Eric Sprott On Ignoring The Obvious

Tyler Durden's picture

By Eric Sprott of Sprott Global

Ignoring The Obvious

Not a day goes by without hearing about the fiscal cliff, the debt ceiling or another political deadlock. We would not disagree that some of these are important issues that need resolving but, in the grand scheme of things, they are relatively superficial.

As we all know, central banks around the world have been frantically expanding their balance sheets. While exceptional times might warrant exceptional measures, Figure 1 below paints a rather troubling picture. The monetary base, the amount of money in circulation in the economy, has expanded at an incredible pace. Since the mid-80s, the U.S. monetary base had been very stable at around 5-6% of GDP. Through fractional reserve banking, this amount was sufficient to maintain annual inflation around 2-3%. With the banking system collapsing in 2008-2009, it was necessary for the Fed to increase the monetary base. However, banks are now in much better shape than they were in that period and the benefits of monetary expansion seem to be waning.

The Fed is not the solution to every economic and social woe and trying to hide real problems (eg. structurally high unemployment and rampant poverty, unsustainable income inequality and exploding government liabilities) with money printing achieves nothing constructive.

Source: Federal Reserve Bank of St. Louis, U.S. Department of Commerce: Bureau of Economic Analysis


First, while we are supposed to be in the midst of an economic recovery, about one in five Americans are on food stamps (Figure 2). As the chart below shows, this measure of poverty has been fairly steady for the past year. We also find it hard to reconcile this data point with the headline unemployment numbers, which seem to be improving. We prefer a more comprehensive measure of unemployment, commonly referred to as U6, which includes discouraged workers and those working part time against their will. By this measure, we see that “Total Unemployment” has come down, but remains extremely elevated at around 14% of the labour force. Moreover, food stamps and “Total Unemployment” tend to move together. If food stamps users stabilize at current highs, we believe that it is a sign that the natural unemployment rate in the U.S. economy is now significantly higher than it was pre-crisis.

Source: U.S. Department of Labor: Bureau of Labor Statistics

Income Inequality

Second, income inequality has been growing steadily since the mid-1980s. Figure 3 shows the share of total U.S. income earned by the middle class and the top 5% of households. As of 2011, the top 5% of households brought home over 22% of all income generated in the country, whereas the middle 20% of households (quite literally the middle class) got less than 15%. Coupled with the unemployment picture, this shows that a majority of the U.S. population has been losing ground to the most wealthy. In a society that relies on consumption for 70% of its economic activity, this certainly does not bode well for the future, since the wealthiest traditionally do not consume much of their income. To top it off, the recent “fiscal cliff deal” just reduced disposable income further by increasing payroll taxes by 2% for all those working, putting additional strain on the working class and their discretionary spending dollars. (See Figure 3).

Source:  U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements

Government Obligations

Another obvious problem is the liabilities of the Federal Government. The current cash reporting basis that the Department of the Treasury uses, vastly understates its deficit and future liabilities. Some estimates put the current unfunded liabilities of the Federal Government at about $222 Trillion and show an increase in the deficit from 2010 to 2011 of around $11 Trillion, which represents about 70% of the U.S. total GDP.1

Simple back of the envelope calculations can be made using the Treasury’s “Financial Report of the United States Government – 2012”, which comprises a detailed breakdown of its future financial obligations for health care, social security and other government services.2 This reporting is similar to what every corporation is mandated to calculate for the purposes of U.S. GAAP reporting.

Of course, accounting can always be “massaged” to improve one’s situation. This problem is most acute when there are many assumptions, like for pension and benefits accounting (a.k.a. social security and Medicaid/Medicare). ShadowStats makes the necessary adjustments and finds that for 2012 alone, the deficit amounts to $6.9 Trillion.3 This represents about 45% of annual GDP. While laudable, the current haggling by policy makers for a meager $2 Trillion in deficit reduction over 10 years represents only the tip of the iceberg.

A significant part of these deficits is caused by current and future health care spending. The Deloitte Center for Health Solutions recently published a report entitled “The hidden costs of U.S. health care: Consumer discretionary health care spending”, in which they analyze the many components of health care spending and how those expenses are underreported in official numbers. Figure 4 shows their estimates for total health care spending by age group for 2010.

Source: The hidden costs of U.S. health care:
Consumer discretionary health care spending, Deloitte
Source: US Census Bureau 2012 National Population Projections 

What is striking - but not that surprising - is the very large increase in health care costs faced by seniors. The report cites that “Seniors and Baby Boomers account for 64 percent of health care costs, but comprise only 40 percent of the U.S. population.” For seniors, total health care costs represent, on average, approximately $30,000 per person per year. Other estimates by Carnegie Mellon University professor Paul Fischbeck (although a bit dated) show that these annual costs increase dramatically as people age, reaching as much as $45,000 for 80+ year olds.4 Considering that GDP per capita was about $46,800 in 2010 and the income inequality mentioned earlier, these are figures that would put most households in dire straits.

