A) The "Fundamentals" they're basing our economy on are ALL WRONG.We have been building America's & the world's economy for the past 40+ years on credit. Government, business & personal debt has been soaring beyond all measures of sanity since the advent of extended borrowing & credit cards. American business P/E, P&L ratios have never been so burdened with debt. American families & consumers have never carried such high credit balances, nearly $40,000 per household. The National debt & unfunded liabilities are an astronomically unmanageable $60+ TRILLION!, and rising by the second! America is on the precipice of implosion. This gun with a hair trigger is loaded, cocked, & aimed squarely on our head...
B) America is a fragmented nation and increasingly so. We are fragmented in faith, in politics, in ethnicity, in creed, in economy, in social strata, and all being herded to rally under a decidedly socialist banner (agenda & system). The US Gov't has never been so distant from its majority constituents, and it being the most liberal in US history doesn't do it justice. Yet, the minority "liberal" factions among our populace drive our nation's mechanisms. This "liberalism" is but one symptom of our overall abandonment of our Christian faith & heritage and America's moral & spiritual degeneration.
C) The world is poised for transition. Not since WWII have countries & nations been in such upheaval; economically, politically AND religiously. The rise of Islamic terrorism, nuclear capability & oil domination are growing threats our nation has never faced before, and never been so ill-equipped to deal with the challenges. Indeterminate wars & conflicts in Iraq & Afghanistan have strapped us for years, with no clear-cut solutions or final results in sight. All major powers are facing global economic peril, even to the point of bankruptcy. Unemployment, business & financial collapse, riots, civil unrest, crime, social & familial breakdowns, and harsh political divisions are daily headlines around the world.
D) Even our planet is in turmoil. Is it global warming or ice age? Record temperature extremes are noted somewhere nearly every day. Climate & earth "disasters" ( floods, droughts, hurricanes, tornadoes, tsunamis, typhoons, earthquakes, snowfalls, you name it, are swinging four-fold from one end of the pendulum to the other (See OxFam Report, Nov 2007), "The total number of natural disasters worldwide now averages 400–500 a year, up from an average of 125 in the early 1980s". There's no telling what the next great, or near great, catastrophe(s) might be...
E) Last, but certainly foremost, is the verity of Scripture, YHWH's Holy Word, The Holy Bible. Biblical prophecy and Yeshua's own words foretell us of these events. They are not myths or possible scenarios, but the future as it will occur. While we may not comprehend specific details in regard to every prophecy, some details are without question hardcore. The re-establishment of the nation of Israel in 1948 and re-acquisition of Jerusalem in 1967 are profound Bible "End of the Age of the Gentiles" promises going back nearly 3000 years.The End Times prophecy of knowledge "accelerating" in technology, science, medicine, etc. was given to Daniel nearly 600 years before Yeshua's earthly ministry! The travail of the earth, its peoples and the heavens, are well described by Yeshua in the Gospels according to Matthew, Mark & Luke, and in His Revelation to John.
I'm not stating we're entering the Tribulation period, not even. I stating we're nearing the End of the Age of the Gentiles. The stage is approaching completion for the One World Order, and the appearance of THE ANTI-CHRIST, whomever he may be.
"The generation shall not pass before these things begin to happen."
(Matt 24:34, Mark 13:30, Luke 21:32)
A generation can mean 40, 60, 80 or 120 years according to Hebrew definition. This "generation" began in either 1948 or 1967, depending on one's assessment of the "fig tree" parable. I lean more toward the 1967 demarcation. But, either way, we're still well within the time frames. And, it means things are going to get pretty interesting & scary in the years to come.
So, you decide where we are, and what's ahead. I know whom I believe...
____________NEWS & COMMENTARY_______________
The lag between cause and effect
Exclusive: James M. Carrillo reveals what to expect in 2009 and beyond
Posted: January 14, 2009
11:32 pm Eastern
Many people are wondering why gold isn't exploding upwards while others believe gold has topped out and is set to decline. The truth most likely is someplace in between the two as the battle between bulls and bears rages on.
