Post neo-liberal bubble continues to implode

In the post election hype, Denninger keeps it real. The post-neo-liberal bubble that popped in 2007 is continuing to implode.

The "New Normal" In Pictures

Karl Denninger, the Maket Ticker

the Market Ticker,

10 November, 2012

Some ugly facts for your Saturday....

From 1990 to 2000 GDP expanded at an average rate of 4.80%.  Debt expanded at an average rate of 7.51%

From 2000 to 2010 GDP expanded at an average rate of 4.13%.  Debt expanded at an average rate of 6.55%.

From 2010 to 2Q 2012 GDP expanded at a rate of 3.93%.  But debt expanded at only 0.94%, which is a massive paradigm shift from the previous 20 years.

This is good instead of bad, right?

In a word, no.  It is signaling the end of the self-delusional game we've been running for the last three decades.  That endpoint is here, now and today.

Real economic growth has to subtract out government deficit spending. When you do that it looks like this:

There has been no growth of materiality since 2000.  We cheated.  And we cheated before too, but in the private sector with all the Internet scam companies that blew up in the tech wreck.

And by the way, at current run rates (although the numbers are not in yet) this year in terms of actual deficit and actual adjusted GDP will be almost identical to 2011, unless something dramatic changes in the next two months.

We have a grown a few things though.  First, let's look at the growth in Federal (only) health spending.  This is what we've done thus far (smoothed, using the endpoints -- $53 billion in 1980 and $850 billion last year.)

And then there's what that rate projects out to for the next 35 years, which is what the government has promised all those who are 50 and older -- your Medicare will not change if you're 50 or older -- remember?

Best of luck with that, Kemosabe; roughly $16 trillion on federal health spending alone in 2043?  

By the way, for the math-challenged by 2029 we will spend more on health care than the entire federal budget is today.  If you believe that can happen, say much less that 2043 will happen, I have a bridge for sale in Brooklyn.  The foundation might have had a bit of trouble of late though.  I think it was called "Sandy".  Heh, that works, doesn't it?

Of course we've all heard that the economy is recovering since early 2009.  That recovery must be real because this statistic is just skyrocketing -- the number of people (and households) on food stamps.  Uh, if the economy is recovering, why does this number keep going up and why has it gone up by more than 50% in the last four years -- and has never gone back down?

That must be because the fine government people and "eCONomists" are all lying to you.  Let's see if we can find the lies.

We'll begin with employment.  We keep hearing that we're gaining jobs.  This is half-true.  We have in fact added 7.2 million jobs from January 2010 to today.

Unfortunately we also added 7.15 million working-age people during the same time period.  So in point of fact, we added jobs -- all 50,000 of them, when you account for working-age population growth.

Eh, that's not so good, and nobody wants to talk about that.

Of course during the same time gasoline prices have roughly doubled, and most food items are up dramatically in price -- 50% or more.  Milk, eggs, cheese, meats.  I wonder if that would force people onto food stamps -- stagnant employment and outrageously-rising costs. 

It just might!

Why is that happening?  Well that might be due to the Federal Budget.  Ok, ok, it's not really a budget because they didn't pass one.  But this is where we're spending our money, and where we're taking in money in taxes -- and what we're putting on the credit card.  I ordered a few things to point out that we must pay the interest, we must pay "General Government" (that's the light bill for the Capitol, among other important things) and we probably want to pay for things like the Fibbies (various federal law enforcement entities and their infrastructure.)  It's also important to keep in mind the size of those shards of the budget, so when someone says "but the FBI and government is so wasteful on such programs" you can point to exactly how much we would "save" if we stopped doing all of it. 

That is, not enough to matter.

So if we were to stop deficit spending today we could pay the interest on the debt, we could pay for the lights in the White House, we could pay for the FBI and similar, we could pay for Medicare, Medicaid and Social Security. 

But then we run out of money half-way through Defense and have nothing for Welfare, Other spending, Education or Transportation. 

Zip, zero, nada.

There's this little problem with that chart too which explains all of the above with employment and food stamps, along with the other markers of actual economic health.  That nasty red bar with the label "Debt", and which both sides of the aisle claim we can continue to add onto every year, is actually dilution of the nation's wealth.  This is exactly identical to imposing a tax, and it's over a trillion dollars annually.  In point of fact from 2008 to 2012 (calendar) it has been $1.40 trillion, $1.647 trillion, $1.852 trillion, $1.225 trillion and at the current (10 month) run-rate for 2012 it will be $1.246 trillion this year.

Remember, President Obama, when he took office, told us all that he would cut the deficit in half from the fiscal 2008 level, which was about $600 billion, by the time he came up for re-election.

He instead more than doubled the annual deficit and added about $5 trillion in debt across his first term.

And let's not forget that this is not just a Democrat thing.  Oh no -- all spending bills must originate in The House.  Without the House there is no spending and there is no deficit.  And who controls The House?  Why that would be Mr. Speaker Boehner, and I do think he has an "R" after his name.  Despite all the screaming about "fiscal responsibility" he (and Paul Ryan) are abject liars; when push comes to shove they are all more than happy to shove all right -- they shove you, your children and every senior citizen right into the hole right along with help from Obama, Nancy Pelosi and Harry Reid.

But that's not the bad news.  The bad news is that at the rate of escalation going on today we will try to do this by the end of the decade:

Now that is just not going to work at all; we'll pay that light bill, the Fibbies and Health Care but then will run out of money about halfway through Social Security, at which point the FBI will have plenty to do as Granny's shotgun comes out.

So as you go about your weekend, contemplate these facts:

• You can't fix medical entitlement spending.  You instead have to fix the medical system, and the only way to do that is to pull all of the monopoly-style protections so that the cost of care in terms of dollars spent crumbles by 75% or more.  This will result in a lot of short-term unemployment and contraction in GDP, but if it's not done our government and society will blow up.  This is a mathematical certainty.
  
  
• You can't keep escalating defense spending either.  But to fix that you must solve our energy dependence problem, because a huge part of why we spend over $750 billion a year is found there.  Oh, it might help if we didn't hand man-portable anti-aircraft missiles to our "friends" that happen to be affiliated with Al-Qaida too, as we reportedly did in Libya.
  
  

If we contracted Medical Spending by 75% and Defense by half, expiring the payroll tax credit and indexing Social Security retirement to longevity we would balance the budget and stop destroying our nation's competitiveness and middle class.

Doubt me?  Here's the graph, and those three things are all I changed; Social Security does not move in expense but tax receipts go up due to the payroll tax cut expiration by about $200 billion a year.

There isn't any other way to do it.  Welfare, even if cut dramatically, can't be cut enough.  Other spending, education and transportation don't have enough margin in them either -- even cutting them in half won't get there.  Social Security can be slowed in escalation but in point of fact most of it is paid for by the Payroll Tax, or at least it was before Congress raided it with the allegedly "temporary" payroll tax deduction that costs about $210 billion a year in revenue.  Indexing retirement to longevity gets us the rest of the way there by halting the advance of spending on that program.

It comes down to medical spending and defense, and with medical spending the only solution is to remove the monopoly protections and allow competition to force the industry to eat well over a trillion dollars a year in decreased gross revenues, accepting the impact that has on the economy and employment in the short term.  On defense we must resolve our energy dilemma and stop pandering to the Middle East, then literally go home, cutting defense spending in half. 

There is no other answer; raising taxes to close the debt gap is exactly identical to what we're doing now in terms of economic damage; the downward spiral will continue if that is attempted exactly as if we do not and keep trying to deficit spend our way out of the hole.

This is reality folks, and yet nobody wants to face it.

Arithmetic cannot be bargained with.

It just is.