Also, structural trends will lead to an ever greater share of the nation’s income being dedicated to health care. Figure 5 above shows the evolution of the U.S. population for the 65+ age group, as forecasted by the U.S. Census Bureau. The U.S. will end up with a steadily increasing segment of its population (from 13% in 2010 to 20% in 2030) composed of persons aged 65 and over. This matters for two important reasons. First, this means a smaller workforce contributing to GDP growth and paying taxes to support government programs. Second, and this is related to the first point, this trend will put tremendous pressure on social security and health care spending in the country, thus leading to structurally higher deficits.

These facts are by themselves troubling, but coupled with the population trends described in Figure 5, they become alarming. To illustrate the impact of overall population aging on total health care costs, we use the per capita numbers implied by the Deloitte study and apply them to the U.S. Census Bureau projections for all age groups. While we believe that those numbers fundamentally underrepresent health care inflation, we inflate per capita costs for each age group using the average “medical care” component of the U.S. Department of Labor Consumer Price Index. Finally we assume a 4% nominal GDP growth, which some might argue is overly optimistic when taking into account the smaller workforce we discussed earlier. In any case, Figure 6 shows the results of our simulation.

Only with the change in the composition of the U.S. population, total health care costs are forecasted to go from 22% of GDP in 2010 to over 30% in 2040. These are huge numbers! To put them in perspective, in 2011 total U.S. GDP was $14,500 Billion, so an increase from 22% to 30% of GDP would represent a $1.2 Trillion increase in health care spending in that year. If we increase the health care inflation rate by only 100bps, we calculate that by 2040, the share of GDP attributed to health care will jump to 40%.

maag-1-2013-5.gifSource: US Census Bureau 2012 National Population Projections,U.S. Department of Commerce: Bureau of Economic Analysis, U.S. Department of Labor: Bureau of Labor Statistics & The hidden costs of U.S. health care: Consumer discretionary health care spending, Deloitte

According to the Deloitte study, about 60% of those costs are borne directly by households and the remaining 40% by the public sector (30% to Medicare and Medicaid). This means that households, of which the majority is either poor or in the declining middle class, will face an even larger squeeze in their discretionary spending.


To conclude, 20% of the population is on food stamps, an ever increasing gap between the wealthy and the rest and ever-increasing health care spending are all deep rooted and immensely important problems that get a ridiculous fraction of the attention that they deserve. The impact of these issues on both government finances and future economic growth are enormous.

As we discussed, the purpose of asset purchases by the Fed might no longer be improvements in the real economy, but rather a more subtle financing of U.S. government deficits. However, in the long run, expanding the money supply inevitably leads to inflationary pressures. Luckily for the Fed and the U.S. government, there is so much slack in the labour market that inflation might be years away. And, if we are right about the long run unemployment rate being structurally higher, then the Fed has all the room it needs to continue Quantitative Easing (QE) to infinity. This might allow them to continue to hide the true financial position of the government for many years to come.

Nonetheless, the rising GAAP deficit and the sheer size of the U.S. Federal Government’s liabilities to its citizens makes it clear that one day or another, services (health care, social security) will have to be cut. Financial alchemy can hide reality, but it does not provide any tangible services.

Europe’s (unresolved) experience with its debt crisis provides an insightful window into the future. Austerity measures in Ireland, Portugal, Spain and Greece have caused tremendous pain to their citizens (25% unemployment rates) and wreaked havoc in their economies (double digit retail sales declines).

Are we going to ignore the obvious?

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IridiumRebel's picture

Oh I see....we got a Saturday morning wanker on a downvote trek. I love little fuckers.

AssFire's picture

Are we going to ignore the obvious?

Like the real reason people are buying the shit out of guns:

They fear the federal government.

francis_sawyer's picture

Your government HATES you & wants you DEAD...

The GOOD NEWS is that, to accomplish that task, they're going to have to go through a process, which necessarily involves 'funding' [whereby taxpayer dollars are spent]... Since there aren't enough, they are therefore borrowed into existence [& some 'mysterious', NEVER TO BE NAMED, money machine then prints what's needed, out of thin air, to accomplish that task]...

The BAD NEWS is that your neighbor, & probably most of your friends & even family are oblivious to all of the above [& the 'hidden hand' behind that motive], & instead prefer the status quo... Therefore ~ by proxy, THEY HATE YOU & WANT YOU DEAD TOO...

The 'facilitators' of the STATUS QUO, as described above, all claim to be be doing 'GOD'S WORK'... Therefore ~ by proxy, GOD WANTS YOU DEAD TOO...

