Trumped! A Nation on the Brink of Ruin... And How to Bring It Back

by David Stockman

  There would be blood in the streets in Washington and eventually staggering tax increases to fund the shortfall. Such desperate measures, of course, would sink once and for all whatever faint impulse of economic growth and job creation that remained alive in the US economy at the time.

  In short, the latest untrustworthies’ report amounts to an accounting and forecasting house of cards that is camouflaging an impending social, political and economic crisis of a magnitude not seen since the Great Depression or even the Civil War. So here follows an unpacking of the phony accounting edifice that obscures the imminent danger.

  The place to start is with the one data series in the report that is rock solid. Namely, the projected cost of $15.5 trillion over the next 12 years to pay for retirement and disability benefits and the related (minor) administrative costs.

  This staggering figure is derived from the fact that the number of beneficiaries will grow from 59 million to 79 million over the next twelve years. And each and every one of these citizens has a payroll record that entitles them to an exact monthly benefit as a matter of law.

  Even the assumed COLA adjustment between 2-3% each year is pretty hard to argue with—since it is nearly dead-on the actual CPI increase average since the year 2000.

  FUNNY MONEY ACCOUNTING—TRUST FUND “ASSETS” ARE PURE CONFETTI

  By contrast, the funny money aspect comes in on the funding side. The latter starts with the $2.79 trillion of “assets” sitting in the OASDI trust funds at the end of 2014.

  In truth, there is nothing there except government accounting confetti. This figure allegedly represents the accumulated excess of trust fund income over outgo historically, but every dime of that was spent long ago on aircraft carriers, cotton subsidies, green energy boondoggles, prison facilities for pot smokers, education grants, NSA’s cellphone snoops, space launches and the rest of Washington’s general government spending machine.

  So when the untrustworthies claim that that Social Security is “solvent” until 2034 the only thing they are really saying is that this $2.79 trillion accounting artifact has not yet been liquidated according to the rules of trust fund arithmetic. And under those “rules” it’s pretty hard to actually accomplish that—not the least due to the compounding of phantom interest on these phantom assets.

  To wit, the 2015 report says that the OASDI funds will earn $1.2 trillion of interest income during the next twelve years. To be sure, the nation’s retirees and savers might well ask how Washington’s bookkeepers could manage to get the assumed 3.5% interest rate on the government’s assets compared to the 0.3% ordinary citizens earn on a bank account or even 1.4% on a 10-year treasury bond.

  But that’s not the real scam. The skunk in the woodpile is actually an utterly arbitrary and unjustifiable assumption about the rate of nominal GDP growth and therefore the associated gain in projected payroll tax revenues coming into the trust fund.

  What the untrustworthies have done here is indulge in the perfidious game of goal-seeked forecasting. That is, they have backed into a GDP growth rate sufficient to keep payroll tax revenues close to the level of benefit payouts, thereby minimizing the annual cash deficit.

  This, in turn, ensures that the trust fund asset balance stays close to its current $2.7 trillion level in the years just ahead, and, mirabile dictu, permits it to earn upwards of $100 billion of “interest” each year.

  Too be sure, beneficiaries could not actually pay for their groceries and rent with this sort of trust fund “income”, but it does keep the asset balance high and the solvency can bouncing down the road a few more years.

  But here’s the thing. Plug in a realistic figure for GDP growth and payroll tax revenue increases and the whole trust fund accounting scheme collapses; the bouncing can runs smack dab into a wall of trust fund insolvency.

  To wit, the untrustworthies who wrote the report assumed that nominal GDP would grow at a 5.1% annual rate for the next 12 years. Yet the actual growth rate has never come close to that during the entire 21st century to date. At best these people are dreaming, but the truth is they are either lying or stupid.

  Given the self-evident headwinds everywhere in the world, and year after year of failed “escape velocity” at home, no one paying a modicum of attention would expect US GDP to suddenly get up on its hind legs and race forward as far as the eye can see.

  Yet that’s exactly what the Social Security untrustworthies have done by assuming nominal GDP growth 35% higher than the actual 3.8% compound growth rate since the year 2000.

