Washington has come up with some “new” terms to use when they talk about our Nation’s Finances. They talk about “Primary Deficit” and “Publicly Held Debt”. What are they and why are they using them?
Primary Deficit is a term they’ve invented for the difference between Receipts and Outlays WITHOUT including Net Interest Expense. Seems a little crazy to me? Isn’t that like me talking about my budget without including payments on my credit cards? Or Mortgage? Why would they be talking about “Primary Deficit” at this time?
It’s pretty easy to see through what they’re doing. Interest rates are extremely low right now. It is allowing us to have Net Interest Expense that’s lower than what we averaged during the 1990’s, but with three times the debt.
90's Average: $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)
2010: $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)
The Fed Fund rate is near zero which keeps short term treasury rates very low. That allows them to finance a considerable amount of our debt with short term treasuries. The problem with that is interest rates won’t remain this low forever. At some time the Fed Fund will return to “normal” levels and the Net Interest we pay on our National Debt will explode. So they invent a new term that excludes Net Interest Expense so as to ignore that reality.
Publicly Held Debt is a term that defines one portion of our National Debt. It’s actually not a new term, just being talked about more at this time. There are two components to our debt. The first is the portion owned by individuals, organizations and foreign countries known as Public Debt. The other portion is the debt owed to other parts of the government known as Intra-Governmental Debt. Coming out of WWII publicly held debt accounted for 90% of our total debt. But as Congress used the surplus in trust funds (i.e. Social Security Trust Fund) for other purposes, publicly held debt dropped to as low as 55% of total debt.
So talking about Publicly Held Debt instead of Total National Debt allows them to ignore a growing and sizable problem. But now that Social Security is “in the red” and needs to be paid back for the I.O.U.’s it has accumulated, the issue is being brought to the forefront.
So when we hear Washington speak in new terms like “Primary Deficit” or “Publicly Held” Debt we can assume they are trying to ignore the reality of some important problem, just like they're trying to ignore that fact we are out of money! Broke!
3/17/2011
A Letter to Our WH Chief Economist
When the 2010 Budget was released I questioned whether they were using assumptions that were too optimistic. When the 2011 Budget was relaesed I did historic studies on each of the five key assumptions (Growth, Unemployment, Inflation and Short Term and Long Term Interest Rates) and found they couldn't be supported by historical trends. This year, when the 2012 Budget was released, I concentrated on the Inflation assumption. I found it to be dramatically understated making the budget projections meaningless. I wrote the following letter to the White House Chief Economist. I haven't heard back.
Maybe you should write to him too? Include a copy of my letter. And be sure to "CC" it to someone on the list.
Its time to let DC know we are watching as they play games with our future!
-------------------------------------------------------------------------------
March 16, 2011
Mr. Austan Goolsbee
Chief Economist
White House Council of Economic Advisors
1600 Pennsylvania Ave.
Washington, DC 20500
Re: 2012 Budget Assumptions
Dear Austan Goolsbee,
First I would like to acknowledge that my training and involvement in the study of economics is not at the same level as yours. I understand that you are well respected for your knowledge of economics, holding the Robert P. Gwinn Professor of Economics position at the University of Chicago. It’s with that understanding that I’m asking for your assistance in understanding the latest budget proposals put forward by the White House Office of Budget and Management.
Each year since 2009 I’ve downloaded the Summary Schedules and done a high level review of the assumptions and trends. In 2009 (2010 Budget) I came away with the feeling that the major assumptions in table S-13 were overly optimistic leading me to wonder if the results shown in the budget were achievable. In 2010 (2011 Budget) I analyzed historical data in an attempt to determine if the assumptions in table S-13 could be supported by past trends. I came away concerned that the inflation assumption was understated from what should be expected and that the Net Interest Expense was also significantly understated. I calculated Net Interest Expense could have been understated by as much as $3.8 trillion over the ten years covered in the budget. This year (2012 Budget) I concentrated on the inflation assumption as it is probably the most important driver determining the budget results. I looked at historical data and current year results. (I wrote to the President about my concerns. In case he hasn’t shared my letter with you, I’ve included a copy.)
During my years in preparing and presenting budgets, the first step I took was to get approval of “high level” assumptions so that’s why I started there. In the case of projecting results for 10 years, it would appear the inflation assumption (Consumer Price Index, percent change, year to year) would be the most important of those shown in Table S-13. Not only does it have a large impact on the size of Outlays, Deficits and Debt in the “out years”, but it also helps determine what assumptions are reasonable to use for interest rates.
