04/24/10 Baltimore, Maryland – In the early days of making the film I.O.U.S.A., we made the decision to stick with Congressional Budget Office (CBO) numbers, but not because we inherently trust them. We enjoy parsing the shadow government statistics produced by John Williams (at shadowstats.com) as much as the next armchair economist. But the CBO numbers are theoretically conservative, and whether we like it or not, they are the numbers the market reacts to and the numbers legislators are meant to use when crafting new legislation.
In those early days, in May 2006, the CBO projected Social Security would run out of cash by 2019. By the time we finished the film, the CBO estimate had been moved forward to 2017.
Last year, in 2009, the government bean counters estimated the fund would be bankrupt by 2016… this year, because of the credit crisis and recession, the CBO says it’s happening now, in 2010. The problem with running chronic deficits is when a real crisis develops, the government is left without the resources to address it.
Unfortunately, the buck stops with your wallet, your paycheck, your retirement plans.
Numbers From Fantasyland Mean Uncle Sam Wants You… for More Revenue
The CBO just crunched the numbers from President Obama’s proposed budget for fiscal 2011. Then it projected the resulting deficits for the rest of the decade.
Allegedly, the deficit retreats under the $1 trillion mark by 2012. But then it shoots back above that level by 2018. And by 2020, we return to a federal deficit that’s fully 90% of GDP.
If that’s not scary enough, consider the CBO’s assumptions behind these numbers:
- Unemployment returns to 5% by 2015 and remains there the rest of the decade
- The consumer price index stays below 2% every year from 2011–2020
- GDP grows at least 4% every year from 2011 onward.
In other words, the budget assumes no more recessions the rest of the decade. (No energy shocks, either.)
That’s fantasyland. And if members of Congress don’t know it, their staffs who study this sort of thing do. They’re going to be scrounging around for more revenue. And after a while, there’s only so much that can be squeezed out of “the rich.”
Which makes us worry about the income tax bill Congress will pass this year.
You haven’t heard about it? Can’t blame you, with all the hoopla over health care. And with that out of the way, Congress now has its sights set on financial “reform” and climate change laws. But if the lowest-income Americans don’t want to see a 50% tax increase come next year, Congress is going to have to do something this year.
That’s right. Remember, the two rounds of tax cuts passed in 2001 and 2003 expire next year if Congress does nothing.
Yes, the president is committed to allowing the cuts to expire for households earning $250,000 a year or more. But they go away for everyone else unless Congress passes a new tax law. The lowest bracket of taxpayers would see its rates go up from 10% to 15% – an effective 50% increase.
That’s not gonna happen. So yes, there will be income tax legislation this year. But will it only hit households above the magic $250,000 threshold? Or will the scramble for revenue hit other people as well? And how soon?
We don’t know. But we know something’s in the works. The acting chairman of the Ways and Means Committee told The Hill newspaper he hopes to take it up as soon as this month. Mainstream media are paying no attention. But we will… both here and in The 5 Min. Forecast.
Last month, I addressed a group of students at the Towson University school of finance by invitation of my friend Tim Maurer who, in addition to being a best-selling co-author of Financial Crossroads, teaches a class on annuities and taxation and other things that CPAs are supposed to know. We discussed the issues raised in I.O.U.S.A. after they’d been assigned to watch it for the class.
“What is so bad about a debt-to-GDP ratio in the 90% range?” one student asked. “We had greater ratios during and after World War II. And Japan has been running in excess of 130% of GDP for years? They seem to be doing fine.”
“You don’t know this yet,” we tried to explain, “but when you leave school with a mound of debt, try to find work in a struggling economy – you’ll begin to understand. When you try to buy a home…when you want to get married…send future children to school. When you try to hang your shingle and attract clients for your wealth advisory business, you’ll begin to see that productive debt is not a bad thing. But unproductive debt, debt for consumption purposes, limits your options.”
We used to be a nation of thrifty creditors. Now even our sharpest students look abroad and see no problem with collectivized risk and a mountain of unpaid liabilities.
