The feds have some difficult choices to make…
by J. Kyle DeVries via Mises
Most people are not aware that there exists a huge conglomerate in the US with trillions in sales. This business provides insurance services such as healthcare financing, disability income protection, worker’s compensation, and retirement income guarantees. Revenues emanate via premiums from customers. Since there is limited or no competition, this firm is a monopoly and therefore controls these markets. But that’s not the extent of its commercial enterprises.
This conglomerate is also in the security business, providing for defense from foreign and domestic threats. In addition, they dabble in environmental maintenance and cleanup, education, banking, and other industries. You would think it’s not possible they can do all these things well, and you would be right. Most customers experience lousy service, but there are no other choices. To burnish their brand, they advertise themselves as benign providers of good services with a strong financial foundation to back all these promises.
However, finances are threatening the enterprise. Income for fiscal year 2019 was just $3.5 trillion but expenses were $4.4 trillion. The $900 billion loss was added to the company’s line of credit (LOC). Bankers, who for some reason have not shown much concern about the conglomerate’s finances in the past, are getting anxious.
The enterprise hasn’t turned a profit since 2001, making just $128 billion that year. They had already tapped almost $6 trillion of their LOC by then, expanding that through consecutive yearly losses to over $24 trillion today. Their debt-to-income ratio has climbed from 55 percent in 2001 to over 106 percent now. Most businesses would be laughed out of town if they tried to add to their LOC with these numbers. Somehow, through some sort of magic, they have been able to continue to borrow.
In the past they have been able to placate their lenders with rosy projections of future income that were not questioned. But in the wake of the coronavirus shutdown, they can’t use those unrealistic forecasts any longer. Revenues could be halved while expenses skyrocket for the healthcare, disability, and unemployment benefits they have promised to cover. They will need to tap at least another $4 trillion of their LOC this year, if not $6 trillion or more.
To make matters worse, the firm has off–balance sheet liabilities that are not reflected in their net worth statement, a strict violation of accounting standards. These liabilities total over $122 trillion on a present value basis primarily for promises regarding healthcare, disability, and income supplements. How could they get away with not disclosing these very significant obligations on their financial statements? They couldn’t.
What are the odds that their bankers will allow them to tap their LOC once again? How many lenders will lend more money to a business that has never made a profit since 2001? That has a debt-to-income ratio of over 100 percent? Zero. The business would have to file for bankruptcy or simply close its doors.
To make matters worse, the corporate governance team consists of a president, vice-president, and 535 others who comprise the board of directors (BOD). Not one of them is an expert in any of the company’s business enterprises, having been elected in a popularity contest instead of vetted based on experience. The BOD experiences much infighting as they struggle for more power and influence on the board, diverting attention from vital day-to-day operations.
By any count, we would all want to see a monopoly like this busted. Our federal government certainly would not permit a monopoly like this to exist in its present form. They would require it to break up and sell various parts of the business off or just plain shut it down. But the “conglomerate” I described above is the federal government.
The budget numbers above are the actual finances of our federal government in fiscal year (FY) 2019. They are bad, but they’re about to get much worse. It is not unreasonable to assume that the feds will see a drop in revenues of at least 20 percent in FY 2020, if they’re not cut in half. When people aren’t working, there are no incomes to tax. At the same time, the feds have increased spending immensely. We were already well on our way to spending a record $5 trillion this year without the coronavirus. The Coronavirus Aid, Relief, and Economic Security (CARES) Act has immediately added $2 trillion in expenses and could increase federal borrowing another $4 trillion or more this year. That would bring expenses for 2020 to an unbelievable $11 trillion, adding precipitously to our already overburdening debt. CARES 2 will only compound the runaway debt.
Our national debt was $24 trillion before coronavirus. Incredibly, it may break the $30 trillion mark in less than six months’ time. If federal revenues did in fact decrease by just 20 percent, they would drop to $2.8 trillion versus expenses of over $7 trillion in 2020 (not including the added borrowing from CARES for business loans). Almost immediately, this shortfall would add over $4 trillion to our national debt, bringing it to over $28 trillion. If 2019 GDP of almost $22 trillion were to also drop just 20 percent, our debt-to-GDP ratio would climb overnight to over 150 percent! It will most likely be much worse than that in September.
Interest rates are low—about zero right now. This is because they are controlled by the feds via the operations of the Federal Reserve Bank. The feds want interest rates lower than natural rates, because they believe it will “stimulate” the economy. Low rates also lower the interest costs of government borrowing. However, at some point rates will rise—and then the cost of our overleveraged government will become crushing. If the average rate of interest due on all government debt were just 3 percent, the annual interest due would exceed $1 trillion alone. Those are monies that cannot go to feed the poor, provide medical care, or comply with climate accords.
No one would lend a business enterprise with these depressing numbers anything. How has the government been able to get away with this in the past? What is the magic mentioned above that keeps it going? It is their ability to print money. The feds are the bankers.
The feds—via their “partners” at the central bank—are printing money now to “assist” with the postcoronavirus economy. They will couch the printing as loans, but this is a comforting fiction. In the real world, loans can only come from savings, but neither the central bank nor the government itself has savings, as evidenced by their perpetual deficits and ridiculous debt. Even social security payroll deductions (premiums in a sense) have never been saved—surplus monies not used to make social security benefit payments have been spent on other things. If the government has no savings but is going to provide for “stimulus” checks and trillions in business loans, this money will have to be created in no small part “out of thin air.”
The feds are stuck between a rock and a hard place. If they don’t inject liquidity into the economy, there will be many immediate bankruptcies and unemployment will skyrocket to record heights. However, chances are great that most are going to go bankrupt anyway—the central bank can’t print enough money to keep all businesses and jobs afloat.
Recessions and depressions are times to restructure and rebuild. Firms that made wrong forecasts about their markets and others who overextended themselves by taking out loans at artificially low rates of interest should be allowed to fail. This happens all the time when times are good. When times are bad, we need to cleanse the economy even more to allow the most efficient and strong to rebuild the foundation. The old adage, “You can pay me now, or you can pay me later” applies here: we can experience some very bad pain for a relatively short period of time or delay the pain in return for even worse pain in the future, lasting much longer.
The feds have some difficult choices to make. They can do the political thing, pretending that they know how to solve the problems with other people’s money (in this case our children’s and grandchildren’s money) while ensuring that they continue to win elections. Or they can do the right thing—admit that they don’t know how to get us out of this calamity and instead allow the private sector to work, produce, and trade, which has always been the key to prosperity.
The sad fact is that the feds are bankrupt. If these institutions were forced to compete in a real economy, they would have been forced to restructure or go out of business long ago.Author:
J. Kyle deVries is a financial planner residing in southern California. He is the author of an Amazon #1 New Release entitled Bern, Baby, Bern!: Why Bernie Sanders’ Policies Would Incinerate the U.S. Economy