Guest Post: The Fiscal Cliff and Demographic Drag

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Federal spending is heading for a fiscal cliff while millions of retirees are starting to draw Federal benefits.

We know two things about the future:

1. Borrowing 35% of Federal expenditures every year is unsustainable. (2012 Federal budget = $3.8 trillion, Federal deficit = $1.3 trillion, 34.2% of every Federal dollar spent is borrowed)

2. The Baby Boom generation of 75+ million may be working longer, but they are also retiring en masse, joining the ranks of Social Security and Medicare beneficiaries at the rate of 10,000 per day, a flood that will not ebb until the late 2020s. (The Baby Boom is generally defines as those born between 1946 and 1964, though many quibble with the 1964 date. The choice of parameter doesn't change anything about the consequences.)

The first Boomers qualified for early Social Security retirement (age 62) in 2008 and for Medicare (age 65) in 2011. The biggest cohort years (almost 4 million a year) will start reaching early retirement (62) in 2014 and Medicare (65) in 2017. The number of people entering these programs will rise every year from 2014 to 2020, and then remain constant at 4+ million a year until 2025.

Here are three views of the Baby Boom for context:

Frequent contributor B.C. calls this enormous transfer of people from wage earners to retirees drawing government benefits the demographic drag, as it will reduce consumer spending, wages and taxes while dramatically increasing Federal spending.

Here is a chart courtesy of B.C. that overlays year-over-year changes in private-sector wages+Federal expenditures, Treasury bond yields and the consumer price index (CPI). Note the downtrend in wages+Federal spending and Treasury yields, and the range-bound CPI.

Here is B.C.'s commentary:

 

The sum of the year-over-year change rates of wages and Federal spending is deeply into historical recessionary/depression territory. With the demographic drag and fiscal cliff constraints ahead, who knows how slow the rate will be hereafter, and for how long.

B.C. also submitted this year-over-year chart of Federal expenditures. Despite the unprecedented size of Federal deficits, both in dollars and as a percentage of peacetime budgets, the recent spurt of spending growth was lower than previous spikes.

To reduce the deficit--i.e. address the "fiscal cliff"--Federal spending will have to decline for many years. Such an extended period of declining Federal spending would be unprecedented.

This raises the obvious question: if Federal spending must decline, then where is the money going to come from to fund 75 million retirees? Calling the Central Bank of Mars: Greetings, Martian friends. Please send us 10 trillion quatloos every year from now until 2029. We promise to pay you in 2030 (heh).

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Thu, 10/25/2012 - 14:15 | 2919175 mrktwtch2
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simple the gov wil linvent a diseas that targets old people..or they will die before 65 because of obesity..

Thu, 10/25/2012 - 14:20 | 2919193 economics9698
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Crash and burn 2014.

Thu, 10/25/2012 - 14:24 | 2919201 ParkAveFlasher
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Can we make it 2013?  I'm getting cliff-expectation-fatigue. 

Thu, 10/25/2012 - 14:15 | 2919181 Frozen IcQb
Frozen IcQb's picture

Earth Shattering Kaboom

Thu, 10/25/2012 - 14:45 | 2919267 old naughty
old naughty's picture

Central Bank of Mars: "Stay the fxxk away, earth-lings, and don't you, Barnxxxx call us...We won't call you".

Thu, 10/25/2012 - 14:21 | 2919185 lolmao500
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Borrowing 35% of Federal expenditures every year is unsustainable

Unless you borrow it from the FED... which creates it out of thin air.

And this whole thing is why the guy from ShadowStats says that hyperinflation will kick in no later than 2014.

Thu, 10/25/2012 - 14:29 | 2919213 NotApplicable
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As I've always said, as long as people accept fed notes as payment for goods and services, there is no limit to Benron's magic checkbook.

Hell, they might even manage borrowing 200% for a while, as long as they can "manage expectations."

We will most certainly crash, but it won't be based upon any metric other than "Oh Shit! We're Fucked! TODAY!!!!"

Thu, 10/25/2012 - 14:55 | 2919305 Spastica Rex
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The con goes on until the mark wakes up or runs out of dough. We have a very effective grifterment.