Regards,
Addison Wiggin
for The Daily Reckoning
Addison Wiggin
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
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When it is said that “the CBO projected Social Security would run out of cash by 2019,” it actually means that Social Security will have no more money for the Government to borrow from, or steal from depending on perspective and the government cannot possibly pay off the IOUs owed to Social Security.
Like .99 cents is so much lower than $1.00. Pathetic
Is “And by 2020, we return to a federal deficit that’s fully 90% of GDP…” a misprint?
Don’t you mean, say, 9% of GDP?
Oh, I see, you meant “debt”, not “deficit”— that’s the misprint. (See prior comment for context.)
All young people I have spoken to feel much the same way. Their credit score is more valuable to them than pretty much anything. This will be a problem for them when they discover reality.
They are also upset about the SS situation, believing too many oldsters are the problem. Explaining that the too many oldsters used to be too many youngsters paying far more into the system than it needed only to be spent (rather than saved) by the government gets you no where.
Good write Mr. Wiggin
“Want more money, print more money.” All over the world, printer speed is accelerating. Gold and silver are tons of money fortified. Last year, when gold started to dip from 1,200 height, Kitco’s prominent commenter, forecasted that it would slide to 700.00. But, it only breifly touched 1,000 and again on fly. Their stagnated prices are only temporary due to imperfect market. Do not hesitate, buy and keep them under the pillow.
Yes, euros is already at 0.7460. Gold held steady. Remember, dollars can also weaken as much as euros. Uncle Sam’s printer is no inferior to European’s model, if not much superior. Gold down to 700 is only a fantasy, a myth.
Yes, it is much easy to print than to drill oil. Much faster to print than industrial production. That is why, everybody will get rich.
I wouldn’t take a dime of gold from anyone. All that does is put at least one more move or effort into trading it for something else. Diamonds were used much the same as gold for exchange only because the supply is manipulated just as gold supply is manipulated. Have you ever paid retail for a diamond and then tried to sell it. You would be lucky to get 50% of what you paid for it. Gold is just something else dug out of the ground.
Like .99 cents is so much lower than $1.00. Pathetic.
well, well, well. We have 99 cents telling us all how dumb we are. It’s like a marriage.
And, drill for oil? It is to laugh.
Ya’ll go ahead on. Us old dusters will watch as you go round and round your corrupt little bush, spondaically, spasms of vital fluids spilling onto the ground.
A very good point that questions what economic data are used as the basis for legislation. I get the impression sometimes that the pols believe their own lies; inflation rate and employment numbers being the prime example.
Do you suppose they are keeping two sets of “books”–one for public consumption and the other for a reality check? Kudos to Shadowstats.
“What is so bad about a debt-to-GDP ratio in the 90% range?”
You answer this students question by telling him he will understand when he grows up. He must be wondering what kind of value he is getting for his education dollars.
The government stole the money that people paid into S.S. all their life. Don’t worry. The Cat Food Commission will provide political cover to default on the debt. Put granny out on the ice but don’t even discuss the pentagon budget.
Hi Mr 99
What on earth is not manipulated ?
From method to program a software..democratic election.. right down to money supply.. they are, needless to tell, “manipulated” ? Aren’t they ?
Yes Indeed,
anything that changes in price, in effect, is due to collective manipulation. The idea is to get in low and out high in ANY “security” long purchase.
“well, well, well. We have 99 cents telling us all how dumb we are. It’s like a marriage.” You said it I didn’t. Your premise being that if one buys gold one is smart and all others dumb? This question can go on forever. Is the human species smart or dumb? Or both? And to Little Opinion: If all things are manipulated does that mean we have to accept them? Just call me a devils advocate. You are all correct and all wrong. Hahaha. Remember “fun” is the salvation of society. Not money, or gold, or oil. Its our ability to laugh at ourselves.
Like .99 cents is so much lower than $1.00. Pathetic