This year I noticed that each of the three budgets used a maximum inflation assumption of 2.1%. So I wondered how well we had done in the past at keeping inflation at or below that rate. Going to the government website for CPI (inflation) I found since 1965 there had only been 7 years (1986, 1997, 1998, 2001, 2003, 2008 & 2010) at or below 2.1%.) Most of those years were during times of recession. Most non-recession years were significantly higher.
From there I looked at the combined assumptions to see what the trends are. I saw reasonably strong growth, decreasing unemployment and low interest rates. My understanding of economics says that during times of growth and reducing unemployment we typically see an increase in inflationary pressures. I believe that was one of the driving factors that caused the Fed to increase interest rates in 2004 (Fed Fund went from 1.00% to 5.25%).
I also looked to see how we have done so far in fiscal year 2011. What I came away with is we have nearly matched the 1.3% assumption for this year during the first 5 months (Oct ’10 to Feb ’11). If that’s the case, I’m not sure the assumption for 2011 will prove to be a reasonable one.
Finally I modeled the compounded impact of various inflation rate assumptions to see what impact it would have on year 10 projections. As you might expect, the difference between the factor for year 10 using the budget assumptions (average 2.0%) and what I thought would be a more historically appropriate rate (i.e. 3.5%) is very significant. The impact on interest rates would be quite significant too.
I’m hoping I’m missing something, but I’m not sure what it would be. I even checked to see if there was a precedent for the use of the Fed Target Rate as the maximum inflation rate. That wasn’t the case as the maximum inflation assumption in the 2009 budget and 2007 budget were 3.2% and 3.4% respectively. (I didn’t check 2008.)
I hope you can help me answer the following questions:
- Is it appropriate to use the Fed Target rate as the maximum inflation rate assumption in the budget?
- If not, what would you think would be a good set of inflation assumptions to use? (I thought a 3.5% to 4.0% average would be more reasonable.)
- If the inflation rate assumption is understated, doesn’t that mean the interest rate assumptions (especially 91 Day Treasury rate) are also understated?
- What would you think would be good assumptions for interest rates if you believe they are understated?
Again, my lack of advanced economic training may be causing me to miss something, but this looks like such a basic error that it almost appears to have been done on purpose. The combination of these issues results in such a significant understatement of Outlays, Deficits and Debt in out years it allows for the appearance of fiscal restraint when in fact reasonable projections would show a true crisis.
I’ve come to the conclusion that it would make sense to reforecast the budget so we have better numbers to look at and Congress has better numbers to make decisions from. What do you think?
I welcome your feedback.
Sincerely,
Alan R. Davis
Private Citizen
CC: Jacob J. Lew, Director
The Office of Management and Budget
725 17th Street, NW
Washington, DC 20503
Douglas Elmendorf, Director
Congressional Budget Office
Ford House Office Building, 4th Floor
Second and D Streets, SW
Washington, DC 20515-6925
Sen. Kent Conrad
Chairman, Senate Budget Com.
530 Hart SOB
Washington, DC 20510
Rep. Paul Ryan
Chairman, House Budget Com.
1233 Longworth HOB
Washington, DC 20515-4901
Rep. Bob Gibbs
329 Cannon HOB
Washington, DC 20515-3518
Sen. Sherrod Brown
713 Hart SOB
Washington, DC 20510
Sen. Rob Portman
B40D Dirksen SOB
Washington, DC 20510
Rep. Robert Dold
212 Cannon HOB
Washington, DC 20515-1310
Jim Angle
Fox News
400 N Capitol St NW
Washington, DC 20001
Ben S. Bernanke
Chairman, Federal Reserve Board
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551
Maybe you should write to him too? Include a copy of my letter. And be sure to "CC" it to someone on the list.
Its time to let DC know we are watching as they play games with our future!
-------------------------------------------------------------------------------
March 16, 2011
Mr. Austan Goolsbee
Chief Economist
White House Council of Economic Advisors
1600 Pennsylvania Ave.
Washington, DC 20500
Re: 2012 Budget Assumptions
Dear Austan Goolsbee,
First I would like to acknowledge that my training and involvement in the study of economics is not at the same level as yours. I understand that you are well respected for your knowledge of economics, holding the Robert P. Gwinn Professor of Economics position at the University of Chicago. It’s with that understanding that I’m asking for your assistance in understanding the latest budget proposals put forward by the White House Office of Budget and Management.
