More Budget Doom, The Rolling Stones, an End Date, and an Unlikely Version of Thunderstruck

“This is the federal government, huh?  Now I know why my old man got a hundred and eleven Medicare cards sent to him.  Not one of them had his name on it.”  – The Rockford Files

20170830_133525

I finally found Waldo!!!

Last week we talked through the specter of the budget deficit.  A link to that awesome post is here (LINK).  But I mentioned there was much more to the story.  I wasn’t trying to be a tease – I had originally intended that this next segment be attached to last week’s post.  But I failed.  When I did the word count on last week’s post?  It was already my second longest post ever, plus it was 2AM (really 2:30), so I punted until this week to cover the rest of it . . . even Iron John Wilder must sleep sometime, even though I consider “sleepy” the next cousin of “communist infiltrator.”

On Last Week’s Wilder Wealthy and Wise:

We have a budget that, mathematically, must rise exponentially and create deficits to keep us from permanent recession.  That’s a pretty ugly realization.  Recap over, though there’s more to it at the LINK.  I was discussing this post with a friend.  “John Wilder, what can we do to fix this?”

Me:  “Ummm, when you’ve been accelerating towards a brick wall and you’ve hit 70 miles an hour, and you yell stop 20 feet before the wall?  Nothing will help you.  Ask for your money back from ACME.”

Last week’s post describes a threat, but not the only threat – if it were, it might be manageable.  Even Wile E. Coyote has airbags nowadays.  But now?  There are components of the budget that are growing much faster than the rest, and will soon crowd out the rest of the spending.  I’ll start with the biggest of the big:  Medicare and Medicaid.

These programs started June 30, 1965, when President Johnson signed some stupid bill that he knew would get him votes but that he wouldn’t live long enough to see the consequences.

The Rolling Stones had the number two slot on the Top 20 the day he signed that stupid bill:

I just never want to see Mick Jagger eating an ice cream cone.  Especially not old, wrinkly Mick. (shudder)

800px-Medicare_and_Medicaid_GDP_Chart

(H/T Wikimedia Commons)

That’s a pretty cool graph.  Even cooler is that the Congressional Budget Office did it for me.  I like free things that I only pay taxes for.

But it’s not cool because it shows that by 2037 (the benchmark year we’ve been talking about) Medicare and Medicaid will grow like some science fiction monster to consume about 10% of the GDP.  Since Federal taxes seem to “break” the economy over about 19% of GDP, it appears we won’t be able to afford much of anything else, since right now Social Security consumes about 25% of federal spending.  But more on that later.

Let me explain the “excess growth” label:  it means that the program is projected to grow faster than the economy grows, and in this case, much faster.  But I’m still suspicious –federal government estimates are rarely conservative – program expenses always seem to grow faster, and the GDP always seems to grow more slowly.

But it gets worse:

Social Security has a “Trust Fund” that will run out in 18 years!  OMG!

Actually, the whole “Trust Fund” consists of the Social Security taxes you and your employer pay in every year.  For most of the history of Social Security, the taxes you and your pay have paid for the program, plus a lot more.

So, did the government invest that money in the stock market?  No.  Real estate?  No.  Well, surely they invested it?

Kinda.  They bought US Treasury Bonds.

And then immediately spent the money that they had just given themselves.  It is technically true that Social Security has a $2.8 Trillion trust fund that gets interest every year.  But it’s more like saying that you have $100 in your left pocket.  You transfer it to your right pocket, and put an IOU $100 LOL paper in your left pocket.  You then spend the entire $100 on PEZ®, pantyhose and elephant rides.

Congratulations!  You still have a $100 trust fund!

So, you can see that math is pretty stupid, but the government keeps doing it.  What’s more important is that we went from having extra money every month that we could blow on PEZ© to not.  Pretty quickly.  And it adds up:

ib3638_chart5_600SS

Source:  Heritage Foundation

I’m sad to tell you that last week’s budget projection doesn’t take into account the explosive growth in cost of Medicare and Medicaid, and the “not quite as scary” growth in Social Security.

Okay John Wilder, this is NOT GOOD.

