Fiscal Suicide; The Point of No Return

ilene's picture

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

At least one mainstream media outlet,  the Washington Post (which is turning into a legitimate news source) conducted an interview with the top ratings mucky muck at Standard and Poors who laid out their actual view on the fiscal deal. The bottom line here is that the gravy train of no accountability, no consequences spending is over.

S&P managing director John Chambers said in an interview ... even if the parties agree to raise the debt ceiling, it may not be enough to avert a downgrade. Chambers said the country must implement a plan to reduce the annual budget deficit by roughly $4 trillion over 10 years, which makes the debt manageable over the long term. The White House and Congress have discussed a plan that big, but negotiations have more recently centered on a smaller deal, at $2 trillion or less. "That could still lead to a downgrade,"Chambers said.

The credit agencies have to be looking at FY 2012 (Sept), where the projections are currently forecasting about a $1.1 trillion deficit. You should understand that the FY 2012 is rife with phony assumptions, such as over $2.5 trillion in tax revenues coming from a robust economy, and the end of a number of so-called temporary programs.  FY 2011 will be lucky to collect $2.1 trillion, and apparently tax increases aren't in the works, so it is entirely unclear what this healthy boost of revenues is based on.

Another example is the 30%  reimburshment cut to physicians under Medicare. There are also presumptions on non-provider reimbursement. The chances of this anti feeding-at-the-trough provision going through is as about as likely as pigs flying, so we will see a large readjustment in the deficit  the general fund is using to fund the excess Medicare and Medicaid spending. If this goes through, then the general fund will balloon out beyond the $1.1 trillion projection. In other words, the cost-cutting measures in Obamacare get gutted, more people come into the system for health care and costs escalate.

There is controversy on how to budget for the housing agencies: CBO says $317 billion, OMB says $130 billion. Both of these were presumed on housing prices stabilizing, which now is problematic.

Another element, not surprisingly, is that under the stimulus, state and local governments were given federal grants equal to one-third of the state budgets. This was used to close budget gaps, cover Medicare spending, expand food stamp programs, and for maintaining bloated workforces and pensions (where contributions were also sometimes kicked down the road). So there may be a state crisis tempting some sort of new bailout that takes the U.S. into the European bailout pattern, with additional costs in the hundreds of billions.

In addition, as a facilitation to maintaining unemployment insurance, the states have utilized a little discussed credit line from the Federal government    The balances are currently $40.5 billion owed by the states. The Federal loans to support the State Unemployment Trust Fund remained interest free through Dec. 31 of last year, but interest began to accrue on Jan. 1, 2011.  The first interest payment  will be due on Sept. 30, 2011. Will the Federal Government defer this, too?  If not, it will be just one more burden on the states.

The FY 2012 budget presumes that the one-year unemployment extension to 99 weeks will go away. If it does, then 6.7 million quasi-permanent unemployed will fall off of benefits, resulting in a hard to imagine amount of distress, disorder and rioting. The cost of the 73-week extension beyond the traditional 26 weeks is $100 billion.

The 2% payroll tax reduction was designed as a one-year stimulus and will automatically expire at the end of 2011. Its extension, the cost of which is $120 billion, is not included in the $1.1 trillion FY 2012 budget. Are they going to roll the dice on this one again?

On the question of does a downgrade matter, keep in mind that many investing entities are mandated to buy AAA government debt. Felix Salmon wrote a great piece pointing out the bloated supply of AAA rated debt around the world.  Much, if not most of this debt represents sovereign obligations or implied guarantees,  which is the rub to the whole Ponzi pyramid.

In a nutshell, triple-A debt is dangerous; there's far too much of it; its growth seems out of control; and the triple-A problem has now become a sovereign-debt problem, in a world where sovereign-debt crises are the most damaging crises of all.

This edifice blows apart once there are actually defaults and as importantly downgrades of the so called AAA debt structure.  This chart is actually dated considering the three trillion in additional US AAA debt that has been issued since the financial crisis. Therefore as an event horizon US credit downgrades will be a big event. And once the big event occurs, the near free financing ability of the US dissipates.  At current debt levels of $14.5 trillion, every one percent increase in interest costs translates into $145 billion. This could easily create a pile on effect or debt trap like the one that is crippling the PIGGS.



