The Real Crisis Yet to Unfold

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DrKrbyLuv's picture
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The Real Crisis Yet to Unfold

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When I recently read the Wegelin & Co. Investment Commentary 265 dated August 24, 2009, it became clear to me that what would appear to be a nation where public and private borrowing has simply spiraled out of control is in fact much worse than it appears.

Many Americans are aware that our government has been tapping the tills of Social Security and Medicare but the methods by which they are doing it are so destructive the ramifications are nearly unimaginable. The Wegelin report states emphatically that our nation’s public trust funds – trusts that are theoretically funded by US taxpayer dollars and government (deficit) borrowings – are in fact holders of 40% of outstanding US Treasury debt (see chart above).

Think about that. A parallel scenario would be one man taking out a credit card to pay another man back for money loaned to the first man from the second man’s credit card – but in reality they’re both using the same credit card. And they keep doing it over and over and over. I actually laughed when I wrapped my mind around that one.

These “intragovernmental bonds” are certainly not assets of genuine intrinsic value. Were we to consolidate both balance sheets – that of the Treasury and that of the institution concerned – it would produce a tautologous situation that would result in the total loss of value of the social welfare trust’s assets if the Treasury were in a position to avail itself of the capital market to an even greater extent.

For a more detailed explanation of the bond "assets" held in the SS "trust" fund, see machineheads excellent posts under "Social Security Shocker - $6B August Deficit"

It is no wonder that the Obama administration would fight so hard to grow this nation’s health care system to megalithic proportions. In doing so they would create yet another mechanism by which to mask the transfer of government deficits behind the veil of shadow accounting. Clinton used similar methods to create ’shadow’ surpluses by shifting social security tax receipts as income (credits) with no offsetting debit for future liability. Viola’. Surplus. Just like magic.

Now Obama is headed down the same shadowy path. While the fate of Obama’s health care plan is yet to be determined, if it were to pass into legislation one thing is for certain – the US taxpayer would suffer unnecessary costs when public funds are mismanaged through shadow accounting.

And of course, as always, on the sideline stands the Federal Reserve – no doubt cheerleading for a new source of public fund manipulation so as to push private losses onto the public balance sheet. If the Obama health care plan fails to pass in Congress the ultimate culmination of this crisis will come sooner rather than later as the Fed and Treasury will have one less slush fund to tap.

My take-away from the Wegelin & Co. report is this – when the music stops who will be left standing?  Foreign holders of our debt?  Or perhaps the American citizenry?  Therein lies the real crisis yet to unfold.  Someone is going to [get] stiffed.

So, how much longer do we have?  Chris Martenson discusses this in his "must read" article "Social Security Stunner; Bankruptcy of Nation Moved Up Several Years." 

From a budget-busting perspective, last year where the US government had a $73 billion Social Security surplus to spend, this year it will be a paltry $16 billion and next year it will be a number indistinguishable from zero. It is hard to overstate the importance of this shift.  - CM


machinehead's picture
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Re: The Real Crisis Yet to Unfold

Never thought of that, but presumably any new health plan would need a trust fund. The negative net worth of Medicare, Medicaid and Soc Sec has already reached $107 trillion, or nearly eight years worth of GDP. It's rather astounding to be expanding this model, even with the best, most honorable intentions.

What concerns me even more is the 'magic of compounding.' Over the past 40 years, Medicare and Medicaid spending has escalated at an average compounded annual rate of 2.5% higher than inflation. Econ 101 teaches that for a 'free' good, demand is infinite. If the government offered free beer on every street corner, I'd swill a keg per day. Practically speaking, there are some procedural hurdles to accessing health care. But still, it grows 2.5% a year in real terms. Expand the system, and it will achieve even higher multiples of GDP.

Without price rationing, only supply rationing works. So the government squeezes reiumbursements to doctors and hospitals down to the marginal cost, or even below. Consequently, some providers have stopped accepting Medicare/Medicaid patients. Supply rationing is guaranteed and inevitable when free goods are offered without price rationing.

Decades ago, before the federal government got involved, most cities had charity hospitals and clinics. In-kind services have very transparent and monitorable costs. That's why charities offer in-kind, on-the-spot medical services in developing countries. Whereas they wouldn't dream of sending out cash payments, with the potential for fraud.

Like real estate, health care is inherently local. The economics of centralizing it haven't proven to be very attractive. It's sadly typical of our government to be expanding a dysfunctional model, without fixing what's already broken. I've seen several essays advocating to make Medicare a universal entitlement. If that were done, Usgov would run $5 trillion deficits for three or four years, till it blew out in a hyperinflationary apocalypse.

At that point, I'd get roaring drunk and break into the pharmacy with other looters, and grab all the morphine, Oxycontin, Vicodin, Valium, Percocet and Adderall I could get my shaking hands on. After all, they said it was free, didn't they?

VeganDB12's picture
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Re: The Real Crisis Yet to Unfold


I am sticking my toe in here and hope to just offer an additional thought.

What is the role of the private insurance companies in all of this expansion of medicare/medicaid?  It has seemed to me, throughout my years of working in hospitals, that there has been enormous cost shifting and displacement of high risk pools of patients to the government systems.

That may account for some of the increase or not I do not have the data to back up my observations.  Meanwhile profits for the private corps have completely skyrocketed by anyone's estimation, if the share price of oxford/united is any indication.

I think the primary advantage to eliminating the public systems could be that the private companies would be forced to stop cost shifting and skimming profits.  Then, perhaps, CEO's collecting a 15 million dollar annual paycheck will have more concern about containing costs when they can"t dump it on the public system so to speak.  Still, the transitionial period will be a tsunami of change and I still maintain will be rife with unintended consequences.  You make a very strong argument and obviously I do not have the data to make a strong counter argument, just my thoughts as a frontline HCW.



DrKrbyLuv's picture
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Re: The Real Crisis Yet to Unfold

I agree that rationing is inevitable as FICA receipts begin to fall below the needs of SS, medicare and medicaid.  Apparently, they've always been pay-as-you-go systems with the government spending any surpluses rather than building an actual "trust."  The next phase will be to pay-what-they-got which surely means rationing.

The fraud doesn't stop with public entitlements, you have to suspect that government pensions will become rationed, pay-what-they-got programs instead of paying the benefits people think they've earned.

It seems insane to me that we are now considering trusting our health care with a fraudulent government.  Why should we think that this time it will be different?


gregroberts's picture
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Re: The Real Crisis Yet to Unfold

"It seems insane to me that we are now considering trusting our health care with a fraudulent government.  Why should we think that this time it will be different?"

I agree, I don't see how anyone can think it's a good idea to have the govt running healthcare, what I would rather see is the govt taken completely out of health/medical care. When I was young before 1965 (I was 10 years old then ) doctors would make housecalls and my parents who were not rich could afford this. When there is a problem you will usually find that govt is the root of it.

kaman's picture
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Joined: Apr 24 2009
Posts: 51
Re: The Real Crisis Yet to Unfold

Not intending to hijack the thread, but the similarity (of health reform) to the administration also wanting to be able to take over private firms that could pose a threat to national security if they become insolvent (finance reform) is hilarious.  The feds can't balance a budget, they rob funds intended for other uses, then spend hundreds of billions more we don't have, print more money from thin air to buy our own debt, none of which we have a snowball's chance in hell of ever being able to pay back, and THEY want to be able to step in and take over troubled corporations to save US?!


"Oh the insanity"

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