I just read this over at Money.com discussing the fact that over half of current individual plans do not meet the new minimum coverage provisions set forth in ObamaCare…so of course, cost will be going up. The problem is, if you don’t need all that stuff, you are now going to be forced to buy it anyway. Imagine you are in the market for a car…all you need is basic transportation, which you can probably get for about $20k (new). But when you get to the dealer…it turns out there is a new ObamaCar mandate…sorry, no more cheap cars….the base model is now a Cadillac Escalade…all options….$80k starting price. There is no doubt that the Escalade is probably a better vehicle than the Focus you wanted…but it’s not what you need, and now you can’t even afford a car period. How awesome is that?
The truth about Obamacare, and the entire medical insurance industry in general, it that it is just one more way for the old and wealthy to screw over the young, poor, and healthy. The game is to pull in as many young and healthy people into the pool who pay way more in premiums than they use. For example, from the time I officially entered the workforce at 21, until my early 30’s, I had exactly one medical expense…stitches in my chin…all under my deductible, I think it ended up costing about $1000 (most expensive 3 minute jet ski ride ever). Over that time, my employer paid $10k per year, and I put in a few thousand more, so lets just say over 10 years, I contributed $120k, and had exactly zero insurable events. This is exactly what they want…and this is the entire purpose of Obamacare….to pull in the young, healthy, and “underinsured” population into the pool and overcharge the crap out of them to keep costs low for the old, fat, and sick.
The solution to all of this isn’t to band together providing a gigantic insurance pool from which we can all demand an infinite amount of medical service. The solution is to return to personal responsibility, and return to the basics, making health insurance more like car insurance. That is…you pay for routine maintenance, fuel, ect….the insurance company pays if your vehicle is stolen, totaled by an uninsured motorist ect… Under this model, you would pay for your Dr. visits, your medicine, and the arm you broke skateboarding (or jetskiing). Insurance would kick in if you were diagnosed with cancer, were seriously injured in a car accident ect… Furthermore…we have to become responsible for the choices we make that affect our health. For example, if you decide to smoke…fine….but in addition to the $5/pack…you also better start saving some money for the $1 million cancer treatment/lung transplant you are going to need in 15 years because that’s on you…insurance isn’t going to cover it, and neither is society. We must be prepared to accept the consequences of our own decisions. The other biggie is food. If you want to eat yourself to death….that’s your personal choice…and I get it…because I love food too. But if you are 35, and weigh 400 lbs, can’t work, need a heart transplant and a ton of medicine just to stay alive because you eat 6000 calories of McDonalds a day….I hope you saved up for it because society simply can not, and should not pony up the million bucks for your treatment. Personal responsibility folks… just own it. That’s what made this country great…and the lack of it is what is actively tearing it down.
Over the course of March 2013, total debt outstanding increased $84B up from $16.687T to $16.771T. External debt…the only category that really matters was up $94B, but offset by a $10B decrease in the intragovernmental debt category….basically money we are pretending we loaned to ourselves, rather than admitting we already blew it.
Moving on, the TTM (Trailing Twelve Month) change in debt:
This looks at the TTM change in external debt only for March of 2009-2013. For example, the 2013 amount of $1.070T is the difference between 3/31/2013 and 3/31/2012. …how much debt have we added over the last 12 months. I like TTM when looking at the debt and deficit because there is so much seasonal variation that looking at any one month doesn’t really tell you anything…like this month, April, will likely post a monthly surplus….but that doesn’t really tell you anything about the $1T or so annual deficit.
Looking at the chart (made in Excel 2013…not crazy about the grayish black fade), we can see a $125B improvement…the right direction no doubt, but at a tepid and declining pace…for now. At this pace…we would get to zero in 8.5 years…assuming the pace continued…it will not. What we will likely see is an acceleration through the remainder of the year thanks to the recent tax increases and relatively flat spending. Then, after a year or two of stabilization, it is going to turn the other way as the growth in outlays surpasses any revenue growth, driven primarily by the large welfare programs…Social Security, Medicare, and Medicaid.
Yes…I said it….these are all straight up welfare programs where one large voting block has forced a “generational contract” where the old and wealthy steal from the young and poor. This is justified by..” well, we were screwed too, so now we are gonna get ours.” Maybe so…but it’s not gonna work for much longer. This entire system needs to be abandoned and go back to the old way. Either you save enough on your own in your 40+ year career to sustain the retirement you want…or, your kids/extended family supports you…if they like you.. The end. The average person making $50k puts about $7,500 each year into the social security/medicare pot each year…. What could you do with $7500 per year? Probably pay off your house in 10 or 15 years and start amassing a lifetime supply of benefiber…. Ain’t retirement grand?
Here we go…the last DTS of the month, complete with a $10B surprise….an additional $10B of revenue from our good buddies at “GSE Dividends”. This is likely some of that missing revenue from earlier in the month…I guess they finally got around to cashing the check. The 3/29/2013 Daily Surplus came in at $12.5B, and the month ended up at $94B, a full $45B improvement over last year’s $ $139B deficit.
