Dave Gonigam – June 6, 2012
- Figures so staggering they’re incomprehensible: Addison on the latest national debt projections… and the steps you can take to guard against the fallout
- A major contributor to the exploding debt: This one category of spending that doubles every seven years
- Reading the Fed’s smoke signals for its next meeting in two weeks… and debunking a too-common “QE” myth
- Aftermath of the MF Global and Facebook debacles… did Japan declare war upon the United States anew?… Intergenerational battle waged anew… and more!
“Nobody even understands what a trillion is,” said Addison on the radio this morning, “but the rate at which it’s growing is actually picking up speed.”
Addison was being interviewed by Laissez Faire Books’ own Jeffrey Tucker, filling in this morning as host of Peter Schiff’s radio show.
The trillions in question are those of the national debt. The debt as a percentage of GDP is set to double in 15 years, according to new figures crunched by the Congressional Budget Office. By 2037, the debt would be twice the size of the economy.
Now, a couple of explanatory notes: First, the doubling in 15 years — the “alternative fiscal scenario” — assumes that Congress extends the 2001-03 tax cuts and throttles back on the automatic spending cuts due to take effect next Jan. 1.
Second, this is only the portion of the national debt “held by the public,” in the lingo of the Treasury Department. If you throw in the debt owed to the Social Security and Medicare trust funds, we crossed the 100% debt-to-GDP threshold 10 months ago.
And the most important explanatory note of all: CBO projections tend to be conservative.
When Addison was filming I.O.U.S.A. in 2007-08, he relied on CBO projections to declare the national debt would grow to $10 trillion by the time President Bush’s successor took office.
In the event, it broke that barrier in September 2008… a month after the film’s release. This morning, it’s $15.7 trillion.
Result: The dollar you had in your pocket in 2008 buys only 93 cents worth of goods today.
Over a longer timeline, the drop is far more dramatic. The dollar you held in your pocket in 1971 — the year President Nixon cut the dollar’s last remaining tie to gold — buys 18 cents worth of goods today. Herewith, a chart Addison and collaborator Samantha Buker share in The Little Book of the Shrinking Dollar…
“Politicians are just out to lunch,” said Addison on the radio this morning, “they’re not even addressing the issue.”
And the Federal Reserve? Well, there’s a growing sense of its culpability. “Certainly after the crisis in 2008, people started asking different questions,” he added. “But even into 2009-10, there was a sense these guys are really smart and as long as we let them work their magic, we’ll be fine.”
Not so much in 2012. Still, “we have an entire political class dependent on the Fed, accommodating their whims.” And they won’t surrender their power willingly.
Which means it’s imperative you take steps to preserve the purchasing power you still have. The Little Book of the Shrinking Dollar lays out 47 steps to consider. You don’t need to follow every one of the 47… but you need to do something sooner, rather than later.
A footnote: The CBO report says one of the major contributors to the debt explosion is the cost of health care.
“Spending for health care in the United States has been growing faster than the economy for many years,” the report says, “posing a challenge not only for the federal government’s two major health insurance programs, Medicare and Medicaid, but also for state and local governments and the private sector.”
Federal spending on health care has exploded over the last 40 years. “From a modest $12.1 billion in 1970,” Addison wrote in the March Apogee Advisory, “it doubled by 1975. It doubled again by 1980. And once again, to $106.1 billion by 1986.”
“From there, it doubled again by 1992. Once again, it doubled by 2002, and doubled one more time to reach the present $856 billion as of fiscal 2011.”
“No wonder,” he said, “the Congressional Budget Office projects that federal health care spending will double yet again by 2022.”
Assuming you’re 55 now, health care spending will eat up half the federal budget by the time you’re 75.
The next issue of Apogee has some intriguing guidance if you’re looking to escape the regulated and costly nightmare that is the U.S. health care system. Not a subscriber yet? Your best subscription value is available here.
The safety trade is off today… for no obvious reason.
CNN is citing an “improved European outlook” — for which there is no evidence. CNBC cites “ongoing stimulus hopes” in Europe — which, at least this morning, sounds ludicrous in light of the latest noises from the European Central Bank.
Regardless, the Dow is up more than 200 points. Which still puts it lower than it was before last Friday’s miserable jobs report. Heh.
“At a lunch yesterday,” wrote Fusion IQ chief and Vancouver favorite Barry Ritholtz before today’s open, “I described why there was more work to the downside, but I didn’t dare get short for fear of some central bank intervention that could cause a 5-10% recovery rally (not in a single day, obviously). We haven’t gotten that bailout yet, but the possibility remains.”