My views always will be based on both technical and fundamental analysis. I use both to make my decisions not only on where I work but where I store my money. Last year I was a firm believer that the stock market was grossly overvalued, profits vs. earnings were skewed and that at some point the technical aspects would reflect the fundamentals. Many of you know how adamant I became in January 2008 about an imminent decline in the stock market. Why? I used both technical and fundamental analysis.
In 2007 the fundamentals were saying that PE ratios were out of whack and that the housing boom was bust, everything said sell yet the market continued to climb. Why? Technically stocks were still in a bull market. Traders and money managers will stay long despite fundamentals until they get a technical sell signal. When you get both technical and fundamental signals money will be made. You have most likely heard "buy the dips" or "sell the rallies" many times.
As can be seen by the chart below, the market I use to monitor the health of the S&P 500 was in an upward march from the technical break out in the second quarter of 2003 until the technical breakout to the downside in December of 2007. This is why I became a huge stock bear. BOTH technical and fundamental factors screamed SELL. But it wasn't until May 2008 that the effect began to be felt.
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Why did gold go down? The enormity of the losses in stocks completely destroyed brokerage company profits and balance sheets, leading to the meltdown of the financial institutions and companies were awash in debt. Hedge companies went bust, banks went bust and you know the rest. The only asset class that had made money was commodities, which later were destroyed by the weak fundamentals of the economy. They then declined rapidly once the technical aspects confirmed the fact in September of 2008. Once again notice the lag between cause and effect.
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Money poured out of all paper assets and flooded into the liquidity of dollars. As I have told many of you I think this will go down as the worst move ever made. Kind of like jumping out of a hot frying pan directly into the fire itself. Why did the dollar rise? When you sell assets like stocks and commodities those funds initially are converted into dollars. In essence you – and everyone else – were buying dollars which reversed course rapidly. This led to a decline in gold prices even though the fundamentals said buy , buy, buy gold. The technical side became short term weak and the dollar, despite its horrid fundamentals technically, became a buy! This signal in my opinion was to be avoided because it is NOT confirmed fundamentally, as explained later in this article on money supply growth.
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The dollar now is still on the buy side, however the fundamentals say stay the heck OUT. A monthly close below the .79 cent level triggers another massive sell signal confirmed by gold's break which did not happen in 2005. That is why it is an unconfirmed buy and also based on extremely poor fundamentals.
Why are the U. S. dollar fundamentals so bad? Mass creation! If you take the time to look at the Federal Reserve site and look up the money supply growth you will note that we have created/printed more dollars in the past three months than in almost the entire history of the federal reserve! They are not done yet. This new money is backed by ONLY the full faith and credit of the United States which has lost faith internationally and within our own borders, and has its credit being downgraded worldwide. If it were you and me they would be repossessing the house.
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GOLD Analysis
One thing that should be apparent by now is the lag between cause and effect. In 2007 there was no fundamental reason for stocks to be rising except the technical aspects of the market were still in place.
There was no reason for commodity prices to continue their upward spiral until July of 2008 with world economies melting down. There was no reason for the dollar to explode upward with such dismal fundamentals.
Go back and note the S&P 500 graph. See after the break below the moving averages how the market then snapped back to the break point before the huge downward plunge. If we are at all lucky this pattern will occur in gold in order to give us all a chance to accumulate.
Note on the chart below we know the fundamentals are with gold to rise, but as of the close of January 31, 2008, we have confirmed a major break technically! The last piece of the puzzle will be the double confirmation with the dollar breaking below .79 cents. If you aren't in gold by then you may find yourself chasing a move that could be one of the most explosive in history. If there is any supply.
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GOLD
Gold actually posted a 5.5 percent gain in 2008 despite the financial ruins of most markets and a rising dollar. Gold is the anti-dollar and it mirrors its value. Based on my research on both the fundamental supply shortages and huge worldwide demand of gold coupled with the unprecedented mass creation of paper dollars, terribly weak stock technical and fundamental appeal, it appears gold will be the best play of the next few years. If we are lucky we will get a choppy sideways pattern until August with a moon shot move up into 2010. However my stance is better a year too early than five minutes too late. Accumulate gold now before the dollar falls into the abyss.
