Jan. 11th, 2013

snousle: (cigar)
The series of dramas with budgets and appropriations has got me thinking about how to prepare for however its going to end. It's clear by this point that it isn't going to be pretty.

The current US national debt, divided by the number of US residents, is about $45K per person. Whether it's paid off through budget cuts and taxes, inflated away, or defaulted on, it's going to come out of someone's pocket. One way or another, the average American must now devote a full year of their economic output to paying it off. Whatever the situation, it's going to be equivalent to SOME sort of tax, because, on average, everyone is already $45K less wealthy than they think they are. The only question is how evenly that burden will be distributed.

This is on top of the current trillion-dollar annual deficit. The US has to reduce the debt AND reduce the deficit to remain sustainable. That's three thousand per person per year just to tread water.

Anyway, understanding the situation starts with understanding the major segments of the federal budget. Here's a handy chart:

At a high level, it's easy to understand because it breaks down into approximate fifths. You can make a little tune out of it: Em Em Ess Ess Dee Dee Dee. That's Medicare and Medicaid, Social Security, Defense Department, and Discretionary - those cover the first four fifths. What remains is "mandatory" spending (mandated by law, not subject to executive adjustment), and interest on the debt itself. All together, this federal spending accounts for about 24% of the whole economy. Trouble is, federal taxes are only collecting about 18% of GDP. The result is that 6% of all economic activivity is being paid for on credit, creating a hot potato of debt that nobody wants to own up to. This is demosclerosis in action, and is not a partisan issue - it appears to be the terminal condition of all stable democratic societies.

The degree of change required really is spectacular. Just to balance the budget, without paying off any existing debt, about two of those fifths has to go away, or taxes must increase by 50% across the board, forever, to bridge the gap created by future entitlement spending. Presumably the ideal solution would be some sort of compromise between the two, but even so, the necessary cuts are deep ones.

The peculiar thing about this situation is that so many people seem eager to take on more of that burden themselves. Old white Republicans who live on Social Security and Medicare want to "shrink government", which you can't do without shrinking entitlements, while young and productive workers are disproportionately willing to pay higher taxes to keep retirees from being cast out on the street. That's how it looks to me, anyway. There seems to be some disconnect there; it's not as if news media act to improve anyone's understanding. Very few budget bloviators can cite even remotely accurate figures, resulting in such responses as "eliminate foreign aid!!!" as if that's going to make any difference.

If the accumulated debt isn't paid through the collection of taxes, then it turns into a sort of tax on assets. Printing more money devalues existing money and serves as a tax on cash. Defaulting on the debt - presumably as a result of some constitutional crisis or collapse of government - means that investments based on treasury bonds are worth a lot less than we had hoped, and the value of those bonds is part of the valuation of all kinds of other assets, including a big chunk of 401K retirement accounts and other long-term stores of value. Social Security cuts draw down the effective wealth of everyone, whether they have other assets or not. If we assume some sort of partial or full default, the result for everyone with positive net worth is that their wealth is immediately diminished, but nobody can tell by how much.

It is useful to frame the debt battle as a contest between "income people" and "wealth people". You can imagine everyone's financial status as a dot on a scatterplot of income vs. net worth, and contemplate where on that plane the burden of the deficit will fall. Will it land mostly on the upper left, or the lower right? Nobody knows! But there will be a pitched battle between those who want to maintain the value of treasury bonds, and those who want to set them on fire and watch them burn.

(Curiously, I note that a number of "patriots" who like to make a stink about "upholding the constitution" will happily ignore the language of the 14th amendment declaring that "The validity of the public debt of the United States... shall not be questioned." Fucking hypocrites.)

Anyway, it's going to be interesting. I remain somewhat optimistic - just a few years ago, the California budget situation seemed impossible, so I was surprised to hear that our Democratic governor has just issued a balanced budget - suck on that, Republicans! - illustrating that seemingly small twists of fate can reverse even the most hopeless situations. But the federal problem remains much, much larger, and there's no avoiding the pain.

So enough with the wailing and gnashing of teeth, it's time to hunker down and ride it out. For the past ten years, I've anticipated and positioned our household for a future of economic disruption and/or extremely high taxes - to that end, we have created for ourselves a low-cost living situation that isn't dependent on having much in the way of cash flow. I like to say that my greatest accomplishment in life is to "live in poverty" - our core budget is right at the official poverty level for three single men. This is, I admit, a slight exaggeration, since we spend quite a bit more than that in practice, but that's only because we want to, not because we need to. Unemployment? Crushing tax burdens? Bring it on!

I don't share the apocalyptic bent of some people I know, but at the same time the whole range of possible outcomes is factored into my decisions. Mostly, that means "grin and bear it" - I work under the assumption of a 50% devaluation of every investment, with the understanding that the actual distribution of loss will be erratic and unpredictable. I'm also going to be holding some assets in Canada, whose dollar is looking increasingly stable. I don't place a big emphasis on gold, because it has been historically too volatile to serve as a secure investment. But in the event of a total currency collapse, the five coins we have stashed away would go a long way indeed; they'd probably be worth a year's salary in whatever regime would replace the current one. Needless to say, buying more of it back in '99 or thereabouts would have been a real good idea. That was one of many expensive mistakes I've made.

And yeah, guns. I don't have any of my own per se, but you might say I've outsourced my self defense to those better schooled in the art. ;-)

My prescription: less anger, more action. Know the numbers, accept the reality of the situation, and prepare yourself. The United States is a senescent country in a world where, eventually, everything grows old and dies. Just because we can't imagine what comes next doesn't mean it has to be awful. So long as our infrastructure remains in place, the US will always be a wealthy country. Even in the worst case, there's a lot to be said for new beginnings.


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