Scoping a Grand Bargain
Mar 3, 2014
We hear comments coming out of Washington about the need for a "Grand Bargain" to resolve our fiscal crisis. In this commentary I will attempt to put forth a straw man proposal that will demonstrate what that "Grand Bargain" might look like in size and scope. The basic problem is that the underprivileged think the Federal Government has the money to pay the social benefit contracts the Government has promised but the Government has been lying to them for 46 years. They do not have any money in the trust funds for this purpose. In fact they have spent the $5 Trillion of money that the U.S citizens have paid in to finance these future benefits. And rather than tax the wealthy as required to finance these trust funds they have made the wealthy look super wealthy. As a result the rich look $94.3 Trillion richer than they really are and the underprivileged have essentially nothing.
Chart 1: Scoping a Grand Bargain.
Chart 1 above shows, in the first section (ActualMar2014), our current financial status as of March 2014. The major problem is that we currently have zero dollars in our social benefit trust fund. The Federal Government has been borrowing and spending all of the funds intended to finance our social benefits since FY1969 and to date has borrowed a total of $5 Trillion that is shown here as Intragovernment debt. We have $12.4 Trillion of debt owed to the public and $76.9 Trillion of Unfunded Liabilities. Since we have not been taxing the private sector sufficiently to fund our future social benefit trust fund, the private sector assets have soared to $109.9 Trillion (source www.usdebtclock.org). Our public liabilities are shown in this chart as our Obligation which is the sum of our Unfunded Liabilities ($76.9 Trillion), our debt owed to the public ($12.4 Trillion), and our Intragovernmental debt ($5 Trillion). So our current status as of March 1, 2014 is $109.9 Trillion of private assets and $94.3 Trillion of public liabilities (Obligation) for a "national" net worth of $15.6 Trillion.
The second section (Funded) shows what our status would look like if we were to instantaneously fund our social benefit trust fund from the private sector including paying off the Intragovernmental debt. At that point we would have enough money in our trust funds to finance the currently promised social benefits ($81.9 Trillion), we would still owe the public debt of $12.4 Trillion, and the private sector assets would be reduced to $28 Trillion.
The third section (FundedNoDebt) shows our status if in addition to funding the social benefit trust fund we also paid off our debt owed to the public. This would give us a clean balance sheet with no debt and our social benefit trust fund fully funded but it would reduce our private sector assets to $15.6 Trillion. That would put our underprivileged in a comfortable position (at least temporarily) but would of course be devastating to the current wealthy.
The fourth section (SocialBenefitsX0.60) of this chart shows what would happen if we came to a bargaining position that says let's just split the difference, i.e. we reduce the size of the social benefits trust fund enough to match the private sector assets. That would reduce the social benefits to $48.75 Trillion and increase the private sector assets to that same level.
That would seem on the surface to be a reasonable deal. The underprivileged and the wealthy equally split the "national" assets. The underprivileged get 60% of what is currently promised ($48.75T/$81.9T=0.595) and the wealthy get to keep 44.3 % of their current assets ($48.75T/$109.9T=.443).
The problem with this deal is that the primary reason that the wealthy have so much money today is because the underprivileged think they have a forward looking benefit stream "worth" $81.9 Trillion dollars and they are living their lives (spending their money) like that is going to continue to happen. Also the wealthy are living their lives assuming that they have more than twice the assets that this deal will yield. Also the wealthy are living their lives assuming that their assets will yield financial returns commensurate with the current spending by the underprivileged and the "other" wealthy. When the economy responds to this cut in social benefits to the underprivileged and the cut in perceived wealth of the wealthy the asset values of the wealthy will also decline.
Therein lies the problem as to how to come to a Grand Bargain. It is not as simple as cutting up the pie today because the size of the pie will change, maybe even dramatically, when the actions are taken to get to a sustainable fiscal plan.
And that is the fundamental problem with USAPonzi. The Federal Government is creating a devastating distortion to our economy by dramatically overstating the value of our private sector assets and not funding our future social benefits commitments at all by continuing the outrageous GAAP basis deficit spending that is largely concealed by Cash accounting.
And that is also why I say that the value of United States private assets, U.S. Total Assets as measured by the Federal Reserve Bank, are largely based on Phantom Money.
The theoretical Grand Bargain that I have proposed has a couple of financial problems or maybe they should be called financial paradoxes.
Financial Paradox #1
The first paradox is this. Where would the capital come from to liquidate the $61 Trillion of private assets that would be required to pay off the $12.4 Trillion of debt owed to the public and the $48.75 Trillion required to fund the social benefit trust fund? Further the market value of these private assets being liquidated would surely plummet if this liquidation were implemented.
Financial Paradox #2
The second paradox is this. Where would the Government invest the money in these trust funds in a fashion that is consistent with the guidelines that are set up for these trust funds? I understand that the guidelines say that these funds are to be invested in conservative Government issued investment instruments. Where would these trust funds find $48.75 Trillion of such investment instruments?
Congress has made some absurd promises!
These paradoxes just further amplify the absurdity of our social benefit commitments. When our financial Obligation is $94.3 Trillion and that Obligation is to be paid for by our $3 Trillion (FY2014) tax revenue stream which is already over committed by $500 Billion (cash basis) any rational person would say: "U.S. Government: you have a problem!"
And that financial Obligation is growing by over $6 Trillion per year; more than twice the current tax revenue stream!
And yet another problem is lurking for the U.S. Government. When actions are taken to balance the GAAP basis budget, GDP will be reduced by one third to one half (possibly more) so even the current $3 Trillion of tax revenue that is over committed by half a Trillion on a cash basis will be reduced dramatically when our GDP shrinks. (see U.S. "Real" GDP )
Next page: Buffett on Pensions