Our politicians and their economic charade

Following yesterday's article on this mess, Mark Steyn's latest column caught my eye. Here's an excerpt.

On the one side are Obama and the Democrats, who in a negotiation supposedly intended to reduce American indebtedness are (surprise!) proposing massive increasing in spending (an extra $33 billion for Pell Grants, for example). The Democrat position is: You guys always complain that we spend spend spend like there’s (what’s the phrase again?) no tomorrow, so be grateful that we’re now proposing to spend spend spend spend like there’s no this evening.

On the other side are the Republicans, who are the closest anybody gets to representing, albeit somewhat tentatively and less than fullthroatedly, the actual borrowers — that’s to say, you and your children and grandchildren. But in essence the spenders are negotiating among themselves how much debt they’re going to burden you with. It’s like you and your missus announcing you’ve set your new credit limit at $1.3 million, and then telling the bank to send demands for repayment to Mr. and Mrs. Smith’s kindergartner next door.

Nothing good is going to come from these ludicrously protracted negotiations over laughably meaningless accounting sleights-of-hand scheduled to kick in circa 2020. All the charade does is confirm to prudent analysts around the world that the depraved ruling class of the United States cannot self-correct, and, indeed, has no desire to.

. . .

How many of “the wealthy” do you require to cover a one-and-a-half trillion-dollar shortfall every single year? When you need this big a fix, there aren’t enough people to stick it to. “We are not broke,” insists Van Jones, Obama’s former “green jobs” czar and bespoke Communist. “We were robbed, we were robbed. And somebody has our money!”

The somebody who has our money is the government. They waste it on self-aggrandizing ideologue nitwits like Van Jones and his “green jobs” racket. How’s the “green jobs” scene in your town? Going gangbusters, is it? Every day these guys burn through so much that they can never bridge the gap. By that, I don’t mean that an American government that raises $2 trillion but spends $4 trillion has outspent America, but that it’s outspent the planet. In my soon to be imminently forthcoming book, I discuss a study published last year by John Kitchen of the U.S. Treasury and Menzie Chinn of the University of Wisconsin. Its very title is a testament to where we’re headed:

“Financing U.S. Debt: Is There Enough Money In The World — And At What Cost?”

There's more at the link. It's well worth reading. I also highly recommend reading the Kitchen-Chinn report mentioned above (link is to an Adobe Acrobat document in .PDF format).

As Mark Steyn points out, and as I've said many times in the past, this isn't a Democrat-versus-Republican thing. Both major political parties are equally responsible for the mess we're in, and equally negligent, ineffectual and even corrupt in their approaches to solving it. Neither appears to be serious about tackling the real issues involved.

Let Karl Denninger say it in his usual no-BS manner.

I know full well that there are a lot of people who believe they're entitled to their benefits, to their Medicare, to their Social Security, to their Welfare and Food Stamps.

I understand.

The math doesn't care what you claim you're entitled to, nor what I believe you're entitled to, nor what Congress wishes to grant you.

Here are the facts:

• Government debt has grown 11% in each year for the last three years, more or less. This is a fact which you can verify from the Treasury's "Debt To The Penny" series. Please do so, because I hate having to post the numbers after someone pops up and claims I'm lying.
• GDP growth since 2000 has averaged 4.1%. I'll use that number, even though our current GDP rate is under 2%. This spreadsheet is a lot worse at 2.1%; government interest expense exceeds GDP (or government size) about 10 years faster!
• I am using a blended interest rate of 3% on government debt. This is consistent with the Treasury's own current numbers. It is also very low on a historical basis. I presume it will not rise, which is likely foolish. If it rises, the spreadsheet gets a lot worse.
• I am using a government growth rate, all-in, of 5%. This provides us a doubling time of about 14 years. This is too conservative since 2000 (government has doubled in size in the decade, which is about 7%) but I am assuming we cannot maintain 7%.
  

Here's the deal. With these assumptions right now interest expense is about 11.3% of government's total budget. Within ten years it is 21.3%. In 10 more it will be 40.52%. In 10 more, that is 30 years from now it will be 76.98% (!) - in theory. And in 35 years, it will consume the entire government budget.

Of course in 30 years interest expense will not be 3/4 of the federal budget. Long before then the market will say "bullcrap!" and blow the entire charade to beyond the orbit of Pluto, much as happened in Greece and Ireland, and which threatens to occur in Italy.

. . .

We therefore must balance the federal budget right now and accept the economic contraction that will come when we do it. Yes, it will be bad - very bad - in the short term for the economy to do this. But it's worse now than it would have been in 2007 when I started The Market Ticker and the longer we wait the worse it will get, no matter what else we do.

Go ahead and download the spreadsheet and play with the assumptions. The fact is simple as I pointed out before, and it applies to government as well as the general economy. For any growth rate in debt that exceeds that of GDP which has any positive rate of interest, you will eventually go bankrupt.

We argue only when, not if; this outcome is a consequence of indisputable mathematical facts.

Again, more at the link. Bold, italic and underlined print are Mr. Denninger's emphases.

We're out of time, folks. If this isn't fixed now, we're staring national default in the face . . . and that'll make it ten, or twenty, or even more times more difficult to fix the problem in the long run.

Peter

P.S.: There are those who might think me heartless for not caring more about those dependent on government handouts. Let me point out that I'm one of them! I was given a disability retirement from the law enforcement service of the US government following a severe injury some years ago. I don't want my benefits to be cut: any reduction will be very difficult for me to make up in other ways, due to my disability. Nevertheless, I must accept that such a reduction is probably inevitable, because our government has wasted so much money in other ways that legitimate causes like mine will suffer along with the less legitimate. I accept this, because I don't want to lumber our children and grandchildren with this problem. Even if it does hurt me, and people like me, that's part of the price we must pay to fix this.

(You never know . . . I may put up a tip jar on this blog yet!)