  But it’s actually worse. Since reaching peak debt just prior to the financial crisis, the US rate of GDP growth has decelerated even more.

  And going forward, there is no meaningful prospect of recovery in the face of the growing deflationary tide in the global economy and the unavoidable necessity for the Fed and other central banks to normalize interest rates in the decade ahead. Failing that they will literally blow-up the world’s monetary system in a devastating currency race to the bottom.

  Thus, during Q1 2008, which marked the end of the domestic credit binge, nominal GDP posted at $14.67 trillion, and during the most recent quarter it came in at $18.44 trillion. That amounts to a seven-year gain of just $3 trillion and an annual growth rate of 2.8%.

  Now surely there will be another recession before 2026. If not, we will end up with 200 straight quarters of business cycle expansion—a preposterous prospect never remotely experienced previously.

  Indeed, in our modern central bank driven world, where both recessions this century have resulted from the bursting of financial bubbles, the proposition is even starker. Namely, the Washington untrustworthies are assuming no bursting bubbles or market crashes for 18 years!

  Not a chance!

  The historical business cycle expansions depicted below make clear that there will be another business cycle downturn. After all, contrary to the untrustworthies assumption that the current business cycle will last forever, and, in the analysis at hand for 200 months through the end of 2026, the average expansion since 1950 has lasted just 61 months and the longest ever was only 119 months.

  During the last business cycle contraction, in fact, nominal GDP declined by 3.4% between Q3 2008 and Q2 2009. And when you average that in with the 3.3% nominal GDP growth rate which we have had during the so-called recovery of the last four years, you not only get the aforementioned 2.8% trend rate of nominal GDP growth, but you are also hard-pressed to say how it can be bested in the years ahead.

  Indeed, as we will demonstrate more fully in Part 2, there is a now an unprecedented deflationary tide rolling through the world economy owing to the last 15 years of rampant money printing and financial repression by the central banks. By collectively monetizing upwards of $20 trillion of public debt and other existing securities and driving interest rates toward the zero bound in nominal terms and deep into negative territory in real terms, they have generated two massive, deflationary distortions that have now sunk deep roots in the world economy.

  First, as we demonstrated earlier worldwide credit market debt outstanding has soared from $40 trillion to $220 trillion during the last two decades. This means future economic growth practically everywhere on the planet will be freighted-down by unprecedented, debilitating debt-service costs.

  At the same time, massive overinvestment in mining, energy, shipping and manufacturing spurred by central bank enabled cheap capital has generated a huge overhang of excess capacity. This is already fueling a downward spiral of commodity and industrial prices and profit margins, and there is no end in sight.

  Iron-ore prices, which peaked at $200 per ton a few years back, for example, are now under $50 and heading for $30. Likewise, coal prices, which peaked at $400 per ton, are heading under $100, while crude oil is heading for a retest of the $35 level hit during the financial crisis, and copper is on track to plunge from its recent peak of $4 per pound toward $1.

  These deflationary currents will suppress nominal-income growth for a dec
ade or longer owing to a now-commencing counter-trend of low capital investment, shrinking industrial profits, tepid wage growth and falling prices for tradable goods and services.

  Accordingly, even maintaining the average nominal GDP growth rate of 2.8% realized over the last seven years will be a tall order for the U.S. economy.

  Needless to say, the law of compound arithmetic can be a brutal thing if you start with a delusional hockey stick and seek to bend it back to earth.

  PHANTOM GDP GROWTH: WHY OASDI WILL GO BUST BY 2026

  In this case, the trustees’ report’s 5.1% GDP growth rate assumption results in $31 trillion of GDP by 2026. Stated differently, compared to only $3 trillion of nominal GDP growth in the last 7 years, we are purportedly going to get $14 trillion in the next 12 years.

  But let’s see. If we stay on the current 2.8% growth track, then GDP will come in at $24 trillion in 2026. Since OASDI payroll taxes amount to about 4.5% of GDP, it doesn’t take a lot of figuring to see that trust fund income would be dramatically lower in a $7 trillion smaller economy.

  To be exact, the untrustworthies have goal-seeked their report to generate $1.425 annual trillion of payroll-tax revenue 12-years from now. Yet based on a simple continuation of the deeply embedded GDP growth trend of the last seven years, payroll-tax revenue would come in at only $1.1 trillion in 2026 or $325 billion lower in that year alone.

  And here’s where the self-feeding illusion of trust fund accounting rears its ugly head. What counts is not simply the end-year delta, but the entire area of difference under the curve. That’s because every cumulative dollar of payroll tax shortfall not only reduces the reserve asset balance, but also the phantom interest income earned on it.

  So what happens under a scenario of lower payroll tax revenues is that the $2.7 trillion of current trust fund “assets” begins circling the accounting drain with increasing velocity as time passes. In effect, the permission granted to Washington to kick the can by this year’s untrust-worthies report gets revoked, and right fast.

  To wit, instead of a cumulative total of $13.2 trillion of payroll tax revenue over the next 12 years, the actual, demonstrated GDP growth path of the present era would generate only $11.2 trillion during that period. That $2 trillion revenue difference not only ionizes most of the so-called trust fund assets, but also reduces the ending balance so rapidly that by the final year interest income computes to only $25 billion, not $100 billion as under the current report.

  In short, by 2026 trust fund revenue would be $400 billion per year lower owing to lower taxes and less phantom interest. Accordingly, the current modest projected trust fund deficit of $150 billion would explode to upwards of $600 billion after the last of the phony interest income was booked.

  Needless to say, that massive shortfall would amount to nearly 33% of the projected OASDI outgo of $1.8 trillion for 2026. More importantly, instead of a healthy cushion of $2.4 trillion of assets (or two years’ outgo) as the untrustworthies projected last year, the fund balance would be down to just $80 billion at year-end 2026.

  Now that’s about 15 days of the next year’s OASDI outlays. The system would go tilt. Benefits would be automatically cut back to the level of tax revenue or by 33%. The greatest social crisis of the century would be storming out of every hill and dale in the land.

  Yes, Jacob Lew is a Washington-Wall Street apparatchik who wouldn’t grasp the self-destructing flaws of trust fund accounting if they smacked him in the forehead. And the same is apparently true for the other trustees.

  But here’s where the venality comes in. In order to goal-seek to 5% nominal GDP growth, the trustees report assumes that real GDP will average 3.1% per year through the year 2020.

  Now, c’mon. Since the pre-crisis peak in late 2007, real GDP growth has averaged only 1.2% annually, and only 1.8% per year during the entire 16 years of this century.

  Anybody who signed up for 3.1% real growth through 2020—that is, for scorching growth during month 67 through month 140 of a tepid business cycle expansion that is already long-in-the-tooth by historical standards—is flat-out irresponsible and dishonest.

  Calling their mendacious handiwork the “untrustworthies’ report” is actually more flattering than they deserve.

  CHAPTER 9

  “Morning in America” Never Was—How the Federal Debt Went From $1 Trillion to $35 Trillion in Four Decades

  ONE OF THE GREAT VIRTUES OF THE TRUMP CANDIDACY IS THE Donald’s propensity to lob wild pitches—knowingly or not—at the sacred cows of Imperial Washington, thereby exposing the tissue of hypocrisy and cant, which surrounds them.

  But within the herd of revered ruminants none is slathered in more hypocrisy than the federal budget and official Washington’s unctuous professions of devotion to safeguarding the “full faith and credit of the United States.”

  The truth of the matter, of course, is that our rulers have been marching the nation’s fiscal accounts straight toward national bankruptcy for the last 35 years, at least. And since the arrival of Ben Bernanke at the Fed, Washington’s actual policy with respect to the nation’s “credit” has been to debauch it.

  So Donald Trump’s recent rumination about negotiating a “discount” on the federal debt was priceless. It caused a Beltway chorus of fiscal house wreckers to loudly harrumph and admonish the GOP candidate about the sanctity of Uncle Sam’s credit promises.

  DEFAULT IS ACTUALLY OFFICIAL WASHINGTON POLICY

  In fact, however, the unschooled Trump had merely mentioned out loud what is already the official policy of the U.S. government. He called them out, and they screamed like banshees.

  Here’s why. For 93 months now the Federal Reserve has pegged interest rates to the zero bound. It believes that come hell or high water, the U.S. economy must have 2.00% inflation in order to grow and prosper, and that shoveling free money into the canyons of Wall Street is just the ticket to make this happen.

  Other than a handful of rubes from the congressional hinterlands, there is nary a Washington operative from either party who has questioned the appropriateness or effectiveness, let alone the sanity, of the Bernanke-Yellen 2.00% inflation totem.

  But what hitting this sacred inflation target really means, of course, is that exactly 30 years from today investors would get back 54.5 cents in inflation-adjusted money per dollar of principal on the U.S. Treasury long bond.

  If that’s not default, it is surely a far deeper “discount” than even The Donald had in mind while jabbering to CNBC about his years as the King of Debt.

  As we noted earlier, of course, the monetary geniuses who peddle the 2% inflation gospel claim we are all in it together. That is, prices, wages, profits, rents and even indexed social benefits allegedly all march upwards at 2% per year.

  Save for minor leads and lags in timing, therefore, no one is financially worse for the wear; there is no inflationary default.

  Actually, not on your life. That’s an official whopper that offends facts and logic on a scale that even Donald Trump rarely attains.

  The truth is, savers get whacked and borrowers get windfalls. The wages of upper-end workers keep-up while the purchasing power of paychecks lower down the ladder shrinks continuously. Social Security recipients get recompense but private pensioners get shafted.

  Likewise, under the Fed’s deliberate debt default policy traditional fixed income portfolios wither, even as the leveraged gamblers of Wall Street scalp monumental profits from zero-cost carry trades.

  Indeed, the 2% inflation campaign in the real world is the very opposite of the Keynesian lockstep claim. Its incidence among economic agents and classes is actually capricious and inequitable in the extreme.

  The debt-addicted politicians of Washington, of course, have no clue that the Fed is an engine of default and random redistribution. Nor do they have inkling that it is destroying the savings function, which is the ultimate key to capitalist prosperity.

  Too be sure, they spend a goodly amount of time waxing about their
endless affection for America’s working people. The often-sensible Governor Kasich, for example, never finished a single GOP primary debate without the sappy claim that he understood how to improve the U.S. economy because his father was a mailman!

  Needless to say, mainstream politicians like Kasich, who also pound the table in behalf of the Fed’s vaunted “independence,” have never looked at the graph below. It shows real wages since the Fed went full tilt with printing press money in 2007. This is not a picture of 2% lockstep.

  Less educated and lower wage workers have experienced shrinking real wages and for a self-evident reason. On the margin, they are more exposed to the lower nominal wages of foreign goods and services competitors than are workers on the upper end of the jobs and income ladder.

  In fact, the chart’s three categories of workers with less than college degrees have experienced a 4% to 6% decline in real hourly wages since 2007, even based on the BLS’ understated inflation. Why in the world, then, does the Fed incessantly strive for more inflation and even more random punishment to the less privileged?

  At the end of the day, Fed policy amounts to a grand scheme of random monetary default. But after Trump had the temerity to broach the topic—whether by inadvertence or by purpose—the spendthrifts of the Imperial City scrambled to smother us in a verbal blanket of phony fiscal rectitude.

  FISCAL HYPOCRISY OF THE BELTWAY BLOVIATORS

  In that regard, there are few more noxious precincts of statist fiscal hypocrisy than that occupied by the ranks of scribblers at “Politico.” And among these scolds and bloviators, there are few Washington apparatchiks more culpable than Gene Sperling, who headed Obama’s economic policy council.

  According to Sperling’s snarky rebuke of Trump’s purely hypothetical suggestion, everything that has been done in the Imperial City these last several decades should have been done. Certainly, there is no fiscal crisis that might warrant radical ideas like those proffered by Donald Trump.