Friday, July 08, 2011

The Buffett Mind Set

Warren Buffett suggests that we raise the National Debt limit. If you look at it his way, we can only run out of money if we stop printing it. CNBC’s Rick Santelli, part of the original Tea Party, thinks that now is the time to stop spending. So what if the government can’t pay all of its bills, it needs to live within our means. Not everyone gets paid, but we won't be kicking the can down the road to the next election. Two opposing views that are radically different. And of course in this country, the more money you have the more valued your opinion.

Total tax collections for the country equaled 2.162 trillion dollars last year. Anyone want to bet that this year won’t quite make it to that level?

Total expenditures equaled 3.456 Trillion. And figure another 800 billion that somehow never made it into the colorful illustrations. The word "Off budget," comes to mind. The "Net Interest" below needs to be added to "Other Mandatory" for a more realistic number. Somebody from Fannie Mae must be doing these visual aids.

Below is a graph plotting future debt payments, to progressively higher interest rates, using the new anticipated national debt level of 16 trillion dollars. As interest rates rise, there are fewer dollars left for real government operations. The "Game Over" point is where taxes collected are less than interest owed. Our debt burden makes us very vulnerable to any future interest rate hikes. [double click for a more depressing view]

Government financing will fall apart way before we hit 12 percent. At an interest rate of about 9 percent, Social Security and Medicare would no longer be 100% fundable. The thing to worry about, is that interest rates don’t just increase slowly. Greece saw an interest rate jump from 12 percent to 26 percent in seven months.

We are at a fork in the road. Rick Santelli makes a lot of sense, no new taxes and put government on a budget. We can't seriously expect to spend our way out of debt. Our other option is a financial train wreck, a year or two down the road. With an added benefit, we get to wipe the 16 trillion off the books and start over. Of course if you're close to retirement age, the words "Start Over" means you're going to need a shopping cart with 4 good wheels and a large cardboard box for the long haul. It wouldn't be so bad if my wife didn't hate camping.


Anonymous said...

Lets make social security optional, then cap SS funds out with funds coming in. Markets have a way of correcting themselves, and it would be interesting to see the outcome on that one. It also gives the government the excuse to pay out less, without defaulting.

Jim in San Marcos said...

Hi Anon 8:40

I think after they hand you the free cigarette, the blindfold should be a dead giveaway.

If you examine the first diagram, the Fed collected almost as much in SS as they do in personal income tax.

Plus the Supreme Court ruled Social Security is a tax rather than an entitlement a while back. Congress has spent every last dime that wasn't paid to a Social Security recipient on other items.

The Social Security fund use to be a cash cow for Congress. It looks as if they will pay out as much as they receive into the fund this year just for Social Security. No surplus for other goodie programs.

As you suggest the government will eventually have to pay out less. It's kind of like sticking a broom handle into a bee's nest. It won't go well from there.

Sackerson said...

Seems to me it's better to apply the brakes in a controlled way rather than stand on them and skid off the road into a tree, so I'd favour raising the ceiling while also starting to sort out the mess. The time to get savagely Puritan about debt was 40 years ago, or more. Doing it now is just for the benefit of those who made their pile twisting it out of the system and now want the right to keep it. It's little better than money-laundering.

Jim in San Marcos said...

Hi Sack

I had an analogy also when I wrote the original copy, but I considered it a bit too vivid so I deleted it. Mine was that Congress was like a pedophile turned loose in a day care center, and tapering off was what the Democrats were proposing.

The contrast of our two analogies, kind of points out how a blogger or commenter can "guide" the reader to the intended view. It scares me a tad. I'll be more careful with my analogies in the future.

You hit on the root cause of this whole mess when you suggested that we should have done something 40 years ago. We probably need to go back to the invention of Penicillin 70 years ago. Politics haven't changed much over time, but people are not dropping dead as fast as they use to. The majority of us are suppose to be dead before age 65. I guess we need to inform people that there is a drop dead day that they are ignoring.

As if that wasn't bad enough, some bloke added in health care benefits.

Most of my analogies in the past, (I hope) were directed toward some levity and off the wall sexual humor.

One of Winston Churchill Quotes come to mind "You can always count on Americans to do the right thing - after they've tried everything else." Congress will get there, I hope.

Another one of his " An appeaser is one who feeds a crocodile—hoping it will eat him last," kind of fits in with the Euro currency-PIIGS problem.

It will be interesting to see what Congress does in the coming weeks as it will with what the the Euro Union does with Greece and the other lost souls.

The real laugh is that this isn't going to cost anyone a dime!

Take Care

frakrak said...

Hi Jim great post, gives clarity to your countries budgetary problems. I think your public will be discussing QE4 in another month!
It makes no sense in pulling the rug out now when your congress has embarked on a huge monetary expansion (esp last 3 years), comment four is in my humble opinion pristine logic:)
Expect the unexpected, and remember that innovation in your economy could make the U.S. bouyant again. I know it sounds a little too hopeful but it shouldn't take too much longer to have the wisdom of hindsight on all this!
Read that your government is negotiating some fairly substancial military bases on Australian soil, and that U.S troops will be stationed permenantly here!! It is as the report said being fast tracked!

frakrak said...

that should read comment 3...

Jim in San Marcos said...

Hi Frakrak

I agree that Sackersons plan could work if our Congress would face the unpleasant tasks at hand and deal with them responsibly. Their only goal is to get re elected.

