medicare: Is doing nothing an option?

So, according to the 2011 Social Security and Medicare Trustees annual report, medicare is projected to pay out more than it collects in every future year (including 2011 and since 2008). But there is a reserve (read IOUs) in the fund cover the difference. The reserve is projected to be exhausted in 2024 (despite that currently, the reserves are being used up at better than 10% each year, which means more like 2019). Where does the money come from to pay out on those IOUs? The general fund, meaning the bank account that pays for everything from corn subsidies to military pay. Currently, the general fund pays about 45% of all medicare expenditures, which triggers a warning, which the President is required by law to address within 15 days.

That's all the background. When the reserve runs out, the program must reduce expenditures, meaning that the benefits will be cut. And if you look at how much it can't pay for out of revenue now, we are talking about a cut of around 50%.

Therefore, doing nothing will result in serious reductions in medicare benefits for everyone. As more people become eligible and also claim benefits, the benefits will be reduced even more. So much for keeping the promise. Look at it this way: The government has $100. It has to pass out the benefits equally to everyone who shows up. If 10 people show up, they get 10%. If 100 people show up they each get 1%. Regardless how many people are eligible for the benefits, once the reserves run out, the program can only pay out as much as it brings in. And that is only about 50% of what it pays out now.

Here are the options:
Do nothing, which will cut benefits by 50% for everyone including people in the program and even more for people entering the program in the future.

Change the program so that current beneficiaries can continue to rely on the program - because they do not have any alternatives. They don't, there just isn't medical insurance for retired people over 60.  But the more benefits you give people now, the less you have available later. Who is in a better position to adjust their retirement plans around these realities, people retired now or people retiring in 10 years?

Stop the program. I don't think you can cancel it for people who are already using it. And even if you cancel it for future beneficiaries, you still need to tax them in order to cover the current costs.

Take the revenue and give it to beneficiaries so they can get their own program (insurance, HMO, PPO) hopefully from an exchange of some sort. People will have to pay the difference, but they are going to have to pay the difference in costs anyway. At least if they have to budget for premiums, that is more predictable. You would know that you have to budget $500 a month for your medical care, instead of guessing where between $10 and $1 million you will have to pay any given month.

Some combination.

The law says the President must propose something besides do nothing and congress must act on that recommendation with some haste.

Here is the trustee's report. Read it and weep.

Sure people have been paying into this program all their working lives. You paid for a benefit that isn't going to be there. Sorry about that. Sure, it isn't their fault at least individually. If blissful ignorance is a valid excuse, neither is anyone at fault for Bernie Maddolf. But as a nation, we are responsible for our debts and this just happens to be a really really big one. We could have addressed the issue years ago. No, the (un)affordable health care act doesn't offer any help or relief. All it does is take $500 billion out of the program every year and give it to other people for their healthcare. And then they call it a savings. Yeah, right.

All I can say is cowboy up and deal with it. Whining about how much we paid, and how awful it is to get screwed is just wasting oxygen.

Gross domestic Product or gross domestic Spending?

There a few other interesting items this week and I hope I can get this all captured.
First, this is an interesting analysis of our economy over the last 13 years. As the author points out, we tend to think that the nineties were good and then 2001 and then we got good again, then 2008. Starting with the premise that GPD is actually a measure of spending more than making, and pointing out that real GDP growth has been at a lame 2.2% since 1998, whereas public and private debt has risen by over 3 times that rate. Meaning that the illusionary GDP growth above 2.2 percent is just us spending borrowed money. And  Rob Arnott of Research Associates of California states: "GDP that stems from new debt — mainly deficit spending — is phony: it is debt-financed consumption, not prosperity," Take the debt part out and our prosperity is nearly unchanged from 1998.
GDP is our estimator of wealth. In other words, we produce more, we exchange more, therefore we make more and we increase our assets. This faux wealth was spent, not invested. Had we successfully invested it, there would be better returns than 2.2%
This like is borrowing the assets in your retirement account and then expecting the money to be in there later when you retire. Not! If you have $100,000 in your 401K but you borrow $350,000 and go buy stuff, your 401K isn't worth more because of that big IOU to yourself. The money in your pocket isn't earning anything. Spending it isn't earning anything, either. Instead, when you square up accounts, you are in the hole, massively. The $350,000 you borrowed wasn't working for you and neither was any return on that investment likewise increasing your wealth. And the amount your $100,000 earned you isn't going to make the monthly payments, let alone pay it off.
You can't unring the bell and you can't unspend the buck. And if the last 13 years are any indication, we can't grow out of this, either. Instead, we need to turn our attention to how we build real wealth. Not how we transfer it from high income earners to the government, or from Exxon to the government. Because really, after this payment comes due (the space between the blue line and the red line below), there isn't enough to go around anymore. Thoughts on how to do that later.
 Ack! forgot the reference: CNN

