Why Uncle Sam is Skunked

April 19, 2011

PIMCO’s Bill Gross explains why he won’t buy US government debt:

The above four multi-trillion-dollar liability balls are staggering in their implications. Remember first of all that the nearly $65 trillion of entitlement liabilities shown above are not some estimate of future spending. They are the discounted net present value of current spending should it continue at the projected demographic rate (importantly ­– it is much higher than the annual CPI + 1% used as a discounter because demand for healthcare rises much faster than inflation.) And while some Honorable Congressional Le Pews would counter that Medicaid is appropriated annually and therefore requires no discounted reserve, those words would surely count as “sweet nothings,” believable only to those whom they romance every several years at the polls. The incredible reality is that the $9.1 trillion federal debt that constitutes the next-to-tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter. The former (the $9.1 trillion current Treasury debt) does not even merit planetary status in our solar system of discounted future liabilities. It’s really just a large asteroid.

Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a “lockbox,” much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1% that was used to produce the above discounted present value in the first place. Actually, that’s not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual “lockbox” tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pepé, you’ve got a stinker of a problem.

Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden. Perhaps we could, if it was only $9.1 trillion, as shown in Chart 2. That would be 65% of GDP and well within reasonable ranges for sovereign debt burdens. But that is not the reality. As others, such as Pete Peterson of the Blackstone Group and Mary Meeker, have shown much better and for far longer than I, the true but unrecorded debt of the U.S. Treasury is not $9.1 trillion or even $11-12 trillion when Agency and Student Loan liabilities are thrown in, but $65 trillion more! This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP! We are out-Greeking the Greeks, dear reader.

If so, and if the USA were a corporation, then it would probably have a negative net worth of $35-40 trillion once our “assets” were properly accounted for, as pointed out by Mary Meeker and endorsed by luminaries such as Paul Volcker and Michael Bloomberg in a recent piece titled “USA Inc.” However approximate and subjective that number is, no lender would lend to such a corporation. Because if that company had a printing press much like the U.S. with an official “reserve currency” seal of approval affixed to every dollar bill, that lender/saver would have to know that the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation – surely unthinkable, 2) surreptitiously via accelerating and unexpectedly higher inflation – likely but not significant in its impact, 3) deceptively via a declining dollar– currently taking place right in front of our noses, and 4) stealthily via policy rates and Treasury yields far below historical levels – paying savers less on their money and hoping they won’t complain.

One Response to Why Uncle Sam is Skunked

  1. Gerry Owen on April 19, 2011 at 10:34 pm

    That is all future debt-
    All monies we do not have. The Social Security portion is pretty much assured- although it too will rise with Inflation adjustments down the road. Medicare and Medicaid numbers have the potential to be affected positively should market forces drive down the cost of health care, but it is hard to see how even in the rosiest of scenarios it will be anywhere close to being enough.

    These ponzi shemes have run their course. We need to make the hard choices and start to dismantle them. 55 and older have been sold this bill of goods their entire working lives, and it is too late for them to adjust- we must meet those commitments. Every one else will need to face reality.
    Eligibilty for SS and Medicare will need to be raised for those under 55.
    SS needs to phased out by setting a schedule of reduced benefits and increased eligibility age limits until the program is zeroed out for currently in the 25-35 range.

    Medicare should be turned over to the states, perhaps as a stipend for private insurance, following a similar path to dissolution as SS.

    Medicaid should also be turned over to the states in its entirety- for them to administer or dissolve as their budgets allow and as they see fit.

    SSI is riddled with fraud and abuse. Drug and Alcohol addiction should not be considered a disability. These types of programs were administered by the states as well before Nixon pushed for the federal takeover- send this back to the states as well, again for them to administer as they see fit.

    We have 50 state governments which can and will come up with a variety of novel and innovative ways to handle these issues. The Federal Government has only made the eternal problem of assisting the poor needy worse in a half century of involvement- and has bankrupted us in the process.

    It is time to end it, before we end ourselves as a nation.