This post was originally posted on the Winter Economic and Market Watch blog, and Russ’s premium service, Russ Winter’s Actionable. Click here for information. 

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theprofromdover's picture

Healthcare costs -3 ideas, plus 1:

1 All health insurance companies have to go mutual, fixed costs regulated with oversight.

2 Lawsuits determined by non-adversarial system (ie to get to the truth) of multi-disciplinary boards. Guilty medics/administrators/drug co. management personally liable and jailed if incompetent enough. Compensation arithmetically related to salary/realistic prospects/original life-expectancy/24hr care costs etc..

3. Rationalise and simplify the drug approvals process, that would bring down the ridiculous costs. So would separation of production from design/licensing. 

+1. At some point, someone local has to be given the authority to evaluate cost/benefit; in other words -on a fixed healthcare budget- who should get the full-on care, and who should just be patched-up? Can't hide from that dilemma forever (unless you just keep raising the budget, now where have we heard that before......)

anony's picture

Every poster here knows that. 

It either disassembles itself somewhat now, into its atomic parts or it blows apart entirely with more massive force later.

But....come apart it will. 

ebworthen's picture


All hail Caesar!


Iam_Silverman's picture

Geeze folks - lighten up!  If the ratings agencies downgrade our debt, who will buy it you ask?  Remember, the ECB has already said that they really aren't going to pay attention to ratings, vis a vis Greek debt.  they'll be our shining night on a white horse.   Won't they?

anony's picture

I've seen 'shining nights' before on the mountain tops of the Rockies with a full moon.


CH1's picture

they'll be our shining night on a white horse.   Won't they?

Indeed! They be gods!

That's what teacher always said...

PulauHantu29's picture

The Bigger Story (imho) is that S&P is even still open.

cranky-old-geezer's picture

It's coming down to a showdown, the people or the bondholders (banks, hedge funds, etc).

So far bondholders are winning.  Everything is being done to avoid default (that nasty new "D" word) and protect bondholders, including Bernokio buying up trillions of the (worthless) stuff directly and via proxies to keep bond markets from collapsing.

But they're coming to the end of the can-kicking road now the edge of a cliff.  Next kick is over the cliff. 

vamoose1's picture



    Furthermore they end exactly like this. recognize and prepare, and depending on age,  remember the party from  1971, abandoning the gold standard to   2007.

    Now that was a party,  i  had fun. many of us had fun ,  but the funs over, now its damage minimization.

    I expect the United States to  fracture,  that :have states"   say  go  eff yourselves to the asshole states, and go their own  way.

    The grand experiment met the exigencies of human nature,  as it always has,  as it always will.

anony's picture

Few wish a break up of the disUnited States into more manageable entities.

But if we look at Europe, which is a closer model to what America would look like, we are not encouraged that even countries with a 12th of our population and not near as 'diversified' (that means Not giving much a hoot about each to the other) can be managed for the benefit of the masses.

There seems to be a bias in the universe that is best exemplified by the Big Pesce eating the Petite Pesce. Size in this case meaning: Who has the most money.  And that is certainly not the peeps.

We are ultimately doomed not so much because of a few oligarchs, princes, kings, and plutocrats (which are only important because of what they represent) who decide how much to take and how much to leave for the proletariat, but because the essential, hunter-gatherer, in human beans, the amygdala is still in the ascendant in the brain pans of homo erectus. In proportion to the entire cranium, it is a tiny fraction. The Wernicke-Broca, and Cerebrum together have not yet matched their control with their size.

A perfect metaphor of our 7 billion people controlled by a few hundred--- mostly zionist sons of Shem. 

sellstop's picture

One of the big lessons of '08 was that liquidity is very valuable. The US Treasury market is still very liquid, and I suspect there are a lot of large real money funds that are placing a premium on liquidity.

