Blog

A Stimulating Train Wreck

Wednesday, August 26, 2009, 7:36 PM

One of my favorite outfits is Sprott Asset Management, located in Toronto Canada, because their analyses tend to be quite data-rich and "reality-based" as well.

In this excellent, short-and-sweet report, the case is made that a 3.5% boost to GDP from government stimulus spending alone will hit in the third quarter of 2009.

This means that whatever reading is turned in, you should mentally subtract 3.5% from it, because "growth" resulting from government deficit spending is not real growth at all, it is merely consumption borrowed from the future.

Are you stimulated yet? We hope you are, because we’ve just witnessed the largest economic stimulus in the history of the world. Never before have so many government dollars been thrown at the economy to prevent a depression. When added together, the combined financial, monetary and fiscal stimuli in the US are more than the cost of the two World Wars and “The New Deal” combined.

Stimulus spending worldwide has taken the form of a combination of tax cuts, transfer payments (free money) and infrastructure investments on roads, schools, railroads etc. In the US, the financial and stimulus contributions have been especially impressive in scale.

According to CNN’s bailout tracker, the various US government departments have committed to stimuli worth $11 trillion dollars and have issued cheques totaling $2.8 trillion dollars thus far in 2009.

Neil Barofsky, the Special Investigator General for the TARP program, has estimated that the total cost to the US taxpayer could be as high as $23 trillion.

The vast majority of this stimulus has been directed at the financial sector - a complete waste of money in our opinion, supporting a segment of the economy that never deserved to be bailed out.

Nonetheless, the US taxpayer has spent massive sums, committed to promises worth even more and may ultimately owe debt in the double-digit trillions when all is said and done. Nice of them to spend so generously, wouldn’t you say?

Although the stimulus has been fantastic for the stock market, it has generated very little benefit for “Main Street”. To make matters worse, the effects of the stimulus packages have already started to wear off.

To explain why, we must mention the American Recovery and Reinvestment Act of 2009 (ARRA), which was specifically directed at stimulating the real economy as opposed to “saving Wall Street”. ARRA calls for a total spend of $787 billion, which breaks down into $287B in tax breaks, $192B in direct aid and $308B in discretionary spending. According to

Christina Romer, a White House economic advisor, 70% of this stimulus will be spent by the end of September 2010. What impact will this stimulus have on the economy?

Chart A presents results from Moody’s that is representative of several private forecasts that we have reviewed.

The chart illustrates the ARRA’s impact on real GDP by quarter, and reveals that right now, in Q3 2009, the US is experiencing the maximum impact of the Obama stimulus package. That’s right - this is as good as it gets. The majority of the Act consists of tax cuts and transfer payments to citizens, the impact of which was felt within the first two quarters of being received.

By the end of September 2009 this stimulus will have worn off, and along with it will vanish the greatest marginal impact of the entire stimulus package itself. According to economic forecasters like Moody’s, by 2010 the net impact of the stimulus package to real GDP will be barely over 1%

(Source)

The "recovery," which will be trumpeted at maximum volume beginning in mid-October, will be a statistical recovery that only a politician (or Wall Street stock hustler) could love. But looking at how the government stimulus will be wearing off entirely in 2010, you can well appreciate why talk of a second government stimulus is already floating about the airwaves.

Certainly this bit of news, especially the way it was framed, tells me that the ground is being prepared for another large round of government stimulus and deficit spending. Why do I think this? Because things get framed by politicians in the negative when it serves them to do so, and positively all the rest of the time.

Economy In Much Worse Shape Than Expected: White House

Tuesday, 25 Aug 2009

The US economy will shrink far more than expected this year and will rebound much more slowly than forecast after that, according to a bleak new assessment by the White House Budget Office.

The federal government also faces exploding deficits and mounting debt over the next decade, far worse than what the Obama administration had estimated just a few months ago.

The revised estimates project that the economy will contract by 2.8 percent this year, more than twice what the White House predicted earlier this year.

Obama economic adviser Christina Romer projected that the economy would expand in 2010, but by 2 percent instead of the 3.2 percent growth the White House predicted in May.

Where it is now projected that the economy will contract by 2.8% this year, you can mentally subtract an additional 2.2%, which is the total contribution to GDP offered by the stimulus spending. So call it a 5% contraction without the stimulus. And this only includes the federal government contribution. Once we add back in the amount by which the federal government should have shrunk due to collapsing revenues, plus the Fed's own actions, plus state government deficit spending, I think we can make a strong case for a double-digit GDP decline this year.

Continuing on with the same article:

Figures released by the White House budget office foresee a cumulative $9 trillion deficit from 2010-2019, $2 trillion more than the administration estimated in May.

Moreover, the figures show the public debt doubling by 2019 and reaching three-quarters the size of the entire national economy. Romer predicted unemployment could reach 10 percent this year and begin a slow decline next year.

