Posted on 09/17/2010 7:12:14 AM PDT by SeekAndFind
In the course of arguing that our real national debt is around $130 trillion — as opposed to the official number of $14.7 trillion — I have frequently encountered the argument that I’m wrong to include unfunded entitlement liabilities in the total. Here’s a typical example from the comments to this post:
Kevin Williamson, expected spending 75 years in the future, based on current policies and projects that are certain to change anyway, is NOT debt. No amount of calling it “debt” or calling it “our REAL debt” changes that fact. Project funding gaps are not debt. DEBT is debt.
About that, a few things.
The first and most obvious thing is that in much of the real world, liabilities of that type are defined as debt, as your favorite corporate accountant will tell you. One of the reasons that American companies started filing all those unhappy financial restatements after the passage of Obamacare was that they had a whole lot of new, measurable, real-world financial liabilities, and they are obliged to include those in their disclosures. As one of our commentators answered the above criticism:
Many promises to pay are categorized as debt according to GAAP and accounting body authorities. If government were required to report like public companies a lot of the promises would show as debt. So if you don’t believe that GAAP correctly classifies debt and that the thousands of SEC filings are wrong it’s your prerogative, but you’d better keep your day job and not become a CPA or one responsible to produce SEC financials.
Maybe you object to the word “debt,” but it’s still $100 trillion or so on the wrong side of the balance sheet.
But there is a more important reason to worry about the entitlement shortfall. To understand it, it’s helpful to take a look back at the housing meltdown and its effect on the current economy. While it is true that a shocking number of homeowners currently are upside down on their mortgages, it’s also true that a lot of homeowners experienced only “paper losses” — they bought houses for $100,000, saw the value rise to $200,000, and then watched as it fell back down to $100,000 (to take a simplified example). People often pretend that these paper losses are meaningless: If the money never hit your checking account, the argument goes, you haven’t really lost anything. (And it’s not just households; I recently heard the same argument made about the Harvard endowment fund and its “pretend losses.”)
Here’s the problem: Those “paper losses” were preceded by “paper profits,” meaning people thought that they had an extra $100,000 in assets, and they made consumption, borrowing, investment, saving, and working decisions accordingly. The simplest illustration: Your $100,000 house, which is paid for, has gone up to $200,000 on the market at the top of the bubble. If you took out a $50,000 home-equity loan against 100 percent equity in your (at the time) $200,000 house, you still had $150,000 of equity, no mortgage, $50,000 in cash, and a $50,000 equity loan to pay off. If the market value of your house crashes back to $100,000, you still have no mortgage, $50,000 in cash, and a $50,000 loan to pay off, and the same house; you haven’t really lost anything (other than opportunity cost), since the house is still worth what you paid for it; and you only make your paper losses real if you sell the house while the market is down.
But anybody who thinks your financial situation hasn’t changed is nuts. Your equity debt has gone from 25 percent of the value of your house to 50 percent. Your credit profile has changed. Any other debts have just become significantly larger relative to the value of your biggest asset. (And your other assets, like your 401(k), probably are not in great shape, either.)
Whatever you’d planned to do with that $50,000, you probably are going to think twice about doing. If it was straight-up consumption, you’ll probably forgo the bass boat and pay back your loan. If it was for home improvements, why sink another $50,000 into a house that’s worth half of what it was, making a $150,000 investment in a $100,000 house? Your economic decisions will change.
But it’s not just you. The bigger problem — bigger because it’s harder to solve — is that somebody was planning to sell you that bass boat and those home improvements. You can buy one bass boat, but the guy at Bob’s Bass Boats doesn’t manufacture them one at a time. He’s counting on selling hundreds or thousands of bass boats to guys like you (that is, guys who are cashing in some of the gains from their residential real-estate investments). The suppliers and contractors and workers who stock and run Bob’s factory, the container ships that bring components from around the world, the people who service them — the whole system gets thrown into disarray. The capital Bob invested in factory tooling and whatnot is lost or radically devalued, and he has to make new investments to create whatever products he is going to sell in the new economic environment, e.g., less-fancy bass boats, or maybe paddle boats. (Or, if the Democrats continue to spend us into penury, those little inflatable floaty things for your arms.) The Austrian economists call that problem “malinvestment” — capital has been dedicated to uses that appeared productive but are not actually viable — and they blame them for recessions.
The problem with the business cycle under this analysis, you’ll notice, is not the bust — it’s the boom. That’s when the bad investment decisions are made, largely because political influence in the markets (housing policy, tax breaks, artificially cheap money and other interest-rate subsidies, risk subsidies, etc.) distorts economic calculation.
