Boomergeddon is the day investors stop buying U.S. Treasuries — the day the U.S. government goes into default, the global economy is thrown into turmoil, the American empire begins to crumble, and the social safety net starts to unravel.
Following the main themes in “Boomergeddon” the book, this blog chronicles the melt-down of federal finances and the demise of the democratic welfare state. (Read a free sample here.)
If you’re looking for a laugh or a warm, fuzzy feeling, go somewhere else. In “Boomergeddon,” we explain why there’s a good chance you’ll spend your golden years eating dog food and recycling beer bottles.
Visit the blog to stay current with news about the looming retirement crisis caused by runaway spending on government programs and entitlements; mounting federal budget deficits; the coming global capital shortage; the debt burden that will cannibalize the entire federal government; and the inevitable disintegration of America’s retirement safety net.
But we’re not all gloom and doom. Not at all. We also provide helpful tips on how to avoid an old age of destitution and shattered dreams. Check in often!
I have shifted my blogging activity for the indefinite future over to the Wonk Salon and Bacon’s Rebellion blogs. The Wonk Salon monitors tracks think-tank and government websites for public-policy studies and reports relating to state/local government. Bacon’s Rebellion covers public policy issues pertaining to the commonwealth of Virginia.
Come visit us!
Japan likely faces hundreds of billions of dollars of reconstruction costs from its devastating earthquake and tsunami. Where will the money come from? Not from Japanese savers — due to a rapidly aging population, the once-thrifty nation has seen its household savings rate plunge to about 2%. From the issuance of more government bonds? Perhaps. But the country already faces calamitous indebtedness. How about drawing down its $886 billion invested in U.S. Treasuries? Hmmm…
I’m not venturing any predictions about how the Japanese plan to refinance their reconstruction, but I would point out that liquidating some of its Treasury holdings is one logical possibility. And that poses significant risk for U.S. monetary policy because, outside of the Federal Reserve Bank and China, the Japanese are the largest owners of Treasuries. Even if the Japanese don’t unload Treasuries, with their pressing needs at home, it is difficult to envision them expanding their holdings. Thus, the Treasury will likely lose a major customer in future auctions as its financing needs grow exponentially.
The stakes are high for the U.S. As Senator Rand Paul, R-Kentucky, said in the Washington Times: ““This natural disaster in Japan concerns me that it could speed up what’s coming, because they are the second leading buyer of our debt. Small degrees of differences in how much they buy of our debt, I think, can make a big difference in interest rates that we have to pay people to buy our debt.”
Yes, friends, it’s all about the interest rates. To meet its budget forecasts, the Obama administration is counting on interest rates to stay low. Should rates surge unexpectedly, so will interest payments on the debt, and so will the deficit. And higher deficits mean more borrowing, which leads to… higher interest rates. We are in the early stages of a vicious cycle, and it won’t take much to get it spinning faster. Consider this: If you think that a disastrous earthquake and multi-hundred billion dollar reconstruction costs in Japan augurs ill for U.S. interest rates, just consider this possibility: a disastrous earthquake and multi-hundred billion dollar reconstruction costs in California.
Sleep well.
The Middle East is experiencing one of its periodic convulsions and, as day follows night, tsunamis follow earthquakes and trouble follows Lindsay Lohan, America’s chattering classes have renewed talk about “energy independence.” America’s reliance upon “foreign” oil is said to be undesirable. Why? Because it makes us vulnerable to Arab oil embargoes, anti-American crackpots like Moammar Gadhafi and Hugo Chavez, and madmen bent upon acquiring nuclear weapons and dominating the Persian Gulf oil fields.
There are very good reasons for wanting to extract ourselves from the chaos of the Middle East. But does that really mean we should forsake all “foreign” oil? To the extent that we can avoid buying our petroleum from people who either (a) hate us, or (b) could be taken over next week by people who hate us, energy independence is a good idea. But to the extent that it becomes a justification to squander tens of billions of dollars on white elephants ranging from synfuel facilities (Carter administration) to solar-energy fabrication plants (Obama administration), it’s a bad idea.
Permit me to suggest an alternate definition of “energy independence”: The United States ceases to purchase oil from parts of the world where supplies can be disrupted by wars, civil strife, regime change or capricious government edict and instead buys it from democratic, peace-loving countries that appreciate the benefits of free markets and abide by the rule of law – in other words, countries like Canada.