Each year since 2009 I’ve downloaded the Summary Schedules and done a high level review of the assumptions and trends. In 2009 (2010 Budget) I came away with the feeling that the major assumptions in table S-13 were overly optimistic leading me to wonder if the results shown in the budget were achievable. In 2010 (2011 Budget) I analyzed historical data in an attempt to determine if the assumptions in table S-13 could be supported by past trends. I came away concerned that the inflation assumption was understated from what should be expected and that the Net Interest Expense was also significantly understated. I calculated Net Interest Expense could have been understated by as much as $3.8 trillion over the ten years covered in the budget. This year (2012 Budget) I concentrated on the inflation assumption as it is probably the most important driver determining the budget results. I looked at historical data and current year results. (I wrote to the President about my concerns. In case he hasn’t shared my letter with you, I’ve included a copy.)
During my years in preparing and presenting budgets, the first step I took was to get approval of “high level” assumptions so that’s why I started there. In the case of projecting results for 10 years, it would appear the inflation assumption (Consumer Price Index, percent change, year to year) would be the most important of those shown in Table S-13. Not only does it have a large impact on the size of Outlays, Deficits and Debt in the “out years”, but it also helps determine what assumptions are reasonable to use for interest rates.
This year I noticed that each of the three budgets used a maximum inflation assumption of 2.1%. So I wondered how well we had done in the past at keeping inflation at or below that rate. Going to the government website for CPI (inflation) I found since 1965 there had only been 7 years (1986, 1997, 1998, 2001, 2003, 2008 & 2010) at or below 2.1%.) Most of those years were during times of recession. Most non-recession years were significantly higher.
From there I looked at the combined assumptions to see what the trends are. I saw reasonably strong growth, decreasing unemployment and low interest rates. My understanding of economics says that during times of growth and reducing unemployment we typically see an increase in inflationary pressures. I believe that was one of the driving factors that caused the Fed to increase interest rates in 2004 (Fed Fund went from 1.00% to 5.25%).
I also looked to see how we have done so far in fiscal year 2011. What I came away with is we have nearly matched the 1.3% assumption for this year during the first 5 months (Oct ’10 to Feb ’11). If that’s the case, I’m not sure the assumption for 2011 will prove to be a reasonable one.
Finally I modeled the compounded impact of various inflation rate assumptions to see what impact it would have on year 10 projections. As you might expect, the difference between the factor for year 10 using the budget assumptions (average 2.0%) and what I thought would be a more historically appropriate rate (i.e. 3.5%) is very significant. The impact on interest rates would be quite significant too.
I’m hoping I’m missing something, but I’m not sure what it would be. I even checked to see if there was a precedent for the use of the Fed Target Rate as the maximum inflation rate. That wasn’t the case as the maximum inflation assumption in the 2009 budget and 2007 budget were 3.2% and 3.4% respectively. (I didn’t check 2008.)
I hope you can help me answer the following questions:
- Is it appropriate to use the Fed Target rate as the maximum inflation rate assumption in the budget?
- If not, what would you think would be a good set of inflation assumptions to use? (I thought a 3.5% to 4.0% average would be more reasonable.)
- If the inflation rate assumption is understated, doesn’t that mean the interest rate assumptions (especially 91 Day Treasury rate) are also understated?
- What would you think would be good assumptions for interest rates if you believe they are understated?
Again, my lack of advanced economic training may be causing me to miss something, but this looks like such a basic error that it almost appears to have been done on purpose. The combination of these issues results in such a significant understatement of Outlays, Deficits and Debt in out years it allows for the appearance of fiscal restraint when in fact reasonable projections would show a true crisis.
I’ve come to the conclusion that it would make sense to reforecast the budget so we have better numbers to look at and Congress has better numbers to make decisions from. What do you think?
I welcome your feedback.
Sincerely,
Alan R. Davis
Private Citizen
CC: Jacob J. Lew, Director
The Office of Management and Budget
725 17th Street, NW
Washington, DC 20503
Douglas Elmendorf, Director
Congressional Budget Office
Ford House Office Building, 4th Floor
Second and D Streets, SW
Washington, DC 20515-6925
Sen. Kent Conrad
Chairman, Senate Budget Com.
530 Hart SOB
Washington, DC 20510
Rep. Paul Ryan
Chairman, House Budget Com.
1233 Longworth HOB
Washington, DC 20515-4901
Rep. Bob Gibbs
329 Cannon HOB
Washington, DC 20515-3518
Sen. Sherrod Brown
713 Hart SOB
Washington, DC 20510
Sen. Rob Portman
B40D Dirksen SOB
Washington, DC 20510
Rep. Robert Dold
212 Cannon HOB
Washington, DC 20515-1310
Jim Angle
Fox News
400 N Capitol St NW
Washington, DC 20001
Ben S. Bernanke
Chairman, Federal Reserve Board
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551
“Why would they want to do that?” 2012 Budget Inflation Assumptions
"America is not broke," Moore said "the country is awash in wealth and cash ... It has been transferred in the greatest heist in history from the workers and consumers to the banks and the portfolios of the uber-rich." Source: Wisconsin State Journal; dwahlberg@madison.com; http://host.madison.com/wsj/news/local/govt-and-politics/article_8a60e128-4791-11e0-9892-001cc4c002e0.html
Technically he may be right, but it’s not going to help us much to be "technically right".
