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--- Begin Message ----Caveat Lector- Gary North's REALITY CHECKIssue 368 August 10, 2004 THE FEDERAL DEFICIT: KILLING YOU SOFTLY WITH THEIR LIES The U.S. government's budget deficit this fiscal year will be in the range of $450 billion. If we assume an $11 trillion economy (GDP), the deficit is in the range of 4.2%. The figure for Gross Domestic Product is deliberately misleading. It counts government expenditures as part of the productive output of the nation. If we are comparing the burden of the national deficit on the productivity of taxpayers who actually produce something of value, the deficit's burden is much higher. Governments at all levels extract about 40% of the output of the nation. If we reduce the GDP estimate by, say, 80% of 40% (32%), we get a GDP of a little under $7.5 trillion ($11t x .68). The deficit this year will be in the range of 6.2% of total productive output. The official federal debt is over $7.3 trillion. You cam monitor this on the U.S. national debt clock. http://www.brillig.com/debt_clock Your personal share of this is a little under $25,000. If you are married, add another $25,000. This is the per capita burden, which includes children. Like the GDP, this figure is misleading. It does not count off-budget programs, most notably Social Security/Medicare. Add another $50 trillion for Social Security/Medicare. KERRY, THE BUDGET CUTTER In Kerry's nomination acceptance speech, he promised to reduce the deficit by half. He meant the official deficit. And we're going to return to fiscal responsibility because it is the foundation of our economic strength. Our plan will cut the deficit in half in four years by ending tax giveaways that are nothing more than corporate welfare -- and will make government live by the rule that every family has to follow: pay as you go. "Pay as you go" is the policy of the Social Security and Medicare system. It produces a long-term disaster. It means that the government is not setting aside income for investments that will pay off these obligations. Set-aside investment (amortization) is required for publicly traded private companies, but not the government. "Pay as you go" means that the government this year will not set aside the $3 trillion per year that it needs to finance Social Security/Medicare over the next 75 years at a 6% interest rate. I used this amortization calculator (adding seven zeroes at the end): http://www.hsh.com/calc-amort.html With a $2.4 trillion budget (2004), a $3 trillion set-aside is a bit high. But if the government refuses to set this money aside, then $3 trillion is added to the total debt owed this year. Then next year, $3 trillion plus a little extra to cover the added interest payment is added. And so it goes, year after year. In real estate, this is called a backward-walking mortgage. It grows and grows. Eventually, you get evicted. By "set aside," I mean "invest in companies that will produce profits that will pay off the obligation." That will not happen, Kerry says. We believe in the family value expressed in one of the oldest Commandments: "Honor thy father and thy mother." As President, I will not privatize Social Security. I will not cut benefits. And together, we will make sure that senior citizens never have to cut their pills in half because they can't afford life-saving medicine. By the way, "honor thy father and mother" is the biblical law that both Social Security and Medicare are designed to violate. Parents are saying, "Stick it to the taxpayers, not my kids." Their children are saying, "I am not willing to pay for my parents' old age. Let the government do it." In any case, it will take the Democrats four years to get the official (fake) deficit cut to 50% of what it is today. This means four years to go from $450 billion a year to $225 billion. This is campaign-speech finance, not real-world finance. How will he do all this? And let me tell you what we won't do: we won't raise taxes on the middle class. You've heard a lot of false charges about this in recent months. So let me say straight out what I will do as President: I will cut middle class taxes. I will reduce the tax burden on small business. And I will roll back the tax cuts for the wealthiest individuals who make over $200,000 a year, so we can invest in job creation, health care and education. http://tinyurl.com/693n7 About four decades ago, liberal cartoonist Jules Feiffer drew a multi-panel cartoon of a crowd that was looking upward. Above the crowd was a pair of boots on legs hanging in the air. You could not see the President who was wearing them. Each panel had a balloon containing another promise. There would be lower taxes and more government benefits and economic prosperity. In the next-to-last panel, the people listening to the speech ask: "How will you do all this?" The final panel had the answer: "I shall wheel and deal." Lyndon Johnson wheeled. He also dealt. Then he refused to run again. He transferred the quagmire of Vietnam to Richard Nixon, who also could not find a way to get out, and under whom the deficit climbed to a staggering, unthinkable, back-to-back $25 billion a year (1970, 1971). Kerry continued: I know what we have to do in Iraq. We need a President who has the credibility to bring our allies to our side and share the burden, reduce