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A "Trillion" is Mind-Boggling: No, Even Worse!

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 21, 2012

IN THIS ISSUE:

1.  A “Trillion” is Mind-Boggling

2.  The “Tax the Rich” Argument

3.  Four $1+ Trillion Budget Deficits in a Row!

4.  Fed Sending Mixed Signals on QE3

Today’s Overview

I would wager (with odds) that very few Americans understand just how mind-bogglingly enormous $1 trillion is. The analogy I will share with you today will knock your socks off! It certainly did mine.

Yet our government is running trillion-dollar annual budget deficits like it’s no big deal. And it’s not just Obama – the first trillion-dollar deficit, which was incurred in FY2009, was actually the result of President George W. Bush’s budget, one of the few legitimate things Obama really inherited from “W.”

I begin today by summarizing a recent eye-opening analysis – a great video, actually – that concludes that our continued trillion-dollar deficits will send us into the abyss. I realize that this is nothing new to many of my readers, but we need to continually remind ourselves how we are willingly and knowingly sending our country into economic and financial ruin.

You will definitely want to watch this video and forward it on to others!

A “Trillion” is Mind-Boggling: No, Even Worse!

Most Americans know that a “trillion” dollars is a LOT of money. But with our government running trillion-dollar budget deficits for the last three years (soon to be four and then five), many people have become numb to the magnitude, unfortunately. I have seen a lot of attempts at putting the concept of a trillion in perspective, but the one that follows is the best I’ve seen.

  • 1 Million seconds is 12 days.
  • 1 Billion seconds is nearly 32 years.
  • 1 Trillion seconds is 31,688 years!

Read that again. And maybe again. Let it sink in for a few seconds. Does that not put a “trillion” in a better perspective than you’ve ever thought about it before? It certainly did for me. Sure, we all knew that a trillion was a huge number. But this analogy just nails it.

Currently, the US national debt is $15.931 trillion. That figure does not include tens of trillions more in unfunded liabilities for Medicare, Social Security, government pensions, etc. For purposes of discussion, let’s call the national debt $16 trillion, since we’ll be there before the end of this year. 

  • 16 times 31,688 years is 507,008 years!

That’s where we are today folks! There is simply no way our government will ever pay off this enormous debt. Yet buyers around the world still line up to purchase Treasury debt at near record low interest rates. The yield on 10-year Treasury notes recently fell to 1.4%, while 30-year T-bonds fell to 2.3%. Why would anyone loan the US money at such low rates? That’s a long discussion for another time.

The “Tax the Rich” Argument

Motivational speaker Tony Robbins produced a video earlier this year that should be required viewing for all Americans. In this 19-minute video, Robbins demonstrates the massive increases in taxes and the confiscation of wealth from “the rich” that would be required to balance our budget and begin to pay down our debt. I’m not the biggest fan of Tony Robbins, but if you watch this video, you’ll be shocked!

            To watch the video, CLICK HERE. It will be well worth your time.

Robbins demonstrates how much (or how little) revenue would be gained by various tax increases on the wealthy, such as:

  • 100% tax rate on family income above $250,000 per year
  • 100% of all the profits of Wal-Mart and Exxon Mobil
  • 100% corporate tax rate on Fortune 500 companies’ profits

These onerous tax rates would come nowhere near balancing the budget, as Robbins illustrates in the video with facts and figures. He then looks at actually confiscating wealth, such as:

  • Confiscating the combined annual salaries of all professional players
    in the NFL, Major League Baseball, the NBA and the NHL
  • Confiscating 100% of the wealth of the super-wealthy including
    Warren Buffett and Bill Gates

Please understand that Robbins is not proposing these draconian tax increases and wealth confiscation; he is merely using them to illustrate how much revenue they would create for the government.

The point of the video is that no amount of increased taxation would fully pay for what our government spends each year. More importantly, the video makes clear that, whether taxes are increased or not, we have to significantly CUT SPENDING at some point.

I highly recommend that you forward this video around to as many people as possible. It is loaded with facts, statistics and figures on our monstrous debt that most people have never seen.

Four $1+ Trillion Budget Deficits in a Row!

Let’s take a quick look at how the US budget deficits soared out of control in the last few years. Here are our annual budget deficits for the last six fiscal years, including this year’s estimate, from the Congressional Budget Office:

                        FY 2012*         $1.327 trillion             FY 2009           $1.413 trillion
                        FY 2011           $1.300 trillion             FY 2008           $459 billion
                        FY 2010           $1.293 trillion             FY 2007           $161 billion

Our national debt has exploded by $5.33 trillion in the last four years alone! The CBO estimates that the budget deficit in FY 2013 will decline to $901 billion, but that number is almost certainly too low given that the economy is not recovering as the CBO forecasted.

President Obama’s proposed federal budget for FY2013 called for spending totaling $3.8 trillion, the largest ever. Fortunately, that budget was defeated unanimously in Congress earlier this year. Since the Senate has not passed a budget in more than three years, we have no budget. Even so, that doesn’t mean Obama won’t spend $3.8 trillion if he is re-elected.

But is gets even scarier. The White House Office of Management and Budget projects that federal spending for the next 10 years will skyrocket to a cumulative $46.956 trillion! That averages out to apprx. $4.7 trillion a year, versus the estimate of $3.7 trillion for FY2012. The OMB projects that government spending will escalate to a whopping $5.8 trillion a year in 10 years.