My background is 30+ years in the healthcare finance field with most of those years at a senior management or CFO level. My training is accounting with a Masters and CPA. So I have a background for what I'm writing. My only concern is for the future of my grandkids and others like them. I'm not sure what Mr. Moore's motivation is?
Something isn't "right".
I started downloading the White House Office of Management and Budget Summary Schedules (found on their website) in 2009 (2010 budget). I was curious how they might have calculated the Net Interest Expense for the budget years. I came away concerned with their overall budget projections since I felt they had used very optimistic assumptions for each of the 5 key budget assumptions (growth, inflation, unemployment, short term interest rates and long term interest rates found on Table S-13). Using overly optimistic values for each of the assumptions would make the resultant projections very unrealistic.
In 2010 (2011 budget) I decided to create historic databases on each of the five key assumptions to test their reasonableness and came away concerned that historical trending couldn't support any of the five, let alone all five of them. That year I calculated the amount of understatement in Net Interest Expense and National Debt would be based on the understatement interest rates. I estimated it to be over $3.5 trillion dollars.
This year I concentrated on what I thought would be the most important of the high level assumptions, inflation. In the budget they call inflation "Consumer Price Index, percent change, year to year". I Googled "CPI" and found a government website from which I could get historic annual inflation numbers. I compared those to the average (2.0%) and maximum (2.1%) inflation assumptions in the 2012 budget. I was stunned with what I found. We've haven't had a decade with a 2.0% average inflation rate since before the 60's and we've only had 7 years, most during recessions, that were at or below the 2.1% maximum inflation rate they show in their projections for the years 2012 - 2021. It turns out they are using the Fed Target Rate for their maximum inflation rate despite the fact we routinely surpass it.
Why would they use such unrealistic numbers in putting out the budget projections. There might be two reasons:
First, compounding. There's is a concept in math and finance called compounding rate. The old example was 7 and 10. If you earn 7% a year for 10 years you can double your money, but if you can earn 10% per year you double it in 7 years." Simply the put, higher numbers double more quickly and lower numbers double slower. Imagine how much longer it takes spending to double at 2.1% inflation as opposed to a more realistic 3.5% inflation. And back in the 70's and early 80's it didn't take long to double at all with inflation over 7.0%. This means they create much more acceptable numbers for Outlays, Deficits and Increase in Debt by using lower inflation assumptions than higher ones. I order to make sure that they weren't doing the same thing other administrations had done, I looked up four other budgets (2009, 2007, 2005 & 1997) and found the maximum inflation assumption for those averaged 3.1%. While still below historical trending, it was significantly above what this WH OMB has used. Finally I tested the 2011 projection of 1.3% against what we've already seen this year (Oct - Sep fiscal year). We've already reached this year's annual assumption In February and still have most of the year left.
The second ties to something Chairman Greenspan used to tell Congress about interest rates. He told them that Interest rates follow trends in inflation and inflation follows trends in government spending. In otherwise, if you project lower inflation rate assumptions, then you can also use lower interest rate assumptions. And the 2012 budget uses very moderate to low interest rates. That in turn results in understating Net Interest Expense, Outlays, Deficits and Increase in Debt. I also found we are currently well above their 2011 average annual 10 Year Treasury assumption of 3.0% with the rate close to 3.5% at the end of February.
So I'm left wondering "What's going on here?" While M. Moore may be technically correct that there is a lot of cash around and we aren't totally broke, we are running very significant deficits and watching our debt increase at an alarming rate. Soon we will be faced by a catastrophic increase in Net Interest Expense that will overwhelm the budget. If you don't believe it, just compare the level of Net Interest Expense we paid in 2010 to what the average annual Net Interest Expense was during the 90's and that was with about one third the National Debt we currently have. That's what a Fed Fund rate under 0.2% will do for you.
90's Average: $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)
2010: $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)
It appears this administration is now using the Budget process as merely a political tool to achieve their ends. Unfortunately it appears their political ends include misleading us as to the extent of the financial crisis we are facing. So ask yourself this. "Why would they want to do that?"
This year's summary schedules show up in Table S-13 on page 202 of the Summary Tables found on the WH OMB website.
2012 Budget = http://www.whitehouse.gov/omb/budget/Overview (choose last item Summary Tables)
Inflation tables = http://www.bls.gov/cpi/tables.htm (choose top item)
Technically he may be right, but it’s not going to help us much to be "technically right".
