Congress is Worthless for Limiting Spending

It is hard for people to grasp the magnitude of the U.S. debt problem—and what the ultimate “day of reckoning” will be. The national debt reached $1 trillion for the first time in 2009. It is now well over $18 trillion. That's the official total; the real total is much higher. Lawrence Kotlikoff, a professor of economics at Boston University, has calculated that based on Congressional Budget Office data the real debt is $202 trillion, more than eleven times the official debt. It is also about 3 times what the entire world produces, that is, global gross domestic product (GDP), which is $72 trillion. In 2013 Kotlikoff updated his debt calculation to $222. That's $700,000 per person, $1.9 million per household.

Kotlikoff says, “ Congress has been very careful over the years to label most of its liabilities 'unofficial' to keep them off the books and far in the future.” Professor Paul Gutterman says, “Congress plays games with the budget in so many ways that it is hardly a stretch to say that if it was held to the same accounting standards as public corporations, the entire Congress would be in jail for fraud.” Here are two examples of accounting gimmicks identified by Gutterman, which I describe in my book The Impending Monetary Revolution, the Dollar and Gold. Second Edition:

“Congress only budgets out ten years. The government receives immediate benefits of increased revenue from Roth individual retirement accounts, but the lost revenue occurs beyond ten years so is treated as never happening. In the 2013 fiscal-cliff agreement, this 'long-term revenue loser was scored as raising $12 billion over the next ten years.'

“The Congressional Budget Office says the four largest student loan programs will yield official saving of $135 billion in fiscal years 2015-2024; but it notes that under fair value accounting that is practiced in the real world, those programs would likely cost $88 billion rather than save $135 billion.”

Underlying the accounting gimmicks are fundamental realities that the gimmicks cannot mask indefinitely or prevent from asserting themselves as the future unfolds. Kotlikoff explains:“We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

“This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck....It will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills. Worse than Greece. Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices.”

Both Republicans and Democrats have created the problem of government spending, and both have failed to solve it. Since 1980 the U.S. national debt ceiling has been raised 42 times, and both parties were complicit in that. In 2008 the deficit under George W. Bush was $458.6 billion, less than half a trillion, a record at the time. While running for president in 2008 Obama promised to cut the deficit in half by the end of his first term. Ha! That promise was worth no more than his oft-repeated promise that under Obamacare people could keep their insurance and their doctor and that the average family would save $2,500 on health insurance. Obama became the biggest spender in world history. In just the first six years of his presidency his deficits added more than $7 trillion to the national debt, more than all the presidents in our history from George Washington through George W. Bush combined. And the national debt limit was raised seven times under Obama.

Raising the debt limit has become a meaningless formality. Everyone knows it is a hollow gesture that will not control spending, because Congress will routinely raise the limit as it is approached in order to accommodate greater spending. Or the law will simply be violated as Obama has done:

The Budget Control Act of 2011was supposed to restrain federal spending. But in return for multiple rounds of spending cuts for the decade 2012 through fiscal 2021, it raised the debt ceiling $400 billion immediately and provided for even further increases. The act provided that if the distribution of spending cuts could not be agreed upon in those coming years, across-the-board cuts would be made, known as sequestration. The sequester budget cuts were subsequently postponed and reduced somewhat. Then Obama unilaterally reneged on his commitment to the law. The Washington Times reported, “Four years after agreeing to 'sequestration' budget cuts, the White House has emphatically told Congress that President Obama will no longer abide by them and will use his veto to insist that lawmakers boost spending on defense and domestic programs alike. In letters to the Republican chairmen of the House and Senate spending committees, Office of Management and Budget Director Shaun Donovan said sequestration 'was never intended to take effect' and that it was time to officially end the budget tool.” Though the president expects everyone else to obey the laws, he was flatly not going to do so. (This man was a lawyer?)

Now sequestration will henceforth be a meaningless formality just like raising the debt ceiling. The precedent has just been established which destroys it usefulness as a budget tool.

The Bipartison Budget Act of 2015, which has now been passed, is an even more shameful—and extreme—example of the familiar pattern of increasing spending along with the debt limit and pushing reform into the future. It accedes to Obama's violation of the law by dispensing with the sequestration budget cuts, not just the current ones but to sequestration previously agreed to for all the years through fiscal 2021. It would increase spending by $85 billion over the next three years, suspend the debt limit until March 16, 2017 and allow unlimited spending and borrowing until then. Significant cuts would not take place until 2015.

