federal debt

Reagan Budget Director David Stockman: ‘We Are Heading Into An Absolute Fiscal Bloodbath’

I’ m pretty sure I’ve never brought up David Stockman before on this blog, but what he’s warning about the nation’s finances is worth mentioning tonight. Stockman is a former two-term Congressman from Michigan, Director of the Office of Management and Budget under President Reagan, Wall Street veteran, and author. On Wednesday, he appeared on the FOX Business Channel show Mornings with Maria and talked about President Trump and the national debt. Stockman warned viewers:

We are heading into an absolute fiscal bloodbath. As the CBO put out yesterday, there’s $10 trillion of more debt built into the next decade, even before one dime of tax cuts from Trump or infrastructure spending or increasing defense like he wants to. And so what I suggest is that we have an even more absurd fiscal proposition from Donald Trump today than we did back in 1981 when we tried to cut taxes, increase defense substantially, and balance the budget. They are going to be in a crisis within weeks. The debt ceiling was suspended arbitrarily until March 15. When it comes back into effect there will be $20 trillion of debt. And before they can do anything on all of this stimulus they’re talking about they’re going to have to raise the debt ceiling and where are the votes going to come from? It’s going to make 2011, if you remember the debt ceiling crisis in 2011, look like a Sunday school picnic. We’re in bad shape.


“David Stockman: We are heading into an absolute fiscal bloodbath”
FOX Business Channel Video

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: A qualified professional should be consulted prior to making a financial decision based on material found in this weblog. If this recommended course of action is not pursued, then it must be understood that the decision is the reader’s and the reader’s alone. The creator/Editor of this blog is not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information contained herein.)

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The Crash Prophets Revisited, Part 3

(Editor’s note: Part 1 located here; Part 2 located here)

Concluding the three-part series of posts entitled, “The Crash Prophets Revisited,” back on June 21, 2007, I discussed what past and present (at that time) government and Federal Reserve officials were predicting what the future had in store for the U.S. economy. That summer, former Treasury Secretary Robert Rubin was worried about unsound fiscal conditions and the negative impact it might have on the U.S. dollar, U.S. Comptroller General and head of the U.S. General Accountability Office (GAO) David M. Walker was touring the country warning about the “fiscal black hole” Washington had dug itself through reckless borrowing from overseas lenders, and how it was going to get a lot worse from a fast-approaching “demographic tsunami” of retiring Baby Boomers. Finally, former Federal Reserve Chairman Paul Volcker was predicting that the United States’ dependence on foreign money raised the risk of a crisis in the dollar as soon as the next two and a half years.

Almost four years later, all three continue to worry about the direction the United States is heading.

Robert Rubin

Jane L. Levere wrote on the Daily Finance website about President Clinton’s Treasury Secretary and current co-chair of the Council on Foreign Relations Robert Rubin on March 17. Rubin had just participated in a public conversation on the U.S. economy at New York City’s 92nd Street Y. From that piece:

“If you compare where we were to a year ago, we really are in much better condition,” says Rubin. “There are indeed a goodly number of positives.” But there are also, he says, “serious headwinds” in the form of possible impediments to growth. Rubin says these obstacles include “our long-term fiscal trajectory (which) is horrendous, unsustainable and dangerous” and undermines confidence — as well as state and local government deficits “that are going to be have to be closed by their constitutions.” Contributing to those figures, he says, are rising oil prices and high unemployment — which Rubin estimates at 16%, if temporary workers and people who have entirely dropped out of the workforce are included.

“The probabilities are very unclear,” he says. “While the most likely outlook may be the more positive forecast that many forecasters now have, there is a very real chance that what actually happens could fall short of that.

Rubin says that, as an investor, he is concerned about “low-probability events which, if they occur, could have huge consequences” — events such as a resurgence of terrorism, possibly in a politically unstable and nuclear armed Pakistan. He also warns the U.S. fiscal deficit could cause a crisis in the bond market, that in turn could have “severe effects on our economy.”

“It’s not inconceivable that something goes wrong in Europe,” Rubin notes. Adding that if default happens there, “that could have ramifications elsewhere.” But he admits the future is far from clear: “This is the most uncertain and complex time in my adult lifetime in trying to make judgments about what is going to happen either in the short term or the long term.”