Have a nice day... :-)



Xibalba's picture

population control though vaccines.  

JungleJim's picture

Already been implemented, check out the Anthrax vaccine problems, how about the "flu" vaccine that was killing old folks a few years ago, research "mandatory vaccinations" which you will be seeing more of in the future ...

hooligan2009's picture

umm...or coffee plus vicodin plus viagra plus WoW plus big brother plus...

outside the box..if you can have everything done for you for free by bots..are you healthy?

Bad Attitude's picture

"Fear the government that fears your guns." - Unknown

"Political power grows out of the barrel of a gun." - Mao Zedong

"When the people fear the government there is tyranny, when the government fears the people there is liberty." - Thomas Jefferson

This new gun control push isn't going to go away any time soon - this feels so much like the political situation after the Stockton schoolyard massacre (1989, in California, a state with tough gun control laws that didn't stop the perpetrator), but with a dramatically compressed timeline. The gun-grabbers are going to hold on tight. The anti-gun propaganda is going to be relentless. There are going to be more tragic mass-killings to feed the anti-gun propaganda frenzy. (I'll leave it to the reader to decide if these tragedies are a product of conspiracies, or simply a product of crazy people.)

The positives include a recent poll that found that 65% of gun owners said they would defy new firearms restrictions, ( and that everybody is buying all the firearms and ammunition they can get their hands on.

americanspirit's picture

"Are we going to ignore the obvious?" Yes.

secret_sam's picture

This may be true, and if so, it is unfortunate.

The Federal government should not be feared.

People who are afraid often make unwise decisions, or act rashly.  There's very little call for this when thinking about FEDGOV.  Resident Americans are far more likely to be assassinated or imprisoned by a local police force than any agency of the Feds.

FEDGOV is a dancing bear, a dinosaur, a steam-powered computer network. 


Make THEM do the work.

IridiumRebel's picture

Jeez! Three Downvotes? Anonymous just declared war on the US Justice system and their web presence. I am not a part of Anonymous, but they supposedly have a nuclear option. Just saw it on CNN and thought I'd share....never again. I will leave the reporting to TD and ZH....Let's see if we can get to 15 downvotes huh?



downvoting now......

Svendblaaskaeg's picture

"Jeez! Three Downvotes?"

Could be a browser (Opera) fault? - I just gave you a +1 (after reloading the page) and it returned 2 ups and 5 downs

IridiumRebel's picture

We all know Eric Holder is secretly here. It was probably him. We are at 7.....Come on Holder! Let's get to 15!

Svendblaaskaeg's picture

I still think it's my bloody Opera browser, it has done it before on other sites, adding to uppers or downers that is, never made reversed votes on other sites though...very sorry if it really is my browsers fault! - if anyone knows if this is possible please chip in!  

IridiumRebel's picture

Well luckily for you and me I could give two shits about being downvoted. 

mess nonster's picture

...which is why it's all you talk about.

I think Ananalmous is a psyop. Agents provocateurs. Opt out, bitchez.

IridiumRebel's picture

Ummm....I have a collective TWO posts on anonymous with some relative periphery posts. This is the only thread amongst hundreds that i have discussed it because I wanted the ZH take which is usually enlightened. Alright, I admit it it. I am Janet Napolitano. 

Just Ice's picture

There seem to be at least 5 gubmint trolls at the ready on ZH to downvote any undesirable politically related posts...especially if the majority of your information is linked, (the thought being people will not click offsite for something fellow readers have found unmeritorious).  If they can pile the negative votes up before you get any green arrows, all the better (for them).  Don't sweat it, just recognize it is what it is.

SafelyGraze's picture

a modest proposal

1. the payscale for an employee of the federal reserve system shall be indexed to the the median salary of US citizens (whether employed, unemployed, disabled, retired, not seeking employment, or other) who are above the age of 15 years. for example, a governor's salary shall be 10 times this median salary, where 10 is the index.

2. the indexes shall be adjusted only by a specific act of congress, limited in scope and containing no other provisions.

3. the pension of all vested employees of the federal reserve system shall be an annuity, not indexed to inflation. the annuity shall be a fixed percentage of the employee's cumulative salary. for example, the annuity shall be 10 percent of the employee's cumulative salary.

4. the percent shall be adjusted only by a specific act of congress, limited in scope and containing no other provisions.

part 1 gives a natural incentive to fed employees to promote employment

part 3 gives a natural incentive to limit (actual) price inflation

the salaries and pensions would be reasonable -- even generous -- as long as the populace is employed and price-inflation remains low.

parts 2 and 4 give congress a natural incentive to consider how the electorate will react to future raises (measured against median salary) for fed employees.