More news to brighten April

I love spring. It's a season of renewal, awakening (allergies). But this spring is feeling more and more ominous. I expect thunderstorms in spring. I wish I wasn't expecting the coming economic storm.
So, here's part 1: The IMF has declared that the "Age of America" will end in approximately 2016, when the economy of China surpasses us.

This assessment is based on "purchasing power parities," not exchange rates (which as we can see, are gross indicators affected by numerous factors, speculation not being the least). This actually compares what people can earn and spend. China has a prospering middle class, while the US has a dwindling one - and not because our population is getting richer. The age of Chinese hegemony will be quite different. One reason not cited in the source article is this contrast. Our national wealth is tied up in raw resources (property and the rights to exploit them), multinational corporations (GE) and a few very wealthy individuals who have "capitalized" on the world market changes of the last 40 years or so. Chinese wealth is in their manufacturing capabilities, equity markets to an extent and mostly in their sovereign funds. Meaning China itself can pretty much buy whatever it wants to accomplish whatever purposes it wants. And it has the capacity to make and sell things the world needs to maintain this path.
Source: Marketwatch
The second item of bad news is that China looks like it will be "diversifying" about $2 trillion in sovereign wealth it currently has wrapped up in US treasuries. That is a whopping 2/3 of their dollar reserves which they propose to use to invest in their own industries and markets, strategic resources (to feed those), and (other) foreign investments. Well, duh, why would they want to keep holding those $turkeys? It's not like they are earning much interest.
Source: Xinhuanet  but this news has been on any number of sources during 2011.
No, it probably won't happen next month or even be completed this year. But if China decides to just quit adding dollars to the reserve (+$197 billion in Q1 2011), we will need to find other buyers and that means we will need to pay more interest. And there you have the wicked combination of rising interest and rising inflation (leading to rising interest and more inflation).
Which brings me back to the weak dollar. According to this article on CNBC. "If things were to somehow go into freefall (see below) or there were disorderly markets (see above), or if it is associated with a rise in interest rates (necessitated by above), there could be some concerns there," said Josh Feinman, chief global economist at Deutsche Bank Advisors. "But that's not happening at all. Rates in the US are still very, very low. At the margin, (a weak dollar) is a slight easing in financial conditions." Meanwhile, "Panic dollar selling is setting in," according to Dennis Gartman, a hedge fund manager and author of "The Gartman Letter."
How low can it go? Well if a 2/3 divestiture of dollar reserves by China and no market for US debt because of the free-falling dollar, and the kinds of inflation and interest we have not seen in decades is not cause for concern, I don't know what is. With just exactly what are we going to grow this economy back into some sort of stability, let alone hegemony?  Selling off our assets is about all we have left.

Energy as a factor in recession

I offer this interesting chart to back up my assertion that the last crash and therefore the next crash are driven by the cost of energy.

Perhaps historically, the price of food contributed. Today, the price of food is inexorably connected to the price of energy. Beyond getting food to market, agribusiness relies heavily on energy for current productivity levels. Energy is the force magnifier. The difference between an ox-driven plow and John Deer-driven plow - the power of the internal combustion engine. They both do the same thing. Food prices have increased 6.5% since January, which if you do the math, is over 25% a year.
So why is the price of gas going up? According to a SME on C-SPAN (sorry, don't have that reference it was morning edition either Monday or Tuesday), American refineries (or I should say refineries located in the U.S.) purchase oil on the spot market, not the futures market, so WTF.
April is the month that refineries change from the winter formula to the boutique summer formulas (driven by state regulation). So, refining capacity is down and the supply of gasoline is broken up into smaller "buckets." None-the-less, sooner or later the spot market catches up with futures (like in the inevitable future). Therefore, don't expect that May or June are going to provide any relief. These are two components driving the supply and demand side of the equation.
The other component that is driving both futures and spot markets is the value of the dollar. Today (April 22) it hit a 15 month low. Last time we saw this was (no surprise) Q2 2008. If the dollar is worth less, then it requires more of them to buy a barrel. Doesn't matter which market.

And the value of the dollar affects the cost of other goods imported by this country. On the other hand, it makes goods that we export more affordable in those markets. Which brings more valuable currency here. From those countries that we export to. Which are..... ummmmm.... what exactly are we making anymore?




CNBC source for chart 1
FX Street source for chart 2
IC Mark source for 2008

Update: Another source to back up my analysis - Financial Times which claims we are at a 2.5 year low against the dollar index - lowest since (drum roll please) August 2008.

Our deficits are a spending problem

Of course the debt (14 trillion), is everyone's problem.

Deficits by President

$38 billion - A pathetic pittance

$38 billion is like sending a $1 check for a $200 payment. Not even worth cashing, let alone arguing about.
The post-game show talks about the beneficiaries of brinkmanship. How getting a cut to this and that program is a major concession. How nearly $40 billion is 60% of the way between one arbitrary number and another. That somehow, Boehner won something by losing the majority of cuts republicans wanted. That somehow Obama lost by staving off cuts to NPR, PBS and Planned Parenthood. With all of the chest beating about these wastes of precious revenue, you have to figure they are permanently off the table. Well that was easy, how many other wasteful programs can they take of the table next time?

I don't really care where the $100 billion comes from. The programs that get a pass this time have to be back on the table next time. Instead of arguing over it, the house leadership should have just said, "OK, we will set those aside for next time. Now find something else to cut that equals $40 billion."

Eventually we will get down to reality. The target for cuts is $1.65 trillion. Savings do not exist until you get to zero deficit. And then you have to balance savings against debt payment. Talk about reductions in unfunded programs, not cuts to a budget like there is actually any money to pay for it. Talk about savings next year, not next decade. Be honest, you have no idea what will happen between now and 2012. Budget outyears = smoke and mirrors.

We can afford to pay for about 5 things and everything else is an expendable expense. Interest on the debt, social security (in some revised form), medicare (because there is no way seniors are going to get health insurance once they aren't working), border protection and military defense. And the trust funds need to go back to being separate accounts used for the intended purpose or for paying off debt (which is basically deferring interest to a loan later, still saves money).

It isn't a matter of picking and choosing winners anymore. It isn't picking NPR over planned parenthood. Instead of talking about an orderly shutdown of government during a lapse in spending authority, we should be talking about an orderly shutdown of government programs forever.

Likewise with the tax code. It isn't a debate about deductions vs allowances vs credits. Stop fiddling with income tax to impose a social agenda. Quit wasting time about marriage penalty and alternative minimum tax. Value added tax and only value added tax, computed on sales (wholesale and resale), surrendered at the time of sale to the treasury. See how much eliminating the IRS will do for the budget... that's a $12 billion dollar savings right there.

I am starting to think that the solution may be the number of people in Congress. Maybe we need to limit each elected representative to three staff, limit the number of committees to ten, and limit the committee staff to 5 per. I think that is actually very generous even if 2320 employees is about a quarter of the current number estimated at 7000-8000. There is only so much a person can do, and then the rest just has to be ignored. Hard to get into the details, think up all the tangential arguments, write all the emotional speeches, plot all the political angles with 75% less "time" to do it. The legislative branch actually employees something like 33,000 people, but most are taking care of other things like security, facilities management, information technology, visitor services, etc.

Gas per Gallon