No Runny Eggs

(H/T – Monty)

This is a few months old, but this piece from Rob Arnott relayed by John Mauldin explains why we’re headed into a double-dip recession (all emphasis in the original):

Consider a simple thought experiment. Let’s suppose the government wants to dazzle us with 5% growth next quarter (equivalent to 20% annualized growth!). If they borrow an additional 5% of GDP in new additional debt and spend it immediately, this magnificent GDP growth is achieved! We would all see it as phony growth, sabotaging our national balance sheet—right? Maybe not. We are already borrowing and spending 2% to 3% each quarter, equivalent to 10% to 12% of GDP, and yet few observers have decried this as artificial GDP growth because we’re not accustomed to looking at the underlying GDP before deficit spending!

From this perspective, real GDP seems unreal, at best. GDP that stems from new debt—mainly deficit spending—is phony: it is debt-financed consumption, not prosperity. Isn’t GDP, after excluding net new debt obligations, a more relevant measure? Deficit spending is supposed to trigger growth in the remainder of the economy, net of deficit-financed spending, which we can call our “Structural GDP.” If Structural GDP fails to grow as a consequence of our deficits, then deficit spending has failed in its sole and singular purpose.

By this measure, the economy is no better off than we were in 1998. Indeed, our soverign debt problem is even worse than it appears. From the conclusion:

Even our calculation of the national debt burden (debt/GDP) needs rethinking. Is the family that overextends correct in measuring their debt burden relative to their income plus any new debt that they have accumulated in the past year? Isn’t it more meaningful to compute debt relative to Structural GDP, net of new borrowing?! Our National Debt, poised to cross 100% of GDP this fall, is set to reach 112% of Structural GDP at that same time, even without considering off-balance-sheet debt. Will Rogers put it best: “When you find yourself in a hole, stop digging.”

The gang over at Investor’s Business Daily really teed off on DNC Chair Debbie Wasserman Schultz’s admission that the economy was now the Democrats’. I’ll give you the first four (no pun intended) paragraphs to whet your appetite; as always, I highly encourage you to read the rest:

The head of the Democratic National Committee says the administration has turned the economy around. So let us give discredit where discredit is due.

Joe Biden should sue DNC chief and Florida Congresswoman Debbie Wasserman Schultz for copyright infringement based on her statement at a Politico breakfast. We thought the vice president had a monopoly on statements completely detached from reality.

“We own the economy,” Schultz said. “We own the beginning of the turnaround, and we want to make sure that we continue that pace of recovery, not go back to the policies of the past under the Bush administration that put us in the ditch in the first place.”

That’s right, Debbie, you guys own the economy, though you might explain President Obama’s chuckle about those shovel-ready jobs not being as shovel-ready as he thought. Does your “pace of recovery” include an official rate of unemployment of 9.1% after a failed trillion-dollar stimulus was supposed to cap it at 8% and force it downward?

Less than 2 months after Standard and Poor’s cut its federal government credit outlook to negative, Moody’s announced on Thursday that it expects to place its federal government credit rating under review as there still is no agreement on whether to live within the government’s revenue limits or to raise the debt ceiling. To wit, this is the set of implications from Moody’s:

1) The likelihood that Moody’s will place the US government’s rating on review for downgrade due to the risk of a short-lived default has increased. Since the risk of continuing stalemate has grown, if progress in negotiations is not evident by the middle of July, such a rating action is likely. The Secretary of the Treasury has indicated that the government will have to drastically reduce expenditure sometime around August 2 if the debt limit is not raised; the initiation of a rating review would precede this date.

2) If a debt-ceiling-related default were to occur, Moody’s would likely downgrade the rating shortly thereafter. The extent of and length of time before a downgrade would depend on how factors surrounding the default affect the government’s fundamental creditworthiness, including (a) the speed at which the default were cured, (b) an assessment of the effect of the default on long-term Treasury borrowing costs, and (c) measures put in place to prevent a recurrence. However, a rating in the Aa range would be the most likely outcome. Any loss to bondholders would likely be minimal or non-existent, as Moody’s anticipates that a default would be cured quickly.