Many Americans think most of our foreign oil comes from Saudi Arabia. In fact, more than half comes from the Western Hemisphere: Venezuela, Mexico and Canada. Oil production in the two Latin countries has declined in recent years, but oil output is booming in Canada. Indeed, our friends the Canucks export 2.7 million barrels of petroleum per day, accounting for roughly 30 percent of total U.S. imports.
Yes, our courteous, self-effacing friend to the north has quietly emerged as the No. 1 foreign supplier of oil to the United States. Development of new extractive technologies and $50-plus-per-barrel oil prices have made the vast Athabascan oil sands, located primarily in Alberta, economical to mine. Between conventional oil sources and the oil sands, Canada sits atop 175 billion barrels of oil, the third-largest proven reserves in the world. The Canadian Association of Petroleum Producers forecasts that production will increase to 4.3 million barrels per day by 2025.
As Brian Crowley, managing director of the Ottawa-based MacDonald-Laurier Institute puts it, “Alberta’s oil sands constitute a geopolitical fact of global significance.” Current reserve estimates are based on the assumption that 10 percent of the oil sands are recoverable, he says. If new technology boosts recovery to 20 percent, he says, that would put “a second Saudi Arabia” on America’s doorstep – a Saudi Arabia that doesn’t commit human rights abuses, fund radicalizing madrassas or send the United States into a blind panic when a neighboring power threatens to invade.
The Canadians speak of a strategic U.S.-Canadian energy relationship that would foster development of Canadian oil resources for shipment to U.S. markets. The only trouble is, few Americans are listening. The U.S. commentariat discusses non sequiturs like fostering a strategic U.S.-Russian energy partnership, creating “green” wind and solar-energy farms that require massive subsidies or building electric cars that, if the early sales of General Motors’ Volt are any indication, nobody wants to buy.
The Canadians are willing to ship us all the oil we want, subject to their ability to expand capacity. There’s just one catch: They need a way to get it to us. That means building pipelines such as TransCanada’s proposed multibillion-dollar pipeline, which would link Canada to the vast petrochemical refining complex in Houston. What Canadians want is regulatory approval for construction of the pipelines – approval that, given the opposition of the environmental lobby, is far from guaranteed.
As Americans, we need to ask ourselves: Where would we prefer to get our oil? From Saudi Arabia, which manipulates oil prices to extract maximum wealth from American consumers? From Russia, where Vladimir “turn off the tap” Putin uses his control over oil and natural-gas supplies as a strategic political weapon? From Iran, which uses oil revenue to fund development of an atomic bomb? Or from Canada, a country with a democratic market economy, which recycles some of its oil revenues by purchasing American goods and where an influential environmental movement lobbies for appropriate environmental safeguards?
Only in the bizarro world of Washington could the answer fail to be blindingly obvious.
(This op-ed was originally published in the Washington Times.)
The United States is on a fiscal path towards insolvency, said Dallas Federal Reserve Bank Chairman Richard Fisher in an interview with CNBC: “If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when. … The short-term negotiations are very important, I look at this as a tipping point.”
Well, what do you know? Someone has noticed that Social Security’s disability insurance fund, the smaller sister of the old-age retirement fund, is scheduled to run out of money within four to seven years. The Wall Street Journal profiled the issue this morning on its front page.
The disability fund provides modest benefits to pre-retirees deemed incapable of re-entering the workforce. The number of recipients has soared over the past decade, from 6.6 million in 2000 to 10.2 million in 2010, reflecting the growing number of Boomers encountering the disabilities of late middle age, desperation borne of high unemployment since the recent recession, and a creeping expansion in the type of disabilities that allow people to qualify. Benefits are routinely extended to people who suffer from back pain, persistent anxiety and schizophrenia.
Benefits are paid by a combination of payroll taxes and a trust fund built up during better times. That trust fund will run out within four to seven years, assuming no action by the federal government, which will mean either (a) benefits will have to be cut to match the income flow from taxes, or (b) Congress will have supplement the program with a new source of funds.
Here’s my bet: Congress will kick the can down the road by paying for disability benefits from the Old Age Survivors Insurance (OASI) trust fund, which is actuarially sounder, scheduled to last another 25 or 30 years before it runs out of money. That will postpone the collapse of the disability program, but will accelerate the collapse of the old-age retirement program, which neither Congress nor the Obama administration have shown any inclination to fix. When the end comes, it will be all the worse because it will entail the collapse of two major programs, not just one.