Orszag, anticipating backlash over the deficit numbers, conceded that the long-term deficits are "higher than desirable." The annual negative balances amount to about 4 percent of the gross domestic product, a number that many economists say is unsustainable.

First, the statement, "the public debt [sic] doubling by 2019 and reaching three-quarters the size of the entire national economy" is very slippery.  Here they are distinguishing between all government debt, which already stands at more than 80% of GDP, and "publicly-held debt" (the proper term), which is a bizarrely narrow and irrelevant figure to draw upon.

What really matters is not just the debt of the government, but its entire accrual-based liabilities, which stand at somewhere between $50 and $100 trillion. On this basis, the US government is entirely insolvent, so debating whether the publicly-held debt is 75% or 90% or even 140% of GDP is like arguing about proper tire pressure for a wheel that's been slashed open.

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

19 Comments

FireJack's picture
FireJack
Status: Silver Member (Offline)
Joined: Feb 8 2009
Posts: 156
Re: A Stimulating Train Wreck

It's still a question if oil has begun its permanent decline. If the overall net energy rapidly declines (or is declining) the real economy will start to contract faster. Government stimulus will have to get larger and larger. Any idea where demand and supply sit atm?

dickB's picture
dickB
Status: Member (Offline)
Joined: Jun 28 2009
Posts: 9
Re: A Stimulating Train Wreck

As the song goes - "along came the FFV, the swiftest on the line".

As an outside observer (from Tasmania), it is very sad to see the way the US is headed.

Thank you CM for this site and thank you Davos for the daily digest. It is all very interesting and stimulating and makes so much more sense than the 'non-sense' peddled in the mainstream media.

ernie's picture
ernie
Status: Bronze Member (Offline)
Joined: Feb 18 2009
Posts: 39
Re: A Stimulating Train Wreck

Any links to where I might find a definition of this "publicly-held debt"?

 

- Ernie.

 

Headless's picture
Headless
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: A Stimulating Train Wreck

[Ed. note: Suggesting torture of government officials neither adds to the conversation in an intelligent way, nor is it appropriate for this website]

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5730
Re: A Stimulating Train Wreck

You might as well start at the Treasury Department itself.

This next image is the "debt to the penny" of the US government.  Note that this is ONLY debt, not the liabilities of the USGOV.

(Source)

You see it's broken out into two portions, "debt held by the public" and "intragovernmental holdings."

Taken straight from the FAQ section of the Treasury website:

Ownership of the Debt
Who owns the debt?

The Treasury Bulletin, available online from the Financial Management Service categorizes ownership of U.S. Government securities by types of investors.

What is the Debt Held by the Public?

The Debt Held by the Public is all federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government less Federal Financing Bank securities. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds, and State and Local Government Series securities.

What are Intragovernmental Holdings?

Intragovernmental Holdings are Government Account Series securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities. A small amount of marketable securities are held by government accounts.

(Source)

The goofy part in all this is the notion that and entity can owe itself money - as in "intragovernmental holdings" - an absurd notion easily dismissed with a small bit of critical thinking.

The total debt is $11.7 trillion which is more than 80% of current GDP.

 

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: A Stimulating Train Wreck
cmartenson wrote:

The total debt is $11.7 trillion which is more than 80% of current GDP.

Unbelievable. That says it all. 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: A Stimulating Train Wreck
cmartenson wrote:

The total debt is $11.7 trillion which is more than 80% of current GDP.

Good read. When I beging to think that GDP is cooked by 20%-30% + or - and I factor in the unfunded liabilities it the way the movie ends is pretty clear. 

gpoulsen's picture
gpoulsen
Status: Member (Offline)
Joined: Aug 27 2009
Posts: 20
Re: A Stimulating Train Wreck

Thanks for all of this information.  I am a new member who came upon Chris Martenson's Crash Course as I was on YouTube and searched demographics.  I was interested in demographics after reading a book titled 'Sudden Impact" which was a very good read.  The Crash Course reinforced many of the issues that I have been concerned with but also included much new information, especially the Fuzzy Statistics.  Thanks again, I will be passing this information on for sure.

hughacland's picture
hughacland
Status: Bronze Member (Offline)
Joined: Oct 7 2008
Posts: 25
Re: A Stimulating Train Wreck

Nahh. Come on fellas! Don't be so pessimistic! $11,700,000,000,000 is not so much!

The Fed should be able to print that up lickerty-split.

Chill.....

 

;)

bluebird's picture
bluebird
Status: Bronze Member (Offline)
Joined: Sep 4 2008
Posts: 75
Re: A Stimulating Train Wreck

About the debt to the penny government site...you can put in any date you want. Enter the date for yesterday to find yesterday's debt amount. Subtract yesterday's debt amount from today's debt amount (best to use a calculator), and you get the amount of money added to the debt for 1 day. Some days it is a very large amount, other days, not so much.

