08/02/11 Paris, France – First, we turn to the news. And what do we find? Netscape’s “Money & Business” has this report:
The House on Monday evening passed a bill that would raise the U.S. debt limit by at least $2.1 trillion and cut spending by a similar amount over the next decade. The agreement was reached Sunday night by congressional leaders and President Barack Obama. The Senate is expected to approve it on Tuesday, and it will go to Obama, who has indicated he will sign it.
If you read that fast enough, and drink enough whiskey, you might even think the feds have the situation in hand. Cut spending by an amount equal to the debt ceiling hike…hmmm….sounds almost like you come out even.
But wait, these are two very different things. If you would come out even, there would be no need to increase the debt ceiling. Instead, the deal allows both spending and the debt to go up. It will go up $2.1 trillion…and then, they’ll raise the debt ceiling again.
And yes, they will ‘cut’ spending too. From about $45 trillion over the next 10 years…down to $42.9 trillion (we’re just estimating…we haven’t seen the feds’ numbers in any detail). A $2.1 trillion cut.
Analysts for the feds say they need about $4 trillion in cuts in order to keep the situation under control. That would allow the debts and deficits to increase…but at a pace equal to the growth in the economy.
Alas, the poor schmucks have no idea what they are doing. They base their assumptions on growth rates registered BEFORE the Great Correction began. They assume a full recovery, in other words.
It ain’t gonna happen…for all the reasons Dear Readers know so well.
…an economy burdened by debt does not grow very fast
…an economy that is in the middle of a debt contraction barely grows at all
…forget adding more cash and credit ‘stimulus’ – it doesn’t work when an economy is already drenched in debt
…the US economy is also burdened by the cost of maintaining a military empire – costs that aren’t going away
While revenues will not meet expectations, spending will exceed them. Why? Because the softness in the economy will leave more and more people on government support. Already, 59% of the public gets money from the feds. And because spending ALWAYS exceeds expectations…
Even $4 trillion worth of budget cuts would probably not be enough…not by a long shot.
As we told the investment conference in Vancouver, there is something bigger, more important going on. A Great Correction is underway. We wait to find out what it will correct.
…a real estate bubble?
…a bull market in stocks?
…a credit expansion?
…a great empire?
…the rise of the European powers after the invention of the steam engine?
…the outsized gains brought by using cheap oil?
We don’t know its final destination. All we know is that a Great Correction is underway.
Regards,
Bill Bonner,
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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“…an economy burdened by debt does not grow very fast”
our currency is debt. our economy is based on pyramid debt. that’s what “growth” is – growth of debt.
the base of the pyramid scheme has exceeded all possible support. and because of demographic decline what support remains is shrinking. because it can no longer grow the pyramid scheme is now beginning to implode. it will continue to implode until fresh debt slaves can be found. none are on the horizon.
Sure the debt ceiling gets raised right away, but the major cuts themselves don’t really get enacted untill 2014, if the current or future administration does not undo it. If this isn’t kicking the can down the road, then what is?
gman has it right, at the end of the day its a demographic problem that goes all the way back to 1963 when the birth control pill became widely available and was considered an acceptable part of family planning. Not that I have a moral opinion on that, it simply is what it is. But the end result has been a stagnant growth in population aside from immigrants, and now with the graying of the population nearly every aspect of the economy is doomed to contraction. Of course there are some exceptions, anyone aware of any publicly traded hospice companies? But seriously, the crash is already in the cards, there is no fiscal or monetary solution because the debt situation is a symptom not a cause of the problem.
The Pill came out in 1960, not 1963.
Ask me how I know.
Pill did came out in 1960, but did not become the social norm until several years later. Hence a steady decline in kindergarten enrollement beginning in 1965 which became much more pronounced in 1967 and 1968.
Baseline accounting Enron would be envious of !
It is the Empire, but only b/c the Empire is the biggest drain on the Zombie Economy there is. Parasites all over the world can feed off it and it is expensive. Food stamps for 100,000 of our Srs. for a year probably won’t buy the ignition switch of a fighter jet.
The Zombie Economy is what is bringing the U.S. down. Not demographics or pyramid schemes like SS.
The U.S. could afford every other section of its Zombie Economy, but not the Empire, b/c it causes the Zombie Economy to be financed via debt. Whereas social programs in the Zombie Economy can be paid for without incurring debt.
AR has lost 72,100 manufacturing jobs over the last 10 year period. This loss in the private sector allowed the FedGov to become the state’s 4th largest employer. Prior to 4/1/01 I believe the Fed was about around the 50th or so largest employer the state. Production jobs lost, consumption jobs took over.
How long can this go on.
I agree with most statements made here. The ability to understand Debt Ceiling Madness in this market will show your strength in the future. I appreciate you sharing this with the rest of us Bill.