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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Gloomy's picture

So Sprott says the crisis is years and years away!! Time to sell all my gold and silver holdings and join the stock market parade!

IridiumRebel's picture

I just bought a fuckload of Netflix! Fuck Yeah!

BobPaulson's picture

If the collapse were that easy to predict in time, you could buy in and get out at the last minute. Sure, the rigged casino is doomed but calling that moment is the big variable IMO. All the shoe shine boys have already predicted the crash. I have been wringing my hands about it fir eight years, have made a good bit on bullion but am in no position to retire to my massive off grid survivalist ranch yet. My prognostication have so far been difficult to turn into a feeling of safety about it.

Rainman's picture

To compound their catastrophic folly, .gov is rapidly outlawing all beloved consumable vices so that the geriatrics can survive into their slobbering 100's as wards of the State. Idiots !

Positive Dennis's picture

I agree, there will be no crash in 2013. We hard money types underestimate the power of the status quo. Even Japan has a few years of drifting before Ragnarök.

LawsofPhysics's picture

Perhaps, but supply lines do have hard limits and history is pretty clear on how fast a currency can die when people lose faith in it's value for future redemption of real assets or labor.  The whole "flation" debate is pointless as the issue is really about the reliability of all these paper promises and the failure of humanity to fully understand that things are deteriorating exponentially. The only thing of any real substance that is backing the Federal Reserve Note now is the U.S./U.N. military, but the exchange of real goods and services in other currencies or hard assets is excellerating.

Positive Dennis's picture

Yes, it is coming, but when? I am selling into what I think will be a multi year rally. It is a suckers rally.

Positive Dennis's picture

As long as interest rates are low, we will be fine. This observation is why I think things will not crack up for some time. But eventually a tipping point will be reached and then we enter uncharted territory. Here is a rent blog of mine on interest rates.

tradewithdave's picture

Is it okay to ignore this? Jus' saying'..

Never One Roach's picture

<<In a society that relies on consumption for 70% of its economic activity>>


If you've started taking a closer look at your budget for the New Year and are trying to scale back some of your extra expenses, don't overlook your credit card statements for extra fees in the near future. The consumer advocacy group Consumer Action advises consumers to be on the lookout for "checkout fees" that some retailers may be tacking on to credit card transactions starting January 27. While this practice is banned in 10 states, consumers are encouraged to be on alert for these fees that would legally be passed from merchant to consumer.


After the settlement and new agreement, some retailers would be permitted to impose a surcharge for credit card purchases.





akak's picture


After the settlement and new agreement, some retailers would be permitted to impose a surcharge for credit card purchases.

As it should be, as the banks charge the retailers a certain percentage on every credit card transaction.  It is only right and proper that these costs be passed along directly  to the consumer.

Dr. Engali's picture

I don't know if Anonymous is phyops or not , but these attacks on government web sites sure stinks of a set up to clamp down on the web.

Dr. Engali's picture

It's for our own good of course, cyber security will protect us from those scary hackers..... Think of the children man.

IridiumRebel's picture

This site makes my mind feel like a fucking pretzel. I think I have things figured out and then someone posts some mind twisting shit that kinda makes sense and I begin to drool and contemplate not in that order. DAMMIT ZH

AssFire's picture

I agree with their supposed beef about the laws and penalties for using technology,

hell as of today you can be prosecuted for unlocking your cell phone...But, if this was

really anything more that a ploy to assert more control- the decryption keys would have been sent out.

In the sick world of government, politics and banking- nothing happens by chance.

LawsofPhysics's picture

Bingo.  Nothing is ever as it seems, and this is and has always been about power and control. 

The MIC relized that they were going to have their budget cut in 1999, they had to do something to get control back over congress and direct more funding to their interests.  They have been very successful.

IridiumRebel's picture

Well, shit. I guess I shouldn't "like" their Facebook page. OOH! A puppy dancing on my friend's timeline! BRB.

max2205's picture

Nationalize everything health related now before it's too late!

Fucking everyonein this sector is wag overpaid and services wag over priced.


Like GM in the 50ns


nmewn's picture

I share the same concern doc.

Whether or not they (Anonymous) are...government(s) will never let a good crisis go to waste...of they're own making or someone elses.

Dr. Engali's picture

I agree nmewn. If they were serious they would do a lot more damage to something systematic , but instead they take over web sites. It's all to convenient for TPTB if you ask me.

LawsofPhysics's picture

Again, the "doctor" is using his head.  This spot on.  Impress me, interupt a major power facility etc., these guys need to read the monkey wrench gang.

Dr. Engali's picture

It's funny how something just seems to happen right when they push for legislation. And it's really funny how they just happen to have a 10,000 page bill ready to be signed, but the fuckers can't pass a budget in four years.

IridiumRebel's picture

DING DING DING! We have our post of the day.

