Pick Your Poison With Barton Biggs

Tyler Durden's picture

A Monetary Cliff or a Fiscal Cliff: these are the two poisons that Barton Biggs sees rushing straight toward America, with little hope of an uneventful collision. While we have not been shy of our opinions on Barton Biggs' flip-flopping positions , his note on the US "as a nation of totally self-centered special interest groups that terrorize our politicians" struck a chord and deserves praise in its clarity. Noting that Europe seems stuck again, he points to the US market being data and Europe-dependent for the next month and believes the correction is little less than half way over (in terms of size not time). In Biggs opinion "although the Monetary Cliff is more long-term dangerous, the proximity of the Fiscal Cliff, if not dealt with, will trigger the dreaded double-dip recession we are all terrified of and bring on another financial crisis."



A lethal, poisonous uncertainty hanging over U.S. markets (and world markets for that matter) is the so-called Fiscal Cliff. As of January 1, 2013, the Bush tax cuts, the temporary payroll tax cut, and long-term unemployment benefits will all expire. To make matters worse, on January 15th, because of the failure of the Joint Select Committee on Deficit Reduction, other formulaic draconian cuts will go into effect, which in total will abruptly subtract about 350 basis points of real GDP from what will still be a fragile economy expanding at perhaps two percent. This is the Fiscal Cliff the economy faces.

Unfortunately, there’s another precipice looming – a Monetary Cliff that is even steeper and more hazardous. By the fall of this year, it will become very evident that the U.S. is living beyond its means and that there is an entitlements deficit of truly mountainous proportions. By December of this year, we will be bumping up against the national debt ceiling and a possible downgrade of our sovereign debt. The budget and the deficit are out of control. Just as serious is the enormous liability America has created in the last ten years of unfunded promises to pay to our people when they retire and for their medical expenses. Investors, businessmen, and the people themselves sense these lethal imbalances, and if they are not addressed, they eventually will erode confidence, consumer and capital spending, and will drastically affect valuations. This is the Entitlements Cancer.

In my opinion, although the Monetary Cliff is more long-term dangerous, the proximity of the Fiscal Cliff, if not dealt with, will trigger the dreaded double-dip recession we are all terrified of and bring on another financial crisis. Congress could deal with this issue over the course of this year, but is that a realistic hope with a cantankerous, highly partisan Congress while an election is going on? Is a Lame Duck Congress likely to get anything done (supposing Obama is re-elected and the House and Senate are Republican)? Of course, the other alternative is that Congress defers the issue, in effect kicking the can down the road again, but the tolerance of the equity and fixed income vigilantes has been stretched thin. And make no mistake; the vigilantes are international, cold-blooded and very powerful, and they are like wolves attacking a weak and wounded buffalo.

The debt extension is no minor event. Here are some nasty facts. The average maturity of the U.S. Treasury debt is five years, and the average interest rate is 2.2%, so the interest expense last year was about $450 billion. Since inflation is running close to three percent, in total, the owners of Treasuries have a negative real return. $5.9 trillion or about 70% of the total is the amount of debt coming due in the next five years. Unless an economic miracle occurs, additional Treasuries will have to be sold in the years to come to fund the budget deficit. This year, according to Caroline Baum, a 100 basis point increase in the average interest rate will add $88 billion of interest expense. Last year, the Federal Reserve bought 61% of the new debt issuance and foreigners (probably most of the central banks, particularly of China) purchased about 20%.

Thus, we are very dependent on the Fed and the kindness of strangers for the rollover of our national debt. One of those strangers, China, is already choking on T-bonds and has expressed its reluctance to increase its holdings. Japan is transitioning to its own quantitative easing. Suppose China and Japan not only stopped buying but actually tried to sell. Baum puts it succinctly: “The U.S. is more dependent on short-term funding than many of Europe’s most indebted countries, including Greece and Spain.”

I recently attended a breakfast with former Senator Alan Simpson, Erskine Bowles, and Mayor Bloomberg. I think the Simpson Bowles Committee (SBC), appointed by the President (which incidentally was truly bi-partisan), came up with reasonable, compromise solutions to these big issues, but which do require a pound of flesh from everyone. Subsequently, the President and the Majority Leader dropped it like a hot potato. Everyone got fat in the last ten to fifteen years and now Mr. Everyone is going to have to lose some weight. Since we are an equal society, the top echelons are going to have to give up the most. A few weeks ago, the SBC was summarily dismissed by the House. We are a nation of totally self-centered special interest groups that terrorize our politicians. Our politicians are scared to death of them. As Senator Simpson, a life-long Republican and one-time Minority Leader of the Senate, put it, “if President Obama had endorsed our proposals they would have torn him limb from limb”.

