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Robert Eisenbeis | Do the math
Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com. He may be reached at Bob.Eisenbeis@cumber.com. -- Chris
The deficit reduction ‘super commission’ has now begun its deliberations amid fractious discord among its members. The official target is to reduce the deficit by a total of $1.5 trillion over a period of 10 years, although the actual number may still be up in the air. The question is whether this is a sincere effort or simply a cosmetic and symbolic action to create the appearance of progress as the election next year comes into increasing focus.
Let us briefly the review the problem. The country is on a non-sustainable fiscal path. Government revenues have been nearly constant as a percentage of GDP, which has averaged 17.9 percent of GDP since 1952. In contrast, while expenditures have averaged over 20 percent of GDP, spending has been on a stead upward trend, standing now at about 25% of GDP. The current deficit is about 10% of GDP, which is the gap between revenues and expenditures.
Unless the current gap is addressed, the deficit will only become worse. OMB projections show that under likely scenarios entitlement spending – principally Social Security and healthcare – will exceed expected revenues by 2050, leaving nothing for discretionary spending or defense. The main cause of this problem is not, as the current presidential debates may imply, Social Security. Rather, the principal problems are accelerating expenditures on Medicaid and Medicare.
Now consider what the ‘super commission’ will accomplish if it achieves its goal of reducing the deficit by $1.5 trillion within 10 years. Current GDP is slightly less than $15 trillion, and assuming it were to grow at even the modest rate of 1.5% per year over that period, the cumulative estimated deficit would total about $10.5 trillion. A reduction in this total by $1.5 trillion is trivial compared to the size of the problem.
Even if the commission were totally successful in achieving its goal, we would still be faced with a 60% increase in the outstanding public debt putting the nation in the danger zone identified by Reinhart and Rogoff in their study of 200 years of financial and economic crises. Furthermore, the projections imply the need for a series of additional agreements to serially increase the public debt ceiling. The recent pattern has been to authorize debt-ceiling increases of from $400 to $500 billion at a clip. So, unless things change, we will be faced with a series of debt-ceiling crises, at least once a year over the next ten years.
These back-of-the-envelope calculations suggests that the current attempts to deal with the nation’s fiscal problems are at best a sham and assume that the general public will be fooled into believing that the Congress has righted its ways and is attempting to put the nation on a sound financial footing.
Bob Eisenbeis, Chief Monetary Economist
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The Federal Reserve is neither Federal nor a "Reserve". This private bank run by the "Bank of England" has been stripping the US of its assets since the days of Andrew Jackson. If the $16,000,000,000,000.00 given away secretly, since 2007, to the member banks isn't reason enough to overhaul our entire government financial system then our country is doomed to financial failure. You won't read this in the mainstream media....but it may emerge in the coming elections. Read about this first ever audit of the Fed and understand why we are in such trouble. Tuesday, September 27, 2011 First Ever GAO Audit Of The Federal Reserve
(You can click on the site and read the report).
The first ever GAO audit of the Federal Reserve was carried out in the past few months due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill (HR1207), so that a complete audit would not be carried out. Ben Bernanke, Alan Greenspan, and various other bankers vehemently opposed the audit and lied to Congress about the effects an audit would have on markets. Nevertheless, the results of the first audit in the Federal Reserve nearly 100 year history were posted on Senator Sanderâs webpage earlier this morning.
sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3 (Summarized below)
What was revealed in the audit was startling:
$16,000,000,000,000.00 (TRILLION) had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the worldâs banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest.
Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs. To place $16 trillion into perspective, remember that GDP of the United States is only $14.12 trillion. The entire national debt of the United States government spanning its 200+ year history is only $14.5 trillion.