Bad Attitude's picture

Yup. Legislation ready to introduce, manufactured crisis, propaganda push in the mainstream media coupled with politicians saying they have the "solution," public support grows for the proposed "solution," legislation formally introduced, politicians vote for the legislation because it is the "will of the people," the legislation becomes law. Then everybody reads the new law and realizes how they just got screwed.

Then, the cycle starts all over again.

BidnessMan's picture

Never let a crisis go to waste. 

BLOTTO's picture

Dr. E


I am with you on that. Its just that we've been hoodwinked for so long...on every major front...its hard to figure out the truth and the real motive.


But it very well could be a setup for the reason you stated. Information is powerful and the internet is full of it for free. 'They' don't like that at all.

Stay tuned...


Banksters's picture

The regime cannot exist with the internet in its current state.   As Napolitano recently stated, a cyber attack on critical infrastructure is imminent.    In the name of national security, internet 2 will be rolled out.   

rufusbird's picture

This all deserves a little drill down investigation.


brucyy's picture

Income inequality ? yah, redistribution and socialism is the cure for everything.

You shall be all equal in misery  , said our beloved brother Ben from the church of monetization.


LawsofPhysics's picture

"Income inequality ? yah, redistribution and fascism is the cure for everything."--  FIXED

nmewn's picture

They are one and the same thing. Top down statism run by an oligarchy, for the benefit of the oligarchy.

Exhibit A: Tim Geithner.

Exhibit B: David Gregory.

Exhibit C: Jon Corzine.

LawsofPhysics's picture

Bullshit.  when I help a neighbor or relative get back on their feet I am participating in socialism.  When I steal valuation, money, or hard assets from them to support my failing business models, I am a fascist.  Big fucking difference.

You just happen to be good at identifying who the fascists are.   I'll be impressed when you roll the guillotines.

nmewn's picture

"Bullshit. when I help a neighbor or relative get back on their feet I am participating in socialism."

No, you are participating in charity AND its voluntary.

Temporalist's picture

When people are confusing charity and socialism...things are really bad.  Socialism is state directive; charity is individual elective.

LawsofPhysics's picture

Then there is no such thing as a socialist government since govenment never engages in charitable behavior, right?

 Again, you missed the fucking point, we all see exactly what the problem is and know exactly who the fascist evil fucks are, yet, nothing changes.

Impress me, roll the fucking guillotines already, otherwise, shut the fuck up.

nmewn's picture

My point was, government SHOULDN'T engage in charitable behavior at all, because once started, it will always grow with needs becoming wants and desires until it is looked at as a source to PROVIDE everything.


And for the LAST TIME...fascism is a derivative of socialism.

Read up on the influences of Mussolini, Hitler etal and get back to me before "you lose your head" over something you don't even understand completely.

LawsofPhysics's picture

I agree, the gov should not do anything aside from protect private property and the law of contracts, but we have come to fascism from captialism and are well on our way to another fascist state, again nothing has changed. I dislike all "isms" as they seem to all end up in the same place. Everyone be sure to use their ZH names when the guillotines roll, until then I reamain unimpressed and will continue to strenghten my tribe.  For now, you are free to do the same, if you so choose.

Hedgetard55's picture



     He is a douchebag. Pay no attrention to the fool.

Temporalist's picture

No you are missing the point that people are not here to dicusss what you want in your narrow terms just because you've deluded yourself into thinking that is so. 


If you think that people define socialist government as it being charitable you're wrong or babbling inanities to hear yourself.  Go write your manifesto and think out your ideas first before spouting them nonsensically in a public forum.


I couldn't care less if you are impressed you think much too highly of yourself.


Sorry the world can't be fixed to your liking and by your timeline.  I'll get right on that for you.

LawsofPhysics's picture

BOTH capitalism and socialism seem to get us to the same fascist endpoint.  Sad, guess the gov should have stuck with defending private property and the laws of contracts.

Wake me you actually do something about it.  I have to run now.

nmewn's picture

"BOTH capitalism and socialism seem to get us to the same fascist endpoint."

No they don't.

Under true capitalism, the too big to fail investment banks would have been destroyed...not saved by the state. Its what capitalism does, it cleanses and purges the unviable.

Surely anyone can see this.

WmMcK's picture

"I was married to a socialist and a communist. Neither would take out the trash" - Zsa Zsa

nmewn's picture

It just doesn't work ;-)

Temporalist's picture

So you'll be sleeping then, just waiting for others to "do something"?  Don't practice what you preach; typical.

nmewn's picture

Plus one.

On the point of charity, one may not wish to provide it to the neighbor or the investment banker or a relative because they are evil little pricks of nature who should be allowed to wallow in the misery they have created for themselves.

Dr. Engali's picture

Agreed , but in my book when the state takes property from one to give to another... that's fascism, no matter what it's called or how much lipstick is put on it.