 

dcm's picture
dcm
Status: Silver Member (Offline)
Joined: Apr 14 2009
Posts: 214
Re: Goofy, Minnie, and dollars out to Pluto

"The goofy part in all this is the notion that and entity can owe itself money - as in "intragovernmental holdings"

When I was 13, my mother helped me open my first checking account. I remember writing myself a check for a million dollars and tacking it up on the wall.

good to know our leaders have outgrown those childish pranks 

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Goofy, Minnie, and dollars out to Pluto
dcm wrote:

"The goofy part in all this is the notion that and entity can owe itself money - as in "intragovernmental holdings"

When I was 13, my mother helped me open my first checking account. I remember writing myself a check for a million dollars and tacking it up on the wall.

good to know our leaders have outgrown those childish pranks 

 

Yeah. They got your check off your wall and endorsed it over to them! Mine also.

DJETH's picture
DJETH
Status: Member (Offline)
Joined: Jun 20 2009
Posts: 16
Re: A Stimulating Train Wreck

Can someone straighten me out if I don't get the following correct.

We have an 11 Trillion dollars worth of debt. We barrowed this money which we have to pay interest on.  If I use an average of 3% interest (Just a guess) that adds up to 330 Billion Dollars in interest per year.  So how much total Revenue does the Federal Government receive and at what point does the interest payment exceed the revenue?

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: A Stimulating Train Wreck
DJETH wrote:

Can someone straighten me out if I don't get the following correct.

We have an 11 Trillion dollars worth of debt. We barrowed this money which we have to pay interest on.  If I use an average of 3% interest (Just a guess) that adds up to 330 Billion Dollars in interest per year.  So how much total Revenue does the Federal Government receive and at what point does the interest payment exceed the revenue?

Take in 2 trillion and blows 4 trillion per year.... Goes up each and every day. Also all these debt figures add up to 80 trillion or so. What really matters is what they can borrow and what goes out the door. The difference is being monetized. That will severly impact the value of the USD.

ernie's picture
ernie
Status: Bronze Member (Offline)
Joined: Feb 18 2009
Posts: 39
Re: A Stimulating Train Wreck
cmartenson wrote:

The goofy part in all this is the notion that and entity can owe itself money - as in "intragovernmental holdings" - an absurd notion easily dismissed with a small bit of critical thinking.

The total debt is $11.7 trillion which is more than 80% of current GDP.

 

 

Thanks for the info Chris,

now I am trying to get my head around the significance of these "intragovernmental holdings", from what I have read they are like a trust account, but instead of containing money they just contain IOU's. What's that all about?

 

 

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: A Stimulating Train Wreck
DJETH wrote:

Can someone straighten me out if I don't get the following correct.

We have an 11 Trillion dollars worth of debt. We barrowed this money which we have to pay interest on.  If I use an average of 3% interest (Just a guess) that adds up to 330 Billion Dollars in interest per year.  So how much total Revenue does the Federal Government receive and at what point does the interest payment exceed the revenue?

One website cites $412 billion as the amount of interest paid in Fiscal Year 2008, which ended last Sep. 30th. This year (FY '09), debt has risen sharply. So presumably, we're approaching $500 billion in annual interest.

http://www.federalbudget.com/

What's alarming is that interest payments probably will exceed 20% of revenues in FY '09 -- and that's with very low interest rates, including near-zero on short-term T-bills.

According to Econ 101, more demand for borrowing ought to push up rates. A rise in interest rates, combined with piling on more debt, is the foundation for an exponential expansion.

Already, Usgov is borrowing to pay interest on existing debt. Unfortunately, it has no fixed credit limit. (Well it does, but the debt ceiling is raised every time it's hit.) We'll find out the hard credit limit when a Treasury auction fails one day, or rates hit double digits, or hyperinflation takes hold (whichever comes first).

Usgov manages its finances like an orphaned 18-year-old who's inherited his parents' credit cards, and uses them to finance a 24/7 drug-fueled orgy in their former mansion.

'Democracy' and paper money mix like teenagers and whisky. Rock on, Timmy Geithner -- and send some of them wanton floozies over here, wouldja?

DJETH's picture
DJETH
Status: Member (Offline)
Joined: Jun 20 2009
Posts: 16
Re: A Stimulating Train Wreck

Thanks Davos and Machinehead for the response.  I guess its not less bad its just plain old fashioned BAD.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: A Stimulating Train Wreck
machinehead wrote:

'Democracy' and paper money mix like teenagers and whisky. Rock on, Timmy Geithner -- and send some of them wanton floozies over here, wouldja?

Please don't thank me, I'm grateful you asked - the better answer has me rolling on the floor laughing my but off.

Yoann's picture
Yoann
Status: Member (Offline)
Joined: Aug 29 2009
Posts: 1
Re: A Stimulating Train Wreck

About the debt and interest

you can find all infos here :

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

Enjoy

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments