Quote of the Day: On tax reform and US debt

"[Senators] are worried that the tax-reform bill that just got out of the Senate Finance Committee will grow the deficit, and hence the national debt. This is a very reasonable concern... However, the solution isn’t to implement a trigger in the bill that would terminate some of the tax cuts if the projected revenue does not materialise. There is so much wrong with this proposal that it is hard to know where to start. But I will try. First, [America's] debt problem is not a revenue problem: It’s a spending problem."
~ Veronique de Rugy, 'A ‘Revenue Trigger’ Isn’t the Solution to Fiscal Irresponsibility'

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King of Debt Seeks Presidency

 

Guest post by Peter Schiff

During a lengthy interview on CNBC the week before last, Donald Trump, fresh from becoming the presumptive Republican nominee, came as close as any major presidential contender ever has to saying that America is not capable of repaying her debts in full, and that our path to economic recovery might involve some pain for our creditors. This moment of candor earned Trump almost as much condemnation as his earlier suggestions to ban Muslims from entering the United States.

To many, the idea that U.S. debt obligations involved even the slightest risks to investors was both the height of financial naiveté and the epitome of political recklessness. The pressure was so great in fact that The Donald, who has consistently refused to engage in even the most sensible strategic retreats, appeared on CNN last Monday to “clarify” his earlier remarks. However, he ignited another firestorm when he inadvertently let slip another unspoken truth, namely, that the United States can always print however much money she needs to “repay” her debt. Apparently the only acceptable position to hold on this issue is to completely deny reality.

Despite his public image as a premiere pitchman, marketeer, and builder of glitzy gold towers, Donald Trump owes his business success to his ability to walk into a roomful of people to whom he owes money and, through the use of threats, bluster, and hardball negotiations, convince them to accept less than what he owes. Time and again he has used competitors' prior lending mistakes as a lever to get what he wants. That's why he has said repeatedly that he is "the king of debt." Evidently he thought that this private experience and common sense could help in the counterintuitive arena of public debt.

Trumpeting American debt default

 

Guest post by Simon Black

I’ve often joked very tongue-in-cheek that Donald Trump is the only person qualified to be President simply because he’s declared bankruptcy four times.

Trump himself talks up his own debt credentials, saying “I’m the King of Debt,” and “I know more about debt than practically anybody.”

He’s flat wrong, of course.

Trump may have racked up billions in debt for his companies, but Barack Obama has racked up more debt for America than anyone else in the history of the world.

That said, Trump does have mad street cred when it comes to debt.

In 1991, 1992, 2004, and 2009, Trump filed under Chapter 11 of the US Bankruptcy Code to reorganise his business debts.

Each of these constitutes a default, i.e. a violation of the original terms between the borrower and the lender.

And as I joke (only half-kidding), that’s precisely what America needs: default.

Stop kicking the can down the road, admit that you can’t pay your obligations, hit the reset button, and get on with it already.

Yet anytime I talk about US government debt, there’s invariably a voice in the crowd that says, “yeah, but we owe it to ourselves. . .”

This is one of the biggest lies in finance.

People have actually become convinced that the US government’s $19+ trillion nominal debt, and $60+ trillion total debt, doesn’t seem to matter because ‘we owe it to ourselves.’

First of all, is this true? Sort of.

According to the Treasury Department, foreigners hold roughly $4 trillion of US government debt.

The rest of it—the vast majority of US debt—is owed to various domestic agencies, banks, and citizens.

The #1 owner of US government debt, in fact, is Social Security... in other words, all current and future American retirees.
Next comes the central bank-- the Federal Reserve, which holds $2.46 trillion worth of US government debt according to its most recent balance sheet.

Just on the heels of the Fed are other US government agencies (like the Defense Department and the FDIC) which also own US debt.

Then, of course, are all the thousands of banks and pension funds in the United States, which routinely buy US government debt.

And last but not least are all the individuals and companies across America who own US government debt as part of their portfolios.

So, yes, a minority portion of US debt is owed to foreigners.