Thu, 10/25/2012 - 15:08 | 2919345 JPM Hater001
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In 1996 the "Econ Club" at my university held a "What to do about Social Security" Session open to the campus.  At that time I supported means testing.

Follow me here

Right now we could still means test off 30-40% of the population with some pretty serious targets.

After the collapse it will be 2%.

We missed our chance and with the economic collapse uncle sam will be the one means tested.... that is to say they will have no means.

Thu, 10/25/2012 - 14:23 | 2919196 fonzannoon
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This article is so far off base. I keep reading everywhere that the proper balance of revenue increases (that's another word for higher taxes) with a very mild set of spending cuts (no third rail stuff).....(that means entitlements)...will be able to resolve the fiscal/finacial/flautlent cliff. The boom in growth that would accompany that as Corporations everywhere will shut down their plants overseas and lay off their 35 cent/hr workforce to bring those jobs back here and pay $50/hr with benefits to US citizens would be eye popping.

I would say by the first quarter next year the fed will have to hike rates to slow growth crushing the housing market and blowing up the banks and wait a minute what?

Thu, 10/25/2012 - 14:31 | 2919214 LawsofPhysics
LawsofPhysics's picture

"The boom in growth that would accompany"  -  Bahh ha ha ha ha, please, wake the fuck up.  You can create all the "capital" out of thin air that you want, it's imaginary.  Nothing grows or gets accomplished or is built without energy.  What is the current level of available energy being produced again? is it growing?  Infinite growth in a closed system?  FAIL.

Barring a revolution in energy production/delivery, tradition text-book economic growth is fucking dead, period.  next human doubling coming in less than 7 years, 7 billion to 14 billion, what does common sense tell you about your quality of life moving forward?

stupid sheep.

Thu, 10/25/2012 - 14:36 | 2919239 fonzannoon
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and I was going to vote for you for President.......

Thu, 10/25/2012 - 14:43 | 2919260 RSloane
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I keep telling you to type /sarc after your posts.... but noooooo

Thu, 10/25/2012 - 14:45 | 2919265 fonzannoon
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I truly thought that one was transparent enough (shrugging shoulders/confused face)

Thu, 10/25/2012 - 14:50 | 2919284 LawsofPhysics
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So what you are saying that the energy available to the inhabitants of the earth is growing?  Hhmmm seems like you might be violating a few laws.  But let the sheep keep smoking the hopium because I like lamb and after all on a long enough timeline...

 

Yeah, (some of) you folks get it.

Thu, 10/25/2012 - 14:57 | 2919311 fonzannoon
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I WAS KIDDING. THE WHOLE THING! PLEASE REREAD

Flatulent cliff?

Thu, 10/25/2012 - 16:14 | 2919537 odatruf
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Or, we can start burning people for energy.  Two birds with one stone...

I win!

Edit: then I decided to do a quick search.  Seems the Swedes are already burning pests for heat: http://www.thelocal.se/22610/20091012/

 

Thu, 10/25/2012 - 17:05 | 2919797 Panafrican Funk...
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The truth you're speaking is accompanied with a hearty dose of cognitive dissonance, hence the down arrows.  The humans wealthy enough to access a computer and have the IQ high enough to even reach this site and kinda comprehend what you said, that also understand the English language, seem to contain a fairly large element of softness/weakness.  

For those Matrix fans who are fans of "there is no spoon", the spoon here is "real growth".  There is a very obvious message in this film that is often missed, that happiness is a bowl of gruel and a simple tunic (because these things are real and provide necessary sustenance), and the fantasy is the steak in the nice restaurant.  People seem to mentally skip over that part.  

The good news is that you can start acclimating your body to what's coming by switching to a macro-plant diet.  The crash isn't nearly as scary when you've already been eating rice and beans.  I know there's a thought process of "as long as the music is playing, keep dancing", but that's just going to set you up for a personal "crash" to go along with the socioeconomic crash.  

Thu, 10/25/2012 - 15:16 | 2919362 lolmao500
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Well that's because it was so well written and so many stupid people believe exactly what you wrote that it seemed legit...

Thu, 10/25/2012 - 14:42 | 2919257 oddjob
oddjob's picture

Less hoof room for you urbanites.

Thu, 10/25/2012 - 14:43 | 2919258 slackrabbit
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Jeopardy: What is irony?

