Admittedly, this is a bit delayed. These numbers have been out for over a month, and I am just now getting around to digesting them. I will get into the numbers in a second, but first I want to discuss a general theme that needs to be taken into account when looking at FY 2009’s data. The most obvious number that has a certain sore thumb quality, when comparing this year’s interest costs to last year’s, is the total amount of interest payments. The total payouts to treasury security holders are lower this year. This is amazing given that over a trillion dollars ($1,000,000,000,000) was added to the overall debt in the last fiscal year. However amazing, it is easily explained given the underlying economic circumstances. Following the collapse of late 2008, investors were so scared of risk that they flooded the federal bond market auctions with capital, driving up demand for government debt and thereby simultaneously driving down the yield to bondholders or interest cost to the taxpayers depending on how you look at it. This was definitely a good thing for average American citizens that do not have large sums of money invested in treasuries. Unfortunately it was not a permanent condition – it only temporarily took pressure off of the Federal government since they were paying next to nothing in interest costs on short term debt. A year after the collapse interest rates on federal debt are climbing again. Whether it be next year or two or three more down the road, interest costs on an annual basis will continue the approach to $1 trillion/year.

So since it wasn’t as bad as FY 2008, how bad was it?

The government paid $383 billion (.pdf) in interest during FY 2009. That is the 4th highest, behind the preceding 3 fiscal years, amount paid in interest in the history of the country. The interest payments, which are hardly ever discussed, were more than the total amount spent to date on the war and occupation in Afghanistan and more than 40% of the cost of the war an occupation in Iraq (source). If you have read my earlier posts on the national debt, you will know that the $383 billion figure isn’t a pure dollar figure. In the pdf linked above you will find two sections of debt, public issues and government accounts. Interest on public issues was $186 billion. That is the money that the government paid last year to rich people for doing absolutely nothing. The remaining $212 billion is “interest” on the money the government stole from working people via FICA taxes. I say “interest” because the money the government stole from the working people (perhaps Alan Greenspan’s most disgusting accomplishment) is gone and can only be “paid back” to them by taking more of their money through more taxes. So the “interest” is just a huge chunk we are promising to pay ourselves back at some point in the future supposedly.

So I am guessing that is about as clear as mud, but hopefully not. If you want to get a better understanding of this, look through my “little book on the big debt” posts for a more extensive explanation.

debt drinks,

mike

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In 1981, President Reagan established a commission to review the fiscal soundness of social security. The chairman of the commission was Alan Greenspan, who went on to head the Federal Reserve and lay the groundwork for the policies that wrecked the domestic economy. Not surprisingly, the commission determined “that there is a financing problem for… the short run, 1983-89″ (as measured using pessimistic economic assumptions) source. Ostensibly to solve the financing problem they encountered, the commission recommended increasing the Federal Insurance Contribution Act (FICA) tax rates to end the forecasted shortfalls and create a surplus trust fund to help defray future shortfalls in the Social Security program.

Translation – The commission told the government to raise Social Security taxes to protect against the potential short-term financing problem, and to create a trust fund for the revenue that was not immediately paid out in benefits. The trust fund would consist of treasury bills issued by the Treasury Department so that the excess revenues of the tax hike could be used to cover part of the annual budget deficit. This trust fund today holds approximately $2.3 trillion at the end of FY 2009 (monthly reports can be found here). Of that $2.3 trillion, it is unclear exactly how much of that is money that was collected from FICA tax and how much is accumulated interest on the principal. As an example of this, in fiscal year 2009, the trust fund made about $100 billion in interest from the Federal Government while surplus FICA taxes were over $141.9 billion.

On its surface this seems like a good idea. Put some money away for a rainy day sometime down the road to assure old people don’t spend their golden years eating dog food in a cardboard box. But, this isn’t a savings plan at all. It more accurately represents the money that the federal government stole from you and your employer under the guise of stabilizing the Social Security system.