3) If default is avoided, the Aaa rating would likely be affirmed after any review. Whether the outlook on the rating would be stable or negative would depend upon whether the outcome of the negotiations included meaningful progress toward substantial and credible long-term deficit reduction. Such reduction would imply stabilization within a few years and ultimately a decline in the government’s debt ratios, including the ratio of debt to GDP.

Allow me to translate the last item. If the only thing that is done is a short-term solution, either a “clean” debt-ceiling increase or a massive spending cut that doesn’t affect interest (or a combination thereof), Moody’s is going to join S&P in having a negative outlook on debt.

I’ll borrow a couple of the slides my Congressman, Paul Ryan, included in his series of April listening sessions to illustrate why a short-term solution, regardless of what it is, won’t work. The first shows the trajectory of publicly-held debt from 1940 to 2080 (click for the full-size graphic):

Do note how soon the publicly-held debt crosses the 100% of GDP threshhold (sometime between 2020 and 2030). I could also point out where it ends up, but one thing Ryan pointed out in the listening sessions is that the CBO cannot project what the economy does after 2037 because the computers crash when trying to model that.

The second one focuses on the projected yearly spending on just the “Big Three” of the entitlement programs, Social Security, Medicare, and Medicaid, versus projected federal revenues, again as a percentage of GDP (click for the full-sized graphic):

I really wish Ryan had included interest on the debt in the chart because it would better illustrate just how much entitlements and debt crush the life out of the rest of the federal budget. Indeed, in a floor speech on Thursday, Ryan pointed out that by the end of this decade, 20% of the total tax revenue would be dedicated to interest. That brings the entitlement plus interest share of the tax revenue to somewhere around 85%.

The unsustainable trend is undeniable. Once revenues stabilize at the historic 18% (give or take a couple tenths of a point) of GDP, just the entitlements will rapidly approach 100% of the revenues, hitting somewhere around 90% by the aforementioned 2037 GDP model crash date, and crossing 100% around 2050.

The bond ratings agencies are making it crystal clear that simply saying the government can borrow more isn’t going to cut it. Similarly, as much as many people don’t want to hear it, thinking we can avoid default just by cutting spending isn’t going to cut it. Indeed, given the current tax collection rate (due to the collapsed economy, not to the Bush tax cuts; though that’s an argument for another post), Congress could zero out all discretionary spending, and we’d still run a deficit and thus increase the debt.

Revisions/extensions (6:15 pm 6/6/2011) – James Pethokoukis, who just returned from China, says the Chinese want a long-term fix.

Another item in James’ piece is that some of the “smart money” seems to think the Treasury will prioritize debt service and Social Security checks. Without specific instructions from Congress, I wouldn’t put my money on that.

(H/T – Tom Blumer, who has some further stats worth reading)

Former Senator Phil Gramm (R-TX) wrote in today’s Wall Street Journal just how disappointing the POR Economy (™ Tom Blumer) “recovery” has been:

Had the U.S. economy recovered from the current recession the way it bounced back from the other 10 recessions since World War II, our per-capita gross domestic product (GDP) would be $3,553 higher than it is today, and 11.9 million more Americans would be employed.

Those startling figures are based on the average recovery rate of real GDP and jobs three years after the beginning of each postwar recession. Some apologists suggest that the current recovery is so weak because the recession was so deep. But the totality of our experience in the postwar period is exactly the opposite—the bigger the bust, the bigger the boom that follows.

On average, three years after the four deepest previous recessions started, real GDP was 7.6% higher than the pre-recession level. During the Obama recovery, real GDP is up only 0.1%. Forty months after the start of the 1953, 1957, 1973 and 1981 recessions, total employment was on average 4.7% higher than the pre-recession peaks, while total employment today is still down 4.7%—that’s a total employment gap of 13.9 million jobs.

Gramm goes on to further contrast the POR Economy to that of the Reagan recovery, including a laundry list of sabotage undertaken by Obama.

There is a further bit of required reading from Tom – what jobs have been gained since the “official end” of the recession has been entirely temporary work. That’s right – since June 2010 2009, a seasonally-adjusted 263,000 non-temporary jobs have been lost.

That’s the reason why Shoebox started the “Economy Held Hostage” series.

Revisoins/extensions (4:05 pm 4/15/2011) – Corrected a typo. D’OH!