Predictions
Yes predictions. They are based on over 30 years of experience. No feather in my cap but my overall track record speaks for itself. In 1978 I began buying gold as a college student studying economics and gained a position with one of the premier precious metals dealers in the country. I noted that markets were going to turn when interest rates hit 20 percent and they did. In 1982 I became a stock and commodity broker. In 1986 I also joined a firm to deal with what I saw as a coming boom, "information technology". That worked out very well. In 1999 I saw the rapid money supply growth prior to Y2K and started watching gold again very closely. After 9/11 I saw more money creation. Then gold finally gave me the technical buy signal, coupled with its fundamentals, I began buying.
In 2004 due to unrealistic low interest rates from 9/11, I told my wife we just won the lottery in real estate and convinced her (that was not easy) that we should sell all of our real estate and go to gold rather than cash and relocate the family to Arizona, pay cash for a modest home and let the economy go through what I felt would be a major adjustment. Family and friends thought I had lost my mind. In 2004 I decided to come to Swiss America rather than just sit around watching my investments. There are those who make things happen; those who watch things happen; and those who don't know what the heck happened.
2009-2010 – STOCKS – Will chop in a wide range as base building begins. I see a new low in the second through fourth quarter of 2009. The Dow will base build after this new low possibly in the 6,000-5,000 area for about five years. However, it could get worse. Personal credit will doom many more banks, unemployment will surge, many businesses will go bankrupt or close their doors in the first half of '09. A record number of municipalities will fail. States will be needing bailout money. Don't be tempted this year. Stay away.
REAL ESTATE – A bottom will hit after 2009 but the doom and gloom will spread to the commercial sector. I see massive problems in commercial real estate in '09. There will be bargains if you go to the banks themselves but use the site www.zillow.com and try not to pay MUCH more than the 1999 price. Yes 1999.
The U.S. Dollar – Will sink by 10-20 percent or more by 2010.
GOLD – Could go to $2,000.00 very rapidly by the end of 2010. This is highly unpredictable but should be amazingly profitable.
BONDS/Bills/CD's – If you like negative yields for safety go for it. I prefer to wait for the double digit rates coming in a few years when the economy is deemed stable. At that point the Fed will be jacking up interest rates to slow down the inflation that they caused by the mass printing of dollars. Remember there is always a lag between cause and effect. Don't wait to buy gold, buy gold and wait!
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Deficits, Debt and Looming Disaster: Reform of Entitlement Programs May Be the Only Hope
For the fiscal year 2008, the federal government’s deficit totaled $455 billion, the largest ever for a single year. In the final days of the fiscal year, which ended Sept. 30, the total federal debt rose above $10 trillion for the first time. Forecasts for 2009 anticipate an even larger deficit.[1] As a new president and Congress take office, government deficits and the public debt will undoubtedly be a factor in economic policy discussions, especially in light of ongoing financial uncertainty and economic weakness.
From an economic perspective, the size of the deficit and debt per se are not necessarily as important as the underlying policies of spending and taxation. By their very nature, deficits reflect an imbalance between expenditures and receipts. Such imbalances need not be a concern and might, in fact, be desirable under some circumstances. And while rising government debt is often associated with direct economic costs, including higher interest rates and lower rates of private investment, evidence on the significance of these effects is mixed.
Nevertheless, when deficits are part of a fundamental structural imbalance in the long term, they signal a need for serious attention and reform. In a long-run fiscal analysis of U.S. federal government programs, this is demonstrably the case.
Government Accounting
The top panel of Figure 1 shows two measures of the federal deficit. The blue line is the official measure reported by the government—$455 billion for fiscal 2008. The red line tracks the change in the total outstanding national debt from year to year. By this measure, the deficit exceeded $1 trillion in 2008.[2] Note that the reported unified budget showed a surplus in 1998 through 2001; however, the change in the national debt has recorded red ink in every fiscal year since 1969. The difference between these two measures primarily reflects the treatment of the Social Security trust funds.[3]
By conventional accounting standards, the deficit is equal to the difference between total government spending and total revenues received, over a particular period of time. The debt equals the sum of previously accumulated deficits (or surpluses), plus interest accrued. When it comes to government, however, the accounting is slightly more complicated.