In the United States, we’re getting signals of just such an intervention when the Federal Reserve meets and delivers its next statement two weeks from today.
“Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn’t making progress on bringing down unemployment,” reports The Wall Street Journal’s Jon Hilsenrath, who’s proven himself the Fed’s favorite conduit for leaking whatever it is the Fed wants to leak.
Consider it confirmation of what you read here in The 5 on Friday when Dan Amoss advised us the Fed will either “announce QE3 or hint at it in the near future” come the 20th of June.
Yes, we’re aware of the arguments against this position. They amount to this: “The Fed sees no need for QE. The point of QE is to lower interest rates, and interest rates are already at rock-bottom.”
The problem is that each of the previous instances of QE came when rates — as measured by the 10-year Treasury note — were at, or near, rock-bottom… and then rose.
The yield has risen from Friday’s record low to 1.63% this morning.
The commodity complex is also sharing in the euphoria. The CRB index is up nearly 4%, to 274. Crude has recovered $85 a barrel, and Brent crude has recovered $100.
Precious metals aren’t being left out, either. Gold is up to a one-month high of $1,640. Silver’s up big, to $29.61.
For the record: It will take six years to sort out the MF Global mess, and even after that, clients won’t get all their money back.
“Six years, that’s my personal estimate,” Commodity Markets Council president Christine Cochran tells Reuters.
As its customers have recovered 72% of funds that MF raided to meet a margin call shortly before its collapse last fall.
Also for the record: Nasdaq says it’s set up a $40 million fund to compensate trading firms for losses they incurred from the “glitches” on the day of Facebook’s IPO.
FB shares are up slightly today, back above $26. As a helpful reminder, the IPO price was $38.
“I have been reading The 5 for about two years,” writes a reader dismayed with the outbreak of generational warfare in our virtual pages. “Never have I read so much hate and resentment on The 5 as I have for the past week.
“All these Social Security arguments of who deserves it and who does not, all these solutions to entitlements, why or why not. I’m not sure where all this is heading, but after the comments Tuesday about reframing the thought process and the clash of generations, I become fearful of these trends.”
“Perhaps people should refresh their memories with a little history. All this sounds like that anyone over 65 getting Social Security, anyone born with severe mental or physical disabilities receiving entitlements or veterans crippled with loss of limbs or brain injuries, etc., are no longer a viable, supportive part of society and must be eliminated. This as not to be a financial burden to the next generations.”
“Hmmmm… Sounds to me a lot like Nazi Germany or Communist Russia. Destroy the weak to advance the young and build a new world order.”
“Our friend who was bemoaning the ‘boomers’ and calling them names,” writes another, “should only remember the one name of the Vietnam-era group he was referring to earned. That name was ‘Cowards,’ with the capital ‘C.’”
“Since I’m 86 and not sitting in a corner drooling,” writes another, “I would like to tell the guy who thinks that only the baby boomers can save the world that the vast majority of Americans are not truly aware of what our leaders are doing in government.”
“And if they are aware, there is not much they can do about it. If he thinks my age group all signed up for Social Security because we wanted to lay around in the sun and suck money from our younger countrymen, he’s nuts. My age group are not the ones who used credit cards like drunken boozers. We saved. My house is PAID for.”
“My take is that we can all place any blame needed on all members of Congress who led us down the paths of insanity.”
“It’s not the ‘Greatest Generation’s’ fault,” writes another, “that the government doesn’t have any money to pay what they promised. The government is the one that spent the money.
“However, the blame should really fall on the people who have voted in the last 30-40 years, because they elected our legislators. They allowed what was happening to Social Security, which is helping to bankrupt our country.”
“While I believe in limited government, if we are going to have some form of Social Security, it should be more like a 401(k) plan, with the funds belonging to the individual. The individual should also have some control over the way the funds are invested.”
“Dare we say,” a reader writes after our tongue-in-cheek remark that China declared war on the dollar by trading with Japan in yuan and yen, “that an ally has also joined that war?”
“I guess we don’t… or don’t want to.”
The 5: Well, as we also said, it’s a war of self-defense.
In addition, we’ll mention Japan is the second-largest foreign holder of U.S. Treasuries, after China. And it can’t keep up its pace of Treasury purchases indefinitely.
Japan is choking on government debt far larger as a percentage of GDP than our own. Money that used to flow into Treasuries will increasingly flow instead into Japanese government bonds.
Every government and central bank will do what it can in the name of self-preservation. That’s bad news all around for the dollar.
Regards,
Dave Gonigam
The 5 Min. Forecast
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