the cost to American taxpayers, and reduce the risk to American soldiers. That's the right way to get the job done and bring our troops home. Here is the reality: that won't happen until we have a president who restores America's respect and leadership -- so we don't have to go it alone in the world. This means that Kerry expects France and Germany to send billions of dollars and troops to Iraq because he has replaced Bush. Why? I guess because Skull & Bonesman B has replaced Skull & Bonesman A. This will make all the difference. He actually expects voters to believe this. The conventioneers cheered -- anti-war, anti-draft Democrats who obviously understand the truth: we are not going to get out of Iraq, so why not cheer for our candidate, since there is no exit? Make the best of it. We will not leave Iraq until there is peace in our time. I defended this country as a young man and I will defend it as President. Let there be no mistake: I will never hesitate to use force when it is required. Any attack will be met with a swift and certain response. I will never give any nation or international institution a veto over our national security. And I will build a stronger American military. In short, we'll get the international community to help bail us out in Iraq, but we will refuse to give them control. We won't give them a veto. We have seen this program before: the June 28 transfer of "sovereignty" to Iraq's government -- a government that we control and defend and pay for. But the crowd in Boston cheered! We will add 40,000 active duty troops -- not in Iraq, but to strengthen American forces that are now overstretched, overextended, and under pressure. We will double our special forces to conduct anti-terrorist operations. We will provide our troops with the newest weapons and technology to save their lives -- and win the battle. And we will end the backdoor draft of National Guard and reservists. More troops! But where will we get these troops? Re- enlistments are falling. How will we keep from having to increase the military budget by increasing pay for the troops? He did not mention the dreaded word. Bush does not mention it, either. But Congress knows what is coming: the reinstitution of the draft. --- Advertisement --- Think $43 Oil and $2 Gallons of Gas Are Bad? Get Ready For Prices Four Times That High! The most devastating financial event in 150 years will arrive July 2, 2006. That's my best estimate. And no, you won't hear any bells go off. They won't even talk about it on the nightly news... until it's too late! Do nothing, lose everything. Or you can make as much as 668% on the two stocks that are set to SOAR as the chaos unfolds... http://www.agora-inc.com/reports/OST/day806/ ----------------------- UNCLE SAM WANTS YOU, SWEETIE On May 1, the "Seattle Post-Intelligencer" ran this report. WASHINGTON -- The chief of the Selective Service System has proposed registering women for the military draft and requiring that young Americans regularly inform the government about whether they have training in niche specialties needed in the armed services. The proposal, which the agency's acting Director Lewis Brodsky presented to senior Pentagon officials just before the U.S.-led invasion of Iraq, also seeks to extend the age of draft registration to 34 years old, up from 25. The Selective Service System plan, obtained under the Freedom of Information Act, highlights the extent to which agency officials have planned for an expanded military draft in case the administration and Congress would authorize one in the future. "In line with today's needs, the Selective Service System's structure, programs and activities should be re-engineered toward maintaining a national inventory of American men and, for the first time, women, ages 18 through 34, with an added focus on identifying individuals with critical skills," the agency said in a Feb. 11, 2003, proposal presented to senior Pentagon officials. . . . The agency officials acknowledged that they would have "to market the concept" of a female draft to Congress, which ultimately would have to authorize such a step. http://tinyurl.com/2tt9g There is an old rule regarding government policy: "Don't believe a rumor until it is officially denied." Selective Service has posted this on its website. Notwithstanding recent stories in the news media and on the Internet, Selective Service is not getting ready to conduct a draft for the U.S. Armed Forces -- either with a special skills or regular draft. Rather, the Agency remains prepared to manage a draft if and when the President and the Congress so direct. This responsibility has been ongoing since 1980 and is nothing new. Further, both the President and the Secretary of Defense have stated on more than one occasion that there is no need for a draft for the War on Terrorism or any likely contingency, such as Iraq. Additionally, the Congress has not acted on any proposed legislation to reinstate a draft. Therefore, Selective Service continues to refine its plans to be prepared as is required by law, and to register young men who are ages 18 through 25. http://www.sss.gov/Default.htm We are losing the war in Iraq. Over 1,000 American troops have died. This week, the Shi'ite insurgency persuaded the company that controls the oil pipeline in Basra to shut it off for the time being. This