Nope.  And we’ve only been talking about the federal government.  At the state level, pension funds are (according to Moody’s (LINK)) underfunded by $1.75 trillion.  Whew!  I thought we were talking big money!  But in 2015, these same pensions were underfunded by $1.25 trillion.  So, that’s only a loss of 40% in two years, when the stock market has been consistently rising.  Right now the stock market is near an all-time high.

It’s like the states have a dedicated team of sugar-addled toddlers to managing their pension money and replaced the water cooler with chocolate syrup.  NO ONE could lose money in this environment.  But let’s not forget to blame 43 of the state legislatures for assuming that their pension funds would grow at a constant 8%.  First, most people would love that rate with current interest rates.  Secondly, you’re never going to get that with the batch of sugar-addled toddlers that they currently employ – you might get your portfolio traded for a Cadbury’s® Cream Egg™, and there’s not a lot of return in that.

I’m expecting the state underfunding to double or triple in the next five years – Chicago can’t pay policemen retirement past 2020 or so.  There are actually more retired cops than active cops that they’re paying.  This stuff is all over the place.  Easy to solve in a growing economy without debt.  Here?  Just more chaos to add to the picture.  You how bad it is in your state, according to the Wall Street Journal (LINK).

There certainly is an end game, however.

As I’ve mentioned before, the high United States’ reliance on debt combined with the use of the dollar as the de facto world currency places it in a pretty perilous precarious position.  Here are some random bad things that could happen (up front, I’m thinking these things won’t happen for a few years, and it may not be these things – but something will happen):

  • Some country, like China, will dump all of their dollars to sink the dollar. Right now, China hasn’t done this because they’re not strong enough militarily or economically.  Eventually, their math might change.
  • Somebody will come up with something better than the dollar. This isn’t as likely, but is still a possibility.  When a currency isn’t backed by anything (like the dollar) it’s all a matter of perception.
  • Everyone stops buying Treasury Bonds (i.e., the money government is borrowing) and interest rates have to shoot up to convince people to buy United States debt.
  • We will have an internal crisis brought on by the cold equations that govern the debt. One projection shows that by 2031 (not that far off) that Medicaid, Medicare, Social Security and interest on the debt will consume . . . all the projected tax money.  All of it.  And this might be optimistic, because this graph doesn’t show nearly as much Medicare and Medicaid spending as the CBO does.  I think this might be based on an older data set.  Too optimistic.

End Game

Source:  Heritage Foundation, http://budgetbook.heritage.org/

It’s really hard to post a graph like the one above and argue that it’s too optimistic, but I think it really is.  We’ll probably run into hard limits sooner, say 2025.  In no way can this continue beyond 2040 or so.

Well, John Wilder, you say, we’ve been through a depression before.  This should be a cakewalk!  We have Netflix®!

True!  And I will be chillin’ with Netflix© as the ship sinks with a Macanudo™ and some awesome Malbec as the deck tilts, but in the Great Depression our economy was fundamentally different – instead of 70%+ of our economy being driven by consumption, we were the net producer for the world.  Our big problem back then was that we had so much money from all of those other countries floating around, as we were the largest net creditor nation in the world.  Now we’re the largest net debtor.  Ever.

And your grandma and grandpa had a garden, didn’t they?  It was quaint, you thought.  Back during the depression 20% or so of folks lived on farms.  They didn’t starve because they had access to chickens, eggs, food.  They could turn corn stalks into shoes.  Or something.  The garden your grandma kept?  She kept it because she remembered the hungry days, the days when they saved everything because it might have a use.  My mother saved aluminum TV dinner trays (yes, this was a thing) for decades.  “Might have a use for them.”

So what happens after the currency gets wonky?  Hard to say.  This is the textbook definition of a singularity – all the parts go vertical or are divided by zero.  What happens when that happens?  Again, that’s a really hard set of questions, and this is not the only singularity we will be facing in the near term.

I’ll have a future set of posts on other singularities like this.  The next one should be Monday, and it’ll be a doozy.

Hope this conversation didn’t leave you Thunderstruck.  If so, here’s a cure:

Yes, you did just see that.

 

Author: John

Nobel-Prize Winning, MacArthur Genius Grant Near Recipient writing to you regularly about Fitness, Wealth, and Wisdom – How to be happy and how to be healthy. Oh, and rich.

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