To paraphrase Groveton, my fellow blogger on Bacon’s Rebellion, politicians are ever ready to buy votes today by mortgaging tomorrow’s future.
It’s nice to know that I’m not the only one experiencing angst over interest payments on the national debt. As I laid out in “Boomergeddon” and again in the previous post (“Batten Down the Hatches”), the combination of a bigger national debt and higher interest rates over the next 10 years will lead to soaring interest payments on the national debt. Earlier this month, the Economic Policies for the 21st Century blog made an identical argument.
The authors of the blog post started by citing President Obama’s budget 10-year budget forecast in the FY 2012 budget, noting that even the Obama administration concedes that the public debt will increase by trillions of dollars, that interest rates will rise, and that the cost of servicing the debt will soar from under $200 billion in 2010 to more than $900 billion by 2021 — an annualized rate of increase of 15.8%.
Making the same point that I have been harping on, the blog authors then argue that Obama’s interest rates could very well be conservative. If interest rates go higher than projected in his 10-year forecast, the cost of servicing the debt will be very much higher. They analyze two different interest rate scenarios, one in which interest rates reach 6.3% in 2020, and one in which rates hit 10.4%. (I looked at 8% and 10% scenarios.) Their finding:
A 10.4% interest rate would cause interest expense to reach 11.7% of GDP in 2016 and account for 60% of all federal revenue. By 2021, 77 cents of every dollar of federal revenue would go to paying interest on the debt. The federal government would be effectively insolvent, with a debt burden equal to more than 7-times revenues.
Our conclusions are the same: The country is slouching toward insolvency. Meanwhile, Congress and the Obama administration are still operating on the premise that the United States can keep the national ponzi scheme going indefinitely with modest budget cuts (Republicans) or higher taxes on the rich (Democrats). The current debate over cutting $61 billion in spending in the current fiscal year (annualized to $100 billion out of a $3.7 trillion budget) is laughable. One day, historians will look back upon this era and excoriate the blindness of our nation’s leaders and the legion of apologists who kept the American people in the dark.
One unalterable fact will shape the debate over the size and scope of federal, state and municipal government over the next decade: Interest payments on the national debt will become overwhelmingly, mind numbingly large. It is impossible to hold meaningful discussions about taxes and spending priorities without fathoming this harsh reality.
According to projections made by the Office of Management and Budget (OMB) in its fiscal 2011 mid-year review, net interest paid on the federal national debt will metastasize from about $220 billion this year to more than $900 billion by 2020.
That’s an increase of nearly $680 billion, and it compares to the $754 billion in increased spending planned for national security… plus discretionary domestic programs… plus Medicare… plus Medicaid. In other words, the national debt is getting so big, and growing so fast, that servicing the national debt will, at a minimum, start crowding out all other types of federal spending, including aid to states and municipalities, by the end of the decade. And that’s the optimistic view.
The Obama administration has every interest in putting the best possible gloss on the budget forecast. Last summer’s estimate (there should be an update in February) was based on two critical assumptions: that economic growth would rebound strongly and that interest rates would remain tame throughout the decade. And, oh, by the way, the projections did not include the parting gifts from the last Congress, which extended the Bush tax cuts, temporarily reduced the payroll tax for Social Security and goosed unemployment benefits, all of which should add more than $800 billion to the national debt over the next two years.
While the Obama administration projected the economy to come rip-roaring out of the Global Financial Crisis in an expansion rivaling the Clinton-era Internet boom, at least in the early stages, it seems increasingly apparent that the rebound will be tepid. The economy is improving, but it is not beating expectations. Tax revenues are likely to come in below forecast.
As for interest rates, the U.S. Treasury has been the beneficiary of the lowest borrowing costs in decades, resulting in interest payments that are considerably below forecast. But the rock-bottom interest rates will not last long. As the economy picks up speed, private borrowing will push interest rates higher. If Europe resolves its sovereign debt crisis, hot money will flow from the safe haven of U.S. Treasuries back to Europe, pushing interest rates higher. If Europe does not solve its debt crisis, it will be because Greece, Ireland, Portugal, Hungary and perhaps even Spain have defaulted on their bonds, which will mean terrified investors will demand a risk premium for sovereign debt everywhere, including the U.S. … which will push rates higher.