The spending and taxing policies of the federal government are classified into “on-budget” and “off-budget” categories. Those activities that are considered off-budget include the Postal Service fund and, more important, Social Security. The officially reported deficit is a “unified budget,” which includes the revenues and expenditures of these off-budget activities. Because the Social Security trust funds are currently running large surpluses, their inclusion has the effect of lowering the reported deficit. For example, in 2008 the on-budget deficit was $638 billion, while the off-budget surplus was $183 billion (due primarily to the Social Security trust fund). As a result, the unified budget deficit was $455 billion.
A similar dichotomy applies to the measurement of the national debt: Total public debt stood at $10 trillion at the end of fiscal 2008, but debt “held by the public” was $5.8 trillion. The difference is attributable to $4.2 trillion held in government trust funds and other intragovernmental accounts, of which $2.4 trillion was held by the Social Security trust funds.
As long as the balances in the Social Security trust funds are increasing, the on-budget deficit is partly offset by off-budget surpluses. When Social Security benefit payments begin exceeding revenues—which latest estimates suggest will begin in 2017—the off-budget components will add to the overall unified budget shortfall. (It will be interesting to see if the federal government continues to report the unified budget figures when this is the case.)
When the trust funds begin to be drawn down, the government will be faced with the need to borrow from the public in order to pay the obligations of the debt currently held in the trust funds. This will result in an increase in the debt held by the public, with no change in the total outstanding debt. In this sense, the total debt might better represent the long-term obligations of current government programs. In fact, as will be discussed later, a proper accounting of the long-term obligations of federal entitlement programs is far greater than the value of government IOUs in the Social Security trust funds.
Relative Size Matters
Although both the deficit and debt for fiscal 2008 were the largest on record in dollar terms, putting these figures in proper perspective is important: A more appropriate evaluation compares the deficit and the debt with national income. In the same sense that the manageability of a household’s debt depends on income (the ability of the household to make payments), evaluating the size of the government’s debt should be gauged against the size of the national economy.
When expressed as a percent of GDP, as shown in the lower panel of Figure 1, recent deficits have not been exceptionally large. In fact, official deficits in the mid-1980s were nearly twice as large as the 3.2 percent of GDP recorded for 2008. Even using the alternative measure, last year’s change in the national debt amounted to 7.6 percent of GDP—only slightly greater than the 7.3 percent of GDP registered in 1986.[4]
Similarly, the $10 trillion national debt represents 69.5 percent of GDP—only slightly higher than the previous peak of 67.3 percent of GDP that was reached in 1996. Netting out intragovernmental holdings, debt held by the public in 2008 represented 40.3 percent of GDP, well below a previous peak of 49.4 percent in 1993.[5]
U.S. government debt is also not particularly large compared with that of other countries. In 2007, France’s government debt amounted to approximately 70 percent of GDP, Italy’s debt-to-GDP ratio was nearly 120 percent and Japan’s was over 170 percent.
Put in perspective, current deficits and debt levels are high, but not unprecedented. Should this red ink be a cause for concern?
Economic Impact of Deficits
In principle, deficits can serve a useful role by providing the ability to smooth the path of distortionary taxes over time, particularly over the business cycle. Longer-term deficits can be justifiable if they finance long-term expenditures (as with an individual who finances the purchase of a home) or if they are expected to pay off in higher national income in the future (as an investment). In a growing economy, even a permanently increasing deficit (if it is not increasing too fast) is sustainable in the long run.
It is often argued that government deficits, particularly longer-term deficits, impose a direct economic cost. A conventional Keynesian analysis of this effect begins from the fundamental national income accounting relationship that total domestic investment is equal to national savings, which includes the total of saving (or dissaving) by consumers, business and government. When the government runs a deficit, the borrowing needed to finance the shortfall diverts the private savings that would otherwise flow into investment. One of the expected manifestations of this “crowding out” effect is that government deficits, by increasing the competition for loanable funds, put upward pressure on interest rates.
This need not be the case, however. A theoretical construct that often serves as a baseline for evaluating the effect of deficits is known as “Ricardian equivalence.” In a closed economy with rational, forward-looking consumers, Ricardian equivalence suggests that deficits may have no effect at all. For instance, suppose the government were to implement a lump-sum tax cut, financing the resulting budget shortfall by borrowing from the public, with the resulting debt to be repaid in the future with a tax increase. Rational consumers would be expected to increase their savings in anticipation of higher future taxes, which would be needed to pay off the debt. The increase in government dissaving would be met by an increase in private sector saving, leaving overall national savings unchanged. With no change in the balance between national savings and investment demand, there would be no upward pressure on interest rates.
