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Commentary

Mar 28
0

Congressional Budget Office vs. Citizens Budget Office

By | Commentary

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.

Methodology:

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

Revenues:

2013-03-28 CBO vs CBO Revenue 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%.

Outlays:

2013-03-28 CBO vs CBO Outlays

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.

Deficit:

2013-03-28 CBO vs CBO Deficit

 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.

Debt:

2013-03-28 CBO vs CBO Debt

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.

Conclusions:

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.

2013-03-28 CBO vs CBO Interest

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.

 

Mar 28
0

3/26/2013 Daily US Cash Deficit

By | Commentary
The US Daily Cash Deficit for 3/26/2013 was $8.3B, bringing the March deficit through 26 days to $85B. With 3 business days remaining, it looks like we are zeroing in on $105B or so, with the possibility of a $+15B surprise depending on how Medicare costs flow in.

2013-03-26 USDD

Mar 24
0

What Does Deficit Spending Accomplish

By | Commentary, Quantum Economics
I wanted to expand a bit on my earlier post. The economic Witch Doctors are firm in their belief that deficit spending is the cure to jumpstart an ailing economy. They promise that at some point, the spending can be weaned, and the economy can stand on it’s own. We’ve been trying this for a decade and are now working on our 5th straight trillion dollar deficit, with no weaning in sight. I think it’s time to think just a little bit harder about the true affect of deficit spending. The symptom deficit spending tries to cure is declining GDP, or even just a reduction in the rate of growth….in other words, people are deciding not to transact.
In a prior article, we looked at a scenario where a buyer and a seller had a desire to transact, but were simply too far apart on price for a transaction to occur.
After haggling for a bit, the buyer is at $25, and the seller is still at $75….no transaction occurs. Oh no…GDP is crashing…prepare the soup kitchens right? Well…no. You see, the buyer has determined that the value of a massage to him is only $25. Spending $75, would mean taking a loss….which he won’t do, because he can take his $75, and get something he personally values at greater than $75…even if that something is nothing at all. On the other side of the transaction, the seller values his time at greater than $25. He would rather call it a day and spend the extra time with his kids…or watching TV, or sleeping….all things he may personally value more than the marginal $25. In this case, a non-transaction is the optimal economic outcome.
I would offer that this scenario…the decision not to transact is the natural state of things. For example…the Bugatti Veyron is a phenomenal machine, one that I would love to drive and park in my driveway, and yet…I drive a substantially less phenomenal vehicle. The problem, you see, is price, and utility. While I would surely have a blast driving a Veyron, to me, those occasional adrenaline rushes simply are not really worth a decade or two of pay…at least not to me. And if I walked into a dealership…and offered say $25k….they would almost certainly politely, or not so politely decline. And so…Bugatti, and I, though never having met, have collectively decided not to transact. The same thing happens every time you go to the grocery store. Out of tens of thousands of potential products…you politely decline on all but a few dozen….And yet the world keeps turning.
Deficit spending, in one way or another, alters this equation by temporarily subsidizing either the buyer, or the seller, or both.  This initiates transactions that otherwise wouldn’t have taken place, spiking GDP, which sounds fine…except that it leaves an extra trillion of debt on the federal governments balance sheet each year. So back to our Bugatti example, maybe the government offers Bugatti a rebate…$1.5M per vehicle sold. Now, Bugatti can afford to sell them for $25k, and with the government’s rebate, make enough to cover production cost and a healthy profit. GDP increases, Bugatti hires thousands of new employees, and all is right with the world right? Well…no, because someday…all of the new Bugatti owner’s kids and grandkids have to pay back the Billions borrowed. Furthermore….we know that the amount of marginal enjoyment these owners will get from their cars us substantially less than $1.5M….or else they would have bought them before, so while we get a temporary increase in GDP and employment, over the long term, the losses are huge.
Now of course, our Bugatti example may be a bit silly. (or is is…anyone remember the Chevy Volt?) Rather than handing out high performance sports cars, our government tends to be a little more subtle. Typically, they will just buy things nobody needs or wants, and hire people to do things that don’t really need to be done. It doesn’t have to be something completely useless…it will generally be something we would all like….just not at the going price… They will send $100 a month to a family for food…which frees up $100…now they can go buy an I-phone, which helps Apple and AT&T. They can send the money to schools, so they can buy overpriced laptops for students to misuse…saving parents money, and helping out computer manufacturers like Dell.. Or…they could just offer to give everyone over 65 a stipend and more or less free medical care…for about $1.5T per year….so those people, rather than saving for retirement over their career…can spend that money on other things.
 While all of these things do increase GDP and employment, they all actually result in suboptimal economic outcomes….overriding optimal decisions not to transact by hiding and shifting the true cost. My theory is…that you can never wean, because if you stop paying sellers to sell and buyers to buy…those transactions would simply cease. GDP would revert back to its natural, and optimum state. Only the debt would remain. Since there is no capacity, or even intention to repay, every dollar of deficit spending simply devalues the dollar. Now, official statisticians cleverly hide this in CPI, but it is quite obvious…just look at this selection of commodities from 2002-2012:

