Tuesday, August 5, 2014

US is insolvent blasts Charles Biderman - and then demonstrates precisely why and presents the bloody details !


"The US Is Bankrupt," Blasts Biderman, "We Now Await The Cramdown"

Tyler Durden's picture

Submitted by Chris Hamilton via Charles Biderman TrimTabs' blog,

US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The Gap is Growing. We Now Await the Nature of the Cramdown.

There are many ways to look at the United States government debt, obligations, and assets.  Liabilities include Treasury debt held by the public or more broadly total Treasury debt outstanding.  There’s unfunded liabilities like Medicare and Social Security.  And then the assets of all the real estate, all the equities, all the bonds, all the deposits…all at today’s valuations.  But let’s cut straight to the bottom line and add it all up…$89.5 trillion in liabilities and $82 trillion in assets.  There.  It’s not a secret anymore…and although these are all government numbers, for some strange reason the government never adds them all together or explains them…but we will.
The $89.5 trillion in liabilities include:
  • $20.69 trillion
    • $12.65 trillion public Treasury debt (interest rate sensitive bonds sold to finance government spending)
      • Fyi – $5.35 trillion of “intra-governmental” Treasury debt are not included as they are considered an asset of the particular programs (SS, etc.) and simultaneously a liability of the Treasury
  • $6.54 trillion civilian and Military Pensions and Benefits payable
  • $1.5 trillion in “other” liabilitieshttp://www.fms.treas.gov/finrep13/note_finstmts/fr_notes_fin_stmts_note13.html.
  • $69 trillion (present value terms what should be saved now to make up the present and future anticipated tax shortfalls vs. present and future payouts).
    • $3.7 trillion SMI (Supplemental Medical Insurance)
    • $39.5 trillion Medicare or HI (Hospital Insurance) Part B / D
    • $25.8 trillion Social Security or OASDI (Old Age Survivors Disability Insurance)
      • Fyi – $5+ trillion of additional unfunded state liabilities not included.
Source: 2013 OASDI and Medicare Trustees’ Reports. (pg. 183),http://www.gao.gov/assets/670/661234.p
These needs can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination.  But since 1969 Treasury debt has been sold with the intention of paying only the interest (but never repaying the principal) and also in ’69 LBJ instituted the “Unified Budget” putting all social spending into the general budget reaping the gains in the present year absent calculating for the future liabilities. If you don’t know the story of how unfunded liabilities came to be and want to understand how this took place, please stop and read as USA Ponzi explains nicely… http://usaponzi.com/cooking-the-books.html

$81.8 trillion in US Household “net worth”
According to the Federal’s Z.1 balance sheethttp://www.federalreserve.gov/releases/z1/current/z1r-5.pdf, the US has a net worth of $81.8 trillion – significantly up from the ’09 low of $55.5 trillion…a $23 trillion increase in five years.  Fascinatingly, “household” liabilities are still $500 billion lower now than the peak in ’08 but asset “valuations” are up $22.5 trillion.  All while wages have been declining.  A cursory glance at the Federal Reserve’s $4 trillion in balance sheet growth in the same time period shows how the lack of growth in “household” liabilities (currently @ $13.7 trillion) has been co-opted by the Fed.
I believe it’s clear when incomes no longer supported credit and debt growth in ’08, consumers tapped out and in stepped the Federal Reserve to bridge the slowdown.  But what the Fed may or may not have realized is once they stepped in, there was no stepping out.


Why Can’t We Pay Off the Debt or Even Pay it Down?
Take 2013 Federal Government tax revenue and spending as an illustration:
  • $16.8 Trillion US economy (gross domestic product)
    • $2.8 Trillion Federal tax revenue (taxes in)
    • $3.5 Trillion Federal budget (spending out)
      • -$680 Billion budget deficit (bridged by sale of Treasury debt spent now and counted as a portion of GDP)
      • = $550 Billion economic growth?!?
        • PLEASE NOTE – The ’13 GDP “growth” is less than the new debt (although the new debt spent is counted as new GDP) and the interest on the debt will need be serviced indefinitely.
Why Cutting Benefits or Raising Taxes Lead to the Same Outcome
While many try to dismiss these liabilities assuming we will continue to only service the debt rather than repay principal andinterest; assuming we turn down the SS benefits via means testing, delaying benefits, reducing benefits; assuming we will bend the curve regarding Medicaid, Medicare, and Welfare benefits; assuming we will avoid further far flung wars and military obligations and stop feeding the military industrial complex; assuming no future economic slowdowns or recessions or worse; assuming a cheap and plentiful energy source is found to transition away from oil.  But all these debts and liabilities are someone else’s future income they are now reliant upon; someone’s future addition to GDP.  If these debts or obligations are curtailed or cancelled to reduce the debt or future liability, the future GDP slows in kind and tax revenues lag and budget deficits grow.  Of course I do advocate these debts and liabilities cannot be maintained, but austerity (real austerity) is painful and would set the stage for a likely depression where the nation (world) proceeds with a bankruptcy determining what and how much of the promises made can be honored until wants, needs, and means are all brought back in alignment.
So What’s it All Mean?
Let’s get real, austerity is not going to happen and we aren’t going to balance the budget.  We’re never going to pay off our debt or even pay it down.  We’re rapidly moving from 4 taxpayers for every social program recipient to 2 per recipient.  And ultimately, now we aren’t even really paying the interest on the debt…the Federal Reserve is just printing money (QE1, 2, 3) to buy the bonds and push the interest payments ever lower masking the true cost of these programs.  Of course, interest rates (Federal Funds Rates) have edged lower since 1980’s 20% to todays 0% to make the massive increases in debt serviceable.
Politicians and central bankers have shown they are going to print money to fulfill the obligations despite the declining purchasing power of the money.  It’s not so much science as religion.  A belief that infinite growth will be reality through unknown technologies, innovations, and solutions that in four decades have gone unsolved but somehow in the next decade will not only be solved but implemented.  Because it is credit that is undertaken with a belief that the obligation will ultimately allow for future repayment of principal, interest, and a profit.  But without the growth, the debt cannot be repaid nor liabilities honored.  Without the ability to repay the principal, the debts just grow and must have ever lower rates to avoid interest Armageddon.  This knowledge creates moral hazard that ever more debt will be rewarded with ever lower rates and thus ever greater system leverage.  The politicians and central bankers will continue stepping in to avoid over indebted individuals, corporations, crony capitalists, cities, states, federal government from failing.  It is a fait accompli that a hyper-monetization has/is/will take place…and now it is simply a matter of time until the globe either becomes saturated with dollars and/or reject the currency (so much to discuss here on likely demotion or replacement of the Petro-dollar and more…).  Because the earthquake (unpayable debt and obligations) has already taken place, now we are simply waiting for the tsunami.  Forget debt repayment or debt reduction…forget means testing or “bending cost curves”…we’re approaching the moment where even at historically low rates we will not be able to pay the interest and maintain government spending…without printing currency as this generation of American’s have never seen.  Bad governance and bad policy coupled with disinterested citizens will demand it.