At first glance, revenues look flat, but the truth is, Corporate tax deposits were up 15% YOY and individual TD were up 12% for a combined increase of about $30B. This is offset by a decrease in TARP($15B), an increase in tax refunds ($10B) and about $5B decrease in other misc. revenues. This is good news….I have been using about 11% in my forecasts, so at least for the month, we are over performing. I won’t get excited yet…I really want to get beyond tax season and see how May-July looks…if we are still seeing 10%+ out there, it’s going to be hard to deny that we have some bona fide YOY revenue growth. Duplicating that in 2014 is an entirely different story, we’ll find out in time though.
Cost really jumps out at you with a $47B improvement, but about $30B of that appears to be just timing….costs that hit in late March in 2012 won’t hit until early April in 2013. Of course, that should give April 2013 a $30B headwind if it is going to improve upon last year’s $58B surplus, but with tax deposits showing strong growth, a strong showing on tax day (4/15) could make it close. That leaves a bona fide decrease in outlays of about $17B, which is quite impressive, maybe too impressive. Payments to defense vendors was down $6.3B from $33.8B to $27.5B. That doesn’t really jive with the sequester numbers I’ve been seeing, which was’t supposed to really hit until April or so…maybe they are just “slow paying” who knows…we’ll keep an eye on it. “Other also makes up a big chunk, and among the remaining categories, there is quite a bit of downward movement. It is worth noting that Social Security payments are up 9% YOY, posting a $5B increase from $55B to $60B in 3/2013. That $5B annualized means that just to stay even…we need $60B of revenue increases or spending cuts…every single year just to cover increases in Social Security.
So for a first glance, this is a better report than I expected, but it doesn’t warrant celebrations or a “Mission Accomplished” banner by any stretch. Tax deposits are definitely trending up, and outlays are more or less flat, maybe even down a smidge. If we keep this up, we may come in under the $1T deficit mark this year…maybe.
CBO vs. CBO Round 1
As required by law, the Congressional Budget Office released their semi-annual 10 year budget forecast last month, projecting a $6.825T deficit between FY 2013 and 2022. Over that period, debt held by the public (excluding Intragovernmental debt) is projected to increase $7.6T from $11.3T to $18.9T to end FY 2012. On its face, that sounds pretty terrible, though it is a marginal improvement over the last 10 year period where debt increased $7.7T from $3.6T at the end of FY 2002 to $11.3 at the end of FY 2012 according to the US Treasuries Debt To The Penny web site.
That the CBO has a spotty record is no secret, including their famous projection in 2000 that the debt would be eliminated by 2010, missing that one by about $7.5T. To be fair, it’s not all the CBO’s fault. Their masters in congress dictate that they use predetermined assumptions…regardless of how unlikely those assumptions are. In any case, while this forecast is definitely an improvement over the August-2012 release which forecasted a mere $2.3T deficit between 2013 and 2022, it still struck me as wildly optimistic, particularly on the revenue side, where they have revenues increasing 93% from 2012 to 2022, despite the last 10 year period only increasing 46% from 2002 to 2012.
All of this got me to thinking…could I, a simple citizen-accountant with a small deficit blog, do a better job forecasting the 10 year deficit than the mighty CBO, with their legions of TPS processing bureaucrats? We won’t know for 10 years, but below is my personal Budget Outlook for 2013-2012.
My preferred source of historical data is the Daily Treasury Statement (DTS) which provides a daily snapshot of cash inflows and outflows, uncorrupted by the so called “principles” of government accounting. From the DTS, I have identified 19 cash revenue streams and 35 categories of cash outlays. For each, I have created an interactive forecast of the next 10 years by month, taking into account seasonal patterns and historical rates of growth. One key assumption is that interest paid on public debt stays around 2%. For more on methodology see related posts on my blog USDailyDeficit.com here
This chart gives us 2013-2022 projected revenues as a percentage of 2012 actuals. The Congressional Budget Office projects revenues to grow at 11%-12% per year from 2013 to 2015, before tapering down to a 4%-6% for the rest of the forecast period. I think this is quite optimistic, especially for 2015. 2013 does get a one-time bump due to actual tax hikes on income and payroll. However, I have a hard time seeing this repeat for 2014 and 2015 without significant additional tax hikes in the $200B per year range, or $2T for those who prefer their tax hikes presented in decades rather than annualized. At this time, that just doesn’t seem realistic to me at all. Over the forecast period, the Congressional Budget Office forecasts revenues to increase 93% from $2.449T in 2012 to $4.734T in 2022. My forecast comes in at 55% growth over the same period. For reference, over the prior 10 year period, 2002 to 2012, revenues increased by 46%.