means that world oil output fell in one day by 1.8 million barrels. The fighting with Muqtada al-Sadr's Mahdi Army militia began to have economic fallout. Iraq's southern oil company stopped pumping oil to the southern city of Basra -- where militiamen were controlling main streets -- because of threats to infrastructure, an official with the company said. About 1.8 million barrels per day, or 90 per cent of Iraq's exports, move through Basra. Iraq's other outlet from the north to Turkey has been out of operation since early June, so a stoppage from Basra threatens to completely shut down the flow of Iraq's main money earner. http://tinyurl.com/4d788 Iraq's oil was supposed to pay the reconstruction bills. The military bills must also be paid. American taxpayers are unwilling to pay them. So, the deficit will continue to be in the 6% range of the real economy for the foreseeable future. Kerry has no answer. He speaks in grand, empty phrases. They all boil down to this: "I shall wheel and deal." Bush has no answer. If Bush had an answer, it would be implemented. American troops are trapped in a disaster zone that keeps getting worse. The candidates dare not refer to a draft, but that is where we are headed. After three decades, the draft will have to be restored during the next Congress unless we have pulled out our troops, which no candidate says he is willing to do. So, add to the paralysis over the deficit a major political fight over the draft. Middle-class parents are not interested having their children sent to Iraq. But that is where the kids are headed if a new draft law is passed by Congress. If it isn't passed, then the President, whoever he may be, will have to increase the pay scale of the military or else pull the troops out. Neither candidate is willing to discuss any of this. No one asks. It's "don't ask, don't say" on a national level. A conspiracy of silence prevails. UPWARD, EVER UPWARD The deficit keeps escalating. The so-called surplus in Clinton's second term was fake. It was achieved by raiding the Social Security trust fund, issuing non-marketable IOU's, and not calling these IOU's an official obligation of the U.S. government, and hence not part of the deficit. For details on how this scam works, click here: http://tinyurl.com/6zqac Who is going to pay off this debt? "Not you, not me . . . the man behind the tree." It is going to be paid off with freshly created fiat money issued by the Federal Reserve System. No one is going to admit that the system is bankrupt. It's politically acceptable to let the dollar go bankrupt and then blame its decline on speculators. The government will keep upping the retirement age. This will help stem the ocean of Fed Ink, but not much. Social Security is not the big problem. Medicare is the big problem. Medicare, not Social Security, is now the third rail of American politics. Touch it, and you die. The bulk of the projected Social Security/Medicare deficit -- over 80% -- is expected to come on the Medicare side of the ledger. Check this out in economist Kent Smetters' testimony to Congress. See Table 1 at the end of his testimony. http://www.house.gov/judiciary/smetters030603.htm The deficit will increase. We are now addicted to the deficit. Congress will not cut spending. The increase is becoming exponential. A $450 billion deficit in a $7.3 trillion budget is 6%. Using the doubling period "law of 73," we divide 73 by 6. We get 12 years. Every 12 years the on-budget national debt will double. But the U.S. economy is not going to grow at 6% to pay for this. We are falling behind -- not counting the off-budget debt monster. CONCLUSION The stick market is stuck. If you have your money in an index mutual fund, you have seen no growth in four years. The old dream of 10% or 15% per year growth is dead. Yet the public still holds on, hoping against hope, that their meager pension fund will grow fast enough to keep them secure and comfortable in retirement. It won't. The no-load, index fund, buy-and-hold strategy is being eaten alive by the deficits -- national, personal, and corporate. When interest rates rise -- as they surely will -- the economic burden imposed by these growing deficits will increase. The stock market will be in even worse shape than it is today. Corporate debts must be repaid. Rising rates will be bad news for holders of bonds, because existing bonds fall in price when long-term interest rates rise. No one in Washington is willing to tell us how they can cut taxes, increase benefits, and get out of Iraq. Kerry gave assurances, but his assurances are not backed up by numbers. Bush will either follow suit or just avoid giving assurances. Voters don't want to hear the economic truth. The economic truth, even more than Medicare, is the third rail of American politics. Here is the economic truth: "If you ain't got any, you can't re-distribute it." The government has only one thing left: the illusion that it can and will pay its bills with money that is still worth what it is worth today. It can't. It won't. Don't be on the receiving end. Neither a borrower from the government nor a debtor be. ------------- -- Been to the Daily Reckoning Marketplace Yet? -- If not, you ought to see what you've been missing. Want to read more from our regular contributors? 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