Deficits, Dollar, Dubiously Free Trade, Federal Reserve, Game Theory, Individual v. Collective, Live and Learn, Taxes, Treasury, Trust

The COMPLETE Fiscal Picture of the U.S.

Fiscal Flash is forgetting about net exports...

There’s a lot of talk out there about green shoots, economic recovery and stabilization. Most people aren’t predicting giant leaps in GDP anytime soon, but some are predicting modest global GDP growth between 2-4 percent in 2010. As Greece goes bankrupt and looks to its EU compatriots for help, remember they’re not the only nation on the belly up path. And from a United States perspective, here are the numbers you should be hearing on a daily basis, but aren’t. It isn’t just a matter of restoring economic growth and reducing unemployment. Surprise, surprise: debt, unfulfillable promises and easy money have consequences. Unfortunately, we have plenty of all three:

Current US Debt Ceiling: $14.3 trillion (1)

This figure is supposed to get US finances through 2010.

Current Unfunded Liabilities: Estimated $60 trillion

These are the promises of the federal government made through Social Security, Medicare and government pensions. There is much fanfare made of the legitimacy of unfunded liability estimates (some have surfaced at over $100 trillion), or even the concept of a liability being “unfunded” in general. One thing is for sure: people are paying into these systems, and they are unsustainable; barreling on a path toward bankruptcy.

David Walker, former Comptroller General of the United States and head of the U.S. Government Accountability Office (GAO), testified in November 2009:

Clearly, escalating federal deficits and debt levels, combined with our growing dependency on foreign lenders and the deepening federal financial hole represent challenges that must be addressed…A commission could make recommendations in connection with needed statutory budget controls, social insurance programs reform, tax reforms, additional health care reforms, and other appropriate areas… Its efforts should involve various citizen education and engagement efforts and result in a range of recommendations that will be guaranteed a vote in the Congress.

Importantly, everything must be on the table for any commission to be credible and to have a real chance of success. This includes acknowledging the need to modernize the current social insurance programs, constrain federal spending, including defense spending, and raise additional revenues.

In the final analysis, this special process should be designed to facilitate achieving a significant reduction in the over $60 trillion in federal liabilities and unfunded promises, and to create a climate and momentum to do more over time. This process could also enable achievement of the so-called “grand bargain” that President Obama has spoken of. (2)

The on- or off-balance sheet obligations of Fannie Mae and Freddie Mac: $5 trillion (3)

As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of the U.S.’s $12 trillion mortgage market. (4)

Budget for military expenditures for 2010: $685.1 billion, or $1.87 billion/day (5)

As of September 2009, China owned 23.35% of US Treasury Debt held by foreigners; Japan 21.13%. The two Asian countries are far and away the largest foreign holders of US debt. (6)

Obama’s recently released budget projections:

Fiscal 2011 budgeted deficit: $1.56 trillion
Fiscal 2012 budgeted deficit: $1.27 trillion
Fiscal 2013 budgeted deficit: $727 billion
Fiscal 2014 budgeted deficit: $706 billion
Fiscal 2015 budgeted deficit: $752 billion
Fiscal 2016 budgeted deficit: $778 billion
Fiscal 2017 budgeted deficit: $778 billion
Fiscal 2018 budgeted deficit: $785 billion
Fiscal 2019 budgeted deficit: $908 billion
Fiscal 2020 budgeted deficit: $1.003 trillion
(7)

Remember, these numbers are assuming economic recovery in the coming years, where tax revenues will begin increasing again. Somebody is going to get taxed to the hilt to cover the spending and, at some point, tax revenues decline as a result of increased tax rates. See the Laffer curve:

 

Art Laffer is a supply-side economist I don't always agree with, but this phenomenon is undeniable.

 

Reasonable minds can disagree as to where that tax rate figure lies in a given economic climate. President Obama better hope that employment is way up, incomes are rising and inflation is in check for these budget projections to hit the mark. However, the federal government is notorious for mis-calculating income and expenses.

As of the end of fiscal year 2009, every 1% increase in interest rates on federal debt will add an additional $147 billion to annual interest charges.

So what are the possible consequences of these staggering numbers? If the United States thinks it can continue to run three quarters of a trillion dollars, to a trillion dollar deficit for the next 10 years, on top of the obligations listed above, we may be in for a rude awakening. President Obama, his administration and the White House website preach fiscal responsibility as the cornerstone of their budget; but I just don’t see it. I understand they want to spend to prop up the economy, but fiscal responsibility? In a world of failing and floundering state and national governments, people are just trying to survive. Meanwhile, China’s GDP grew an astounding 8.7% in 2009. As previously mentioned, they are the principal holders of US Treasury debt. China has proven to be buyers when virtually everyone else in the world are sellers. The United States would be wise to stop spending, or we might wake up at the end of this ten-year budget forecast no longer the world economic power.