What eludes me is why anyone thinks this is OK…

It’s like saying, “well I owe grandma a million bucks, but she won’t mind if I don’t pay.”

Ummm. Come again?

The US government is totally unable to pay its debt. The debt has been rising for decades, and they haven’t been able to run a budget surplus in 20 years.

Not to mention they have to borrow money just to pay interest on the money they’ve already borrowed at a time when interest rates are at historic lows.

Debt is already over 100% of GDP, and even the government itself predicts this number to rise.

At this point default is an almost mathematical certainty. The question is-- default on whom?

Defaulting on the debt owed to Social Security means that hundreds of millions of current and future retirees have their lives turned upside down.

Defaulting on the Federal Reserve means that the Fed will become formally insolvent, creating a massive currency crisis in the Land of the Free.

Defaulting on other government agencies means that the Defense Department (among others) won’t have any more money to operate… so they’ll just end up increasing your taxes to make up the difference.

Defaulting on banks and pension funds would cause every bank to fail, creating an unprecedented financial catastrophe.

So the fact that ‘we owe it to ourselves’ means the debt is even MORE important. And that’s what’s so scary.

Think about it-- it would actually be better if the US government owed 90% of its debt to the Chinese.

In that case, they would simply make the Chinese out to be evil, and then selectively default on that debt.

The rest of the world would probably go along with it, and America would get a pass. US citizens, banks, corporations, etc. would be largely unaffected.

But that’s not going to happen.

There’s a lot of tough talk about negotiating the debt with the Chinese… but this is all hot air.

Even if they default on the Chinese, they still owe tens of trillions to Americans that they have absolutely no hope of paying.

Some people think, ‘well can’t they just restructure the debt?’

No. First of all, restructuring is just a fancy way of saying ‘default.’

It means that you’re not going to honour the terms of the original agreement, and instead work out more favorable terms to pay off the debt.

But… what terms can possibly be more favourable?

Uncle Sam is already paying record low interest. There’s nothing left to restructure… no terms they can renegotiate which are more favorable than they already have.

Bottom line, the US government can’t possibly meet its obligations… so the only hope is to default.

They’ll either outright default and cause any number of major crises in the financial system or the American retirement system.

Or they’ll default on the promises they’ve made to their taxpayers, including the solemn obligation to maintain a sound currency (something they already abandoned long ago.)

Look, understanding this reality doesn’t mean that you’re negative or pessimistic.

There’s nothing pessimistic about acknowledging basic arithmetic.

Bonus Quote of the Day:

“The whole notion that an honest and explicit debt default by the U.S.
government is an unprecedented event and the worst possible outcome
in the current situation is ludicrous given that the U.S. has been continually and surreptitiously defaulting on its debt since World War 2 via inflationary finance…”
- Joseph Salerno, from his article
“Bruce Bartlett’s Nutty Government Default
Hysteria: Here’s Another Economist for His Hit List”

So they’ve raised the debt ceiling.

So they’ve raised the debt ceiling.

For three months.

A reason to drink in celebration?

Or a reason to drink to oblivion?

What’s your call?

UPDATE:

And a further question: “Is There a Big Loophole in the Debt Ceiling Deal that Will For All Practical Purposes Eliminate the Ceiling Forever?”

Guest Post: Ten Things to Expect from Obamacare in 2014

Since the arguments about partial government shutdown and debt ceilings were linked to opposition to ObamaCare, I figured some of you might like to know something about it. So here, courtesy of the Casey Daily Dispatch, is Dan Steinhart introducing Dr Elizabeth Lee Vliet to brief you.

Obamacare's health exchanges opened on October 1, with a system so crummy that even the Washington Post is calling it a disaster.

Though Obamacare has been America’s law of the land for 3½ years, this marks its first major milestone that impacts Americans on an individual level. That's because Obama designed his crowning achievement to phase in slowly, over nine years—probably a good idea considering it's a hive of onerous regulations and 20-something new taxes that, if unleashed all at once, would wallop the US economy. Better to boil the frogs slowly.