If that seems like a strong statement, good. When looking at the aftermath of the Greenspan Commission’s recommendations, you have to put their recommendations into the proper context. In 1981, when the commission was conceived, Reagan had just become president and wanted to lower the Income tax rate for America’s highest wage earners. There were also reports of a funding shortage in the social security fund which needed to be addressed. He knew that in order to accomplish his desired tax cuts for the rich, since he was supposed to be a fiscal conservative, he would have to make up for the tax cut somehow. He also had huge spending plans that he needed to fund and spending on other programs couldn’t really be cut to the necessary extent. To prevent an increase in the public debt that would draw the ire of many of his supporters, Reagan followed the recommendation for the creation of a trust fund along with Congress. And for the rest of the 80’s and 90’s they cleaned up. Deficits grew which increased the overall debt, but more and more of the debt was being covered by the surpluses in FICA taxes (a similar scam is underway with the Medicare payroll tax as well) so the publicly-held debt didn’t grow as quickly.

I know, I am jumping to a huge conclusion about the people that crafted this policy but there are only two possible scenarios; this is more or less how Reagan, Greenspan and Co. planned it or, they are total idiots. I do not agree with much about the politicians and economists involved in this scheme, but I don’t think they are stupid. It seems obvious to me that the plan from the Greenspan commission accomplished two goals in one fell swoop, they shifted a big tax burden from the rich to wage earners while simultaneously hamstringing a major progressive policy for the future (in case you don’t realize it, the right wing hates Social Security).

Now if you go out in search of material to debunk my little theory, you may run across the old doosy that right wingers love to throw out – lowering top bracket tax rates actually increases tax revenue. Suuuuure. They will point to periods in history that followed rate cuts when revenue from the rich actually went up and assume (with purposeful ignorance) that the tax rates were the only thing holding rich people back from going out there and making more money. While it is true that high taxes are a disincentive, the main times that rich people make money is when the economy is growing. And in case you didn’t know, government policy (particularly under Republican leadership) has only as small role in the overall health of the economy.

Let me get back to that figure I mentioned earlier $2.3 trillion. That is how much money the government now owes itself. It is a real debt in that the government does pay interest on the debt, as I mentioned earlier, the interest cost for fiscal year 2009 was about $100 billion and that money does come out of the general budget. It is not a real debt though because the interest payments on the treasury notes are made with more treasury notes, which don’t hold a real value on the open market, unlike the cash payments made on interest held by the public.

That $2.3 trillion in the Social Security trust fund account for more than half of the total $4.3 trillion in government held debt. The remainder of the $4.3 trillion includes Medicare, Railroad retirement and the environmental superfund, to name a few. You can find reports on all of the individual intragovernmental holdings here.

In the future, I expect the true intent of the Greenspan Commission’s recommendations to be accepted as I have outlined them above. The government simply cannot maintain the huge burden of this debt over the long haul.

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That is how life would be if you were the US government. Almost every year since the turn of the 20th century, the US government has spent more money than it has earned. There are a number of reasons for this, but the most basic is a politician can easily justify spending money on different programs that s/he feels will benefit his/her image with the voters. On the other hand, it is very difficult to convince voters that they should pay more taxes to pay off debt accrued in the past. Keep in mind that the main task for an elected official is to win the next election or position your party to succeed you upon retirement – all other tasks are secondary. I will get into a possible rationale for this mentality later, but for now I will stick to the debt.

So, every year the level of government borrowing increases. Which means every year the government has to go out into the market and find investors for their treasury securities (bonds and T-Bills) for most of the money it needs to borrow. The rest of the money is “borrowed” from the welfare trust funds, mainly Social Security and Medicare – I will talk more about this later as well. Since the government has to pay interest on growing sums of money each year, like any other borrower, a certain portion of each annual budget is directed at paying money to owners of the debt. When interest rates to borrow money are low like they have been thus far in 2009, this is a fairly cheap way to run a government in the short term. Since easy money is readily available for politicians to borrow, they can keep taxes low and spending high. But if – and I would say when – the interest rates go up, paying the interest on the debt will become increasingly expensive. An analogy here would be the teaser rate offered by a credit card or mortgage company to sucker you in to borrowing and spending. At first it is easy to keep up with the interest payments and still increase your spending, but once the rate spikes upward, you are saddled with a debt you can’t repay.

