 | 3633 | 0.497925311 |
These rosy assumptions are required in order to predict a falling deficit and get us back to our "new era of responsibility" that is certain to start just as soon as the next guy comes into office, or maybe sometime later, or probably never. Mostly, these rosy assumptions are a transparent attempt to save the Treasury market.
Forgive my crude chartology, but here are the numbers in graphical form:
It is easy for even a fool to see what this chart would look like if it were not for the rosy assumptions of the "new era of responsibility". Even a bond market genius, whose entire genius career took place during a 20 year-plus era of falling interest rates and who frequently pumps Treasuries, can see that we're screwed. The regime of falling interest rates is over, and the outlook for bond market geniuses is grim.
It is also easy to see that, as a nation, we are borrowing simply to maintain mandatory expenditures. We are borrowing to maintain our status as world power; in effect, we are begging the rest of the world for handouts so that we can maintain hegemony over it. I for one do not expect the world to continue to feed the dog that bites it.
Deflationists are fond of quoting Mises out of context in an attempt to convince us that deflation is coming and that we should buy Treasuries. They want to fix your attention on the obvious deflationary forces that are in play. Above I have shown that deflation cannot be allowed to persist, as we have already crossed the threshold where we are borrowing just to maintain mandatory expenditures. Inflation is the policy that central banks and the government must pursue.
The public must be made to continue to believe in deflation in order to save the Treasury market. It is absolutely essential to understand this: were the authorities to make clear their intentions, everyone would immediately place the appropriate bets and the outcome would be self-dependent. The authorities know they must maintain doubt as to their intentions. But the facts remain: there are two ways out of this crisis: 1) a magical increase in productivity that will enable sufficient surplus to be produced so that debts can be repaid; 2) the present value of the debt must be reduced somehow, either by default or inflating it away. Sovereign default causes a currency crisis. Inflation causes...inflation.
I'd like to present an extended Mises quote of my own:
This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.
But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.
Dear World: Please Stop Lending Us Money. I can't afford the payments. Congress is borrowing against the wishes of the American people, and we are growing increasingly tired of it. You will be lucky to be paid back at all.
Disclosure: The author is not a financial professional, so please do your own due diligence. The author is long precious metals and various other dollar short instruments, hedged by a substantial cash position.