The underhanded way in which the law was crafted and passed is as despicable as the law itself is. It was negotiated in secret closed-door meetings of just four people: Speaker John Boehner, House Minority Leader Nancy Pelosi, Senate Minority Leader Harry Reid and Senate Majority Leader Mitch McConnell. Boehner had kept his party members in the House in the dark until the final product was introduced on October 26, with only a few days to the deadline of November 2 for avoiding financial default. Hence it was really too late for any meaningful opposition or even any input from Boehner's Republican colleagues. Obviously that was the way Boehner wanted it. He didn't want his own party members to interfere with his capitulation to Pelosi and Reid. He was more interested in satisfying them than members of his own party who elected him as speaker. When voters elect House members, they choose candidates who reflect their views and expect their voices will be heard in Washington. If those elected are excluded by their party leader from representing the views of the people who elect them, why should anyone bother to vote for a Republican? And why would anyone want to run on the Republican ticket? Now you know why Boehner resigned. After what he did to those who elected him to be speaker, you can sure they would never vote for him as speaker again.

Senator Mike Lee is a former law clerk at the U.S. Supreme Court and author of the book “Our Lost Constitution.” Speaking on the floor of the Senate, he called the new budget deal a “horrible piece of legislation,...a product of an unfair, dysfunctional and fundamentally undemocratic process, a process that is virtually indistinguishable from what we promised the American people a GOP-controlled Congress would bring to an end.”

A major detriment to controlling future spending—as well as his own party's political future—was Boehner's acquiescence to pushing the date for further budget and debt ceiling legislation to 2017. In addition to opening the door to unlimited spending in the meantime, it downgraded the importance of spending as an issue in the 2016 elections, making it more difficult for Republican candidates to win.

For many decades there have been attempts to control federal spending. These include proposed constitutional amendments requiring a balanced budget and returning to a gold standard, both of which are desirable and would not have permitted the expansion of federal spending we have seen. All have failed because the procedure employed required support from too many members of Congress who benefit from the status quo and don't want it changed. The procedure, which has been used for all past amendments to the Constitution, requires approval of two-thirds of both Houses of Congress. But the Constitution provides a second procedure for amendments, which has never been used. It provides that a convention be called for amendments if two-thirds of the legislatures of the states agree. The U.S. House and Senate will be left out of the loop.

Once a new convention is called, it cannot be limited to a single amendment; any number of amendments can be brought up for consideration. This would set the stage for adoption of amendments to overturn decisions of the Supreme Court, as I mention in my book. I shall mention here only one that should be overturned. The Constitution limits the legislative powers of the federal government; but in case United States v. Butler, 1936, the Supreme Court ruled that “the power to authorize appropriations of public money for public purposes is not limited by the direct grants of legislative power found in the Constitution.” I maintain that if government has no power to act beyond the enumerated powers, it should have no power to spend beyond those limitations either. A constitutional amendment to this effect would greatly reduce federal spending, but obviously it will never happen under the usual procedure for amendments, which involves Congress. Congress is never going to vote to limit its power to spend.

Another constitutional amendment I recommend pertains to unfunded mandates. These allow federal politicians to please their constituents—and garner votes from them—with spending the federal government does not pay for, because the costs are pushed onto the states.

For example, under Obamacare (Affordable Care Act) and the Dodd-Frank financial reform the president signed in 2010, the federal government imposed 86 unfunded mandates on state and local governments. There are six paperwork requirements related to ACA that each impose more than one million hours on local governments. Combined, these six impose 27.1 million paperwork burden hours that cost $880 million. Since Obama took office, his regulators have added $35 billion in unfunded regulatory costs and at least 75 million paperwork burden hours on state and local governments. These don't show up as federal expenditures, but Americans still have to pay for them.

States have no power to print money and must pay through taxes for federal mandates imposed upon them. State taxes should be for purposes determined by state government; federal taxes for federal purposes. We need a constitutional amendment that requires all federal mandates thrust upon the states must be paid by the federal government. That would certainly reduce the proclivity of the federal government for expanding its powers to dictate what the states must do and force them to pay for it.

Opponents of a convention by the states for proposing Constitutional amendments sometimes claim it might become a “runaway” convention, that too many amendments might be dangerous. This is absurd. The new convention would simply propose amendments. They would not take effect unless ratified by the legislatures of three-fourths of the states. That is the same process of ratification that was required for all previous amendments, which were achieved under the procedure originated by Congress. That is a very high bar to pass. If passed, it is far more likely the effect would be beneficial rather than dangerous. What we do know right now is that today's “runaway” government—of “runaway” spending—is already dangerous. And constitutional amendments such as I have suggest are our best option.

U.S. Economy Is Worse Than Claimed

            Courtesy of ShadowStats.com

        

The above chart shows a growing divergence between the Consumer Price Index and what it would be if the method of calculation had remained consistent. Beginning in 1983 the government changed its method of calculation to show lower inflation by excluding food and energy, claiming they were too volatile to be reliable indicators. The result is the so-called “core inflation” CPI, which is a favorite of the Federal Reserve. The latest figure for the CPI reported by the Bureau of Labor Statistics is 0.4% (for August and also July), but if calculated by the method used in 1980 the inflation rate would be 7½ percent, as shown by Shadow Government Statistics (ShadowStats.com).

The chart shows the difference in the inflation rate only from the change in 1983. The divergence would be even greater if the effects of several later adjustments were also included. For example, a reconfiguration of this statistic by the 1995/96 Boskin Commission made the CPI an even worse indicator of the cost of living for most Americans. It has been estimated that from 1996 to 2006 this adjustment reduced by over $680 billion what the U.S. Government would have paid in cost-of-living increases in salaries, social security, federal employee pensions, and other benefits.

 

It seems no one attempted to objectively determine the real cost of living without the influence of the flawed government model. The Chapwood Index sought to remedy that. Its founder, Ed Butowsky, said it is “our attempt to help people understand why they feel like they aren’t keeping up and why, as they get older, they feel as though their money does not go as far – even when they’re following the rules, working hard and supposedly beating inflation.”

The Chapwood Index reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation. The latest average price increase of the 50 cities is 8.9%. Not a single one of the cities was even close to the near zero (0.4%) inflation of the CPI reported by the U.S. Bureau of Labor Statistics. The lowest of the 50 cities in the Chapwood survey was Tucson, Arizona, at 5.7%. http://www.chapwoodindex.com/

Butowsky notes that routine salary increases and corporate pensions are often keyed to the CPI. “The middle class has seen its purchasing power decline dramatically in the last three decades, forcing more and more people to seek entitlements when their savings are gone. And as long as pay raises and benefit increases are tied to a false CPI, this trend will continue.” The Chapwood Index shows where people actually spend their money. The CPI is not a true indicator of the cost of living since it excludes food and energy, which are not only necessities but for many people their largest expenditures.

Like the inflation numbers, the unemployment statistics have been manipulated by the government to present a more favorable picture.

Courtesy of ShadowStats.com

John Williams, founder of Shadow Government Statistic, says, “The seasonally-adjusted SGS Alternate Unemployment Rate depicts current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers. The U-3 unemployment rate is the monthly headline number [Note that this is the least complete category—has the most exclusions—and thus shows the lowest, most favorable unemployment numbers]. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.”

Notice that the most complete measure of unemployment (SGS) places today's unemployment rate at 23 percent. That is not only worse than in the recession of 2007-09 but comparable to what occurred in the Great Depression of the 1930s. The so-called recovery from our recent recession has been the weakest since World War II despite the most massive effort in history to promote economic growth and employment with the stimulus of “quantitative easing,” which is simply a scholarly-sounding term for printing money. 

In addition to the above charts, there are many other indications that quantitative easing has not benefited the economy. The labor participation rate (those working or looking for work) fell in September 2015 to 62.4%, the lowest level since 1977. Wages have increased by the slowest rate since the 1980s, and median household incomes are still falling, down 1.5% in 2014 from 2013, according to new census data available mid-September 2015.

Small businesses account for most new jobs and employ about half of the private workforce. But small business deaths now exceed births for the first time since the Census Bureau began keeping records more than 30 years ago.

The September jobs report was a jolt. It said only 142,000 new jobs were created, compared to economists' forecast of 206,000. The numbers for August and July were revised downward by 59,000, showing an average of only 167,000 for the third quarter. That's down from the monthly average of 198,000 for all of 2015 so far, which is down from 260,000 a month in 2014. (Previously, April and May were revised downward by 54,000 jobs.) And of the 142,000 jobs created in September, only 118,000 were in the private sector. Some 350,000 Americans left the labor force in September. An all-time record of 94 million people are not employed or actively looking for work.

Obama's $787 billion (later adjusted to over $800 billion) stimulus program was a failure of the Keynesian idea that government spending produces a multiplier effect as dollars would be spent again and again throughout the economy, multiplying wealth. Franklin Roosevelt tried the same thing. Didn't work then—in fact, prolonged the depression. Didn't work for Obama either. Keynes' biographer Hunter Lewis says, “There is just no evidence” that spending ever cured a recession, and Keynes “wasn't much interested in evidence.” Harvard economics professor Robert Barro has written, “What few people know is that there is no meaningful theoretical or empirical support for the Keynesian position.” I discuss this subject at greater length in my book, but here is a convincing admission about it by Roosevelt's treasury secretary before the House Ways and Means Committee on May 9, 1939: “We are spending more than we have ever spent before and it does not work....After eight years of this Administration we have just as much unemployment as when we started....And an enormous debt to boot.”

Here is a more recent statement, in July 2015, from a paper by Stephen Williamson, economist and vice president of the St. Louis Federal Reserve Bank: "There is no work, to my knowledge, that establishes a link from QE [quantitative easing, i.e., bond-buying to increase the money supply] to the ultimate goal of the Fed—inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation....Indeed, mainstream monetary theory and the experience of Japan for the last 20 years tells us that extended periods of ZIRP [zero-interest-rate policy] lead to low inflation, or even deflation. [emphasis added.]"

Japan is now in its fourth recession since 2008. Annual growth has averaged 0.85% since 1992, and Standard & Poor's just downgraded the ratings on its massive national debt, which the other two major ratings agencies had already downgraded.

Shinzo Abe was elected prime minister by campaigning for a more aggressive version of the monetary stimulus policies that have failed Japan for 20 years. He said, “Countries around the world are printing more money to boost their export competitiveness. Japan must do so too.” That was his prescription for a degree of “needed” inflation to bring the country out of economic stagnation and avoid the growing fear that deflation was now a greater threat than inflation. On October 31, 2014, Japan's central bank and its main government pension fund said they would pump trillions more yen into the long-stagnant economy, now growing at 0.2%. The bank of Japan would expand its asset-buying program by as much as 33 %. It would now buy at the market more than twice the amount of new bonds issued by the government, and it would buy not just government bonds but stocks, ETFs, and real estate funds.

The European Central Bank is engaged in a QE policy of buying 60 billion euros ($67.5 billion) per month in hopes of raising inflation by increasing the money supply and reducing borrowing costs. That program, which amounts to more than a trillion euros ($1.1 trillion), is scheduled to end in September 2016; but on September 3, 2015 ECB President Mario Draghi said he is prepared to expand the program. He previously said he would do “whatever it takes” to save the euro. Deflation could stifle consumer spending and make it more difficult for European governments and businesses to repay debts. In response to Draghi's comments, the euro tumbled 1% against the dollar. Jean-Michel Six, Standard & Poor's chief economist for Europe, said he would not be surprised if the ECB's program extended into 2018 and reached 2.4 trillion euros, twice what was initially committed.

“The next stage for both the Bank of Japan and the ECB is more easing; they’re going to keep putting fuel on the fire, but at some point the fire’s big and there’s nothing left to burn -- What do we do?” said Philip Moffitt, the Asia-Pacific head of fixed income at Goldman Sachs Asset Management, which oversees about $1 trillion globally. “So your immediate response to that would be a huge sell-off in risk assets.”

The stock market is poised for a huge sell-off of risk assets.  Stocks are terribly overpriced in view of the economic weaknesses I've cited. 

Since 2008 the combined balance sheets of the world's five largest banks have increased by a staggering $9 trillion. This has inflated financial assets just like excess credit inflated the stock market bubble in the 1920s and the housing/mortgage bubble in the 2000s. Today's stock prices have also been inflated by companies buying back their own stocks with near-zero interest rate borrowing. And those same low interest rates have led many people to withdraw from traditional savings and shift to riskier investments such as the stock market in hopes of higher returns—and very likely also because of concern about the future value of the dollar. What is the point of saving for the future when interest on savings is so low and printing vastly more dollars will surely make the currency worth less in the future? If central banks achieve the 2% inflation they now view as optimal, nearly half the principal of today's savings accounts—43%—will disappear in 25 years. Do you want to settle for that or roll the dice for greater return? With those two bad choices, gold becomes more attractive.

With all the fiat money being printed by central banks, it should be no surprise that people all over the world have been turning to gold. As we have pointed out in previous writings, there is a global shift of gold from the West to the East and increased demand for physical possession of gold. The Shanghai Gold Exchange has become the world's largest gold market, and here we are talking about physical delivery. According to the China Gold Association Yearbook, China in 2014 imported at least 1,250 tonnes and domestically mined 452 tonnes, for a total of 1,702 tonnes. In the week ending September 25, 2015, the Shanghai Exchange delivered over 65 tonnes of gold, making a year-to-date total of 1,958.7 tons—an annual rate of nearly 2700 tonnes, which represents about 90 percent of world's gold mine production this year.