Finally, as older Boomers retire this decade, moving from the wealth accumulation phase of their lives to the wealth-drawdown phase of their lives, they will exert downward pressure on the U.S. saving rate, which will… push interest rates higher.
What few Americans appreciate is how extraordinarily sensitive the U.S. budget is to interest rates when the national debt is $14 trillion While the Obama team assumes interest rates on 10-year Treasuries will never exceed 5.3% in the 2010s, some analysts say that rates could reach 10%. Nobody knows for sure what interest rates will do that far ahead. But it is indisputable that, if 10% interest rates transpire, they would be disastrous for the federal fisc.
When writing my book “Boomergeddon,” I asked Chmura Economics & Analytics, a Richmond-based economic consulting firm, to run some alternate budget scenarios for me. We assumed that interest rates would stay low for three years, as the U.S. benefited from European debt woes, then started an upward march to 10% by 2020 for the reasons described above. Under that scenario, the “miracle of compound interest”—a miracle for savers—would become the “horror of compound interest” for the world’s largest borrower, the United States. Propelled by swelling interest payments, deficits and the debt would mount higher with alarming speed. According to Chmura’s projections, deficits by the end of the decade under that scenario would be running between $2.5 trillion to $2.8 trillion a year, and the national debt could reach as high as $36 trillion!
Of course, we will never actually experience numbers like those. Financial markets would panic long before the national debt passed $30 trillion. The combination of escalating retirement benefits for the wave of aging Boomers and runaway interest payments would plunge the U.S. into default—an event I call Boomergeddon. Investors would stop lending money, and federal spending then would be limited to what the government brought in from taxes, perhaps 60% of what it had been spending. The other 40%, equivalent to about one tenth of the entire economy, would go poof! The economic downturn would be two or three times as intense as the recent recession, as painful as that was.
Averting this scenario should be the No. 1 preoccupation of President Obama and the Congress. And preparing the Old Dominion to survive this trauma should be the No. 1 preoccupation of Virginia lawmakers. Our economy is more dependent than almost any other state economy upon federal spending. When Uncle Sam goes into default, the impact will be felt here first. Our AAA bond rating will not long survive a collapse in federal spending.
Even though Boomergeddon may be 10 or 15 years off, we need to start preparing now. We cannot conduct business as usual on the assumption that the dysfunctional political system in Washington, D.C., will fix the problem. We must avoid taking on new long-term debt, fully fund our public employee obligations — trust me, it will not get any easier to do it 10 years from now—enact productivity and quality reforms in our health care system, and otherwise batten down the hatches. Boomergeddon will be quite a storm.
Image credit: Washington Times
There is much more at stake in the showdown between Wisconsin Gov. Scott Walker and the public-employee unions than negotiations over pay scales or even the extravagant pension costs that threaten to drive the state into insolvency. The sleeper issue, the one that could have the biggest impact over the long run, is the move to curtail public employees’ collective-bargaining rights. Why? Because that could overturn the ossified practice of rewarding schoolteachers on the basis of seniority and credentials rather than performance.
Holding Wisconsin teachers accountable for performance isn’t what all the street protests, the sit-ins and the vein-popping hollering are about. To Republicans, the conflict is about tearing down a corrupt system in which Democratic Party officials and public-employee unions feather each others’ nests at taxpayers’ expense. To Democrats, it’s about shadowy billionaires underwriting GOP efforts to crush the union movement.
Ignore all that for a moment and follow my logic here. If there is one thing upon which liberals and conservatives who study educational reform agree, it’s that the single most important thing schools can do to improve the quality of public education is to hire good teachers. The academic research all agrees on that point. The big question among the wonky intellects who debate public policy issues is how to staff schools with good teachers.
One way to upgrade the overall caliber of the teaching profession is to weed out the bad teachers, but that is nearly impossible when public-employee unions negotiate contracts that eliminate the ability of school management to fire.
Dan Goldhaber and Roddy Theobold of the Urban Institute analyzed how Washington state school districts handled the layoff of 2,000 schoolteachers at the beginning of the 2010-11 school year. A teacher’s seniority was the greatest predictor of whether he received a reduction-in-force (RIF) notice, they found, but teachers with master’s degrees or those who were credentialed in “high-need” fields such as math, science and special education also were less likely to be furloughed. Teacher effectiveness was not a factor in determining who got axed.