Prediction: That will never happen! Then again, I probably would have made the same prediction if you told me 10 years ago that federal spending would be at $3.7 trillion a year today.

Interest Expense on the National Debt

Interest rates are near historic lows. I say “near” historic lows because rates on 30-year Treasury bonds and 10-year T-notes were at all-time lows earlier this summer. But over the last month or so, rates have surprisingly ticked up. 30-year T-bonds have moved from below 2.5% to 2.9%. The yield on 10-year Notes has jumped from 1.38% to near 1.9%.

Treasury Yield 30 Years

Most analysts agree that the latest jump in rates is only a “correction” and not a major change in the trend. They cite the fact that the Fed continues to buy long-term Treasuries in its effort to keep interest rates as low as possible. So this can’t be a major trend change in interest rates, some say. We’ll see. Anyway, that’s not my point today.

My point today is that with interest rates near historic lows, you would think that the government would be paying less to finance our national debt, right? Wrong! In fact, the debt service on the national debt was the highest in history in 2011, even though interest rates were near record lows. The dramatic increase in federal spending has more than offset the benefit of lower interest rates.

Most Americans pay little attention to the interest on our federal debt, but it’s a rapidly growing problem, and will become even more so whenever interest rates rise again (which has already started). The interest expense on our national debt includes the monthly interest for:

  • U.S. Treasury notes and bonds held by the public and inter-government agencies
  • Foreign and domestic series certificates of indebtedness, notes and bonds
  • Savings bonds
  • Government Account Series (GAS)
  • State and Local Government Series (SLGS) and other special purpose securities.

Amortized discount or premium on Treasury bills, notes and bonds is also included in the monthly interest expense. Take a look at the table below from the Treasury Department. As you can see, interest expense on the national debt has increased rather dramatically over the last 23 years, reaching an all-time high of $454.4 billion in 2011 – despite the fact that interest rates were very low last year.

INTEREST PAID ON THE NATIONAL DEBT

Interest Paid on the National Debt

I don’t have to tell you what will happen when interest rates go up and it becomes more and more expensive to finance our ever-growing mountain of debt.

Fed Sending Mixed Signals on QE3

Fed Chairman Ben Bernanke testified before the Senate Banking Committee on July 17. In his prepared remarks, he warned lawmakers about the looming fiscal cliff, and that if action is not taken to avoid automatic tax increases and spending cuts on January 2, the economy would fall into recession next year.

Regarding whether or not the Fed is considering QE3, Bernanke was once again vague, saying only that it would depend on the economy and the pace of jobs growth in “coming months.” The Fed Open Market Committee met on July 31-August 1. The policy statement following that meeting was little changed from previous FOMC statements earlier this year. With regard to QE3 or other stimulus, the statement read:

The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. [Emphasis added.]

While the language was tweaked ever so slightly, it was really nothing different. Basically, the FOMC is saying that the Fed stands ready to implement more stimulus, but only if it has to. The next FOMC meeting will be on September 12-13.

There is some division within the FOMC on the question of more QE or other stimulus. Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, and a voting member of the FOMC, said in a recent interview with The Associated Press that the Fed can only do so much to lower the 8.3% unemployment rate. He stated:

"There are a lot of people overestimating the extent to which monetary policy is capable of having any sustained effect on growth or labor markets."

Lacker has dissented from the past five FOMC policy statements. He has maintained that the Fed has done what it can to bolster a weak economy and that going further risks triggering high inflation. Obviously, he and Bernanke disagree.

In the wide-ranging interview, Lacker explained why he has objected to the Fed’s language in all five policy statements this year. The statements have said that the Fed plans to keep its key interest rate at record low levels until at least late 2014.
Lacker said the use of a specific date was confusing to the financial markets. He said his own forecast for the most likely time for the Fed to begin raising interest rates was late 2013 or even sooner.

The central bank has kept its benchmark Fed Funds rate, the interest that banks charge each other, at a record low of zero to 0.25% since December 2008. It began including a date for how long rates could stay at that low level in August 2011 when it said the plan was to keep rates at exceptionally low levels until at least mid-2013. It extended that date to late 2014 at its meeting in January and has retained that language at meetings since then.

So, all eyes will once again be on the Fed on September 13 when the next FOMC policy statement will be released. Bernanke is scheduled to hold a press conference after the meeting. That should be very interesting no matter what the Fed decides.

We should all pay special attention to the upcoming economic reports which may hold the key to whether the Fed launches QE3 at the next meeting, or not. Key among those reports will be the second estimate of 2Q GDP which comes out next Wednesday, August 29. The first estimate put 2Q GDP at only 1.5% (annual rate).

Finally, let’s not forget that Fed Chairman Bernanke is scheduled to give his annual speech at the Jackson Hole Economic Symposium on Friday, August 31. It will be interesting to see if he has any surprises in store this year.

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Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Bad Economic Policy is Killing Patient
http://www.washingtontimes.com/news/2012/aug/20/stop-global-economic-malpractice/

To Trim the Budget, Let’s Slash Corporate Welfare
http://www.forbes.com/sites/dougbandow/2012/08/20/where-to-cut-the-federal-budget-start-by-killing-corporate-welfare/

How Paul Ryan has changed the race
http://online.wsj.com/article/SB10000872396390443989204577601254048147454.html?mod=WSJ_Opinion_LEADTop

 


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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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