The remaining 10 percent cannot possibly meet the demand. Indian demand is conservatively estimated at 950 tonnes, and there is little variation in this since it is determined largely by cultural and religious factors. Some of this demand will no doubt be met by smuggling and recycling of “scrap” gold, but those cannot possibly make up the difference. Nor have we included here any demand from other Asian countries, the Middle East, Europe and the United States, which collectively usually account for up to 50% of global demand. Most likely China has grossly understated the amount of gold it produces domestically, but in any case only a far higher price will determine how newly-mined gold is rationed to world demand. 

President Franklin Roosevelt outlawed private ownership of gold in the 1930s, but there remained one final link between the dollar and gold. Foreign central banks could still exchange dollars for gold until 1971, when President Nixon ended that policy.

When Deng Xiaoping ascended to power in China, he made many far reaching market reforms that transformed the rigid, backward communist nation into an economic powerhouse. Through its exports to the U.S., it accumulated trillions of dollars. Some of these were used to buy U.S. Treasury Bonds—in effect, recycling China's trade-surplus dollars back into the U.S. There were benefits to both sides. China could use the dollars for investment in developing the country and paying wages for its workers, and the U.S. government needed a buyer for its bonds to pay for its huge deficit spending.

It seemed that both sides were “trapped” in a relationship that neither wanted to give up nor could see a way out of. But China grew increasingly uncomfortable about accumulating greater amounts of dollars whose future value would be eroded by the expansion process it was financing. China was fearful that U.S. printing of money would lead to inflation and a hard fall of the dollar, which would seriously reduce the value of China's holding. In 2009 Zhang of the China Gold Association stated: “In view of the declining US dollar value, it is paramount that China steps up gold reserves. How to do this is the only question that China is debating these days. The possible steps include opening up new gold mines, aggressively going for gold mining, buying gold from the open market etc. All said and done, it is imperative that China needs to buy more gold,”

China has done all the things Zhang recommended, and more. For instance, the government takes out ads on television urging people to buy gold. It has established gold stores throughout the country. They look like jewelry stores but exist to sell gold. Any person can walk into any such store or bank and buy gold for cash. No questions asked. It's all part of the goal of “storing wealth among the people.”

Meanwhile, China's currency, the yuan, has climbed in stature. It is now in fourth place as the most-used currency in cross-border payments, having surpassed the Japanese yen in August. As recently as 2012, it was in twelfth place. It is now behind only the U.S. Dollar, the euro, and the British pound. The volume of foreign exchange trades in yuan reached more than a million in a single month in August, rising 50% from the same period last year. More than 1,000 banks in 100 countries can now use the yuan. According to a Bank of England survey, trading in the yuan rose 25% in the six months to April this year while trading in other currencies fell 8% on average.

The London Metal Exchange, the oldest futures exchange in the world, in now owned by the Hong Kong Exchanges and Clearing Ltd., which has launched yuan-denominated futures contracts for some industrial metals.

China is no longer “trapped” into buying U.S. treasuries to finance U.S. profligate spending. Although China and other countries can no longer exchange dollars for U.S. Treasury gold, they can instead exchange their dollars for gold on the Shanghai Gold Exchange and other exchanges.

The New York Comex is the leader in gold futures contracts, accounting for 82% of the world trade in them. But the overwhelming majority of these do not involve any physical exchange of the metal. They are simply paper trades because most positions are closed out before the delivery date. A buyer will almost always sell his contract before delivery is due, and a short seller will do just the opposite. Neither trader will see the gold, and the Comex will have exactly the same amount of gold in storage as before those traders participated. The Comex warehouses gold to provide a delivery option, but historically most participants haven't used it. That has changed in the last few years.

Recently the website zerohedge.com, a highly respected observer and analyst of monetary happenings, noted that the Comex supply of deliverable gold had declined to barely 10 tons, its lowest ever, resulting in a record-high ratio of 124 ounces of outstanding open interest for every physical ounce of gold in storage. Fears of default were quickly calmed by the Comex “boosting its eligible gold by a whopping 78% overnight, from 362K ounces to 643K,...However, this was not achieved with an infusion of actual new gold into the Comex, but thanks to JPM [J.P. Morgan] reclassifying 276K ounces of gold from the Eligible into the Registered category, even as actual eligible gold continues quietly hemorrhaging out of the Comex.”

Delivery troubles on the Comex and increased demand for delivery by buyers, fearing they may have problems doing so later, point to a higher gold price. That does not augur well for the dollar, but another trend is developing that is also negative for the dollar. In an article headlined “Central Banks Dump U.S. Debt,” the Wall Street Journal stated: “Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.

“Sales by China, Russia, Brazil and Taiwan are the latest sign of an emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt....China, the biggest owner of U.S. treasury securities, owned $1.241 Trillion at the end of July, according to the latest data from the Treasury. That is down from the record $1.371 trillion in November 2013."