Debt

Comments from the 2/18/2010 Agora Financial's 5 Min Forecast:

Remember, this was only 5 weeks ago---it's gotten worse since then.

 

 We have deficits and debts on the brain this morning. The federal deficit for the first four months of fiscal 2010 just clocked in at $430.7 billion. That’s 8.8% higher than the year-ago figure. 

 

We remember that when the annual deficit hit a record high $430 billion under the second Bush administration, we thought the world was going to end and we’d have to “buy guns, ammo, dry goods, go into hiding, cling to God and wait for the country and the rest of world to collapse.” (More from a reader below.) 

 

 

 The national debt now stands at $12.4 trillion. When we finished our final edit of I.O.U.S.A. back in August of 2008, we forecast it would reach $10 trillion and were called gloom and doomers for the effort. 

 

The president’s solution? An executive order this morning establishing a National Commission on Fiscal Responsibility and Reform. This 18-member “debt commission” (10 Democrats, 8 Republicans) has two main tasks…

 

• Cutting the deficit to 3% of GDP by 2015 (it’s currently running over 10%)

• Fixing the problems with the Big 3 entitlement programs of Social Security, Medicare and Medicaid. 

 

We applaud the goals, modest as they are. But we hold out little hope a blue-ribbon panel will actually solve anything. Looking back on the 9/11 Commission, it seems its major accomplishments were a best-selling book and a host of new security irritations at the airport.

 

 “Within 12 years… the largest item in the federal budget will be interest payments on the national debt," said former U.S. Comptroller General David Walker in an ABC News story that’s getting considerable readership via Drudge. "[They are] payments for which we get nothing.

 

"Habitually spending more money than you make is irresponsible," says Walker. "Irresponsibly spending someone else's money when they're too young to vote or not born yet is immoral." 

 

David Walker, the protagonist of I.O.U.S.A., will join us again at this year’s Agora Financial Investment Symposium in Vancouver. We’ve asked him to fill us in on what’s been happening since we finished filming I.O.U.S.A., the effort to get the deficit commission established and what happened behind closed doors as the muckety-mucks dreamed up the bailout and stimulus plans. 

 

 Is China really cutting its holdings of U.S. Treasury debt? As we told you yesterday, that’s what the numbers show, but “it would be a mistake to take these figures at face value and assume that China is cutting its U.S. holdings,” says Martin Walker, editor emeritus of the UPI newswire.

 

“For political reasons, China wants to keep the U.S. uncertain about its readiness to continue buying U.S. Treasury bonds and funding the U.S. trade deficit. And for its own economic reasons, as Beijing's internal policy debate about exchange rates and inflation unfolds, China also wants to keep the markets guessing about its intentions.

 

“The most important fact is that over 65% of China's $2.3 trillion in foreign asset holdings is denominated in U.S. dollars, and of that $755 billion is in direct holding of T-bonds. The U.S. and Chinese economies are locked into mutual interdependence. Any Chinese action that undermined the dollar would hurt China's nest egg.

 

“And what would China buy instead of dollars? The euro does not look too good, with the Greek crisis, and Japan's debt levels (and Toyota's problems) do not make this a good time to buy yen. The U.S. dollar and its T-bonds remain the world's least bad negotiable asset.”

 

 Call it the trillion-dollar hole. That’s the funding gap state governments have in their pension plans. Amount set aside: $2.35 trillion. Actual future obligations: $3.35 trillion

 

Worse, the Pew Center on the States, which crunched the numbers to reach this conclusion, says the actual gap is likely bigger -- for these reasons:

 

• The study runs only through the end of fiscal 2008 -- which in most states was June 30. In other words, most of this is pre-Lehman

• Typically, public pensions don’t use mark-to-market accounting; they try to average things out across a period of years using a technique called “smoothing.”

 

In 2000, half the states had fully funded pension systems. In 2008, only four did -- Florida, New York, Washington and Wisconsin. The basket case that is Illinois was worst off, with only 54% of its obligations funded.