Common sense suggests that our country should have been saving for that "rainy day." Well, they never did and this mess hit right when we were most vulnerable financially.

The governments massive spending programs to jump start the economy have either gone into consumption or speculation in the stock market.

If a country borrows 16 trillion dollars with no hope of ever paying it back, you have to ask the question "Who loaned them the money?" Just look in the mirror for your answer.

The Federal Reserve has also been buying Treasuries on the open market to keep interest rates low. The legality of it is in question.It is only a matter of time till the PIIGS collapse. When that happens interest rates will rise and that is where that last chart shows our present vulnerability.

The thing to realize here is that these 10 year proposed solutions only last till the next election (2 years). The Democrats won't cut entitlements, it's what got them elected.

If I was broke and over my credit card limit, having Visa raise my limit higher makes life easier for me short term. Long term, I'd still be broke. Raising my limit in no way makes me more able to repay what I have borrowed.

Anonymous said...

The US maxes out all of its credit cards. The lenders refuse to raise the limits any further. Bond vigilantes raise the interest rates due to risk. Government income can't even pay the interest now. The politicians will take it all the way to this point. They will never reverse their misguided ways. It will have to be the crisis scenario I just outlined above.

Expect this total collapse within the next 5 years (I give it 5 because of the amazing tenacity and potential that the politicians have to kick the can down the road even further).

If you can live in a tent and can play the fiddle, tap dance or something in order to get money for supper you'll be alright.

Be prepared for an economic zeitgeist of "Brother can you spare a dime" on steroids.

Anonymous said...

This could be a major catastrophe or life will go on as usual.

Remember the cold war? Remember the 80's with all the survivalists warning of economic apocalypse? Remember Y2K? Remember 9/11? And the list goes on. All those threats and all that preparation and anxiety for naught.

Things can continue to float forward despite all the bad news and threats. We could be sitting waiting for the other shoe to drop for another decade. Or longer.

I'm not convinced that things are going to fall apart in the near future.

Anonymous said...

"I'm not convinced that things are going to fall apart in the near future."

Interesting. It is a manmade societal issue, not like we have a famine or meteor coming. I get this feeling they want us to be scared though. The more we believe in their world, the more it exists.

Jim in San Marcos said...

Hi Anon 11:06 and 12:06

I think your both right in your assumptions.

Financial ruin is a non event. Nothing has been destroyed in a physical sense.

I do think that the people at the poverty level will feel the most pain.

What will happen next is a little like that room at the top of the stairs when we were little kids and it was dark. I wish I had a dollar for every monster that I thought was lurking up there.

I don't think it will be as bad as we imagine, but it could involve some real suffering on a financial level.

Jim in San Marcos said...

Hi Anon 1:31

I wonder if we have the luxury of 5 years? It seems like the rest of the world could fall apart within the span of a year.

The only musical instrument I can play is the radio, so I guess I'm SOL

Anonymous said...

Can you believe Bernanke is already offering up QE3!? More of what didn't work. He should be assasinated. Every Fed Governor should be assasinated. The message should be that anyone taking over these positions will be assasinated. That is how to put an end to the Federal Reserve. They are a scourge. A deadly virus that has been killing our country. Execute these criminals and blow up the Federal Reserve building or turn it into a museum or library.

Jim in San Marcos said...

Hi Anon 9:23

I think your anger needs to be redirected towards Congress. Bernanke isn't making a dollar on this. His shenanigans only help Congress kick the can (rearrange deck chairs) down the road.

The trouble is, most of the life boats have already been launched and the band is playing--kind of exciting, only in this case, it isn't a movie.

frakrak said...

Jim, Benanke must feel some pressure at the moment, I wouldn't like to be in his position, have you noticed how Greenspan got out just before all this went feral?
When we started having our GFC no one thought of PIIGS and the European debt crisis? Suddenly the U.S. was the safe haven compared to the rest of the world. I think this will be a last man standing scenario, more unexpected to come?
We only see a thin veneer of what is going on here.
Steve Keene (debt watch)has interesting hypothesis on why the U.S. is experiencing some levels of inflation during this record credit contration. The 1930's depression was driven primarily by business debt, this time 'round it is personal debt and financial sector debt, two very different inputs to the 1930's situation.
Jim on your first diagram who inputs the SS and insurance part of the pie chart?

Unknown said...

and why not cut government spending (like say, the wars, the medicare prescription drug benefit) and let the Bush tax cuts expire?

Anonymous said...

Bernanke, Congress and the Obama Administration are all tied for first place as...

Public Enemy #1

Our government has been usurped by criminals, clowns and self-serving opportunists.

The best thing you could do for this country would be to imprison every last one of them.

Ron Paul just announced that he will never run for Congress again as it is full of criminals and it is impossible to get anything done. He realizes that he can accomplish much more outside the beltway through educational actions in the hope of saving our country.

Jim in San Marcos said...

Hi Frakrak

You touch on an interesting point. Who pays for the Social Security and health care contributions?

Technically the employer pays half and the employee pays half. If you are self employed, you get to pay it all.

Reality is when you have to pay it all!

Anonymous said...

It stands to reason that neither the FED nor foreign creditors will provide more loans to the US Govt when it is incapable of making interest payments.

What's a govt to do?

Print its own money.

No wonder Bernanke makes speeches about the need to cut spending. ...