by Karl Denninger, Market Ticker:
A relatively painless one?
No.
But can it be done without collapsing American society?
Yes.
It will take all of the below to do it, and that will not prevent it from being nasty. The choice is between nasty and collapse, not whether we can avoid the nasty.
We can’t.
TRUTH LIVES on at https://sgtreport.tv/
Two decades ago we had a choice to make in 2001 and chose poorly. In 2008 we chose more-poorly bailing out banks and failing to imprison and ruin those who defrauded investors of all stripes, including individuals who lied on mortgage applications, a violation of federal law. Since the early 1980s, when the Supreme Court confirmed that it is indeed a felony (15 USC Ch 1) for medical providers, pharmaceutical companies and health “insurers” to price-fix and restrain trade we have refused to prosecute and jail a single doctor, hospital administrator or health insurance executive. President Obama, knowing (having in his hand by advisory opinion) it was illegal to put DACA in place and obligate federal, state and local governments to spend hundreds of billions on illegal aliens in their housing, education and general welfare did it anyway. Presidents Obama, Trump and now Biden have all wildly spent on both ill-advised and blatantly illegal schemes, some authorized directly by Congress (making them complicit) and in other cases in direct violation of law — all without consequence.
The current operating deficit in the Federal Budget is approximately one dollar in three. The final 2023 MTS is not yet out, but it will be soon and will show an operating deficit of more than $2 trillion. All of that is contained within CMS; that is, Medicare and Medicaid, which has spent more than that and of it only Medicare tax receipts offset the spending.
More than a decade ago I predicted in print when this day would come, and it was basically now. But all the way back to the 1990s, including when I ran my company, I was talking about this and modeled exactly this problem with a date at which it would all go to Hell of right around 2025. Here we are, right near that date thirty years later and being off a year or two doesn’t look so bad over that period of time, does it?
During those 30 years not one single step has been taken to change the trajectory of this problem no matter which party was in office.
Through August the deficit was up 11% from last fiscal year, totaling $1.524 trillion. September is always an extremely heavy month; last fiscal year the deficit in that month was $429 billion alone. There is no reason to believe this September, just past, will be any different.
This, and only this, is why interest rates are rising. The Fed is not setting rates. It is following rates, specifically the 13 week T-bill. Think not?
Which moves first?
Think this is unique to this cycle? Go look at it historically. It is extremely rare that The Fed is in front of the market. That is a trope everyone wants you to believe and most of the so-called “professionals” know they’re full of crap. Congress in particular wants you to believe it because that means they’re not responsible — Powell is, and of course someone else was before him.
Social Security will likely run a small (about 10%) operating deficit this year. That is not the problem despite the claims otherwise; the taxes collected are huge and yes, a trillion goes out but nearly a trillion comes in.
Medicare and Medicaid, however, have spent through August $1.918 trillion yet have received only about $330 billion in offsetting taxes, or about 17% of what is spent. The entire problem lies here; that is the entire budget deficit thus far and it is actually worse than the figures show because part of Medicaid spending is in the States and thus not reflected in the federal MTS.
This fiscal year — thus far — interest expense alone has been $807 billion, up from $677 billion or 19% higher. This does not include the last month, of course.
That latter figure is going to continue to move higher as existing debt rolls over. Leaving aside the intergovernmental holdings (paying someone with the same $20 in one pocket to another is a net zero) there is $26 trillion outstanding. At an approximately 4% coupon that is over a trillion a year in direct interest expense or half the budget deficit all on its own.
With a current US GDP of $23 trillion and a $2 trillion deficit the implied rate of inflation is 8.7% across the entire economy. A person would be crazy to lend you money at a negative real rate of return thus it would be reasonable to expect that a one year bond would cost you at least 10% interest in that environment. Today’s short-term rates are half that, and if the escalation continues the lag effect (as you can see the rate is behind the inflationary spending!) will shortly turn into a vertical rate ramp and make paying both interest and the desired programs of the government impossible.
