Provisional
Truth |
Essays | August 2006 The Emperor's Clothes
Will somebody
please tell the emperor he's missing more than a few items of clothing?
Like that strutting monarch of fable, earlier this month President Bush
personally announced a better-than-expected revised 2006 U.S. budget
deficit of “only” $296 billion, thanks to a strong economy and the
impact of more than a trillion dollars in tax cuts the last five years.
Compared with an earlier deficit projection of $423 billion, one would
suppose by the president's upbeat tone nearly $300 billion of red ink
was a good thing, as
truly it must be here in the land of doublespeak.
In this updated fairy tale favorite, it's the incredible
illusion of fiscal soundness that cloaks our leader. This administration
(as have all others) includes Social Security tax receipts in its budget
numbers. Since Social Security has been running a surplus since
1983 when former Federal Reserve chief Alan Greenspan last fixed it,
announced budget deficits, when combined with Social Security surplus,
always look better than they really are. In 2005, that surplus was $174
billion and the 2006 projection: $180 billion. It's cumulative surplus
approaches $2 trillion, all of which will be necessary when the Baby
Boomers start collecting in earnest in less than 10 years.
In truth, this illusion of fiscal soundness - the
emperor's imaginary clothes – evaporates in the harsh reality of our
real budget deficits, excluding Social Security receipts:
$476 billion projected in 2006 – not $296 billion. (Pause to exclaim the
epithet of your choice.)
Through 2006, deficits will total more than $2.4
trillion since George Bush was appointed president by the Supreme
Court six years ago. And nearly another trillion can be expected in the
last two years of this administration, nearly $3.4 trillion in the eight
years of the Bush presidency, and that's the best-case scenario. If our
Goldilocks economy swoons, those deficits will be much worse. So much
for fiscal conservatism. Apparently our elected leaders believe
America's gold card has no credit limit, no late-payment fees and no
default interest rate.
The president, who once said the deficit was only
“numbers on paper” apparently isn't concerned (like Alfred E. Neuman:
“What, me worry?”). Dick Cheney claims Ronald Reagan proved “deficits
don't matter,” and Congress clearly could not care less, especially in
an election year.
New Fed chairman Ben Bernanke is plenty worried, however,
as when he warned Congress in July, “Deficits (do) matter because they
represent additions to debt that our children and grandchildren will
either have to pay through higher taxes or reduced services.” Bernanke's
key word is “pay,” not borrow more, and the result of higher taxes and
reduced government spending generally would be a shrinking
economy, which, ultimately translates to a lower standard of living.
Regrettably this is nothing new in Washington, D.C.,
although Ronald Reagan's deficits paled by comparison. The Gipper
managed to blow only $1.4 trillion in two terms to re-outfit the
empire's police force and send tax-cutting benefits trickling down to
the lower echelons of the economic spectrum. George H.W. Bush, the
First? Like father, like son, as it's said. “41” rang up more than $1.1
trillion in four years with a tax increase despite his
lip-reading pledge. Bill Clinton, the only U.S. President lucky enough
to preside over true budget surpluses in 1999 and 2000 – the first such
in more than 40 years – oversaw a $1 trillion shortfall in his two
terms.
Since Kennedy, our cumulative budget deficits will exceed
$7.4 trillion through the end of George W. Bush's (“43”) tenure, but
most of that staggering total has accumulated in the last 25 years. Do
the math: $7.4 trillion of cumulative deficits equals $7.4 trillion of
additional government debt of which $2 trillion is owned by our national
retirement fund – essentially IOUs to and from ourselves.
By now you should have correctly surmised Social Security
is not a fund at all, it's merely a wealth transfer system that extracts
wage withholdings from currently employed Americans, hands off most of
it to other Americans who are retired, disabled or survivors, and lends
the surplus to the government which then is able to pretend its more
fiscally sound as a result. Are we nuts?
If the United States was a corporation it would be
bankrupt and its executives would be jailed. Businesses are prohibited
by law from “borrowing” from their pension, profit-sharing and 401k
plans under a quaint and reasonable notion those funds belong to
their employees. Yet our government routinely borrows our Social
Security funds, issuing its IOUs in the form of treasury bonds which are
held by the Social Security Trust.
It would be as if General Electric, facing a bad year
profitwise, withdrew some of its employees' pension funds and issued its
own corporate bonds - its IOUs – in their place, thus making it's
numbers and keeping Wall Street and investors happy. That's called funny
accounting, and it's what brought down WorldCom and Enron and Global
Crossing and a few other notorious examples of corporate theft and
idiocy in the early 2000s.
In the 2000 presidential campaign, when Al Gore was
describing his now-infamous “lockbox,” he was referring to creating a
statutory division between the government and our pension plan – Social
Security – that would prevent government from borrowing the surplus,
thus keeping it “locked away” from greedy politicians. Although Gore
promoted this concept in opposition to George Bush's privatization plan
for Social Security, which went down in flames faster than a falling
stock market, the novel idea was to keep Social Security separate from
the government's general revenues and outlays.
Yet our government, administering what may soon become
the world's largest fiscal confidence game, has done this every year but
two in the last 44 years. Somebody stop the madness.
To be sure, it's not only the President's fault.
Republican presidents and hopefuls always enjoyed blaming (a
Democrat-majority) Congress for runaway spending and pork-barrel
profligacy. Not this time. This mortgage on future generations is
largely courtesy of a Republican Congress that has been empowered since
Newt Gingrich and the Contract For (On?) America in 1994. The last dozen
years, however, mostly have been “tax-cut and spend” as opposed to a
more traditional government formula of, as Ronald Reagan used to enjoy
repeating, “tax and spend.”
It would seem the nearly two-thirds of Boomers who expect
to rely on Social Security as their sole source of retirement income
would be concerned (incensed?) at our government's practice of
appropriating our retirement fund. In 15 years, if they are told - by
their children who then will lead our country - benefits must be
reduced, or no benefits are forthcoming to those who fail the “means
test,” they will look back and wish they had done something to protect
Social Security. By then, it will be far too late. That next generation,
by the way, already believes that Social Security will not exist for
their retirement years, so why should it care if the Boomers, who
rightly will be blamed for this fiasco, don't get their “fair share.”
Ladies and gentlemen, boys and girls, we are drowning in
a sea of red ink. Addicted to oil? Folks, we (as in “We the people in
Congress assembled”) are addicted to deficit spending, and we as a
nation are borrowing more than two billion dollars a day from
foreigners to slake our habit. In fact, foreigners now hold more than
half of all our private government debt. Not all those foreigners like
us as much anymore, and those that still do - China, for example - could
change their minds at a moment's notice.
Think of the implications. Foreigners – foreign
governments to be accurate – are financing our tax cuts for the wealthy,
our bridges to nowhere and our preemptive military excursions and, in
effect, have set our relatively low interest rates the past few years by
lending us the money to sustain our economy. The fastest growing
“investor” in U.S. Government bonds is our good friend and
soon-to-become nemesis China. What do you think the Chinese are doing
with all those dead presidents we send them every month to settle our
import bills? The Chinese are buying U.S. Treasury bonds. We get salad
shooters and tee-shirts and computers and Barbie dolls, and China gets
dollars – billions of them.
What if the Chinese decide to begin investing in Euros
instead of dollars? What would happen to financial markets around the
world if the Chinese even suggested they might think about buying Euros
instead of dollars? What if the Chinese decided to test-drive that
theory the next time they disagree with one of our policies of empire?
Would we back down to their request? Would we call their bluff? Would we
be willing to accept the instant, ugly consequences of financial market
meltdown that effectively would end this gas-guzzling, TV-watching,
sedentary, throwaway shopping mall life as we know it?
Just like the evil credit card companies, world financial
markets immediately would ratchet our interest rates to the default
level. In the credit card industry, the default rate today stands at
more than 30 percent. We hit a 21.50 percent prime rate in late 1980, it
could happen again, and very quickly, and then the fun really begins. An
entirely new generation of Americans has no idea what a brutal recession
and deflationary asset meltdown means, like the ones in 1973-1974 and
again in 1980-1981, much like the Boomers have no concept of the Great
Depression, which lasted a decade and only ended when the government
jump-started the economy to enter World War II.
So there you have it, a substantial majority of Americans
who have no clue what life would be like in the event of a serious
economic crisis – a deflationary implosion – lasting years. One thing is
clear. Median home prices in California, which reached $575,000 in June,
will not be as valuable - perhaps by half. And the banks that offered
interest only loans, negative equity loans, 100 percent financing,
40-year amortizations and home equity loans will find themselves
foreclosing a lot of real estate as former owners turn in the keys and
walk away.
That scenario, of course, adds fuel to the fire as the
banks scramble to unload portfolios of repossessed “OREO” Other Real
Estate Owned at any prices possible. Most banks do not keep mortgage
loans as assets on their books – they are sold in so-called secondary
markets which in turn make up the pools (CMOs – collateralized mortgage
obligations) of investments offered to pension funds, mutual funds and
individual investors. These investors will see a shocking decline in the
value of these pools and a similar decline in investment income.
But almost all banks have significant portfolios of home
equity loans and lines of credit – essentially second mortgages. If
borrowers are unable to make payments on these obligations, the banks
will initiate foreclosure proceedings and quickly to try to minimize
their losses. If homes are sold (can you say Sheriff's Sale?) at prices
below the first and second mortgage amounts, the banks will take the
hits as losses on the seconds. And if a borrower cannot make their
mortgage payments, they certainly aren't going to be making credit card
payments, and the banks – and investors – take more hits.
To say this is a train wreck soon to happen is an
understatement of biblical proportion. One must surmise the vast
disinterest in the topic itself as indicative of our inability to grasp
the sense of danger that accompanies these policies. Mention the word
“trillion” and most Americans' eyes glaze over. The real crux of the
issue is that our wanton deficit spending and new dependence upon
foreign governments to continually increase our credit limit to finance
our decadence ultimately constricts our monetary policy choices should
the doo-doo really hit the fan again, like a couple more Katrinas or
9/11s.
How fondly we now must recall those halcyon days ending
1999 when a five trillion dollar
budget surplus was projected into the next decade. When a
new paradigm of ever-increasing sales and, someday, earnings had
enveloped the dot.com stock market and the internet promised to make
successful day-traders of us all while we rejoiced in the service
economy of the new millennium. Now a millstone of incredible proportions
is firmly secured around our necks, or rather the necks of our children
and grandchildren, and very little is Osama bin Laden's fault, Fox News
opinion to the contrary.
Nero fiddled
while Rome burned, so we are told. This government and its elected
officials spend while America and its citizens drown in a sea of debt
and the only life preservers are now owned by foreign governments.
When the Deficit Trials are held some years hence, many
of those responsible perhaps will be tried posthumously or in absentia,
but in these proceedings the government officials and members of
Congress yet alive – and who have not fled the country - will, in their
defense, be unable to repeat those words heard at war-crimes trials
past: “I was just following orders.”
In those dark days to come, with our children or
grandchildren presiding, those responsible for our financial demise will
say they were only following the will and desire of us, the American
people, giving us the bread and circuses that became our undoing.
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