December 2012

In April 2007, something amazing almost happened…driven by strong April tax collections, we came within a mere 64B of posting a Trailing Twelve Month (TTM) surplus, a feat not achieved since 1/2002. From there, the deficit proceeded to explode…topping out at $1.8T in 9/2009 before gradually improving to the “healthy” $1.2T we saw with the close of 11/2012. So let’s compare 2007 to the latest full year we have, 2011, and try to figure out what happened. 2007 ended up with a $190B deficit…2011 ended at $1,204B….a $1T change in a mere 4 years. If you listened to the news lately…you would probably guess that plummeting revenues and soaring costs together created the mess we find ourselves in. You would be partly wrong.

The truth is, Revenue was pretty constant over that 4 year period, dropping $87B from 2007 to 2011. Spending…on the other hand spiked $925B. So of the $1T increase in deficit from 2007 to 2011….about 10% of that was from lower revenues….and 90% was from higher spending.  So…that’s kind of understandable in 2008-2009…when Tarp money was flowing out…but 2011? What are we spending another $1T per year on that we weren’t in 2007? I sure don’t feel like I’m getting another $1T worth of government services…do you?

The above table has a handful of the spending categories reported in the DTS…we just line up 2007 with 2011. With the exception of a few small categories, spending is up…huge. Over a period when revenue was essential flat, and population growth up perhaps 5%….spending is up accross the board 36%. Most is already locked into a steady upward trend like Social Security and Medicare. What’s left is too small to make a difference. For anyone looking…the future is quite obvious. Spending will continue it’s upward trajectory and whatever revenue additions our government manages to squeeze out of taxpayers will be both inconsequential and fleeting. As a result…deficits will continue to soar and the debt outstanding will continue to climb until external parties refuse to buy any more debt and start liquidating what they do have. At that point, either the spending stops…and trillions of off balance sheet liabilities like social security and medicare are defaulted on, as well as on balance sheet liabilities like bonds outstanding and government/military employee pensions.

The other option is that they just start printing money…which lets be honest has already started. The treasury has accelerated a little game they like to play with the federal reserve. The federal reserve magically creates “e-money” and uses it to buy debt from Treasury. Then, when the interest payments are due…treasury hands them off to the Fed…who turns right back around and gives it back….and reports it as REVENUE!! Per my back of the envelope calculations…this accounts for about $1.7T of our current outstanding debt. In this scenario…the price of everything increases as the value of the currency declines. It’s a kind of an invisible tax…rather than directly taxing you, the government steals it while you aren’t looking. That CD that used to yield 5% and is now 0.25%. That $20 that used to fill your tank…now gets you half. That $1.5 pound of ground beef that used to feed your family…now $3.50. We kid ourselves playing games with accounting, debt, and these silly keynsian theories, but in the end, the “Econoverse” always wins.