Near term crisis averted. Larger long term crisis assured

Congressional Budget Office issued revised long term outlook in Sept 2013 with chilling outlook for US.

  • Today Debt to GDP is 73. That’s double 2007 levels. Also near double our historic Debt to GDP over past 40 years, which is 38
  • If politicians do nothing, Debt to GDP will reach 100 in 25 years; that’s factoring in all spending cuts & tax hikes to date
  • If politicians repeal sequester cuts as Dems seeking, Debt to GDP will reach 190 in 25 years
  • Greece’s Debt to GDP is 160 — they’re the poster child for fiscal irresponsibility
  • Need to make $2 trillion in cuts (over 10 years) to stabilize debt. Need to cut $3.5 trillion to get debt back to historic levels.
  • In latest estimates CBO has made some key changes to assumptions that impact calculations: (1) Change est of life expectancy — people living longer. (2) Higher claims for Disability (SS Expense) — claims are through the roof $124B today 5% of population  (3) LT Unemployment estimated to be 5.3 v 5.0 — they’re assuming fewer fewer jobs coming back in long run

While debt outlook has been improving in the near term, outlook through 2018 manipulated by artificially low cost of debt. Fed has pumped $3T into economic system last few years to keep interest rates rock bottom.  As rates rise (and they inevitably will), cost of interest will increase significantly — $100B per yr per 1% increase. Note that  10 yr treasury 2.5% today v.  30 year avg 6.4% .  So we could be looking at another $400 billion in interest expense each year for current debt — that’s 4 times the size of the sequester cuts each year. The other major driver  is projected increases in cost of major entitlement programs — sheer demographics of boomers retiring collecting SS, higher medicare costs related to  aging population and higher healthcare costs to cover obamacare subsidies, all noted in CBO outlook.

None of this is news to Washington.  Nor is it rocket science to address (Simpson Bowles etc).  But Politicians consistently show they don’t have political will to make hard choices. Dems not willing to touch entitlements. Repubs unwilling to increase taxes. I’d like to add that the bipartisan Government Accountability Office has flagged 80+ sources of gov’t waste, redundancy.  Did you know we spend $80 billion per yr on software, much of which doesn’t work properly according to their analysis; we’ve completed maybe 10 of these recommendations.  Politicians know all this.  They are too distracted with taking cheap shots and partisanship to deal with the real problems at hand.

The only measures taken over the past 4 years to deal with debt have been attached to debt ceiling discussions.

  • Budget Control Act 2011: $917B cuts (over 10 years) — all reduction to growth of govt budgets versus actual cuts
  • Jan 2013 Debt Ceiling Neg: $400B tax increases (over 10 years) on wealthier americans + $200B (over 10 years) eliminating  payroll tax holiday
  • Sequester Deadline/Debt Ceiling Mar 2013: $1.2T cuts (over 10 years)

Debt crisis will get solved — either the politicians will deal with it or the markets will deal with it.  The easy way is actually sucking up the cuts and tax hikes.  The hard way means we’ll wake up one day and credit spreads will be through the roof (think Weimar Republic, Argentina  — although those are dramatic cases)

As the world’s reserve currency we enjoy many perks, like lower cost for our debt and ability to print money beyond our gold reserves to cover our ever increasing debt ceiling.  Despite our large debt to GDP, we’ve benefitted from the fact that Euro zone has been bigger fiscal catastrophe.   But our creditors are taking note our political dysfunction and thinking twice about the good credit of the US greenback and that’s not a good thing.

  • Negative watch from Fitch
  • Conference of International Bankers in DC (managing Trillions of dollars) last Friday full of grumblings that US doesn’t deserve to be reserve currency … CEO of BlackRock says “ US not principaled nation”
  • Last week Chinese State News Agency (Beijing) issues call for “DeAmericanized world order” … They see our dysfunction, and its getting them worried.
  • In past week China launches currency swap deal with Europe
  • Yen, Swiss Franc, Yuan gain against dollar

Economic recovery is too fragile to handle unnecessary shocks caused by feuding politicians

  • Consumer purchasing peaked early 2011.  Americans struggling with stagnant wages and rising costs
  • Jobs created part-time, low paying, not keeping pace with immigration (labor force participation is the real employment number that takes inflow/outflow or immigration into account and it shows no improvement  since 2007 whatsoever Credit default swaps up +50% in past month (measures likelihood of government default risk)
  • Since shutdown, mortgage applications hit 2013 low. -14% Wells Fargo, -42% JP Morgan in originations
  • Auto sales also at 5 month low
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