Temporalist's picture

I like the ideas but the problem with laws is that the people with means can change them or completely ignore them all to their benefit.  They, people that have the means, will allow any law to pass with the knowledge that people will forget or become apathetic eventually and the law will become meaningless or be changed outright.


It should be very apparent that the US Constitution has been trampled on and discarded long ago.  Why amend something that is no longer regarded as necessary or useful by the very people that pledge to abide by it and protect it?

Drachma's picture

“But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”

Frederic Bastiat, The Law

TPTB_r_TBTF's picture

Why do you use such a shitty browser?

If you know it sucks, why do you stay with it?

Svendblaaskaeg's picture

"Why do you use such a shitty browser?"

I have a personal Opera account with all my links and notes collected over years, and its made by an Norwegian software company and they store the data, I don't trust Google   

Xibalba's picture

just tells you who's on ZH nowadayz




Fuck you arswhores


Long live ANON

BobPaulson's picture

No doubt it is compromised on many levels but the strength of a distributed network is that even when compromised it just operates at a diminished capacity. Bacteria have that advantage over centralized large organisms. There is probably an appropriate Ho Chi Minh quote in there but you get my point.

seek's picture

Three sockpuppet accounts out of the DoJ is more likely. Remember, on ZH, downvotes are upvotes for truth by TPTB.

Unless it's all downvotes, in which case it means the poster was a spam whore or a troll with no entertainment value.

Atomizer's picture



Every road traveled comes to a fork. Only you can make a decision. There are many levels of information you can seek on the internet. I’ll start you on ground level.

Click me


As you head down into sub levels, make sure you leave your cyber hygiene at the door step. LOL

Never One Roach's picture

If the balance sheets have been expanded so much the last 2 years, why have the PMs been stagnant?


Is debt destruction that vicious?

LawsofPhysics's picture

"Banking is like a jet engine, it's too complicated for you debt-slaves to understand, just keep paying my interest and bonuses." - Jamie Dimon.

Five8Charlie's picture

It sucks in everything around it, makes a lot of noise, and blows out lots of hot air?

WmMcK's picture

I know congress is bought ...

2% blending ...

Burn it down ...

+1 for Dylan R.

Highly recommended:

OpenThePodBayDoorHAL's picture

PMs are stagnant because they've been turned into fiat. All the paper gold out there now gives them the ability to play all sorts of games with the price. The naked shorts on silver are a paper ploy that screws with the real price of physical. PMs are fiat now, sorry.

Creepy Lurker's picture

I watched that vid, and it led me to this one, which is even better.

q99x2's picture

No reason exists to have certain things on the internet except for Govt to use them against the citizens. And, I don't think they are on the internet unless the Govt has plans to use them against the general population. Mission critical data and operations as well as banking, energy and transportation are on their own fiber. So if anything happens you can be certain the FEDs did it - Holder, Napolitano, Clinton, Halliburton, Blankfein and Dimon. And if they didn't do it then it was them anyhow.

Stonecold's picture

Hyperinflation is possible with high unemployment.  They did it in Zimbabwe

booboo's picture

Honest questions.

How do banks make money in a hyperinflationary environment?

How do Federal, state and local governments fair under hyperinflation with fixed money supplies (taxes)?

dwdollar's picture

Bankers and governments want to print forever without hyperinflation happening.

Hyperinflation is what happens when people discover how rigged the game has become. It's basically a run on the central bank.

WmMcK's picture

“I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.”

Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders
(in 1924, that's right, we've been here before, bitchez.)

hooligan2009's picture


banks make money by printing it...kep in mind that in hyperinflation moeny is worthless so banks can print all they like and be "correct" in an accounting sense, but are left looking at piles of cash that are worth...nothing

federal governments hope that wages (and taxes) go up at the same (hyper) inflation rate as the overall economy. unfortunately, doing something "real" (like fixing a pipe or repairing a car) in exchange for another "real" thing, (like cutting your hair or fixing your teeth) drops the fed right out of the entire system. in short the federal government fails. dimisnishing taxes are collected and no benefits are paid; debt and deficits become meaningless. corporates have to increase wages and salaries in order to retain staff and face hyperinflating input costs.  

state and local governments try and get by on consumption and property taxes. the value of goods transacted electronically gets hyper inflated as does the value of a house. these taxers hope that wages go up by a hugely inflated amount and that companies can keep raising prices of products. people have no money to buy products and so local transaction taxes fail to keep pace, resulting in the failure of local and state governments; people clean their own streets and look after their own trash and security.

in short, the system resets. people are the items of value, provided they are not sick or elderly and can do something useful.

Harbanger's picture

"How do banks make money in a hyperinflationary environment?"

They manipulate prices and buy physical assets with the printed money before it pops.  Become your own central bank before it's too late, bitches!

Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves. — Norm Franz