Federal Government Budget Deficit in October is Three Times the Annual Budget Deficits of the Banana Republic of California.
California has been the poster child of ineffective state government. Bickering politicians, constant spending, and budget deficits that baffle the economic bottom line. But California isn’t alone in this spend more than you earn reality. Last year, California had to patch up $60 billion in budget deficits. A large and historical sum no doubt. Yet the federal government ran a $176 billion deficit in one month alone! In October the federal government brought in $135 billion in revenues (taxes) and spent $311 billion. This is not the kind of math you want to be seeing.
In fact, let us put this on a graph. Be warned, this is a financially scary graph but get used to it, since this is the future:
What a coincidence that in the 1970s when President Nixon took us off the gold standard, we suddenly started having epic swings in surplus and deficit spending. Without any standard, the fiat money world allowed our government to spend as much as the world would allow us and gave incredible power to the U.S. Treasury and Federal Reserve to print money out of thin air. The government is arrogant at best if it thinks it can print money and at same time, allow revenues to decline. Any company operating like this would be bankrupt in a short time. In our case, foreigners are starting to worry and are exiting dollar trades and pushing up commodities like gold.
I’m not a gold bug and I won’t recommend you go 100 percent in to gold. But make no mistake, gold is a trade against the stability of the U.S. dollar and the trust people have in the U.S. Treasury and ultimately our government. There is good reason to believe this is going to go on given the massive budget deficits we are now operating under. Now we are hearing whispers of stimulus version 2.0 and the Treasury has already talked about secretly bailing out the commercial real estate market.
States unlike the federal government, have to balance their budgets. And many states are facing epic problems:
Source: Pew Center, Zero Hedge
The sizes of the budget gaps are simply incredible. It is a basic arithmetic problem. The recession has caused record unemployment and profits to fall in the real world. Sure, Wall Street is seeing markets up by 60 percent but this is casino like profits. In the real world, unemployment is up to 10.2 percent and in states like California, the underemployment rate is up to 22 percent. This is depression like statistics.
Take a look at the chart above. 7 states have budget gaps of over 20 percent. 9 out of the 10 states researched by the Pew Center study have seen revenues fall by over 10 percent. These are reflections of the Great Recession. States like California, Arizona, Florida, and Nevada built entire economies on the decade long housing bubble. Short of seeing another housing bubble, these states are going to be in an economic funk for over a decade. Where is the revenue going to come from? So far, the federal government has demonstrated that all they care about is protecting the profits of Wall Street. Did your paycheck go up by 60 percent? Is healthcare 60 percent cheaper? Is education 60 percent more affordable? The 60 percent rally is a joke. It is based on hot money and as you might have noticed, the only folks pushing out record profits are the banks. Other bread and butter companies are showing profits because of firing workers and restocking inventory. Is that really something to jump in the air for?
Just run the score card. Let us see how things have changed over a one year timeframe:
Every measure seems to be worse except the stock market. The unemployment rate nearly doubled in the year, 7 million more Americans are on food stamps, and foreclosures are higher. But things are getting better supposedly.
And the foreclosure rate isn’t abating:
From 1999 to 2007, the U.S. foreclosure rate was much higher than that of California. But after that, California’s housing market completely imploded. This wasn’t any accident. Much of this was brought on by toxic mortgages like option ARMs that were nothing more than financial time bombs. The chart above is troubling on many fronts because it shows no abatement to the ongoing foreclosure disaster. Most can understand that until foreclosures trend lower, any talk of a real recovery is rather mute.
States, like average American households, are dealing with the realities of a shrinking balance sheet. Or to be more precise, the revenue side of the equation is quickly shrinking while debts are still elevated to bubble levels. That is why some $12 trillion has evaporated from the net worth of U.S. households.
The October federal budget deficit is troubling. Last October the government brought in $164 billion compared to $135 billion this October. A 17 percent drop in revenues. The federal government makes the state budget deficits look like child’s play. At some point, the government is going to need to adjust the revenue side of the equation. You can either raise revenues (taxes) or cut spending. Since they are choosing to do none of the previous options, they are opting to devalue the U.S. dollar and putting all their faith in Wall Street and the banks to save us.
Lining up at Midnight at Wal-Mart to buy Food is part of the new Recovery. Banks offering Mattress Interest Rates. The Invisible Recovery Outside of Wall Street.