That number is the total amount of federal government debt outstanding as of 12/31/2010. Of that, $9,390,476,088,043.35 (plus about $10 million, or if you prefer, $0.00001 trillion in what is termed “guaranteed debt of government agencies” that is somehow not part of the public debt but is part of the “debt subject to limit”), and $4,585,749,068,174.55 in “intragovernmental debt” (that would be, for the most part, the various “Trust Funds”). To put it in a bit of text perspective, the Gross Domestic Product was $14.119 trillion in 2009, and if projections can be believed, will come in at just over $14.7 trillion in 2010. That makes the public debt just under 64% of GDP and total debt over 95% of GDP.

That dry text doesn’t, however, do it justice. I decided to go through 40 years’s worth (or, give or take a few shakes of a lamb’s tail, about the length of time I’ve been walking the Earth) of calendar-year-ending Monthly Statements of the Public Debt, grab the GDP for each of those years (estimated for 2010), and whip up a “little” frightening chart for you:

Click for the full-size chart

The short version of that chart:

• Between 1970 and 1981, total debt remained right around the 37% of GDP, and publicly-held/guaranteed debt remained right around 27% of GDP.
• Publicly-held debt plateaued right about 40% of GDP between 1986 and 1989, but because of changes to Social Security, the increasing intragovernmental debt, which crossed the 10% of GDP threshhold in 1988, caused total debt to continue to increase at an unchanged rate.
• Sticking with intragovernmental debt briefly, it steadily increased to a high of nearly 32% of GDP in 2009 before multiple “trust funds” began running deficits, both primary (cash) and gross, helping to increase the publicly-held debt as said “trust funds” get monetized through borrowing while there is exactly $0.00 set aside or otherwise available for the purpose.
• Back to the publicly-held debt, it again plateaued at 50% of GDP between 1992 and 1996, with total debt plateauing around 68% of GDP, before “unified budget surpluses” and a gangbusters economy allowed them to go down as a function of GDP.
• By 2000, total debt dropped to about 57% of GDP, with publicly-held debt hitting its post-1981 low of 33% of GDP in 2001. While publicly-held debt remained about 37% of GDP through 2007, the increasing reliance on “trust fund” surpluses caused total debt to increase to about 66% of GDP in 2007.
• The muzzle came off the debt monster in 2008, with publicly-held debt increasing to about 64% of GDP and total debt increasing to about 95% of GDP by the end of 2010.

Several of those in my bloated feed reader, like Dad29, Zip, Allahpundit Stephan Tawney, and ultimately NRO’s Corner crew, found yet another utterance from Barack Obama that has reached its expiration date – one from a 2006 debate in which he opposed raising the debt limit as Senator, an act which his economic advisor now calls “insanity”:

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

The publicly-held debt was 37.3% of GDP at the end of 2005 and 36.6% of GDP at the end of 2006, while total debt was 64.6% of GDP at the end of 2006 and 64.4% of GDP at the end of 2006.

Revisions/extensions (7:02 am 1/4/2011) – The Emperor links, and provides a further link to Aaron Worthing at Patterico’s Pontifications and the full Obama remarks that were walked back. The relevant extension:

Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is “trillion” with a “T.” That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President’s budget will increase the debt by almost another $3.5 trillion.

For those who can’t do the math, Obama was complaining about a potential $12.1 trillion total debt by the end of 2011. Well, we’re at just over $14 trillion before we got to the beginning of Calendar Year 2011 (or if you prefer, a quarter of the way through Fiscal Year 2011). The kicker – had Pelosi taken up Obama’s proposed budget, the total debt would be $15.1 trillion at the end of FY2011.

R&E part 2 (7:45 am 1/4/2011) – Dan Spencer points out just how much the debt has gone up under Nancy Pelosi’s now-expired Speakership – $44,662 for every man, woman and child who make up the 310,574,015 U.S. populace.

A minor point of order – the first 9 months of 2008 were largely budgeted by the prior Congress, while the last 3 were budgeted solely by Pelosi and Senate Democrat leader Harry Reid. That explains why the deficit, at least as a percentage of GDP, didn’t increase all that much in 2007.

I might redo the chart to reflect fiscal years instead of calendar ones, but it is a bear to get the numbers.