May 19, 2019

Fiscal Shell Game Nears Collapse

To the astute reader, the signs are popping up all over and the long term economic future is looking dim. Under current law as of May 16th, the United States Treasury will be at the statutory borrowing limit and will need to use so-called extraordinary measures to continue to raise cash. These measures, in effect now, will probably be exhausted by October or November. The Temporary Debt Limit Extension Act specifies the amount of borrowing through the period of suspension. That debt now stands at $18.1 trillion dollars. The accounting measures used to buy time are deferring payments to Government pension plans, borrowing money from these same pension plans, and slowing payments of some $80 million dollars each month to fund dozens of obligations for other agencies. This whole shell game is due to collapse in a few short months.

In case you missed it, the United States Postal System is bankrupt. Its latest quarterly loss is about $1.5 billion dollars. Total mail volume of 37.7 billion pieces was down by 420 million pieces and the future looks no better. Forecasted losses will continue indefinitely. Solution? Congress has to act but when? To be honest, I can’t remember the last time that the Post Office actually made money. Who wants to be Post Master General of a sinking ship? We have to make adjustments to a system that has to be brought into the 21st century.

Both the Obama administration and the congressional Republicans say that they are weighing reforms to salvage the finances of the disability program of our Social Security Administration. Why? Because the disability fund of the Social Security System is due to go broke in 2016. Created decades ago to help those unable to work because of severe health problems, the $128 billion dollar program stops many from sliding into total poverty. It is estimated that some 8.7 million beneficiaries will never rejoin the workforce and remain dependent upon the federal government. Many of the plans discussed by federal officials are to reduce benefits by 15% and eliminating disability payments for anyone older than 62 who are eligible for the Social Security retiree program.

To keep adding to the economic woes, the Social Security program is a on a collision path to oblivion. Unless something is done soon, the trust funds will run dry. Current suggested changes call for a raise in the retirement age from age 67 to age 69 and a reduction or elimination of benefits including COLA adjustments. Obviously, without the COLA adjustments, the social security payments will eventually fall behind the cost of living and become less and less of economic advantage to the retiree. Coupled with these reductions in benefits, taxes will have to go up.

Not many of us follow the problems of Fannie Mae and Freddie Mac. They have seen hard times in recent months. Together, the two companies back around $5 trillion dollars in mortgages, almost half of the entire U.S. housing industry. This overwhelming domination of the market is the very thing that has placed them in jeopardy. So many of the mortgage loans purchased over the past five years have defaulted or gone into foreclosure and many that have not defaulted have declined in value. When you begin to pool these worthless mortgages together, you end up with a lot of mortgages that are collectively worth vastly less than the securities they back. This pooling technique on the second market allowed banks to slip through many subprime mortgages to Fannie Mae and Freddie Mac. However, the enormous volume of mortgages that have gone into default, coupled with dropping home prices, has ballooned these previously insignificant losses into major losses. Guess what? Uncle Sam is on the hook for the entire mess.

Under normal accounting rules, fully owned companies would be consolidated into the books of the owner, but the large size of Freddie and Fannie has made the U.S. Government reluctant to incorporate Freddie and Fannie into its own books. So folks, we have $5 trillion dollars out there backed by the full faith of the U.S. Government that is not accounted for anywhere!

What bothers me the most is that deficit spending has been a way of life for the federal government for most of the years since World War II. A whole generation of elected federal officials has come and gone without ever balancing the budget. The congressional budget process itself has contributed to persistent budget deficits. At no point in the process does anyone decide on the total amount the federal government will spend. Instead, responsibility for individual legislative bills that determine the total amount of spending is divided up among fifteen separate committees in the Senate and seventeen committees in the House of Representatives. The Appropriations Committee has jurisdiction for non-entitlement programs covering about 40% of the total federal spending. The remaining 60% is made up of entitlement programs, which are handled by various other standing committees. The agriculture committees have authority over farm price supports, food stamps, and other rural programs. The tax-writing committees in the House and Senate are responsible for Social Security and Medicare. The House Energy and Commerce Committee has jurisdiction over Medicaid and shares responsibility for Medicare with the Ways and Means Committee.

Imagine that a mother sends her family to the store, tells her husband to buy beer, her teenage daughter to buy magazines, and her ten year old son to buy candy. Imagine again that she sets no limits on how much each can spend. Each family member would then overspend on the various items. Congress is like that family. Government spending repeatedly exceeds tax revenue and that is how chronic deficits occur.

Something has to change quickly as our borrowing is no longer unlimited and we, as a nation, are facing some serious issues.

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Written by
Donald Wittmer

DONALD WITTMER is a retired business executive who held key roles in the automotive and banking sectors. For a time, he also served as a Fiscal Agency Manager for the Detroit branch of the Federal Reserve Bank of Chicago. He received his undergraduate degree from Cincinnati's Xavier University, an M.A. in business management from Central Michigan University, and earned certification in bank operations from the School of Banking at the University of Wisconsin-Madison. A husband, father, and grandfather, he teaches part-time at the Kent Place School for Girls in Summit, New Jersey.

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Written by Donald Wittmer