There seems to be a growing divide in the current U.S. economy. On the one hand, you have the financial sector swimming in their bailout-induced profits like a modern day Scrooge Mcduck. In their circles, it appears as if the recession is over. On the other hand, you have average Americans seeing access to credit cards shut down, equity in their homes vanishing, and their stock portfolios looking a little too much like 1999. Then you have 35.8 million Americans, roughly 11 percent of our population, on food stamps. To this group the recession is still very much alive.
At a recent Alliance for Family Entertainment of the Association of National Advertisers, Wal-Mart gave a sobering look at the current economy:
“(NY Times) There are families not eating at the end of the month,” said Stephen Quinn, executive vice president and chief marketing officer at Wal-Mart Stores, and “literally lining up at midnight” at Wal-Mart stores waiting to buy food when paychecks or government checks land in their accounts.”
Now this is important since Wal-Mart is in every corner of every American metro area:
The fact that you have people lining up at midnight just waiting to have their paychecks or government checks clear for food is probably something you are not going to see on CNBC but it is happening. This recession is really creating a split and is also flaming the fires of class warfare. Average Americans and working class Americans are still dealing with what is known as the Great Recession.
Wal-Mart is looking to meet the new market reality by offering items that meet the new austerity demanded by millions of American families:
“Among the steps Wal-Mart is taking to address the changes in shopping habits, Mr. Quinn listed an overhaul of the retailer’s private-label brand, Great Value, which is promoted in commercials describing how families can fix dinners with Great Value products “for less than $2 a serving.”
For less than $2 a serving means millions of families are now needing to stretch their dollar. So as you might have guessed, having the U.S. Treasury and Federal Reserve go on a path of dollar weakness actually hurts those at the bottom and middle class the most. Yet they are concerned more about the financial sector and the chips may fall where they may for the remaining group of Americans.
Punishing the Prudent Saver
Those that save and are cautious with their money, are now being forced to make difficult decisions. Even holding on to U.S. dollars is not a good move with the way the Fed is systematically devaluing the dollar. The Fed is artificially keeping rates at record lows so putting your money in a savings account amounts to stuffing it into your mattress. Take a look at three of the too big to fail (TBTF) banks and their savings rates:
All you are doing is giving them your money to hold. That is it. A 0.1 or 0.05 annual interest rate is laughable. Even if we have 0 percent inflation, the U.S. dollar is now down by nearly 20 percent since the March levels. You have lost money. Unless, you placed your money into the casino known as Wall Street. The stock markets are now up by 60 percent since the March lows even though P/E ratios are at historic levels and unemployment is now up to 17.5 percent using the U-6 rate. Most of the recent gains are based on cost cutting (aka layoffs) and restocking of inventory. Basically we are seeing companies slim down and using one time gains to capitalize in the current marketplace.
If you doubt this, just take a look at the stunning 9.5 percent growth in worker productivity in Q3:
The above can be summarized as doing more with less. Yet this is somehow good news for the average American? Those that are prudent are left with very few places to protect their money. Do they invest in the stock market even though earnings do not justify current lofty prices? Do they put their money in the bank and allow the devaluation of the U.S. dollar eat their purchasing power away? There are few places to go.
But even with these pathetically low rates at banks, deposit accounts are the only sector that has seen steady growth in the last few years:
Every other major asset class from real estate, equities, to pension reserves has fallen. Yet savings deposits have steadily increased. A largely unspoken trend is out there and many people are basically protecting their money at all cost and believe cash is king, even if the cash is slowly being devalued by the U.S. Treasury and Federal Reserve.
There is little reason to believe that the dollar is going to spike significantly over the long run. We simply have too much debt:
Add up the above and you arrive at $52 trillion in debt. Home mortgages are $10.3 trillion of this amount. State and local governments struggling with tax revenues have $2.3 trillion in debt. Add in unfunded Social Security and Medicare liabilities and you can see why we are entering a perfect storm.
Summary
The financially prudent have taken it on the chin with the current bailouts. The working and middle class Americans are largely caught bailing out the wealthy financial class while confronting the realities that the bailouts were largely designed to protect the banking sector. Corporate equities and mutual funds have taken major hits in this crisis but the wealthier bond holders have faced minimal cuts. Examples like AIG paying out to Goldman Sachs only reinforce this horrendous transfer of wealth. Until the majority of Americans demand action and take to the streets, this pseudo-recovery is going to go on for years until finally Americans wake up and realize that they have given all their wealth to the banks.