(Editor’s note: Italics added for emphasis)

Levere noted the former co-chairman of Goldman Sachs’ longer-term outlook for the country. She wrote:

Looking at the longer term, Rubin says although the U.S. has “a dynamic society” and “tremendous comparative advantage in the global economy…the real question comes down to our political system and whether it will meet its multiple challenges, most particularly putting our fiscal house back in order… and creating the resources necessary for the public investment that is requisite for competitiveness and growth.”

David M. Walker

I’ve talked about the former Comptroller General and head of the Government Accountability Office from 1998 to 2008 David M. Walker before. These days, Walker serves as the CEO of the Comeback America Initiative (CAI), a Bridgeport, Connecticut-based project that seeks to “promote fiscal responsibility and sustainability by engaging the public and assisting key policymakers on a non-partisan basis in order to achieve solutions to America’s fiscal imbalances.” CAI hopes to “keep America great and the American Dream alive for future generations.” Discussing the prospect of raising the federal debt ceiling, Walker wrote in the Connecticut Post last Friday:

In essence, raising the debt ceiling is simply recognizing the federal government’s fiscally irresponsible practices of the past. But while failure to raise the debt ceiling is not a viable option given our current fiscal state, we must take concrete steps to address the government’s lack of fiscal responsibility. We must also do so in a manner that avoids triggering a massive disruption and a possible loss of confidence by investors in the ability of the federal government to manage its own finances. Such a loss of confidence could spur a dramatic rise in interest rates that would further increase our nation’s fiscal, economic, unemployment and other challenges.

The recent decision by Standard & Poor’s, one of the leading credit-rating agencies, to downgrade the long-term outlook on U.S. debt is yet another market signal that elected officials must begin to work together to put our finances in order before the markets force it to. Other recent signals have included the reduced appetite of foreign investors for longer-term U.S. debt and the decision of PIMCO, a global investment firm, to divest its U.S. debt holdings.

In fact, the only player with any real appetite for longer-term U.S. debt in recent months has been the Federal Reserve — and such involvement on their part essentially amounts to government self-dealing. Such self-dealing serves to help the economy in the short-term while increasing longer-term risks and potentially delaying needed fiscal reforms.

In order to begin to restore fiscal sanity, Congress should increase the debt ceiling limit in exchange for one or more specific steps designed to send a signal to the markets, and the American people, that a new day in federal finance is dawning. To be credible, any such action must go beyond short-term spending cuts for the 2012 fiscal year.

One possible step could include agreeing on a set of statutory budget controls that would come into effect in fiscal 2013. Such controls should include specific annual debt/GDP targets with automatic spending cuts and temporary revenue increases in the event the annual target is not met. In my view, a ratio of three parts spending cuts, excluding interest savings, to one part revenue would make sense.

This debt/GDP target concept, which I have been advocating both publicly and privately in recent months, gained additional momentum last week when President Obama endorsed it in his April 13 fiscal speech. It also seems to be gaining some momentum in Congress. It just may be a nonpartisan approach that can gain bipartisan support in order to help ensure that our elected officials do not play “chicken” with the nation’s debt ceiling limit as they did in resolving federal funding levels for fiscal 2011. After all, playing “chicken” with the debt ceiling would be like playing with a tactical nuclear weapon. If it explodes, it would come with a huge amount of collateral damage, including harming U.S. credibility.

(Editor’s note: Italics added for emphasis)

Failure to make progress on the debt situation soon could lead to a major crisis. Walker told CNBC’s Squawk Box on March 24:

I think we’re going to have an adult conversation. We just need to have it sooner rather than later before we have our own U.S. debt crisis. You know, a U.S. debt crisis could come within the next two to three years. We have huge interest rate risk. We have the lowest average maturity of any sovereign nation or major nation on debt. We have historically-low interest rates. We’re adding debt at record rates. We have to rollover a great amount each year. Our largest holder of our debt is the Federal Reserve. I mean, that’s not an arm’s length transaction. And QE2 is supposed to expire on June 30. Wake up Washington- we’ve got a problem. It’s time to come to work.