The next major milestone is approaching fast. On January 1, the individual mandate will take effect, forcing all Americans to either buy health insurance or pay a penalty. Well, almost all Americans. If you happen to be friends with Obama, or a donor, union, or political ally who supports him, you may get a waiver, which you'll read more about below.

Given that the impact of Obamacare will only grow from here on out, I asked Dr. Lee Vliet—physician and acclaimed Obamacare expert—what we should expect as the calendar turns to 2014.

Importantly, Dr. Vliet is independent in every sense of the word. Not only is she an independent physician, she's also a registered political Independent, and has no ties to pharmaceutical, insurance, political, or any other interests. Like any good doctor, she is professionally concerned with one thing and one thing only: her patients. You'll find her criticisms of Obamacare quite harsh, but only because she's disturbed about the impact it will have on her patients…

Ten Things to Expect from Obamacare in 2014
Elizabeth Lee Vliet, M.D.

It's been clear to anyone paying attention that the October "rollout" of Obamacare has been a turbulent, confusing disaster. Sloppy IT systems and technological failures combined to cripple Obamacare's sign-up systems. Security flaws put Americans at risk for identity theft.

In an almost comical understatement, President Obama summarized these massive failures as "a few glitches." I think that Luke Chung, IT expert and president of database solutions firm FMS, explained the situation much more accurately:

"What should clearly be an enterprise quality, highly scalable software application felt like it wouldn't pass a basic code review. It appears the people who built the site don't know what they're doing, never used it and didn't test it."

Chung went on to call it a "technological disaster."

Think about what this ineptitude means in the bigger debate about Obamacare. The administration spent 3½ years and $698 million of taxpayers' money to develop this software. They've known since earlier this year that the system wasn't ready to support the rollout of the exchanges. Yet they proceeded anyway, apparently unconcerned about their faulty software costing Americans millions of hours of frustration and lost productivity.

These same bureaucrats continue to assume more and more control of our medical care. What does their incompetence say about how they will handle making life-or-death medical care decisions?

Like a parasite taking over its host, Obamacare will commandeer almost 20% of our economy, crowding out private options. With 2014 fast approaching, what should we expect in its next phase?

Here's my list Top Ten list for 2014:

Who does the US Govt owe?

Here’s everybody the US Government owes money to, in one simple graphic.

Oh, and here’s the US Debt Clock. It just keeps ticking. Note, if you will, the unfunded liabilities…

Guest Post: Debt Ceiling Delusions

Guest post by Peter Schiff

The popular take on the current debt ceiling stand-off is that the Tea Party wing of the Republican Party has a delusional belief that it can hit the brakes on new debt creation without bringing on an economic catastrophe. While Republicans are indeed kidding themselves if they believe that their actions will not unleash deep economic turmoil, there are much deeper and more significant delusions on the other side of the aisle. Democrats, and the President in particular, believe that continually taking on more debt to pay existing debt is a more responsible course of action. Even worse, they appear to believe that debt accumulation is the equivalent of economic growth.

If Republicans were to inexplicably prevail, and the federal government were to cut spending so that its expenditures matched its tax revenues (a truly radical idea), the country's financial mess would be laid bare. The government would have to weigh the relative costs and benefits of making interest payments on Treasury debt (primarily to foreign creditors) or to trim entitlements promised to U.S. citizens. But those are choices we will have to make sooner or later anyway. In fact we should have dealt with these issues years ago. But generations of mechanistic debt ceiling increases have allowed us to perpetually kick the can down the road. What could possibly be gained by doing it again, particularly if it is done with no commitment to change course?

The Democrats' argument that America needs to pay its bills is just hollow rhetoric. Paying off one's Visa bill with a new and bigger MasterCard bill can't be considered a legitimate payment of debt. At best it is a transfer. But in the government's case, it doesn't even qualify as that. Treasury debt is primarily bought by the Fed, by foreign central banks, and by major financial institutions. None of that will change with a debt ceiling increase. We will just go to the same people for greater quantities. So it's like paying off your Visa card with a bigger Visa card.