The “they” whom he was talking about principally is the American Association of Retired People (AARP) which has 45 million members and is growing by 10,000 new members a day. The AARP is a single issue voting bloc, and on Election Day it can turn out its members, most of whom have not much else to do. Social Security is their beta noire. In the late 1930s, when FDR created Social Security, the average life expectancy of Americans was around 60 and there were 33 workers for every beneficiary. The retirement age was set at 65 and benefits were later indexed to inflation. Today, the life expectancy is close to 80 and there are 3 workers on the way to 2 for each beneficiary. The retirement age is still 65. The Social Security System is bankrupt with an unfunded liability in the trillions that is rising every day. The SBC recommended that the retirement age be gradually raised over 20 years to 70, and that the Social Security payroll tax assessment be raised from the first $110,000 to $175,000. Of course, the other AARP (The American Association of Rich People) screamed bloody murder as they do about any tax rate increase on higher income payers.

The same dynamics apply to Medicare, and here the SBC suggested maintaining the Medicare cost controls associated with the recent healthcare reform legislation and increasing the authority of the Independent Payment Advisory Board. Again, the AARP went nuts, screaming about “death panels”. The issue is that at a huge expense, modern medicine can prolong hopelessly dying peoples’ lives until they are virtually vegetables. End of life care is a major reason health insurance is insolvent.

The SBC also proposed a $200 billion reduction in discretionary spending with proposed cuts including reducing defense procurement by 15%, closing one third of overseas bases, eliminating “earmarks”, and cutting the federal work force by 10%. In addition, it suggested $100 billion in increased tax revenues through reforms such as introducing a 15% gasoline tax and eliminating or restricting a number of exemptions, such as the home mortgage interest deduction on expensive homes and the deduction for employer-provided healthcare benefits. Another proposal was a reduction in entitlements including farm subsidies, federal pension service reform, and student loan subsidies. Senator Simpson points out that last year we spent $740 billion on defense; the next 14 biggest spending countries combined spent $560 billion.

The tax reform proposed by the SBC is staggering in its dimensions. Almost all deductions are eliminated, capital gains and dividends are taxed as income, and we go to three brackets (12%, 20%, and 27%). All corporate and individual deductions and exemptions including mortgages, ear marks, and charitable contributions are gone, as is the Alternative Minimum Tax. A federal excise tax on gasoline goes into effect in 2015. However, all this is another, very complex subject. All manner of fiscal experts have objected, showing disastrous consequences. Senator Simpson just smiles: “Torture statistics long enough and they will confess to anything.”

Alan Simpson and Erskine Bowles are great Americans and their program needs serious consideration. At the breakfast, Bowles said he had just spent time with the President and that Obama had told him after the election he thought progress would occur. Someone then asked Simpson, Bowles, and Bloomberg whether they thought these issues could be dealt with without another financial crisis occurring first. All three regretfully said they did NOT think so. Depressing!

As for the markets short-term, my guess is that we are about half way through a correction slash pullback whatever. The U.S. market for the next month will be data and European dependent. The American economy is looking a little soggy here, but I think the 2% momentum is still up. Europe seems stuck again. That the ECB and EFSF are already talking about spending their precious firewall funds that are supposed to last for three years is not cheery. Italy today sold one year paper at 2.84% whereas a month ago it financed at 1.40%. Germany’s financing stumbled too. It’s clear Europe is in a recession that is affecting everyone, including former stalwarts like the Netherlands. I’m out of Italy and have sold short some French and German equities.

Barton M. Biggs

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Gubbmint Cheese's picture

Ironic that the name Barton Biggs sounds like a character from a Muppet movie.

The Big Ching-aso's picture



I think this guy's a double-dipshit.

BarberKen19's picture

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carbonmutant's picture

Do Crash Dummies need air bags?

TheGoodDoctor's picture

What a jack off. He is finally figuring this out now? I thought he was a perma bull?

Dr. Engali's picture

He knew it just like we all know it. But he can't bring in new money without selling the perma bull story.

SheepDog-One's picture

Im not so sure, I think some of these guys actually do believe their own shit, and also seal their farts in Mason jars for later savoring.