Paul Volcker

Maggie Caldwell of the Wilton Bulletin (Connecticut) recently reported on former Federal Reserve Chairman Paul Volcker’s visit to Stamford, Connecticut, on April 12. Volcker spoke to the local business community about the state of the economy and where it might be headed. From her April 22 article:

Faced with the worst economic downturn since the Great Depression, the U.S. economy traditionally bounces back from recession periods with gains of 4% to 6% in a quarter. Not so in this case, Mr. Volcker said, adding the economy is making a labored crawl to approach 2% to 3% growth, what he termed a “slog.”

So what are the prospects for a real pick-up in the economy?

It won’t come out of consumption and probably not out of manufacturing, though there has been a rise in productivity in the latter, he said. The problem is manufacturing represents an “increasingly smaller proportion of the economy… not enough by itself to carry us carefully to prosperity and low unemployment,” Mr. Volcker explained.

The recently retired chairman of President Obama’s Economic Recovery Advisory Board voiced his concerns about the U.S. banking system and the threat it poses to the global financial system. Caldwell wrote:

With the breakdown in the banking system followed by the subsequent federal bank bailout, Mr. Volcker said higher capital standards must be placed on banks and other financial institutions to protect the system and ultimately the taxpayer. The old problem of “too big to fail,” where the system becomes unstable and the government steps in to save it, is one that must be addressed, he said…

While splitting up the banks may not be feasible, Mr. Volcker argues that regulations must be placed on these behemoth financial institutions to protect the global financial system. Any bank that is FDIC-insured, meaning it gets subsidized by the federal government, should not be making risky deals with great amounts of assets. It’s just too big a gamble, he said, leaving the whole system in jeopardy.

“[These banks] should not be involved in risky business. Don’t do it with the protected sector where the government is indirectly or directly subsidizing the institution,” he said. Banks should instead maintain their focus on customer needs, economic needs and the constructive role of banking in the financial system, not speculative activities.

“I think it is destructive mixing up those types of activities with what we used to think of as ordinary banking,” he said. Enforcing these types of resolutions, however, must be accepted worldwide to keep banks from simply relocating to avoid policing. “It won’t be enforced if other countries don’t follow,” he said.

Finally, Volcker sees a redistribution of economic power in the coming years. Caldwell added:

The United States still boasts the world’s largest economy. However, China —and the rest of the world — is quickly catching up.

Mr. Volcker said the world he grew up in was vastly different than the one we find ourselves in today. After World War II, “everybody wanted dollars, everybody wanted help from the U.S. They respected us for our financial system and our governing system,” he said. There was a recognition of American leadership. For 100 years, the United States was the largest manufacturer in the world. Now China has eclipsed that number and its economy is growing at a staggering rate of 7% to 11% per year. In two to three decades, Mr. Volcker said, China’s economy will be as big as the United States’.

“Not per capita, but the economic force in the world will be quite different,” he said, especially coupled with the sheer size of the population of these emerging countries, three billion to our one billion in the developed world.

In summary, back in June 2007 I identified a number of influential individuals from the worlds of finance and government who predicted financial turmoil ahead for the United States. Revisiting these “crash prophets” almost four years later reveals that substantial concerns remain for Warren Buffett, Jeremy Grantham, Jim Rogers, Robert Rubin, Gary Shilling, George Soros, Paul Volcker, and David M. Walker over the nation’s economic well-being. Especially in the future.

Uncertain times, indeed.

Sources:

Levere, Jane L. “Rubin, Paulson Give Mixed Forecast on U.S. & Global Economic Recovery.” Daily Finance. 17 Mar. 2011. (http://www.dailyfinance.com/2011/03/17/rubin-paulson-give-mixed-forecast-on-u-s-and-international-econo/) 25 Apr. 2011.

Walker, David M. “Raise debt ceiling – then clamp down.” Connecticut Post. 22 Apr. 2011. (http://www.ctpost.com/default/article/Raise-debt-ceiling-then-clamp-down-1348912.php). 25 Apr. 2011.

Caldwell, Maggie. “Volcker talks about the economy.” Wilton Bulletin. 22 Apr. 2011. (http://www.acorn-online.com/joomla15/wiltonbulletin/news/localnews/91880-volcker-talks-about-the-economy.html). 25 Apr. 2011.