Because teachers who keep their jobs are more senior and thus earn more money than those who are laid off, Mr. Goldhaber and Mr. Theobold observed, more teachers had to be furloughed. “We conservatively calculate that districts would only have to lay off 132 teachers under an effectiveness-based system in order to achieve the same budgetary savings they achieved with 145 RIF notices under today’s seniority-driven system,” Mr. Goldhaber and Mr. Theobold wrote.
But that’s chump change compared to the impact good teachers have on the lifetime earning potential of their students. As Eric A. Hanushek wrote in a recent paper published by the National Bureau of Economic Research, “Some teachers year after year produce bigger gains in student learning than other teachers. The magnitude of the differences is truly large, with some teachers producing 1 1/2 years of gain in achievement in an academic year while others with equivalent students produce only 1/2 year of gain. Students starting at the same level of achievement can know vastly different amounts at the end of a single academic year due solely to the teacher to which they are assigned.”
On the assumption that there should be some connection between a teacher’s performance and his compensation, Mr. Hanushek asks, what is the economic value of superior student achievement? He calculates that in a classroom of 20 students, a superior teacher generates an additional $400,000 in present value of students’ future earnings.
Put another way, Mr. Hanushek estimates that dumping the worst 5 percent to 8 percent of all teachers and replacing them with average teachers “could move the U.S. near the top of international math and science rankings.” The present value of student earnings would be roughly $100 trillion.”
Who are the primary victims of a system geared to protect the rights of the worst teachers? Typically, they are minority students. And that brings us back to Wisconsin. The free-market-oriented MacIver Institute observes that in 2009, 18.9 percent of all Wisconsin students failed to qualify for service in the U.S. Army based on their results in the Armed Services Vocational Aptitude Battery. The figure for black students was 46.9 percent.
By protecting the rights of bad teachers, public-employee unions are costing Wisconsin students hundreds of billions of dollars of future lifetime earnings – and blacks lose the most of all. To borrow from the lexicon of the progressives demonstrating in Madison, one might say public-employee unions are a form of “institutional racism.” If Wisconsin’s Democrats were genuinely worried about the future of America’s minorities or its middle class, they would come out from hiding, join Republicans in revoking the unions’ collective-bargaining rights and campaign to put better teachers in Wisconsin schools.
(Originally published in the Washington Times.)
To the tens of billions of dollars in fraud and error that runs through federal spending (see my previous post), the Government Accountability Office (GAO) has documented tens of billions of dollars in redundancy. According to a draft report viewed by the Wall Street Journal, the U.S. government has 15 different agencies overseeing food-safety laws, 20 separate programs to help the homeless and 80 programs for economic development. The GAO also found 82 federal programs to improve teacher quality, 80 to help disadvantaged people with transportation, 47 for join training and employment, and 56 to help people understand finances.
“Instances of ineffective and unfocused federal programs can lead to a mishmash of occasionally arbitrary policies and rules,” the Journal summarizes. The report “recommends merging or consolidating a number of programs to both save money and make the government more efficient.”
It makes you wonder: When Congressmen decide the government needs another friggin’ program to improve teacher quality, help disadvantaged people with transportation or whatever, do they ever bother to check to see if a program already exists? Evidently not. The prevailing philosophy appears to be, shoot first, aim later. Let me amend that: Shoot first, don’t bother aiming at all… and don’t even bother to check if you hit your target. It’s like giving guns to chimps.
Undoubtedly, rationalizing these patchwork programs could save billions of dollars — perhaps even tens of billions of dollars — while accomplishing federal goals more effectively. Unfortunately, the country needs to close the budget gap by hundreds of billions of dollars. I’m not persuaded that most of these programs were justified even if they were operated at half the cost.
I have tended to underplay the role of pure fraud and incompetence in the run-up of federal government spending. There is a tendency to think that the United States can address its budget woes relatively painlessly by eliminating “waste, fraud and abuse.” It’s one of those things, like earmarks, that loom far bigger in the public mind than reality. The fact is, we need to eliminate entire programs, downsize the military, tackle entitlements and raise revenues. But Veronique de Rugy at the Mercatus Center does present information suggesting that cutting waste, fraud and abuse could be a significant contributor to balancing the budget.
Pulling data from the Treasury Department and the Government Accountability Office, she finds that “improper” federal payments — payments that are either fraudulent or made in error — amount to more than $120 billion, as seen in the chart below. Now, that ain’t chump change! Why isn’t anyone in Congress targeting that vast cesspool of waste?