The Outlays chart is presented again with 2012 as a base and the forecast years as a percentage of the base. While the forecasts look surprisingly similar, the internals reveal some big differences. The key difference is the expected interest rate. I keep interest rates constant at 2% over the forecast period, while the CBO keeps rates at 2% through 2015, before gradually increasing to 4.2% by 2022. The result is that while I forecast public debt at the end of 2022 a full $5T higher than the CBO, they have 2022 interest expense at $795B vs. my forecast $452B. On the other hand, for the remaing outlay categories, I am projecting a growth rate that exceeds the CBO’s forecast, coincidentally just about completely offsetting the lower interest expense I am forecasting.
Once you have revenues and outlays forecast, the rest is pretty simple math. The CBO has the deficit decreasing from $1.089T in 2012 down to a low of $430B in 2015 before picking back up as the pace of outlays increases faster than revenues, ending 2022 back neat $1T. Over the 10 year period, the total deficit forecasted is $6.825T. My forecast shows slight deficit improvements in 2013 and 2014 before swinging back in 2015 and accelerating to $1.788T by 2022, for a 10 year deficit of $12.7T, $5.875T worse than the CBO’s forecast.
Since we come to very different conclusions on the 10 year deficit, it should be no surprise that we also come to different conclusions about debt outstanding. While the CBO forecasts public debt outstanding to be $18.902T, I forecast it will be $23.972, a more than $5T difference. For me, this is where the rubber meets the road. Even today, US treasuries are seen as the gold standard of bonds, being priced as if they were nearly risk free. As an investor,I think you have to ask yourself “For how long?” When does the market start to question the ability of the US to repay her debts? Is it when we hit $20T in May of 2020? Five years later in October of 2025 when we smash through$30T? Or is it sooner, perhaps this summer when the debt limit battle resumes after a brief hiatus? If we happen to make it to 2022, whether our debt is at $19T or $24T, the reality is, it only gets worse from there. Even if you missed Greece, Italy, Spain and Cyprus, for the US, the writing is on the wall.
Congress is stuck between the proverbial rock and hard place. In The Spending Problem I compared 2007, the last year we came close to running a surplus, to 2011, when we ran a $1.3T deficit. Over that period, while population increased about 5% and revenues were nearly flat, outlays increased 36%. This created a new and unsustainable baseline that we will never “grow” our way out of. It is quite clear that spending is the problem and that cutting spending is the solution. However, those trillion dollar deficits, going on five straight years, are literally the only thing keeping GDP positive and “official” unemployment in the single digits. Pulling $1T of government spending out of the economy now, or ever, is almost guaranteed to reduce GDP by more than $1T, maybe by a lot more. So, politicians have two choices.
1) Fix it now. Cut spending by around $1T per year to get it back in line with the pre-2007 baseline. This will pre-empt the impending debt crisis, however,it would immidiately tank the economy, putting countless people out of work, infuriate huge voting blocks, and it only gets worse from there. With some really good luck, in five years or so, the economy recalibrates itself, finds a new equalibrium, and we all go on our merry way, though this is in no way a sure thing.
2) The second option is to stay on the current path, borrowing more and more each year just to keep GDP in place. Public debt outstanding surpasses $15T, 20T, 25T. Nobody knows where, but somewhere along the line, the house of cards simply falls apart. When that happens, and it will, lookout because the market is going to do a nosedive that makes 2008 feel like a pillowfight.After that, we pick up the pieces and more or less start over from scratch, hopefully.
Given that the time to really fix anything probably passed a few years ago, and recent squables have only led to inconsequential cuts and revenue increases, The likely outcome is clear. We will kick the can until it is no longer possible. In the meantime, you can be assured that I will not be loaning Uncle Sam any money.
I have one more interesting conclusion related to interest rates that should interest everyone. The Federal Reserve’s storyline for quite a few years now has been that they are keeping interest rates low to help stimulate a recovering economy, lower unemployment, encourage lending, ect. I’ve suspected this for a while, but after completing this analysis, I am convinced that all of that is just a cover story. The truth is, they have no choice to keep interest rates low because if they don’t, the federal budget would instantly come apart at its seams.
In 2012, the US paid $223B in interest on $11.28T of public debt, for an effective rate of 2%. If that doubled overnight to a very historically reasonable 4%, and we applied it to our model it would have added an additional $4.5T to the debt in just our ten year forecast. This is due to the additional outlays, which are of course financed, which pushes up interest expense, which increases outlays, and the cycle repeats itself. Albert Einstein is rumored to have once said that compound interest was the most powerful force in the universe. This may be true for savers, but for debtors, quite the opposite is true. As the example above illustrates, the inverse is that compound debt can be one of the most destructive forces in the universe.
I have to assume that somewhere at the federal reserve is an accountant just like me, but with better data and a lot more time cranking out “real” budget forecasts that give Ben Bernanke and President Obama nightmares. If I am correct, it means that interest rates are never going to increase so long as the Federal Reserve has control of the market. They can’t do it now with $11.9T of external debt, and they surely won’t be able to do it in the summer of 2016 as we are cruising past $15T and the presidential campaigns are in full swing. Since they can’t voluntarily raise rates, I will be watching this chart as an indicator of when they start to get raised involuntarily.