In the media, when this issue is discussed, it seems that many talking heads have a hard time explaining something this simple. I won’t get conspiratorial on you and say that they are intentionally obfuscating, so we will just assume that they are fucking idiots. So, these overpaid-underinformed idiots talk about two words (sometimes interchangeably) when they talk about fiscal imbalance; deficit and debt.

A deficit is the amount the government must borrow every year in order to pay for all of its spending programs after all tax money has been exhausted. I am sorry if you feel like a third grader when I am writing this, but if you get your news from the mainstream media (or if you are in the mainstream media) I feel like the definition of terms is necessary. It isn’t your fault, you are probably not stupid. You are just being informed about issues by fucking idiots.

Where was I? Oh yeah, debt. The debt is the total amount that the US government owes investors for all of the deficits it has ever run. You may remember the famous debt clock located near Time Square in NYC that is occasionally mentioned in the media.

If the numbers in the picture at the top seem really big to you don’t worry, they are terribly outdated and much larger than that now. As of 7/20/2009 the US government owes $11.35 trillion ($11,350,000,000,000). It is estimated that the interest cost on the debt for 2009 will be around $500 billion. That means that the government will either need to tax or borrow $500 billion more than it otherwise would just to stay current with its creditors. To add some perspective on that number, that is more than the US government spends on the wars in Afghanistan and Iraq ($136 billion) and federal health care programs ($353 billion) combined!

There are many economists and government bureaucrats that will say that although this debt is large, it isn’t too big in relation to the US economy’s gross domestic product (GDP) – the sum total of all economic activity in the country. Left leaning economists will justify budget deficits during tough economic times because government spending can spur economic growth. What they do not mention is the other side of this Keynsian argument, once the economy recovers the government should cut spending and raise taxes to pay back the debt.

Before I go on further, I would like to mention that the debt or deficit spending is not a problem of democrats or republicans. Both parties are good at two things, blaming the other party for deficit spending and voting for huge spending increases whenever it is beneficial to their political aspirations. It seems to particularly be the case when one party controls both the executive and legislative branches (as the democrats do now and the republicans did for a good chunk of time under Bush). Conversely, while Clinton was president and the republicans ran congress (most of the time), the total debt increased by only (ha ha ha) around $1 trillion in 8 years. In Bush’s 8 years the debt increased by about $5 trillion and in the first few months of Obama’s presidency the debt has increased more than $1 trillion. I had mentioned in an earlier post just in passing that it took Bush 8 years to double the debt and I think that Obama may be able to do it in 4. The way he is going he may be able to do even more than double it in his first term.

Perhaps the most interesting thing about the debt, and about deficit spending, is that it is seldom discussed in a manner that clearly explains the issue by politicians. I am not sure why this is, partially because they are successful politicians and are therefore adept at manipulating information to their benefit – while avoiding subjects that don’t have much of an upside. I can’t imagine how a politician could explain to a constituency that the government dumps hundreds billions of dollars every year with no return and no end in sight in a way that would be useful to said politician in any way. Maybe we should start calling the interest payments bailouts and that will get people’s attention. I don’t know how people will pay attention to it, but it is certainly the most effective fleecing of the government. It is also not very sexy as far as the people running the news cycle are concerned.

Hopefully more people like me that are writing about this will get people to pay attention.

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I had thought there would be a rebound rally in the first half of the year, but now I doubt it. I think that the real economic news is just going to be too bad and equities will probably stay anchored to something like their current levels through the first half of the year. Maybe 2009 will turn out to be a total non-event for investment indicators. I still think we are screwed, but it seems like the transparency of the screwing we are going to take this year won’t be so clear.

I tried to post the following text as a reply to “Who’s going to pay the national debt?”, but the site wouldn’t let me comment yet. It is a good post that does a decent job of explaining the national debt from a republican perspective:

The original post points the finger at democrats when republicans are just as bad about deficit spending (last 8 years are an excellent example).