Thu, 10/25/2012 - 14:48 | 2919276 HobbyFarmer
HobbyFarmer's picture

I wish I had a reason to refute what you're saying, Laws.  But I don't....so I got off my ass and started down a path of personal independence.  I'm wiser, stronger, enjoy life more, and feel better than when I began this journey....glad I began while it's still considered a hobby.

I would suggest that the average ZH reader is awake and not a sheep (why else waste time reading here?)....the question for anybody reading this comment: how should you personally prepare for a world with expensive energy?  A world with 14 billion people? Where will the food come from? How many calories of energy does it take to produce a calorie of food that you consume at your dinner table? Again, where will the food come from to feed 14 billion humans?

Follow up question: are you hedging (preparing) accordingly? You're not a sheep.....

Thu, 10/25/2012 - 15:00 | 2919324 jal
jal's picture

If you double the # of 99% in seven years, (7 billion to 14 billion), that would mean a reduction of 50% of the use of  the presently available resources for each person.

If inflation of consumer goods is at 10% then those cost will be doubled in seven years.

If wages for the 99% stays flat, then a lot of people will be added to the bread lines or die of starvation.

Gee!

That would mean that if I want the same quality of life as now, then the population has got to fall drastically and my income has got to double.

Gee!

 

I guess I better get a university degree, without borrowing money, to get a higher paying job.

Would I need to get a degree in Mandarin too?

 

If I keep going to school until the boomers are all retired then there should be lots of job opening needing to be filled. Maybe home nursing care for some of you lucky gambles?

 

 

 

 

Thu, 10/25/2012 - 15:02 | 2919329 Heyoka Bianco
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"next human doubling coming in less than 7 years, 7 billion to 14 billion, what does common sense tell you about your quality of life moving forward?'

It tells me that if you don't ask what kind of "animal" all this yummy meat came from, you could be as happy as the proverbial porcine inundated in feces.

Thu, 10/25/2012 - 16:17 | 2919549 odatruf
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Laws - you are way off.  No way we add 7 billion people in 7 years.

The best projection has getting to about 10 billion by 2050.  That's 3 billion more than now.

See: http://www.globalchange.umich.edu/globalchange2/current/lectures/human_p...

Thu, 10/25/2012 - 16:54 | 2919730 LawsofPhysics
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Oh yeah, that makes it "all better". 

Thu, 10/25/2012 - 14:30 | 2919221 blunderdog
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No no.  Revenue increases won't come from "higher taxes"--they'll come from LOWER taxes.  But the loopholes will be closed. 

That Obamney guy who's running for POTUS has devised a cunning plan.

Thu, 10/25/2012 - 14:48 | 2919268 slackrabbit
slackrabbit's picture

Wow - you here that Wilmar? 

Let's flick the house, get a buy to let, use our house as an ATM machine, buy two new cars, tell the kids to get a student loan and watch Cramer on Mad Money for the 'inside skinney'.

Happy days are here again.

Yabba dabba do!

;-)

Thu, 10/25/2012 - 14:24 | 2919202 Zap Powerz
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It is dishonorable for the older generation to steal from younger generations.  That is exactly what SS is.  Dont give me any bullshit about "I paid into it so I deserve it."  Fuck that.  The money you get on SS comes directly out of some young workers paycheck.  When you were working, you were being robbed.  Two wrongs do not make it right.

End the corporate and personal welfare.  End the drag on progress.  Drain the gene pool of unsustainable inhabitants.

Thu, 10/25/2012 - 14:27 | 2919208 slackrabbit
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+1000 brother

Thu, 10/25/2012 - 14:31 | 2919228 ParkAveFlasher
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I don't know about you guys but when I'm long in tooth my retirement plan is to be the old cooter in the family that knows where the gold is buried.

Thu, 10/25/2012 - 14:39 | 2919246 slackrabbit
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Just so long as its your gold ...

Thu, 10/25/2012 - 14:54 | 2919299 Calmyourself
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I would also be sure not to be the old coot with bamboo under his nails...

Thu, 10/25/2012 - 17:15 | 2919833 optimator
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Great life insurance from the family that will certainly take care you in your old age.

