The latest on the economic front

There's little or no real improvement in sight as far as the US and world economies are concerned.  Two issues in particular have dominated the past week's developments.

First, China's economic problems (to which we've referred several times in the past) are becoming clearer by the day.  Here are four articles from the past month that highlight important aspects:

1. China’s great economic leap forward hits the wall
2. China defies IMF on mounting credit risk and need for urgent reform
3. China capitulates
4. Recognizing the End of the Chinese Economic Miracle

All four are worthwhile reading.  In particular, the last article (from Stratfor) provides a good general overview of what's gone wrong and how it's likely to end up.

Next, the US national debt has long been of concern, and is now becoming of critical importance.  In particular, there are signs that the Treasury is hitting a brick wall.  There are serious questions as to whether or not it's actually surpassed the approved credit limit already, and is disguising this through bookkeeping maneuvers and shuffling money between accounts.  CNS News reported earlier this month that US Treasury debt had been 'Exactly $16,699,396,000,000.00 for 56 Days'. This is clearly mathematically impossible, given daily interest charges and rate changes - it's nothing more or less than an accounting sleight of hand.  If you believe that figure, you'll believe anything!

One way in which the Treasury appears to be keeping government spending going is by raiding the retirement accounts of government workers.  Back in January, Money Morning reported that this was happening.

The U.S. Treasury, in order to avoid default, has resorted to an eyebrow-raising move: it has borrowed from the federal employee pension fund as the country nears its debt ceiling.

The U.S. government stopped investing in the federal employee pension fund Tuesday "to avoid breaching the statutory debt limit," according to a letter Treasury Secretary Timothy Geithner sent to Congress.

Geithner said that the move will free up some $156 billion in borrowing authority, while policy leaders in Washington wrangle over raising the $16.4 trillion debt limit.

Geithner promised the fund would be "made whole once the debt limit is increased," and maintains that federal employees and retirees would not be affected by the action.

But an IOU from the federal government isn't very settling for those relying on the fund for retirement.

This is not the first time the government has dipped into pension funds to pay for its overspending.

The Treasury has suspended reinvestments in the federal pension fund, aka the G Fund, six times over the past two decades in order to keep the country under the legal debt limit. The most prolonged delay in raising the limit came in 1995 after congressional Republicans came into power during the Clinton administration.

. . .

In effect, the federal government is playing an accounting game to avoid the legal debt limit.

There's more at the link.  Since then, of course, the debt ceiling has been first suspended, then increased;  but given that official US Treasury debt has remained static for so long, as reported above, the Treasury is clearly getting money from somewhere to replace what it can no longer legally borrow.  It's almost certainly funding the federal deficit from federal pension funds.  Those currently drawing federal government pensions, or expecting to do so in future, may wish to take note and plan accordingly.

Time magazine observed earlier this month:

Continued deficit spending has swelled our national debt to nearly $17 trillion. Servicing that debt (the equivalent of monthly minimum payments on your credit cards) is costing us roughly $250 billion a year, an amount that will only rise as deficit spending continues and interest rates climb. These numbers are a drag on future economic growth.

That’s a recipe for disaster, as Admiral Mike Mullen warned when he was chairman of the Joint Chiefs of Staff: “The most significant threat to our national security,” he said in 2010, “is our debt.”

That challenge cannot be met with vague promises to further “tax the rich.” Nor will defense-budget cuts alone suffice. While the defense budget can certainly stand some reductions as the wars in Iraq and Afghanistan wind down, it is a simple fact that there’s not much more to cut from the military, without compromising force readiness.

America, instead, requires a responsible, balanced approach to budget control that encompasses spending reform at the Pentagon, and in the nation’s entitlement programs.

Programs like Social Security, Medicare and Medicaid were established as safety-net programs to protect the most vulnerable Americans against poverty. Unfortunately, these programs have grown so large that we cannot pay for them as they are currently structured. It’s time for real leadership in Washington, D.C., to reform them so they remain sustainable for the future.

There's more at the link - and I couldn't agree more!

Finally, the inimitable John Mauldin observes that in economic terms, the USA is dealing with 'A Lost Generation' (link is to an Adobe Acrobat document in .PDF format).

We are watching the Fed employ a trickle-down monetary policy. They hope that if they pump up the banks and stock market, increased wealth will lead to more investment and higher consumption, which will in turn translate into more jobs and higher incomes as the stimulus trickles down the economic ladder. The kindred policy of trickle-down economics was thoroughly trashed by the same people who now support a trickle-down monetary policy and quantitative easing. It is not working.

We have a younger generation that is having trouble finding full-time work and developing the skills needed for the transition to more stable, higher-paying employment. The longer the situation persists, the more difficult making up lost ground and lost time becomes for them. As Charles wrote, we may be seeing a new underclass develop, which has disastrous implications for the country. This week President Obama gave a speech on the economy that sounded like a campaign speech except that he should not be running any longer. He blamed the rise of technology for the loss of jobs, the decimation of the power of unions for flat incomes, and the policies of his predecessor for the current malaise. The speech was a wish list of new programs and promises, yet nothing is getting done. He fails to engage with the most pressing problems of our time and doubles down on a healthcare plan that is a train wreck even his most ardent supporters are walking away from. Did you see the recent letter from multiple union leaders asking for a course correction on healthcare?

The Congressional Budget Office now estimates that 7 million people will lose their employer-provided health insurance at the end of the year. One would assume that those are almost all full-time workers. So instead of getting health insurance in some form as a benefit, they will likely soon be paying $1400 a year (minimum) in mandated taxes (the level set by the Supreme Court), and those costs will rise dramatically over the next few years, according to the current schedule. That is a HUGE tax increase for those people.

Young people who have no insurance and are making more than $10 an hour will be paying about $1300 a year, or close to 10% of their after-tax income. That blows a monster hole in their disposable income at those levels. There is no other way to look at this: it's a huge lower-middle-class tax increase. Yes, they get a benefit (health insurance) that someone somewhere in society was already paying for, but they personally did not have these costs before.

The unintended consequences of the healthcare bill are going to be vicious. Not only is there a tax increase on the rich and on small employers, there is a tax increase on young people and the middle class. And it's a tax increase that comes in the middle of the slowest recovery on record. It is possible that we grew at less than 1% this last quarter. And the burden piles on top of a secular shift in employment practices that is making life more difficult for the younger generations.

We are getting close to the point where not only are there no good choices left, but the difficult choices are starting to look pretty bad indeed. And no one in DC is talking about the budgetary choices we are going to be forced to make. The recent drop in the deficit is temporary, fueled by people taking income in 2012 and paying taxes at a lower rate. That "tax dividend" is just about done. Deficits are going to be the number one topic in 2016, with jobs a close number two. Hide and watch.

Again, more at the link.

Keep your powder dry, friends.  You'll be needing it, economically speaking.

Peter