_________________________________________________________________

(1) Owe No! Debt Ceiling Soars as Dow Sinks – NewYorkPost.com, retrieved February 12th, 2010, http://www.nypost.com/p/news/national/owe_no_debt_ceiling_soars_as_dow_
eFxHhvG7ZwEJpCg1SpZdyM

(2) David Walker, Peter G. Peterson Foundation President & CEO, Testifies Before Senate Budget Committee on Need for Bipartisan Fiscal Commission – pgpf.org, retrieved February 12th, 2010, http://www.pgpf.org/newsroom/MainFeature/senate-budget-committee/

(3) Paulson readies the ‘bazooka’ – CNNMoney.com, retrieved February 12th, 2010, http://money.cnn.com/2008/09/06/news/economy/fannie_freddie_paulson.fortune/

(4) Loan-Agency Woes Swell From a Trickle to a Torrent – NewYorkTimes.com, retrieved February 15th, 2010, http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink

(5) Historical Tables – WhiteHouse.gov, retrieved February 12th, 2010, http://www.whitehouse.gov/omb/budget/Historicals/

(6) MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES – tres.gov, retrieved February 12th, 2010, http://www.treas.gov/tic/mfh.txt

(7) Budget Summary Tables – WhiteHouse.gov, retrieved February 12th, 2010, http://www.whitehouse.gov/omb/budget/fy2011/assets/tables.pdf

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7 thoughts on “The COMPLETE Fiscal Picture of the U.S.

  1. Jim Myrtle says:

    “As of September 2009, China owned 23.35% of US Treasury Debt; Japan 21.13%”

    Boy did you misread those stats.

    Debt held by the public is currently about $8.85 trillion.
    China holds less than 10%.
    If you look at total debt, $13.4 trillion, China holds less than 6.5%.

    Like

    • US Treasury Debt refers to US Treasury Securities, not total public debt.

      Here are the figures through June 2010 for major foreign holders of Treasury Securities:

      http://www.treas.gov/tic/mfh.txt

      The column for September has been updated since I wrote this article (the Treasury figures are estimates). China held $938.3 billion of US Treasuries in 9/09 out of a total $3,575.5 billion, or 26.2%.

      I edited the sentence in the article to make it more clear. However, the link above was cited.

      Like

  2. Jim Myrtle says:

    “US Treasury Debt refers to US Treasury Securities, not total public debt”

    US public debt is funded by selling US Treasury Securities, so the numbers will be the same.

    “I edited the sentence in the article to make it more clear”

    Thanks for the correction.

    Like

    • The sentence (and cited link) in question is talking about major foreign holders of Treasury Securities. So, no, adding those up will not equal total public debt, as not all Treasury Securities are held by foreigners. Adding all outstanding US Treasury Securities would equal US public debt. I made sure to highlight major foreign holders of Treasury Securities because we increasingly rely on these countries to finance our deficits. I find it noteworthy that we buy cheaper goods produced in Asia, send dollars to their central banks, and then turn around and borrow some of those dollars back to finance our budget deficits. Sort of an unsettling consumer/debt driven model.

      Like

  3. Jim Myrtle says:

    “The sentence (and cited link) in question is talking about major foreign holders of Treasury Securities”

    Yes, glad you realized the following sentence is wrong….

    “US Treasury Debt refers to US Treasury Securities, not total public debt”

    “So, no, adding those up will not equal total public debt”

    Right, adding up ALL Treasuries outstanding will give you debt held by the public.

    “I find it noteworthy that we buy cheaper goods produced in Asia, send dollars to their central banks”

    Technically, individual Americans are buying goods and sending dollars to foreign corporations.

    “and then turn around and borrow some of those dollars back to finance our budget deficits. Sort of an unsettling consumer/debt driven model”

    Yeah, our government borrows too much and spends way too much.

    Like

    • At the point in the article you had opposition, I was talking about major foreign holders of Treasury Securities. The sentence you say is wrong was from the comment thread explaining that US Treasury Debt referred to US Treasury Securities in the article, which was discussing major foreign holders of Treasury Securities (or debt), not total public debt. You inserted total public debt into your critique when the issue at hand was always major foreign holders of US Treasuries.

      For the record, that sentence wasn’t in the article and wasn’t what I edited to make it more clear.

      You’re right about dollars going to Asian corporations and not central banks when we buy their cheap goods; that was my late night mistake!

      Like

  4. Jim Myrtle says:

    “At the point in the article you had opposition, I was talking about major foreign holders of Treasury Securities”

    Inserting the word “foreign” into your post corrected your error.

    “US Treasury Debt refers to US Treasury Securities, not total public debt”

    US Treasury debt, the public debt and the amount of outstanding Treasury Securities are 3 ways of saying the exact same thing.

    Every time the Treasury sells $1 billion in bonds, the debt increases by $1 billion. The only way the debt increases is when the Treasury sells new Treasury Securities.

    Like

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