We'll be lucky if it's only this bad...
The CBO released preliminary FY 2011 budget numbers on Friday, and federal spending came in at $3.600 trillion, with a deficit of $1.298. Both are higher than FY 2010 ($3.456 in spending and a $1.294 deficit), even though most forecasts predicted that FY 2011 would be better on both counts.
Tax revenues were up 7%, primarily due to more income taxes coming in. Payroll taxes were down 5.3%, in part due to the payroll tax holiday in effect to “stimulate” the economy. Given that unemployment is still high and wages are flat, I’m guessing that the lion’s share of the higher income receipts is coming from those “millionaires and billionaires” who aren’t paying their share.
The biggest increase in spending came in interest payments, which rose 17% in FY 2011. As I wrote last February, future interest expenses are the biggest and most dangerous unknown in our fiscal future, since it’s out of our control to a large degree. Care to guess what will happen to that spending category if our credit is downgraded again and the market loses its appetite for Treasuries?
I also tracked down the amount of publicly held debt issued in FY 2011. As I showed here, the government usually racks up more debt than the deficit figures reveal, with what I call “magic debt” or “hidden debt.” So I went to the Bureau of Public Debt’s site here and searched the time period of 9/30/10-9/30/11. To my surprise, the BPD shows the publicly held debt only increasing by $1.105 trillion, from $9.022 trillion to $10.127 trillion, which is smaller than the deficit. That suggests that the federal government had $193 billion in “hidden revenues” last fiscal year.
I heard somewhere recently, however, that the publicly held debt had reached $10.4 trillion. If true, then we did have “hidden debt” last year, and the BPD’s numbers are wrong. But, if the numbers are correct, my guess is that the “hidden revenues” can be traced to Tim Geithner’s accounting games during the infamous debt ceiling debate, when he was able to keep the debt under the ceiling for months without any explanation as to how.
The scary part, though, is the trajectory of our debt. Approximately 40% of our publicly held debt has been accumulated in FYs 2009, 2010, and 2011. As a share of GDP, publicly held debt has risen from around 40% to about 66%. As Greece has shown, once you get to the tipping point of debt the problem takes off in a hurry.
Once we reach the tipping point—wherever that point is—it will be impossible to stop the meltdown without serious pain. We’ve seen how much trouble trying to rescue a tiny economy like Greece has caused the Euro Zone. As David Skeel wrote in today’s Wall Street Journal, Italy—which is next in line for a bailout—is “too big to save.” Who could bail out the U.S. if we truly go bankrupt? Foreshadowing Skeel’s comment in my novel The Eagle Has Crashed, in late 2029 the IMF rejects the U.S. government’s call for aid, and the head of the IMF tells President Christopher Maynard that “America is not too big to fail. It is too big to save.”
In preparation for writing the novel, I created fictitious economic and fiscal models to see what it would take to postpone our publicly held debt reaching the 90% of GDP threshold until 2029. (The generally accepted “danger zone” for publicly-held debt is when it reaches 90% of GDP. It’s not a fixed rule by any stretch, as many European countries are above that mark. But as the research of Carmen Reinhart and Kenneth Rogoff has shown, historically that is a dangerous level to reach.) It took some very optimistic assumptions to make that happen, and Dr. Robert P. Murphy agreed when he reviewed the models.
To give you a taste, I have the FY 2011 deficit come in at $1.22 trillion (slightly lower than Friday’s CBO report), declining to $763 billion in FY 2012, reaching a low of $468 billion in FY 2015, and not going back north of the trillion mark until a mild recession strikes in 2017-18. Is there anyone out there who seriously thinks we will hit those marks?
Anyhow, the record spending for FY 2011 is part of a dangerous upward trend that will be difficult to slow due to the Baby Boom retirement and their growing demand for Social Security and Medicare. Without major entitlement reform, we are toast. Care to place bets on the odds of the folks in Washington reforming these major programs in time to avert a disaster?
(End Note: The chart above is from the economic model for the book.)
This article is also posted at The Country Thinker.
And it’s not just the feds; as Jonathan Small points out, Oklahoma government spending is also at an all-time high: http://www.ocpathink.org/articles/982
t may be true that you can’t fool all the people all the time, but you can fool enough of them to rule a large country.
Will Durant
The Spender In Chief is still out on the stump pitching a plan to piss away another half a trillion bucks on a phantom jobs bill. He can do this because we are a stupid people led by immoral cowards on both the left and right. Anything additional would be understatement.
I would be lying if I said I disagreed with anything you’ve said here.
You paint a pretty dire picture, Ted. I wish I could find room to argue with you, to point out where you are wrong, to point out that things are not as bad as you suggest. I can not and am afraid your novel may very well come true. I hope that we are both wrong.
I wrote the novel to prevent it from coming true. None of us want anything like it to happen, but too many people have their heads in the sand.
The potential for an economic meltdown is high and in the last debate Romney said “that’s not going to happen”. We need Ron Paul!
with regard to our debt; it helps my state of denial to focus on the few positives. we are still
the largest economy and we do posess the most capable military. money and power baby…
and now there is the tea-party phenom which, at the very least, caused many americans to
dust off their history books and perhaps learn the difference ‘twixt liberty and freedom. in the
best scenario, this might buy our nation the time it needs to re-set.
as far as mr. paul and his ideas; just consider the shameful pandering of the gop hopefuls in
tonight’s las vegas debate; juxtaposed with a thought on the matter from john adams:
“What is to become of an ‘independent’ statesman, one who will bow the knee to no idol,
who will worship nothing as a divinity except truth, virtue, and his country? I will tell you;
he will be regarded ‘more’ by posterity than those who worship hounds and horses;
and although he will not make his own fortune, he will make the fortune of his country.”
If Mr. Romney says it won’t happen, he’d better have a pretty aggressive plan to prevent it.