What that means to me is that there is a very large potential source of capital waiting out there if we ever get some sort of control on our fiscal policy in the western world.


GOSPLAN HERO's picture

Reset = The Year of Jubilee

AnAnonymous's picture

Reset = The Year of Jubilee


People coming with the idea of Jubilee or a great reset have either not understood what debt is or are US citizens and therefore duplicitous.

There can not be a reset at present times. People wont start on fresh. They will take the game where it was left.

Jubilee hid this reality when people were consuming that little a start was like starting afresh.

But the US world order has consumed more in fifty years than all the previous orders accumulated since dawn of humanity.

Debt encompasses two acts of consumption, not one. US citizens have this trick of considering that as their act of consumption through debt is done, debt is repaid.

Repaiment of debt includes the possibility of repeating the same act of consumption when the debt is repaid.

The act of consumption brought from the future into the present as debt allows it has to be real.

It is far from being sure at present times.

The most likely outcome is that all the supposed consumption that has been told to be able in the future does not exist ( as it will not supported by the environment) Debt is just a cheap trick to consume even more, a trick to speed up transfer of wealth to the US from the rest of the world.



HungrySeagull's picture

I believe in that very much.


It would instantly turn us from a poor beggar to a very stronghold of wealth and oppertunity.

FunkyMonkeyBoy's picture

You act like it wasn't designed to end this way? I think you need to do a little more research and you will see the powers that be had this planned all along to further their evil agenda. Same scams played century after century.

ATM's picture

Damn straight. The totalitarians have always had designs to bring down the western economies through a debt crisis. First they steal the wealth then they collapse the systems them grab their power.

They also have the infrastructure already in place from city to city to truy to take advantage of the meltdown when it hits. WTF does anyone think the community organizers are set up to do anyways?

Does everyone think that the falling of governments across the middle east and soon europe and probably asia and s. america are a coincidence? The seeds are sown I'm afraid.

Going Loco's picture

Morons. Cut the deficit significantly and you must remove the equivalent amount from GDP in the short run which will devastatingly affect tax income which will blow the deficit back up again. In the long run lower (or no) deficits accompanied by lower taxes would give sustainability but there is now no way of getting from where we are now to that happy outcome without a reset because only cuts in expenditure can give quick deficit reductions and such cuts translate to lower GDP....  just look at Greece and Ireland if you don't believe me. This article is really boring like 99% of the news at the moment because the entire scenery is populated with people who thought they knew how to run things suddenly finding that they are clueless and that there is no solution that does not involve a reset. Actually, there is no solution. There are times when there is no solution. This is one of them.

AnAnonymous's picture

Actually, there is no solution. There are times when there is no solution. This is one of them.


It can hardly be one of those times.


There are solutions but they are not deemed acceptable, especially in this US driven world with US citizens accustomed to get others endure the costs of the bad consequences of their actions.

US citizens look everywhere and notice that free Indians are a rare species, all you have is captive Indians being sacrificed for the US citizens welfare.

Anyone finding free Indians will find a solution acceptable to US citizens.

vamoose1's picture

Thank you for that. There is no solution, question for you, you mention a reset, can i ask what you mean by a reset,


    because my idea of a reset  is a 30  percent lifestyle haircut for every american for 15 or 20  years gto pull bback from the brink , nope,  impossible,  it presupposes a national character, America has no national character, its a bloated slob  running on fumes,  fat lazy and paralyzingly stupid,  circling the bowl of failed empires.

tgatliff's picture

You are exactly right Loco... There is no solution other than a deflationary trap.  That is why they call times like these the great "reset".  Before this is over, all of the current financial "wizards" will be wiped out and the global system of debt will start over.  Hopefully some sustainable leasons will be learned this time.

knukles's picture

                Then there is a way out!

We can all get "reset" buttons like the one His Highness and Great Potentate had Hisgurlhil give the Russians and "eberythin be Ho-Ka".

equity_momo's picture

Spot on Loco. There is no solution.

I only come to ZH to find out if we are getting closer to said reset because in all honesty , the articles here are preaching to the choir and/or from contributors who seem to just ask rhetorical questions.