Which brings us back to the entitlements. It’s easy to say: Well, we’ll just raise the retirement age, or cut benefits, or means-test them, or raise taxes on the wealthy who receive them (which amounts to means-testing, but Democrats like that version better). And, yes, that probably is what we will do, eventually. But that does not get us out of the economic pickle: People have been making decisions for years and years — decisions about saving, investing, consuming, working, and retiring — based at least in some part on what are almost certainly faulty assumptions about what sort of Social Security, Medicare, and other benefits they will receive when they retire. When those disappear, a lot of consumption is going to have to be forgone — and a lot of capital dedicated to producing those goods and services for consumption will be massively devalued. Businesses will have to retrench, probably in a way that is more disruptive and more expensive than the housing-bubble recession necessitated.
This is the boom. The bust is going to be a nightmare.
– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism
Just wait until a few million of those Food Stamp ‘debit’ cards quit working. Things will get really interesting about 48 hours after that.
Stagflation nightmare next year. As ARMS come due. The only option is going to be moneyprinting or default. Be Prepared.
btttt
Remember all those non-interest bearing IOUs given to Medicare and Social Security for their “surplus” funds in years past? Now that both programs are either beyond or soon to be beyond the breakeven point of current revenues failing to cover current expenditures, those “notes” are coming due.
And there is no money to pay them back.
Ah, the glorious days of the “Clinton Surplus” (with help from the Rebubicans...)
The whole thing is an unsustainable pyramid scheme. It will be painful, but the eventual conclusion has to be: you're on your own; don't expect government to help you -- that's not the proper function of government.
The Medicare cuts are the best part of Obamacare and one of the only two good things Zero has done, and I hate the GOP's pandering about them.
Demographics double edge sword!
The boomers reached an age where they became sellers of houses, sometimes two houses. Housing bubble they created goes bust. To add to the problem, retirees also become much more conservative consumers. In a 70% consumer economy this switch is a disaster.
As these same boomers switch investment strategies (100-age=%equities) and they draw down public and private pension funds, the equities bubble will also go bust.
Good article. In addition to the obvious topic he also touches the political class’s favorite pass time of wordsmithing something into/out of existence. It reminds me of the Rumpelstiltskin story where the demand is to make gold from straw. Believing that renaming alone magically morphs the thing/idea/etc into a completely new and unique entity is wildly delusional! OTOH We the People have fallen for it so many times. Guess we all mostly want to believe a lie rather than the truth.
At any rate, you must know the govt will do all in its power, but not necessarily w/i its authority, to make sure all the balls stay in the air. As I see it this is a double whammy. First, you have the fed taking w/o restraint to prop a system they know is going to collapse. Once the end comes the Eater Class will riot to take what they’ve been told is rightfully theirs.
Excellent description of the realities of economic decision making. The other casualty of the boom is the “animal spirits” of entrepreneurs. If entrepreneurs cannot see where they create a stream of profits because effective demand has shrunk to survival levels, then we are in for an extended recession and a much lower level of economic activity, i.e., few jobs for our children.
48 hours? You, Sir, are wildly optimistic.
The “Haves” and “Have Nots”
I can see that people that saved, prepared, stored up, bought assets instead of TVs and Toys will be demonized.
During the hyper inflation of Germany before WW2 the people went and ransacked the farmers thinking they hoarded everything. Turned out the farmers had enough only for themselves but the mass of scavengers took it anyway.
The future of your family may come down to what you have on hand if a crash happens.
I think certain things may have real value?
Guns
Ammo
Hand Tools
Seeds
Food
Water
Livestock
Transportation that needs no fuel (Bikes or Horses)
Alcohol
Tobacco
Books (Your kindle may be worthless without power but a book is entertainment.)
What will have NO VALUE?
Paper Money
The Word of Congressmen & women,Presidents,Government officials
What could go either way?
Notice that Gold and Silver may be worthless or be a store of wealth. But you can’t eat it or use it for anything practical.
Ping for later
Start posting gaurd.
Just happens to coincide with the the Chicago area politicians and government hacks are looting the state funded pensions for themselves by giving themselves outrageous raises in their last year of “employment” which drives up their pensions. This is not gonna end well folks. Even my utopian burb of Naperville gave its former government hack of some sort a big raise in his last year(s) and now this dedicated public servant makes $141,000 per year in retirement.
bookmark.
Applying GAAP to government is a splendid idea. And let us not forget if any private company attempted something like Social Security, those responsible would deservedly be sent to jail.
What a sham our government has become!
Yep. THIS is how the 2nd American Revolution gets started.
One day (soon) the adults are going to have to say “No more... we’re tapped out!”
When that happens, the permanent welfare class is going to go bat$hit, rioting and rampaging. We conservatives (the adults) are going to be forced to shoot them down like dogs - purely in self defense.
I agree with your double whammy idea. The feds are propping up the system that they know will collapse. And when it does, the eater class will riot and will be probably egged on by dim policiticians and their media. There needs to be some serious corrective action taken by responsible and honest people in power. The current children in charge are not those people. One thought here is that the dims know that they are going to lose badly in November so they are figuring on a collapse after the repubs take office in January. That coincides with a big pile of new taxes kicking in. Given that the dims and their media are on a mission to destroy this country, I wouldn’t put it past them. You know, a manufactured crisis.
These children running the show are evil. Pure evil.
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