I also don’t necessarily believe that the trust funds are worthless yet. If the economy can recover, I think the most likely scenario will be that they sell public bonds to replace the GAS holdings in the trust funds as payroll receipts come due. What I wish they would do is stop paying interest on the the trust funds. Last year $212 billion was “spent” on interest payments on GAS. That is stupid (and yet another Greenspan creation).

A lot of this problem can be traced back to the Greenspan commission in the early 80’s. Their trick was to raise the payroll taxes to unnecessarily high levels in order to cut other taxes without increasing the public debt. It was a bookkeeping loophole that screwed working people some and small businesses a ton (because if you are independent, you have to pay both shares on your income).

My guess is a lot of this isn’t going to matter anyway. The Obama Administration will continue the Bush Administration policies (run huge deficits, continue to dump money into zombie companies) and crash the dollar in the process in order to paper over 20+ years of Greenspan debacles. On the other side, the debt will irrelevant because our economy will be in shambles.

O receives 2 week notice to change

Since I am currently unemployed and dependent on my girlfriend who has 1 week of seniority, I hope this is wrong. However, it is deeply disconcerting to think about things this way. Ilargi has my daily attention.

Mexican Oil output at 60 year low

You may be thinking, “thank goodness I’m not Mexican” but this will have a huge impact on the US too. If production continues to decline (and the price collapse won’t help inject funds) Mexico’s problems will become America’s problems as well since we share a porous border, they send us a lot of oil and the legitimacy of their government is underwritten by their national oil company. To paraphrase KRS-One, Mexico, now your FUCKED.

US financial losses may reach $3.6 trillion

Once the numbers get that big, there is no keeping the system going. Because the numbers are that big, the system is going to change dramatically. Of course, Washington will be there to protect the interests of the vested elite. O or W, doesn’t matter. Meet the new boss, same as the old…

Living Lightly

First, let me say that I could care less about my carbon footprint. I care about two things when it comes to stuff like this.

1. Where do my energy and water come from?

2. How much do they cost?

On this basis alone, I think things like composting toilets, air-drying your clothes and increasing your energy efficiency make sense. Plus, it is weird and fun, so that makes it good too.

Escape from Suburbia

The title is certainly catchy, but I will have to wait until I see it before giving it a thumbs up or down. It is on Netflix for streaming though, so I will watch it soon!

Secessionism and peak oil

We live in an age that encompasses a colossal contradiction. On the one hand, there is the corporatist and technocratic thrust for globalization and a professed New World Order. On the other hand, there is the interrelated dynamic of empire collapse. Both tendencies stem from a diminishing supply of and access to cheap energy resources as evidenced by the imminent arrival of Peak Oil.

Peak oil activist and the coming culture change

The unpleasant truth of US society’s waste and excess has been widely known since the 1960s, when the “Sixties Movement” meant lifestyle change more than mere politicking. Awareness of stifling consumerism and materialism spurred a rejection of “plastic society” as articulated by popular avant-garde artists. This era of awareness peaked around 1970. Energy and environment were not hot topics compared to the US war on the Indochinese. But some of us made note of the fact that the bombers and naval ships were all running on lots of oil. This was not considered a “news” item, when other issues and passions raged.

Forget Peak Oil

The logic of the person interviewed goes that peak oil doesn’t matter because OECD (rich, mostly white countries) demand has probably peaked and global warming regulations will further decrease demand. Then, the reporter interviews an oil exec that says OECD demand doesn’t matter because the Global South was leading the spike in demand prior to the credit collapse. This leads me to the question, what the fuck is the first guy talking about?

The solution to our financial crisis

This post (complete with 3.5 hour video) talks about the idea of abolishing the Fed and issuing debt free notes (new paper currency) to pay off the national debt. I have not watched the video, and I have never heard of the idea but it seems interesting…

A pork Orchard

“For more than 40 years now, Sepp Holzer, the agricultural rebel has been transforming his family farm in the Lungau district in the Austrian Alps into an eco-paradise of fishing ponds, ten thousands of fruit trees, shrubs, vines and highly productive vegetables and herbs. Here, at an altitude of 1500 meters (~5000 feet) in the “Siberia of Austria”, he has created a self-sustaining landscape in which he produces many varieties of the best quality fish, fruits, nuts, vegetables, mushrooms, pork, poultry and even citrus without irrigation, fertilizers, pesticides or weeding.

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Here is John Micheal Greer interviewed last year by peak moment that I thought was interesting:

American taxes and labor are too expensive to build anything

This is ridiculous. If you give business assholes an opportunity to whine, they will seize on it. I don’t think there should be any corporate taxes at all, so I agree with that part of it. But I am sure you can find plenty of qualified people to build whatever you want them to build if you treat them half way decent and pay them enough to survive.

Hedge fund insiders turn into doomers

At least one insider getting ready for impending doom:

During the final months of 2008, as the financial markets imploded, talk on trading desks turned to food and water stockpiles, generators, guns, and high-speed inflatable boats. “The system really was about six hours from failing,” says Gene Lange, a manager at a midtown hedge fund, referring to the week in September when Lehman went bust and AIG had to be bailed out. “When you think about how close we were to the precipice, I don’t think it necessarily makes a guy crazy to prepare for the potential worst-case scenario.”

Preparations, in Lange’s case, include a storeroom in his basement in New Jersey stacked high with enough food, water, diapers, and other necessities to last his family six months; a biometric safe to hold his guns; and a 1985 ex-military Chevy K5 Blazer that runs on diesel and is currently being retrofitted for off-road travel. He has also entertained the idea of putting an inflatable speedboat in a storage unit on the West Side, so he could get off the island quickly, and is currently considering purchasing a remote farm where he could hunker down. “If there’s a financial-system breakdown, it could take a year to reset the system, and in that time, what’s going to happen?” asks Lange. If New York turns into a scene out of I Am Legend, he wants to be ready.

We’re Screwed, figure out how you can survive

Mexico and Pakistan are in danger

This is a 25 year forecast, I don’t think you need to go that far out for Mexico to deteriorate. Pakistan is going to be worth watching…

$200 Oil

The idea here, which I agree with is once demand comes around the price will spike again once the gluts get eaten through.

US to default on debt

A somewhat simple forum post, but kind of cool that there are people out there thinking like this.

Now what?

That’s what. Actually I say make friends with people that know something valuable, or hire them if you are rich. Otherwise try to keep possibilities open, don’t spend too much time, energy, money over-specializing in something that is frivolous.

Big 3 will need help to go electric

Never mind that the vast majority of Americans are not interested in electric cars, Detroit needs money to build them. I hope gas hits 79 cents in the spring or fall and GM finally creeps to a halt and gets sold off.

Here is an interesting quote not directly related to the main thrust of the story (emphasis added):

“There’s an inherent braking mechanism on our economy that’s tied to oil and will limit our economic growth,” said Deutsche Bank analyst Rod Lache. “This is one of the reasons we’re bullish on electrification of the industry.”

Visualizing government debt

This is a cool (and very pretty) expression of government debt.

Stewart Udall’s letter to his grandchildren

I call Stewart’s generation the worst generation because they took the temporary affluence of post WWII and pissed it away on car culture and suburban expansion. Here is one of the better members of the worst generation, apologizing:

Operating on the assumption that energy would be both cheap and superabundant, I admit, led my generation to make misjudgments that have come back and now haunt and perplex your generation. We designed cities, buildings, and a national system of transportation that were inefficient and extravagant. Now, the paramount task of your generation will be to correct those mistakes with an efficient infrastructure that respects the limitations of our environment to keep up with damages we are causing.

Peak Phosphorus

Our ability to provide enough food to feed the human population is dependent on the use of artificial fertilizers, which contain nitrogen and phosphorus. While nitrogen is abundant in the atmosphere, phosphorus is mined at just a handful of locations worldwide.

The natural resources are limited and are being depleted.

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