Elmer Fudd's picture

Oh its a "double?" 

Bartanist's picture

OK, so maybe the punishment for the crime of lobbying should be death. If congressmen had to write their own laws we could at least be assured that none would be more than 3 pages long.

SheepDog-One's picture

This line that our poor politicians have to deal with the 'special interest group terrorists' is just laughable! They sure dont mind pocketing that special interest MONEY!

q99x2's picture

Bick Your Boison With Parton Piggs

Big Slick's picture

Thanks Dick Cheney.  Along equally frightening lines (with a slightly more entertaining narrative) check out our friend Michael Lewis's (Liars Poker, Moneyball) November Vanity Fair article on the coming debt crisis in CA.  Fantastic writing!!!!


Print this and read this.  You will be both entertained and terrified at the same time. 

(To print, click 'single page' at bottom left, BUT do a 'print preview' first to leave off the hundreds of comments)


How it started was with a question: How can G.D.P. [gross domestic product] estimates be so high when the states that outperformed the U.S. economy during the boom were now underperforming the U.S. economy—and they were 22 percent of that economy?” It was a good question.

From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever riskier assets. In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could be dealt with in only one of two ways: massive cutbacks in public services or a default—or both. Whitney thought default unlikely, at least at the state level, because the state could bleed the cities of money to pay off its bonds. The cities were where the pain would be felt most intensely. “The scary thing about state treasurers,” she said, “is that they don’t know the financial situation in their own municipalities.”

“How do you know that?”

“Because I asked them!”


evolutionx's picture
Millionaires’ Doomsday Shelter Being Built Below Kansas Prairie


These luxury flats, deep in the shaft of an abandoned missile silo, are meant to withstand everything from economic collapse and solar flares to terrorist attacks and pandemics. So far, four buyers have thrown down a total of about $7 million.



Dr. Engali's picture

It's probably better that there was no agreement when it comes to Simpson Bowles. Let the system collapse and maybe people will learn that a system built on greed and hubris is doomed to fail.

firstdivision's picture

Well apparently neither matter.  The EUR is off to the moon today. 

Dr. Engali's picture

If by off to the moon you mean depreciating at a slower pace than the rest....you would be right.

navy62802's picture

Speaking of Bbbbbarton Bbbbbiggs, where has Dick F Bove scurried off to?

skepticCarl's picture

Bove is still predicting record bank profits, and higher stock prices for the financial sector.  He has, to my chagrin, been correct so far.

gjp's picture

Correction?  What correction?  Half-over, meaning total dip of 4% or 5% and then we're off to the races again?

Give me a break - US markets at least aren't correcting anything.  The rest of the world is dealing with some measure of reality, but the go-go momentum bubble world in America just will not be broken.

SheepDog-One's picture

I laugh at it all too! Now we're supposed to believe -4% from DOW 13,400 only a few hundred points from ALL TIME highs was 'the big correction'? And then off we go straight up again? I have no idea who any of this is fooling but its not me.

SheepDog-One's picture

Oh, poor poor politicians, being 'terrorized' by special interest groups! Boo hoo....theyre happy to accept all the bribe money from said 'terrorist groups' though!

slowimplosion's picture

The way our political system is structured they have two choices - take the money or go home.

What do you expect them to do?

Hate the game here, not all of the players.

russwinter's picture

To Barton Biggs: No shit, Sherlock! 

skepticCarl's picture

Biggs correctly identifies the main culprits as the U.S. government, captured by special interests, and the give-me-more electorate.  Just switching to a gold standard and eliminating the central bank doesn't solve the insolvency and entitlement problems.

TMT's picture

Simpson Bowles is a half-measure at best.  Making changes to the tax code and lowering some expenses will help somewhat in the near term, but our only hope for survival as a nation is to fix the structural problems that got us into this mess.

NotApplicable's picture

Which would be nationalism itself. When people within one state can steal from people in  another, with full impunity, as it's all "legal," well, just what else should be expected?

skepticCarl's picture

It seems that some inside members of George Carlin's Big Club (and you ain't in it), such as Pimco's El-Erain and Barton Biggs, are stepping up their criticisms.  I weight this development as more important than how over-the-top internet bloggers can go with their anti-establishment rants.

NotApplicable's picture

This is what faux leaders do. Once it's too late to matter, critics emerge from everywhere, so that in the future they can point back to this time and claim they were leading the charge before anyone else in the public eye had a clue.

They're just polishing their facades of integrity.

northman's picture

If the US has to roll-over $5.9 Trillion in debt over the next 5 years, and assuming a $1.5T ish deficit each year, that means they have to issue $7.3 billion in new debt on average every single day (including weekends) for the next 5 years. Thats $23.50 in debt for every single person in the US, every single day, for 5 years. That sounds sustainable.

Big Slick's picture

"$23.50 every day for 5 years?  No problem.  We'll have it for you in the morning."



RoadKill's picture

Personally Id prefer a crash and restart to Simpson Bowels. SB asks for tiny adjustments to a massively screwed entitlement system. It massively increases taxes on the rich, while maintaining a system where 50% do not pay anything. AND NO PAYROLL CONTRIBUTIONS TO FICA ARENT TAXES!!! THEY ARE CONTRIBUTIONS FOR RETIREMENT PAYMENTS YOU WILL RECIEVE IN THE FUTURE!

What would be fair? How about cut 20% of federal workers, cut pay and benefits for the rest by 20%. Send all education spending to the state. Change SS into a private IRA system. Send Medicare, Health Care and Welfare to the states. By that I mean no Interstate transfers. Each state decides how much they want to tax people and what level of benefits to provide. That way the rich can all MOVE!!!

Cut defense spending by half. Get rid of all foriegn aid. Goto a 10% flat income tax and 10% sales tax. 10% tax on capital gains and dividends.

buzzsaw99's picture

Baum is an fool.

ArrestBobRubin's picture

Sorry, but physical silver is my own particular poison. That and Patron tequila. Silver there too.

And I'm too old to change now.

junkyardjack's picture

Barton Biggs is bearish? Bullish!

Hohum's picture



DOW about 6.0% (S&P and NASDAQ more but neither increased in 2011)

WTI: about 4.6%

Silver: about 17%+

Gold: a little under 8%



El Oregonian's picture

"a nation of totally self-centered special interest groups that terrorize our politicians".

Oh, you mean "The Little Red Ridinghood" sydrome? Come on, geesh...

ElvisDog's picture

This made me laugh:

The AARP is a single issue voting bloc, and on Election Day it can turn out its members, most of whom have not much else to do

Nothing else to do. So true. They do watch a lot of TV....

ElvisDog's picture

The issue is that at a huge expense, modern medicine can prolong hopelessly dying peoples’ lives until they are virtually vegetables

My dad was in a rest home the last 2 years of his life. Visiting him was the most depressing thing I can imagine. He was alert and actually liked living in the rest home, but almost everyone else in the rest home was virtually a vegetable. They were always asleep on their backs with their mouths open. And yet, our fucked up morals and fucked up system has to keep these people alive at all costs for as long as possible even though they are probably not even aware that they are still alive.

Another thing was my mom told me that we were one of the only ones in the rest home who were actually paying for their care. Almost everyone else there had their $7000 monthly fees paid for by the State of California.

Getting Old Sucks's picture

Cause they want the MONEY!!!  There is NO compassion or TRYING to save them involved.  As long as they keep them alive, the more MONEY!!! they collect.  Had to laugh, well, not really, when my mother who lived in a assisted living facility, who took her SS check as payment, transferred her to their Nursing home facility attached to the building on her last day of life, charged 30K for that (actually) 2 hours.  It's the MONEY!!!!  It's all about MONEY!!!  Healthcare is all about MONEY!!!  Go back to non profit health care, minus research and see what happens to healthcare costs.  It worked for most of our history, why not now? 

hairball48's picture

But, but , but you aren't gonna take away my Social Security ...are you??? /sarc on :)

Clowns on Acid's picture

Ole Barton just waking up to the biflation / stagflation caused by Fed profligacy and DEM party inspired spending?

Barton must have had a great acupuncture session today in Hong Kong.

jse111's picture

As long as Sir Barton keeps it negative to cataclysmic, he will be more than welcome on ZH.

Chuck Walla's picture

Again, the AARP went nuts, screaming about “death panels”. The issue is that at a huge expense, modern medicine can prolong hopelessly dying peoples’


So, the Independent panel will rule on who gets care and refuse it for those too far gone to heal. Thank God its not a  "Death Panel"!  I only hope Simpson's and Bowles' lives are held in those hands, even with their "fix" in.