The conditions under which Ricardian equivalence holds—even from a theoretical perspective—are quite restrictive; so, it is unlikely to be a literal description of the impact of deficit financing on the economy. Nevertheless, it serves as a baseline for evaluating the relevance of crowding out effects that might be present if, for example, consumers are myopic about their own future tax burden or fail to consider the welfare of future generations, or if credit-market imperfections prevent them from responding optimally to government deficits.
In this regard, the economic relevance of crowding out—and its consequent effect on interest rates—is an empirical matter. As the deficit has increased in both size and public prominence over the past quarter-century, there has been a deluge of research on the subject. One review of the literature in 2004 by William Gale and Peter Orszag reported on a total of 66 previous analyses of the topic. Of these, 33 found significant effects of budget deficits, while 33 found insignificant or mixed effects. Gale and Orszag went on to conduct their own analysis, finding significant non-Ricardian effects: They suggest that a deficit increase amounting to 1 percent of GDP lowers national savings by 0.5 to 0.8 percent and that expected future deficits raise long-term interest rates by 25 to 35 basis points.
These findings have been controversial, however. In fact, another paper circulating at the same time by Eric Engen and Glenn Hubbard suggested that the debt, rather than the deficit, was the appropriate measure to consider. They found that a 1 percent increase in the debt-to-GDP ratio led to an increase in interest rates of only four to five basis points.
Recent experience has renewed skepticism about the effect of government deficits on interest rates. As the U.S. government deficit and debt have risen sharply over the past few years, long-term interest rates remained abnormally low relative to short-term rates. One factor that has evidently contributed to this phenomenon—not explicitly considered under the conventional Keynesian view or in the Ricardian-equivalence analysis—is the effect of savings coming into this country from abroad. The increasing demand for borrowing by the U.S. Treasury in recent years has been met with a substantial foreign inflow. (See sidebar below.) Even if U.S. residents are non-Ricardian in their behavior, the demand for U.S. Treasury securities by foreigners is likely to have mitigated upward pressure on interest rates that might otherwise have been observed.
A Demographic Time Bomb
While the immediate impacts of government deficits and debt are a matter of some controversy, most economists agree that the long-term fiscal outlook for the U.S. requires serious attention. The retirement of the Baby Boom generation and a slowing rate of growth in the labor force will create a demographic time bomb in which entitlement growth threatens to swamp available resources.
As mentioned earlier, the Social Security trust funds are projected to begin running down in 2017. By 2041, they are expected to be depleted.[6] One way of measuring the long-run shortfall is to estimate the present value of unfunded obligations, that is, to estimate how much money would be needed, in today’s dollars, to pay for future promises in excess of expected tax revenues. In the case of Social Security, the U.S. Treasury estimates that paying promised benefits through the year 2081 would require $6.8 trillion, in addition to taxes collected under current law.[7]
The situation is even more dire when we consider health-care costs. The unfunded obligations of Medicare parts A and B amount to a present value of $25.7 trillion. Medicare Part D (prescription drug coverage) adds another $8.4 trillion. All told, the shortfall for government social insurance programs comes to a present value of $40.9 trillion. This is the government’s official estimate—some private sector economists suggest that the total burden is even greater. Economist Lawrence Kotlikoff has recently estimated the total unfunded liabilities of current federal programs at $70 trillion.[8]
Figure 2 displays recent forecasts from the Government Accountability Office, illustrating the budget implications of these trends. The upper panel shows accelerating deficits over the next seven decades. Assuming revenues held constant at the historical average of 18 percent, these projections show the deficit rising to over 40 percent of GDP by 2080. The lower panel of Figure 2 shows the implications for the federal debt: an exponential rate of increase that reaches over 600 percent of GDP by 2080. This would far exceed any level of government borrowing in history.
These projections are unlikely to actually occur. The trends are unsustainable. Long before reaching such unprecedented level of borrowing, there would surely be a crisis of confidence among U.S. creditors, both domestic and foreign.