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Standard & Poor’s Changes U.S. Rating Outlook To Negative

I was prepping the post “The Crash Prophets Revisited, Part 2” when I heard Standard & Poor’s lowered its outlook on the United States. From the Standard & Poor’s press release announcing the action:

‘AAA/A-1+’ Rating On United States of America Affirmed; Outlook Revised To Negative

• We have affirmed our ‘AAA/A-1+’ sovereign credit ratings on the United States of America.
• The economy of the U.S. is flexible and highly diversified, the country’s effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
• Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
• We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

MarketWatch’s Steve Goldstein and Deborah Levine wrote about the move this afternoon:

Standard & Poor’s cut its ratings outlook on the U.S. to negative from stable on Monday, lighting a fire under Washington’s deficit-reduction debate and sending stock markets sharply lower.

The rating agency effectively gave Washington a two-year deadline to enact meaningful change, just days after House Budget Committee Chairman Paul Ryan and President Barack Obama each outlined their plans for slashing debt. S&P nonetheless kept its highest rating, AAA, on the U.S…

“The fiscal profile of the U.S. is increasingly diverging from that of its AAA peers,” said David Beers, an S&P analyst, on a conference call. “This was the time to update our opinion.”

It’s the first time S&P lowered its outlook for the U.S. from stable… The outlook change indicates a one in three chance of an actual rating downgrade over the next few years, Beers said.

The U.S. is one of 19 sovereign governments rated AAA by S&P, out of 127 rated countries. But all of the closest AAA peers — Germany, France, Canada and the U.K. — have done more to address their fiscal problems coming out of the recession, which in some cases were worse than what the U.S. experienced, analysts said.

You can read the entire press release on Standard & Poor’s website here.

“The Crash Prophets Revisited, Part 2” will be pubished tomorrow.

Sources:

“‘AAA/A-1+’ Rating On United States of America Affirmed; Outlook Revised To Negative.” Standard & Poor’s (Press Release). 18 Apr. 2011. (http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245302886884). 18 Apr. 2011.

Goldstein, Steve and Levine, Deborah. “S&P cuts U.S. rating outlook to negative.” MarketWatch. 18 Apr. 2011. (http://www.marketwatch.com/story/sp-cuts-us-rating-outlook-to-negative-2011-04-18?pagenumber=1). 18 Apr. 2011.

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Resource Of The Week: Comeback America Initiative’s ‘Slide Pack’

Before I introduce the latest “Resource of the Week,” I want to recap all the prior ROTW’s since Survival And Prosperity came out last November for those who might have missed them (the posts are also archived in the sidebar under “Categories,” “Resource Of The Week”). Starting from the beginning:

“Survival Database Downloads”– A multitude of survival-related downloads compiled by “Rourke” on ModernSurvivalOnline.com, “Thoughts on Survival and the World Today”
Shadow Government Statistics– Home of John Williams’ Shadow Government Statistics electronic newsletter, which “exposes and analyzes flaws in current U.S. government economic data and reporting, as well as in certain private-sector numbers, and provides an assessment of underlying economic and financial conditions, net of financial-market and political hype”
Financial Sense® Newshour– Financial/market broadcast hosted by money manager Jim Puplava on the week’s market action, interviews with financial experts, and Jim’s personal perspective on the markets/economy
STRATFOR– Website for “The Shadow CIA.” That’s what Barron’s once called Strategic Forecasting, Inc., or STRATFOR, a global intelligence company that distributes a number of intel products, two of them being the free reports Geopolitical Weekly and Security Weekly.
The Survival Podcast– Daily online audio show hosted by modern survivalist Jack Spirko that focuses on self-sufficiency and self-reliance in the modern world
Weiss Ratings’ “Strongest & Weakest Lists”– Weiss Ratings’ lists of their strongest and weakest-rated annuity insurers, auto insurers, banks and thrifts, business insurers, credit unions, health insurers, homeowner insurers, life insurers, long-term care insurers, and medigap insurers
American Red Cross’ “Preparedness Fast Facts”– The Red Cross’ emergency-specific checklists, developed using the latest research, science, best practices, and expert opinion

This week’s ROTW is Comeback America Initiative’s “Slide Pack.” CAI is a Bridgeport, Connecticut-based project headed up by founder/CEO David M. Walker. Why does that name sound familiar? On March 24 I wrote:

I used to follow former Comptroller General of the United States David M. Walker quite a bit. Appointed by President Clinton, Walker served as Comptroller General and head of the Government Accountability Office from 1998 to 2008. While at the GAO, Walker warned Americans about the nation’s long-term fiscal challenges as part of the “Fiscal Wake-Up Tour.” Frustrated by Washington’s refusal to confront these challenges, Walker left the public sector on March 12, 2008, to head the Peter G. Peterson Foundation and continue his work on righting a sinking ship. On September 17, 2010, it was announced that David Walker was leaving the foundation to launch a new project called the “Comeback America Initiative.” As the Founder and Chief Executive Officer of CAI, Walker continues to engage the public and promote fiscal solutions to America’s significant financial hurdles.

On the same day I penned the above, the former chief accountant of the United States appeared on CNBC’s Squawk Box and warned that America could be rapidly-heading towards a debt crisis. He said:

I think we’re going to have an adult conversation. We just need to have it sooner rather than later before we have our own U.S. debt crisis. You know, a U.S. debt crisis could come within the next two to three years. We have huge interest rate risk. We have the lowest average maturity of any sovereign nation or major nation on debt. We have historically-low interest rates. We’re adding debt at record rates. We have to rollover a great amount each year. Our largest holder of our debt is the Federal Reserve. I mean, that’s not an arm’s length transaction. And QE2 is supposed to expire on June 30. Wake up Washington- we’ve got a problem. It’s time to come to work.

David Walker designed the Comeback America Initiative “to promote fiscal responsibility and sustainability by engaging the public and assisting key policymakers on a non-partisan basis in order to achieve solutions to America’s fiscal imbalances.” CAI hopes to “keep America great and the American Dream alive for future generations.”


“Welcome to Comeback America Initiative”
YouTube Video Link

On the CAI website is an 84-page publication packed with easy-to-read charts entitled “Comeback America: The Nation’s Fiscal Challenge and A Way Forward.” This “Slide Pack,” as the CAI site calls it, provides what might be the best, most complete, easily-accessible picture out there of our nation’s financial health. Key charts include (in the order they were depicted):

• Growth of Government
• Defense, Social Security, & Medicare Per Capita
• Discretionary Spending Patterns
• Changes in Spending
• Composition of Current & Projected Federal Revenues
• Federal Debt Burdens
• Historical Deficit Levels
• Historical Receipts & Outlays
• Historical CBO Deficit Projections Vs. Actual
• Cash Vs. Accrual Federal Deficits (Fiscal 2000 –2010)
• Historical Debt Burdens
• Federal Debt Per Capita & The Political Party In Power
• Comparative Debt Burdens
• Fiscal Fitness Index
• Our Fiscal Future
• CBO’s Public Debt Projections
• Future Debt Burdens
• CBO Alternative Estimate of Projected Federal Deficits
• Growing Foreign Dependency
• Debt Maturity Trends
• Interest Rate Trends
• Interest Rate Sensitivity
• Federal Health Care Outlays
• Escalating Health Costs
• Historical Consumption Trends
• Health Cost Growth
• Comparative Health Costs
• Social Security Cash Flow
• Impact of Health Reform
• Entitlement Cost Growth
• Entitlement Programs Status
• Relative Defense Spending
• Historical Defense Spending
• Research Spending Trends
• Federal Revenue Composition
• Federal Revenue Trends
• Tax Burden
• Progressive Tax System
• Individual Tax Expenditures
• Effective Tax Rates
• Statutory Corporate Tax Rates
• Household Debt Levels
• Personal Saving Rates
• National Saving Rates
• State and Local Deficits
• State Property Tax Burdens
• State and Local Health Costs
• Pension and Health Obligations
• Pension and Health Funding
• Pension and Health Costs
• Total Liabilities and Unfunded Obligations Per Capita
• State and Local Ratings
• Statutory Debt Ceiling

Whew! You know that saying, “A picture is worth a thousand words?” Comeback America Initiative’s “Slide Pack” compilation speaks volumes concerning our nation’s present and projected financial health- yet still illuminates a path towards achieving fiscal responsibility.

(Editor’s note: CAI has ceased operations)

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