Sequester or No Sequester: US Federal Finances Are Doomed

Let’s turn our eyes to a gaudy show: today’s financial hurly-burly.

The Dow fell 216 points Monday. Why? We don’t know. Are investors concerned that the Fed will turn off the money machine?

Are they troubled by the ‘sequester‘, which would further squeeze government spending? (This year, Washington is embarking on fiscal tightening of 2% of GDP – one of the biggest budget squeezes in the last century.)

Every day comes news from Washington. Sequester? Compromise? Meat axe? We are getting tired of it. Here’s Reuters:

‘”They’ve rolled out this great political theater about how cutting less than 3% of the federal budget is going to cause all these awful consequences,” said Louisiana Governor Bobby Jindal, a Republican, on NBC’s “Meet the Press.”

‘”Here’s his chance to say, ‘Here’s how we can do it better,'” Jindal said, suggesting Congress and the White House give departments the ability to cut spending on less essential services.

”Senate Democrats have put forward a plan that focuses on those tax loopholes. This week, Republicans are expected to propose alternatives.

‘”We don’t have any ability with dumb cuts like this to figure out what the right thing to do is,” Education Secretary Arne Duncan said on “Face the Nation.”

‘”There are literally teachers now who are given pink slips, who are given notices that they can’t come back this fall,” Duncan said.

‘Democratic Congressman Eliot Engel agreed that Congress should seek “smart” cuts, rather than across-the-board reductions.

‘”I think Congress should sit down and avoid the sequester,” Engel said on ABC’s “This Week.”

‘”And if the sequester kicks in, for a week or so, we should then fix it so it doesn’t become a permanent thing,” Engel said.’

Blah. Blah. Blah.

And here comes Alan Blinder in The Wall Street Journal. Stop worrying about debt, he says. It’s under control. Sort of.

Blinder says the budget fights in Congress have paid off. The idea from the get-go was to cut $4 trillion from the $10 trillion in additional debt the feds were meant to add over the next 10 years. That was supposed to stabilize federal debt – the portion in the hands of the public – at 73% of GDP.

The Budget Control Act of 2011 chipped off a bit: $1.9 billion, if you believe the forecasters. Then there was the ‘fiscal cliff’ settlement, which took off about $850 billion more. Just 0.6% more to go, he says.

Not only that, but also he says Medicare costs are growing slower than GDP…which is a real feat, since GDP contracted in the last quarter.

An Edifice Built on Sand


So, what do we budget-bankruptcy-and-boondoggle worrywarts have to say about this?

We say it ain’t so.

  1. Because the budget forecasters presume a return to ‘growth’, which may or may not be so.
  2. Because they predict that interest rates will remain low, which we know can’t last forever.
  3. Because they don’t bother to consider the real debt – which takes into account unfunded liabilities, such as pensions – that is growing seven times faster than the official debt.
  4. Because they completely ignore that the federal budget edifice is erected on the sand of EZ money from the Fed. The central bank is helpfully printing money at almost exactly the same rate that the feds borrow it. When that tide goes out – and it must, sooner or later – it will wash out the foundations under federal finances…and the whole thing will fall down.

It’s not that Blinder is wrong. It’s just that there are other things going on that are likely to make nonsense of his smiley-faced projections.

Of course, only time will tell. And we’ll stand down…and let time tell her story at her own speed.

Bill Bonner
for Markets and Money

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From the Archives…

High Tide on Main Street?
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The Fed’s Funny Money is Losing its Mojo
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Resurrecting BHP, the ‘Big Australian’
20-02-13 – Dan Denning

End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
18-02-13 – Chris Mayer

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 Markets and Money.

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