Current measures of the federal deficit and the national debt, as dismal as they might appear, fail to reflect full consequences of current-law fiscal policy. The unfunded future liabilities of government entitlement programs imply rising deficits and a ballooning public debt far larger than today’s shortfalls. And debates about the immediate economic impact of government deficits on private savings and interest rates, while of academic interest, fail to address the full importance of these long-run consequences. Fundamental reform of entitlement programs is critical for putting U.S. fiscal policy on a long-run sustainable path.
Figure 1Federal Surplus/Deficit, 1950-2008
SOURCE: Economic Report of the President and Monthly Treasury Statement The unified budget deficit/surplus figures represent the consolidated on-budget and off-budget balances as officially reported. The change in federal debt is the change in gross federal debt from one year to the next (with sign reversed). |
Figure 2Budget Projections, 1970-2080Revenues and Expenditures Debt Held by the Public SOURCE: GAO, “A Citizen’s Guide to the 2007 Financial Report of the United States Government” These projections use Medicare and Social Security data from their respective trustees’ reports. Medicaid is assumed to grow at the same rate as Medicare. Discretionary spending from the war is phased out after 2010, with remaining discretionary spending assumed to expand at the same rate as GDP. The data do not account for any spending expected to be associated with the Emergency Economic Stabilization Act of 2008. |
ENDNOTES
- In its “Mid-Session Review” in July 2008, the Office of Management and Budget projected a deficit of $482 billion for fiscal year 2009, which ends Sept. 30, 2009. Implementation of the Emergency Economic Stabilization Act is likely to add an additional several hundred billion dollars to the Treasury’s upcoming borrowing needs.
- The change in national debt for 2008 includes $300 billion in the new Supplementary Financing Program Account. Through this program, the Treasury issues additional debt, depositing the proceeds into its account with the Federal Reserve. Because the Treasury records this as an increase in cash on-hand, it should more accurately be subtracted from the total change in debt. With this adjustment, the change in the national debt for 2008 would be just over $700 billion.
- There are two Social Security trust funds, Old Age and Survivor Insurance (OASI) and Disability Insurance (DI). At the end of fiscal year 2008, they stood at $2.15 trillion and $216 billion, respectively.
- Adjusting for the $300 billion described in endnote 2, the increase in the national debt for 2008 was 5.4 percent of GDP.
- After adjusting for the $300 billion held in the Supplementary Financing Program Account, the total federal debt represented 68.2 percent of GDP, while debt held by the public amounted to 38.7 percent.
- See Social Security Administration.
- Treasury Department, 2007 Financial Report of the United States Government.
- See Kotlikoff (2006 and 2008).
- See Morrison and Labonte.
REFERENCES
Engen, Eric M.; and Hubbard, R. Glenn. “Federal Government Debt and Interest Rates,” in Mark Gertler and Kenneth Rogoff, eds., NBER Macroeconomics Annual 2004, pp. 83-160. Cambridge, Mass: MIT Press.
Gale, William G.; and Orszag, Peter R. “Budget Deficits, National Saving, and Interest Rates,” Brookings Papers on Economic Activity, 2004, No. 2, pp. 101-210.
Government Accountability Office, The Federal Government’s Financial Health: A Citizen’s Guide to the 2007 Financial Report of the United States Government, 2008. See www.gao.gov/financial/citizensguide2008.pdf.
Kotlikoff, Laurence J. “Is the United States Bankrupt?” Federal Reserve Bank of St. Louis Review, Vol. 88, No. 4, July/August 2006, pp. 235-49.
______. “Is the U.S. Going Broke?” Forbes, Sept. 29, 2008, pp. 34-35.
Morrison, Wayne M.; and Labonte, Marc. “China’s Holdings of U.S. Securities: Implications for the U.S. Economy,” Congressional Research Service, Order Code RL34314; May 19, 2008. See www.fas.org/sgp/crs/row/RL34314.pdf.
Office of Management and Budget. Mid-Session Review, Budget of the U.S. Government, Fiscal Year 2009, July 2008. See www.whitehouse.gov/omb/budget/fy2009/pdf/09msr.pdf.
Social Security Administration. The 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, March 2008. See www.ssa.gov/OACT/pubs.html.
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