There are only so many times you can read the same type of thread though saying " we are fucked". I know we are fucked. Id like to read more about what to do after the reset , how we rebuild , what type of system. Perhaps more on energy issues and how society will adapt.

Because the "we are fucked but lets all argue about politics"  is so very last year.

We are fucked. There is no solution.

uniman's picture

Id like to read more about what to do after the reset , how we rebuild , what type of system.

I've been exploring that theme on my blog.  Here's one modest example

There's more in this direction if you go looking.

El Oregonian's picture

No, you are if you haven't been preparing. Tyler has been "Ringing the bell" for all to hear. And that is a good thing, others on the other hand, just hear noise. It all depends on your perspective. I, Myself, have been preparing financially, emotionally, physically, and educationally(this is where ZH comes in) for the inevitable "Greatest Depression".

There is ALWAYS a solution, individually. Which, last time I checked, includes all of us. Prepare accordingly.



Vlad Tepid's picture

For after the reset you need to consult 3 things

1 - Dmitri Orlov

2 - A good history of the German economy in the early 20th century (I recommend 'Wages of Destruction'

3 - A good set of tarot cards or a few oracle bones.

CH1's picture

Precious metals, lead delivery systems, good neighbors, digital currencies, and most of all... brains.

Debt-Penitent's picture

There are only so many times you can read the same type of thread though saying " we are fucked". I know we are fucked. Id like to read more about what to do after the reset , how we rebuild , what type of system. Perhaps more on energy issues and how society will adapt.


There is not a viable solution for "all to be better again" so I've relied haevily on the future buying power of PMs but with the nagging concerns of confiscation again. 

I'd like to know what people did back in '33 to hide their PMs and then cash them in after FDR banged the value up 50% when he figured the hoard was collected from the herd.

Diogenes's picture

I heard some rich people bought gold in Canada and England and kept it there in safety deposit boxes.

I dont think this violated US law because the gold was not in the US and it was not in US coin.

Jewelry art objects and collector coins were exempt from confiscation. They were after current US gold coins. Maybe foreign coins were also exempt but not sure.

Tejano's picture

Good question. With quite a few pre-'33 US gold coins available today, not everyone (most? many? few?) surrendered their money. The banks did (I guess), but not the citizens.

Can anyone recommend a well-researched account of this inglorious era?

Vlad Tepid's picture

I can tell you anecdotally that (unpatriotic <sarc>) folks in the US just put them at the bottom of their savings jar until gold was 'legal' 4 years later.  Other than that the pre-33 coins were already classified as numismatic and hence beyond U. Sam's grasp or were safely held in vaults in Europe.  Most of the regular pre-33 gold Eagles are re-patriates from European caches.

CH1's picture

Good for them...

Obedience is for suckers.

Lord Koos's picture

Only problem is, not everyone in the US is an alcholic, yet everyone has to pay.

homersimpson's picture

If you're not finished with that Duff I'll gladly drink it. Oooh! Thank you.

ping's picture

The sooner it collapses, the better. An alcoholic needs to hit bottom to realise how screwed they are.

AnAnonymous's picture

An alcoholic needs to hit bottom to realise how screwed they are.


Is there any bottom? At best, a perceived bottom. Wont hold breath that current perception gives a near bottom.

tgatliff's picture

Exactly.  I am also sick and tired of people like "ilene" trying to pretend that a functional treasury market exists.  The only reason why rates are historically low right now is because the FED has openly been distorting them.  In the past it was a cozy relationship of the FED with the banks that kept the rates so low.  

Trying to say that magical silent "investors" will make the american public pay dearly if they do not take on more debt is just plain BS.   The dirty secret is that when the publics perception of debt changed in 2007, the government stepped in to pick up the slack to prevent a deflationary asset spiral.  Hence why the debt load has risen so high.  The only reason Obama wants to raise taxes is so that they can sustain the current debt consumption to even higher levels.   Only a keynesian economist would say this is sustainable.  The rest of us see this for what it is... A pyramid scheme...