2013-03-23 Commodities 2002-2012

So…over this 10 year period, deficit spending was about $10T…and coincidentally, the price (in $) of this selection of commodities just so happened to increase…excluding natural gas, from 200% to 700%, averaging a 332% increase? This isn’t your grandfather’s inflation….this is a government intentionally debasing it’s currency based on the advice of economists who clearly have no friggin clue what they are doing…If you haven’t seen some iteration of this…it’s worth a view. It’s a series of clips of Ben Bernanke before the last financial crisis…Basically whatever this guy predicts based on his models and fancy book lernin…the complete opposite actually happens…this from the cream of the crop….best of the best of what modern economics has to offer. Get ready kids…this fairy tale will not have a happy ending.
Mar 24
0

Do You Believe In Fairy Tales?

By | Commentary, Quantum Economics
It Seems that for the first time in four years, the senate has passed a budget. Republicans are bleating that it “has zero real deficit reduction” and “never balances.”…which is probably all true, but as I discussed a few weeks back, neither does Paul Ryan’s Path to Prosperity. You see, any monkey with a free copy of Google Spreadsheets can make a lot of bogus assumptions about revenue growth and cost cutting and squeeze the “projected” deficit down to zero in 10 or 20 years…Just ask the Congressional Budget Office, who in 2000 projected to much acclaim that the US would be more or less debt free by 2010.
In any case, we now have affirmation by both political parties that one of three things is true about each of them.
  1. They are a bunch of Lying SOB’s…
  2. They aren’t lying, they are just incredibly incompetent.
  3. Or…they believe in fairy tales.
I really don’t know which it is…all seem feasible to me. However, it is time for you to decide if you believe in Fairy Tales…or not. The fairy tale they want you to believe…written by the economic high priests of the last century is quite simple. First…deficits don’t matter. Government, led by the infinite wisdom of elected politicians and an army of bureaucrats can borrow and print an infinite amount of money with no consequences. They will save your job, care for you when you are sick, educate your children, and even manage your retirement for you…all you have to do is believe….and maybe tap your shoes together 3 times.
For comparison, let’s think about what might make sense for a typical family budget. It is generally accepted that an ideal state is a surplus…you should be saving, let’s just say 10% of income…. for rainy days, paydown of debt, and hopefully accumulation of enough wealth for the rather modern invention we call “retirement.” We could have a debate over the specifics, I think we can all agree that more or less, this is a pretty good prescription for success.
Imagine if instead of following the above, our family, with a household income of $80k/year, decides to take the prescription advised by modern economic theory. At this point in time, our family, has accumulated debt approaching $500k….not mortgage debt…unsecured credit card debt. Further, they are accumulating debt at the rate of about $40k per year, with no realistic plan to address the annual deficit, much less actually pay down debt accumulated so far. At this point,  really should be bankrupt, but fortunately for them, their credit card company keeps increasing their credit limit, and at this point has actually removed the limit altogether.
Do you see this ending well? Is it possible that a financial policy that would so obviously asinine for a household makes sense for a nation? Ben Bernanke, Tim Geithner, Republicans, Democrats, and most modern economic theory thinks it will. That’s what’s in the Fairy Tale, so it must be true…right? You need to decide for yourself what you believe. Is infinite deficit spending the right medicine to heal a sick economy, or is it just another line of cocaine….inching closer to bankruptcy and ultimately…death?

 

Mar 22
0

Raiding the Fake Social Security Trust Fund…To Fund Another Fake Social Security Trust Fund??

By | Commentary
Just read this…about how the chief actuary Social Security Stephan Goss is planning to raid one fake social security trust fund to fund another fake trust fund with some awesome accounting voodoo(actually…a 2 line journal entry ought to be all it takes). I wrote a while back about the “Trust Funds” at Seeking Alpha in “Are Intragovernmental Holdings Real Debt” In my opinion…they simply don’t exist….they are just a figment of a government accountant’s imagination…and these shenanigans further reinforce that in my mind. To me…all they represent is the balance of funds already stolen and spent…nothing more. The sooner we accept that…the better.