Tuesday, July 11, 2006

Who's paying for the War on Terror?

Late last week I came across the first of what is now a collection of articles proclaiming an improvement in the US fiscal deficit. Being a skeptical sort I did a bit of cross checking, using government figures, mind you, and discovered there is both more and less to this tale than meets the eye.

On the "less" side of the tale I find the "improvement" in the deficit. The term "deficit", at least as I understand it, is a flow figure. It refers to a shortfall of income relative to expenditure over the course of a period of time, usually a year. The sum of these deficits is a "stock" figure, the debt. I bore you with this remedial accounting as preamble to my rather curious discovery. If, as the President, inter alios, avers, the deficit is shrinking, why is the debt still rising at a rapid pace?

The graph below depicts the annual change of the public debt for the past few years. As you can see, the public debt has risen just under $500B ($478B to be precise) thus far this year and the final quarter of the fiscal year (which ends 9/30) usually results in further increases in the debt on the order of $60-100B. I think it is quite possible that the public debt could increase the same this year as it did last.

So, is the Prez just pulling another Mission Accomplished or is the deficit really shrinking? It depends on how one defines deficit.

If, as many Presidents before him, particularly Bill Clinton, have done, President Bush includes the Social Security (and other government administered "trust" funds) surplus in the general government accounts, the deficit appears smaller than it is in the sense that the Social Security funds are not tax revenues but funds held in trust to be repaid. This trick of hiding general government deficits behind trust fund surplusses, an artifact of the post WWII baby boom, has about run its course.

Within a decade, the Social Security surplus will be too small to hide much of anything. A few years after that, assuming extrapolations from current data hold, Social Security will be competing with Treasury to sell bonds into the open market. Of course, this assumes the government intends to pay out Social Security benefits, instead of pulling an Enron, looting the funds by placing them at risk in a Texas Hedge which goes awry, and then claiming innocence.

This brings us to the "more" side of the tale. While looking through the debt data, I realized that "intragovernmental holdings" of public debt had risen much faster than debt held by the public for the past decade. While much has been made of Asian and more recently OPEC holdings of US debt notably rising the much less heralded rise in intragovernmental holdings beats that hands down.

Since 1997, debt held by the public has risen about $1Tln ($1,000B) while over the same period, intragovernmental holdings have risen about $2Tln ($2,000B). Since the War on Terror began, debt held by the public has risen $1.4Tln (yes, it is higher than the increase since 1997 as Clinton paid down a chunk of debt held by the public) while intragovernmental holdings have risen about $1.2Tln.

In other words, the single largest financier of recent deficits, including those associated with the War on Terror, are not the Chinese, Japanese or Saudis but the US government administered trust funds for the people of the United States. That means the people taking the biggest risk are those betting on returns from those funds, and those betting on the social harmony which, it is hoped, such programs were designed to promote.

Tragically, in my view, very few people are aware of this bet, made with their money...or its implications.

Of course, I don't think the War would have been such an easy sell if people had been informed that their Social Security funds were at risk.

p.s. Worse, it isn't as if these funds are buying an equity share in any winnings, given the recent low Treasury rates, the best people can expect is 5% annually. In the event of default....let's not think about that.


Whammer said...

Dude, surely you've seen this by now: