Obamanomics IV — Armageddon

From Dictionary.com: Armageddon [ahr-muh-ged-n] noun

1. The place where the final battle will be fought between the forces of good and evil (probably so called in reference to the battlefield of Megiddo. Rev. 16:16).

I wrote, in Obamanomics III, about quantitative easing and the US monetary policy. Today I want to write about fiscal policy, that is, taxing and spending.

Since I was very young there have been pundits predicting the end of our way of life because the national debt was too big. In the ’70’s and ’80’s the argument was that government borrowing crowded out private borrowing, thereby making money more expensive and slowing down the economy.

Others argued against the dire predictions, usually by saying that the debt was not dangerous so long as the economy was robust. I claim that this time is different, that our debt is now potentially catastrophic.

Here is the national debt as projected by the Obama administration (as always, click on the image for a larger version):

Obama Debt Projection

Note, that even though our debt exceeded 100% of GDP during WWII, the spending that drove that debt was temporary. The spending that drives today’s debt is from entitlement programs such as Social Security, Medicare and Medicaid, as the following chart, based on CBO estimates shows.

What drives our debt

Private insurance and pension plans are required, by law, to be financially solvent, meaning private companies have to have the money to cover their promises. The government is not under that obligation. As a result, governments, state and federal, have made promises to citizens that cannot be kept.  Estimates of the unfunded obligations of Social Security, Medicare and Medicaid range from $60 Trillion to over $100 Trillion. The bill will come due as more seniors retire.

What’s going on? According to a 2011 report by the Congressional Budget Office, In 1940, there were 42 workers for every retiree. By 1950, the number of workers per retiree fell to 16. And, today, there are about 2.8 workers per retiree and the ratio continues to shrink every year. Meanwhile, Congress continues to expand benefits, costing us more per beneficiary.

Why can’t we just tax the rich to pay for all this? Take a look at the chart below, thanks to usgovernmentspending.com, of the revenue line since 1950, mostly bouncing between 15% and 23%. Under President Obama we’ve set a new spending record of 25% of GDP. If you add in state and local taxes, the total take, by all levels of government, is above 40% of GDP.

Federal Spending as a % of GDP

Here’s the same data in dollars.

Federal Spending in Dollars

The data on both charts after 2012 are estimates.

So, to recap, the tax take on the American citizens is almost half of what we make but still  about 25% below what we need to pay our government bills. Worse, those bills will explode in the future. The Federal budget is over $4 Trillion per year but, with the unfunded liabilities, will explode to beyond $60 Trillion per year. Our whole economy is $15 Trillion, so if we tax every one of us, rich and poor, 100%, we won’t begin to cover the annual costs of government.

To make matters worse, the interest on the debt is running about a quarter of a trillion dollars a year. But, as we see from this graph from Wallace as presented by Michael Shedlock , interest rates are at an all-time low, running less than 3%.

Wallace - Interest Rates on National Debt 2012

If you combine the Obama administration spending projection with the likelihood of increased interest rates you see that the national debt, which is already 100% of GDP, would grow much faster than even the Obama forecast.

The result of spending so far beyond our means will be catastrophic, resulting in a collapse of the financial system, double and triple digit inflation, Social Security and Medicare failing and more. In other words, going “Greek.”

This is part 1 of 4 of a C-Span talk by Mark Steyn, given a year ago, on his highly recommended book, After America: Get Ready for Armageddon. Take a look if you want to see a more eloquent way of explaining the potential catastrophe.

We’ll discuss solutions another time. But, not to be a spoiler, reduced spending and economic growth would work, if we could do that. (Fat chance?)

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One Response to “Obamanomics IV — Armageddon”

  1. http://openmedia.ca/memberind/adrenal-fatigue-basic-data Says:

    Whoa all kinds of excellent information!

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