My background is 30+ years in the healthcare finance field with most of those years at a senior management or CFO level. My training is accounting with a Masters and CPA. So I have a background for what I'm writing. My only concern is for the future of my grandkids and others like them. I'm not sure what Mr. Moore's motivation is?
Something isn't "right".
I started downloading the White House Office of Management and Budget Summary Schedules (found on their website) in 2009 (2010 budget). I was curious how they might have calculated the Net Interest Expense for the budget years. I came away concerned with their overall budget projections since I felt they had used very optimistic assumptions for each of the 5 key budget assumptions (growth, inflation, unemployment, short term interest rates and long term interest rates found on Table S-13). Using overly optimistic values for each of the assumptions would make the resultant projections very unrealistic.
In 2010 (2011 budget) I decided to create historic databases on each of the five key assumptions to test their reasonableness and came away concerned that historical trending couldn't support any of the five, let alone all five of them. That year I calculated the amount of understatement in Net Interest Expense and National Debt would be based on the understatement interest rates. I estimated it to be over $3.5 trillion dollars.
This year I concentrated on what I thought would be the most important of the high level assumptions, inflation. In the budget they call inflation "Consumer Price Index, percent change, year to year". I Googled "CPI" and found a government website from which I could get historic annual inflation numbers. I compared those to the average (2.0%) and maximum (2.1%) inflation assumptions in the 2012 budget. I was stunned with what I found. We've haven't had a decade with a 2.0% average inflation rate since before the 60's and we've only had 7 years, most during recessions, that were at or below the 2.1% maximum inflation rate they show in their projections for the years 2012 - 2021. It turns out they are using the Fed Target Rate for their maximum inflation rate despite the fact we routinely surpass it.
Why would they use such unrealistic numbers in putting out the budget projections. There might be two reasons:
First, compounding. There's is a concept in math and finance called compounding rate. The old example was 7 and 10. If you earn 7% a year for 10 years you can double your money, but if you can earn 10% per year you double it in 7 years." Simply the put, higher numbers double more quickly and lower numbers double slower. Imagine how much longer it takes spending to double at 2.1% inflation as opposed to a more realistic 3.5% inflation. And back in the 70's and early 80's it didn't take long to double at all with inflation over 7.0%. This means they create much more acceptable numbers for Outlays, Deficits and Increase in Debt by using lower inflation assumptions than higher ones. I order to make sure that they weren't doing the same thing other administrations had done, I looked up four other budgets (2009, 2007, 2005 & 1997) and found the maximum inflation assumption for those averaged 3.1%. While still below historical trending, it was significantly above what this WH OMB has used. Finally I tested the 2011 projection of 1.3% against what we've already seen this year (Oct - Sep fiscal year). We've already reached this year's annual assumption In February and still have most of the year left.
The second ties to something Chairman Greenspan used to tell Congress about interest rates. He told them that Interest rates follow trends in inflation and inflation follows trends in government spending. In otherwise, if you project lower inflation rate assumptions, then you can also use lower interest rate assumptions. And the 2012 budget uses very moderate to low interest rates. That in turn results in understating Net Interest Expense, Outlays, Deficits and Increase in Debt. I also found we are currently well above their 2011 average annual 10 Year Treasury assumption of 3.0% with the rate close to 3.5% at the end of February.
So I'm left wondering "What's going on here?" While M. Moore may be technically correct that there is a lot of cash around and we aren't totally broke, we are running very significant deficits and watching our debt increase at an alarming rate. Soon we will be faced by a catastrophic increase in Net Interest Expense that will overwhelm the budget. If you don't believe it, just compare the level of Net Interest Expense we paid in 2010 to what the average annual Net Interest Expense was during the 90's and that was with about one third the National Debt we currently have. That's what a Fed Fund rate under 0.2% will do for you.
90's Average: $216 billion Net Interest on $4.6 trillion debt (Fed Fund Rate of 5.2%)
2010: $197 billion Net Interest on $13.4 trillion debt (Fed Fund Rate of 0.18%)
It appears this administration is now using the Budget process as merely a political tool to achieve their ends. Unfortunately it appears their political ends include misleading us as to the extent of the financial crisis we are facing. So ask yourself this. "Why would they want to do that?"
This year's summary schedules show up in Table S-13 on page 202 of the Summary Tables found on the WH OMB website.
2012 Budget = http://www.whitehouse.gov/omb/budget/Overview (choose last item Summary Tables)
Inflation tables = http://www.bls.gov/cpi/tables.htm (choose top item)
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