The budget that is being debated so heavily in Congress and the Senate is only $3.5 trillion. Take all of the outrage and debate over the $1.5 trillion deficit into consideration, and swallow this Red pill: There was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world. In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies. That was a blatant lie considering the fact that Goldman Sachs alone received 814 billion dollars. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion. ****
When you have conservative Republican stalwarts like Jim DeMint(R-SC) and Ron Paul(R-TX) as well as self-identified Democratic socialists like Bernie Sanders all fighting against the Federal Reserve, you know that it is no longer an issue of Right versus Left. When you have every single member of the Republican Party in Congress and progressive Congressmen like Dennis Kucinich sponsoring a bill to audit the Federal Reserve, you realize that the Federal Reserve is an entity onto itself, which has no oversight and no accountability.
Americans should be swelled with anger and outrage at the abysmal state of affairs when an unelected group of bankers can create money out of thin air and give it out to megabanks and super-corporations like Halloween candy.
The list of institutions which received the most money from the Federal Reserve can be found on page 131 of the GAO Audit and are as follows:
Citigroup: $2.5 trillion($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America: $1.344 trillion ($1,344,000,000,000)
Barclays PLC (United Kingdom): $868 billion* ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank (Germany): $354 billion ($354,000,000,000)
UBS (Switzerland): $287 billion ($287,000,000,000)
Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)
IT WILL BE INTERESTING AS TO HOW MUCH ATTENTION (AS WELL AS THE SLANT) THE MAINSTREAM MEDIA GIVES THIS UNBELIEVABLE POSITION OF OUR GOVERNMENT HAS PLACED US IN WITH NEVER PREVIOUSLY HAVING AN AUDIT OF THE FEDERAL RESERVE.
I AM CONFIDENT THAT WE WILL HEAR SOMETHING LIKE THE FED HAD TO GIVE STIMULUS TO WHOM THE $16 TRILLION WENT TOO BECAUSE IF WE HAD NOT ALLOWED THIS IT WOULD BE THEIR COLLAPSE AND THE OURS.
HAS ANYONE EVER HEARD OF CLOWARD AND PIVEN ECONOMICS? (PARAPHRASING) IT INVOLVES TWO HARVARD PROFESSORS WHOSE BOOK SAID TO CHANGE ANY GOVERNMENTâS ECONOMIC SYSTEM INTO A SOCIALIST ONE, IT SIMPLY DRIVES THEIR ECONOMY INTO THE DITCH THEN THE CITIZENS ALLOW THE GOVERNMENT TO DO WHAT THEY WISH TO SAVE THEM
Originally written by Peter B - your FUCKING FED AT WORK! FRY THESE BASTARDS! My contribution - someone, please post this as a topic - I'm a newbie, and do not have posting priveleges, frustratingly enough. This shit fries my circuits!
Comparisons of revenues and expenditures are important, but not in the way they typically are used.
They are important in demonstrating how much of the economy the government (directly, as opposed to the regulatory drag) is sucking up and what portion it is spending (no indication of course on how much of that is wasted).
What gets me though is that no one discusses that there should be economies of scale!
- Defense costs should not be proportional to population or economic activity. The mission remains the same
- Transportation costs should only be partly related. Most of the roads that need to be built have been built. Some are over-stressed, but that usually is a local relationship, not as much a national relationship
- Science and Space should not be a function of either. They need not expand just because population or economic activity has increased. The National Hurricane Center, NASA, and the CDC need not expand as a function of either
Even those items that are a function of population (generally transfer payments), often are not a function of economic activity
- Social Security is predominantly a demographic / population issue. But other than early/delayed retirement, should not be driven by GDP
- Same with Medicare
Clearly, items such as Medicaid and other welfare spending are driven both by population and GDP
The point is, government expeditures as a % GDP should decline over time. They certainly should not even stay at a constant level, much less increase. Even seeing it flat (the most you will ever hear the GOP or WSJ argue) indicates that government is spending more money because it can, not because it must.