Thu, 10/25/2012 - 14:28 | 2919212 kridkrid
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That last bit is the rub, no? No real easy way to get from A to B

Thu, 10/25/2012 - 14:30 | 2919224 LawsofPhysics
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Relax, this will come anyway.  Paper promises are no match for Nature and the Laws of Physics.

Thu, 10/25/2012 - 15:01 | 2919328 djsmps
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Too bad for you.

Thu, 10/25/2012 - 15:13 | 2919353 Whiner
Whiner's picture

BUT, I didn't know Wilbur Mills indexed SS to CPI. I did NOT know that LBJ and Co. raided the Lock Box to finance guns and butter. Anyway, look who you youngsters elected to our Central Govt. regime. You will therefore pay every dime of my SS, every dime. AARP guarantees it. Get used to a very smaller life style. But if you want to revolt, I will join you. Just pay my SS dammit; it was sold to me as and insurance program. I paid my premiums. So pay up and revolt!

Thu, 10/25/2012 - 15:17 | 2919368 LMAOLORI
LMAOLORI's picture

 

 

How can you say that with a straight face? If two wrongs don't make a right then people who were forced to pay into Social Security shouldn't have the money they paid in stolen from them. The money they paid out worked the same way for them as it does for you. IMO Social Security wasn't Constitutional but then IMO neither is Obamacare and guess what boomer's pay taxes both on their income and Social Security if they get it which funds programs that are really Welfare like food stamps, subsidized housing, student loans and Obamacare. Social Security was self funded not a welfare program if people want to end it fine it will die if Romney is elected once it exhausts the funds owed to it.

Thu, 10/25/2012 - 16:06 | 2919508 RSBriggs
RSBriggs's picture

You know what?  You're a REALLY.  STUPID.  FUCK.   Why not do us all a favor and help cleanse the gene pool by removing yourself from it....

Thu, 10/25/2012 - 16:51 | 2919700 Zap Powerz
Zap Powerz's picture

If I did that, my employees would no longer have jobs and would end up on welfare for you to support.  You dont want that do you?

It seems I touched a nerve with you.  Welfare much there sport?

Thu, 10/25/2012 - 14:29 | 2919218 BlueCollaredOne
BlueCollaredOne's picture

This post needs moar birth rate charts.

Thu, 10/25/2012 - 14:30 | 2919225 NotApplicable
NotApplicable's picture

Really. I mean, why stop at three?

Thu, 10/25/2012 - 14:35 | 2919232 ParkAveFlasher
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I can really use a turnover rate for guaging the approx. length of generation, is it getting longer or shorter?

Thu, 10/25/2012 - 14:29 | 2919219 Segestan
Segestan's picture

Hello Earthlings!!!..... Sorry but someone has stolen all our gold. Call Jupiter....he has godly powers.

Thu, 10/25/2012 - 14:42 | 2919234 Cyrano de Bivouac
Cyrano de Bivouac's picture

Well one solution would be the Federal Government have a firesale of its properties. Sell Alaska(69.1% is Federal land) back to Russia. Sell Nevada(84.5% Federal land) to Japan which would also provide  a place for Japanese to live if it gets too radioactive there. Utah(57.4%), Oregon(55%),Idaho(50.2%) would be sold to China. This would be a more honorable way to deal the problem than what actually will happen and more in the spirit of capitalism. I forgot to add, Germany gets Arizona(48% Federal land) and Wyoming(42% federal land).

Thu, 10/25/2012 - 14:42 | 2919256 BlueCollaredOne
BlueCollaredOne's picture

That is akin to the crack addict taking his kid' PS3 to the pawnshop because he is short on money for more crack. 

Yea, hes going to get his next fix, but his addiction will not be cured.  After he sells his kid's PS3, what will he sell next time when he has no money?

Thu, 10/25/2012 - 14:46 | 2919270 fonzannoon
fonzannoon's picture

his neighbors kidney

Thu, 10/25/2012 - 14:49 | 2919278 Cyrano de Bivouac
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It's better than hyperinflation.

 

Thu, 10/25/2012 - 15:06 | 2919330 Ham-bone
Ham-bone's picture

After selling off the assets...most addicts start "turning tricks"...Americans, go long kneepads

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