Is anyone paying attention?

I was speaking with a client last week. She had no idea that the only institution currently buying US Treasury Bills is the US Federal Reserve Bank. When I mentioned this to her, she instantly understood the ramifications. After all, she is the CFO of a large institution. If someone like her, whose entire career is focused on sophisticated financial matters, is unaware that we are just printing money, then I don't suppose that normal people can be expected to know.

It's too bad, though. We are headed to a financial disaster, and no one seems to care.

Posted with Blogsy

The 21% Limit

I was recently engaged in an intense conversation with a dear friend. She, an ardent Obama supporter, insisted that the Bush tax cuts are to blame for our exploding national debt. Our conversation was interrupted by more important things, but it got me thinking about how best to illustrate the basic problem with her argument.

The Office of Management and Budget (OMB) - a part of the President's team - publishes the percentage of GDP that the federal government takes in each fiscal year. It's helpful to understand what actually happened, rather than an estimate of might happen in the future, or a prediction of how this policy or that policy will affect things. The chart below is based on the OMB's publicly published numbers showing tax receipts since 1945.

What does history tell us? It tells us that, regardless of tax rates, the federal government takes never takes in more than 21% of GDP. This is nearly 70 years of consistent behavior. It is a modern era that includes years of war and of peace. It includes recessions, recoveries, housing booms, oil crises and even the collapse of the gold standard. It is a period of dramatic technological and economic change. In these years, marginal tax rates were as high as 90%. In some of these years, taxes on high incomes and successful investments were exceptionally high; in others they were exceptionally low.

Through it all, tax receipts never went above 21% of GDP. That tells me that our federal government must not spend more than 21% of GDP. We must prioritize that spending so that we fund that which is most important. And we will likely disagree amongst ourselves on those priorities. But the fundamental fact is that we will never tax ourselves back to a balanced budget. The only way is to recognize that federal spending has an indisputable limit.

Source of tax receipt data: The Office of Management and Budget

Accurate Deception

Here is a fascinating graphic. It is technically accurate, but it is highly misleading. It describes the public debt as a static sum. Its sole purpose is to assign blame for the rapid growth in the national debt to George W. Bush.

How is this misleading?

The nominal amount of debt racked up by Bush 43 is $6.1 Trillion.
The nominal amount of debt racked up by Obama is $2.4 Trillion ... or just shy of 40% of the total Bush 43 presidency.

But remember, Obama is only 30 months into his presidency, meaning that his policies are increasing the debt at a rate $80,000,000,000 per month!. If this were to continue for two terms (perish the thought), the total additional debt created in the same period as Bush 43's presidency would equal nearly $8 trillion, or about 33% more. And this does not even account for Obamacare, which hasn't even begun adding to our debt.

Yes, Bush 43 added $6.1 trillion to the public debt. Yes, this was not a success. Obama's supporters have no explanation for why doing more of a bad idea is somehow a good thing.