We need to change the terms of the debate and demand economies of scale
Why the hell anyone would want to be POTUS in 2012 is beyond me............Will romney or perry raise the debt ceiling by 5trillion?............because we know what happens if they dont.........which will happen anyways...........either way, we are screwed.....
makes me think chris christie knows what is coming and does not want to run............
The entire program is built to fail and its working. It is not hard to see where we are.....Govt decisions have no financial consequences, made by people with no skin in the game. People, politicians, are interchangeable but the party will always exist. It is a silly game. The FED has a massive PR problem in that they must maintain the illusion that it all means something, and that there are rules, and that the 30yr is really legit etc. without cheapening the process so much through bailouts that people catch on.
I thought it was a shame to see the CBOT lose status and go broke after having a lock on world wide commodity transactions and cheered with the Eurex offerd a fee holiday to crush the LIFFE exchange. It was a shame to see the US auto industry blow a big lead. The US govt has a massive advantage of the dominant world currency and all they can do is abuse it to make up for all manner of other fiscal fuck-ups by the govt. Wow.
Did he just figure this out? Why couldn't he figure this out while he worked for the Federal Reserve?
A third grader could figure this out, and probably has. Our Enron-style off the balance sheet GSEs alone are leaking more than 150 billion/yr. Lucky for the Beltway crowd that the lame stream media has the IQ of a grape.
And he didn't even mention the lucious possibility the 'super commission' will not be able to reach an agreement to do *anything*, except provide a boost to the meme de jour 'dysfunctional government'.
(Is it a meme or an oxymoron?_
Where the heck is Col. Sol Sanders?
If we sing "highway to the dangerzone" while this happens will that help in any way?
It is a hard argument to disagree with and I'm thinking most peeps that read this board have long ago done that math in their head and come to the same conclusion. Maybe we can save the envelope for multiplying fractions or calculating the half life of the world
fornicating the amphibious poultry for 200 alex
"Fool me once shame on me....fool me again and ...".how does that go asks Bush?
"While the private sector reduces its debt, the public sector adds debt. And the people who run the public sector are activists…"
read more at The Daily Reckoning.
Bill Bonner and his team rock almost as much as ZH!
too right, Bill Bonner is one of the best writers in the business. Financial Reckoning Day was so good that as soon as I finished it, I started at the beginning and read it all over again.
I love his "we listen to dead people and they say, turn back, we have been there before"
They don't get much smarter and yet oddly you don't see him on mainstream media. Their loss.
Global Math:
US: 1 + 1 = 2.7513
China: 1 + 1 = 11
Japan: 1 + 1 = -2.0
Europe: 1 + 1 = 17
Brazil: 1 + 1 = 69
Leaping high five @ the Brazil calc.
The alternatives to the deficit are to a) reduce the expenses below 17.9% in order to catch up, b) increase taxes temporarily, or c) cut the debt by x% and start over. Is their anything more permanent than a temporary tax?
I'm amused when I hear Obama say we can't cut (expenses) our way to prosperity. Have they tried? It's also amusing when you hear the Republicans (Boehner and Ryan) arguing over $300 milion in expense cuts. Who cares? It's pocket change.
As bad as Robert outlines, it is much much worse.
Good info Bob. How many of us really thought that any actual "cuts" were going to happen? We just have to explain this to our less informed friends and family. The sham will continue until the last possible moment and then a callamity will strike this nation that will be read about for centuries.
I too have done this evelope math while watchng all this stupid political foolishness over a 10% attack on the problem. And the US is not the only country in the world with similar problems. Yet, no credible path forward emerges as can kicking and ponzification contributes to making the problem worse, not better.
The Roman Empire did not collapse overnight. We will slide inexorably into the darkness, until one day celluloid Idiocracy is the norm.
I guess I'm supposed to say, this is BULLISH, BITCHEZ!
"until one day celluloid Idiocracy is the norm."
I think we officially jumped the shark on that one with the creation of MTV's "The Real World".
Pull that wool, baby
Demographics. Bitches.