Tuesday, March 5, 2013

What caused the sudden US debt?

In reality, the US debt problem is hardly sudden and can be traced back to specific instances of poor planning from ill-conceived starting visions.

I used to work for an insurance company. Any good actuary can tell you: projections are based on probability. You look at reality and trends and interpolate them into the future. When you create a retirement program annuity (for example), you look at the number and demographics of workers participating in the plan, their anticipated life expectancy, and the return on the premiums you can expect to earn before your payout, and you calculate your current liability. If things change, like if people start living longer, you better change your calculations and adjust your funding.
probability graph on illness likelihood by age
credit: vilasvaidya.blogspot.com
Similarly, if you want to insure the health of a population, you calculate the typical costs in a year for the whole group and project that cost into the future for the group based on the trends for both the amount of healthcare needed and the changes to the costs for that healthcare. Again, if things change, like if people living longer develop more serious health issues and the treatments extend for longer periods of time, you better change your calculations and adjust your funding.

It's the same with a budget. If you want to balance your budget, you need to have your revenues cover your costs. If you spend more than you take in, you have to borrow from a lender to cover your underfunded expenses, and the lender will charge you to use that debt for some specified period. You end up spending more over the long run than you would have had you paid when you made the purchase. So when you host a war and don't fund it with taxes, you have to borrow, and the resulting debt will increase the cost of your war. (The same is true for any government – or business – program.)

The problem of growing debt begins if you fail to increase your funding along the way; each year you continue to underfund your program/budget, you accumulate an unfunded future debt. If you complicate those simple increases to your debts by using some of your income to pay subsidies to businesses that did a bad job and actually lost money, you multiply the effect on your debt. That is, you have less income from the business taxes and you spend more than you expected, so your debt goes up even faster. And if you allow the executives of businesses to pay themselves huge untaxed amounts in "deferred compensation" and exempt bonuses while laying off workers and shipping jobs overseas, you reduce the income from personal and business taxes, and if you then reduce the rate the huge bonus payouts are being taxed at, you escalate the reduction in tax income.

pyramid demonstration why Ponzi schemes are unsustainable
credit: lucrativeturnkeybusiness.com/SEC
And if you have a population trend like the Baby Boomers followed by the Bust, the booming influx of workers is of course going to be superseded at some point by a decrease, and if you are funding future payments out of those expected future revenues, you need to notice that this plan will not work forever. At some point the number of no longer paying in recipients increases beyond the funding ability of the decreasing number of workers still paying in. To top that off, if you have businesses that are firing workers and expecting fewer people doing more work with fewer resources to support them, then the nation's income revenue will decrease as its workers' stress levels go up and there will be more debt and more health issues. And if you have businesses whose sole function is to produce products that adversely affect people's health (that would be tobacco products and fossil fuel producing- and using-industries), then there will be more health costs as well.

So all of this should have been pretty obvious to any accountant. The SEC even provides the pyramid scheme graphic on their website. But instead the financial industry just redefined the Generally Accepted Accounting Principles and required less future liabilities funding on financial statements, making everyone think for a while that the problem wasn't really there. Of course, anyone with a brain should have been able to tell that derivatives and subprime loans and interest-only mortgages and junk bonds were investments that had no more long term viability than Ponzi schemes.
cartoon of US Financial Institutions wondering Ponzi? Illegal?
credit: thedailygrifter.blogspot.com
And yet here we are....
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1 comment:

Anonymous said...

Very concise analogy of our National sinking ship..all aboard.....bb