If you’re looking for something to cheer you up, don’t read the latest letter from ultra-bear Eric Sprott (via Market Folly). Basically he argues, a US default is coming sooner, rather than later, and that there’s just no hope of averting this.
The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars.3 How on earth does anyone expect them to raise this capital? As we stated in a previous article, in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28% from September 2008 to July 2009 – far short of what the US government required.4 The US taxpayer can’t cover the difference either. According to recent estimates, tax revenue from all sources would have to increase by 61% in order to balance the 2010 fiscal budget. Given that State government income tax revenues were down 27.5% in the second quarter, the US government will be lucky just to maintain its currentlevel of tax revenue, let alone increase it.
The bottom line is that there is serious cause for concern here – and don’t be fooled into thinking
this crisis will fix itself when (and if) the economy recovers. Just how bad is it? Below we outline the
obligations of the US Federal Government from 2004 to 2009. We present two sets of numbers,
as government accounting can vary widely depending upon the source. In column A, we outline the
Total US government Obligations, using actuarial reports from the Social Security Administration
and the Medicare Trustees Reports. In column B we identify Total Federal obligations according to
GAAP accounting provided by Shadow Government Statistics, calculated on a US fiscal year end
basis with estimates for 2009. The differences in the absolute amount of total obligations ($114.7
trillion vs. $74.6 trillion in 2009) are a function of timing, the calculation timeline for Social Security
and Medicare, and other obligations included under GAAP rules. Either way we choose to calculate
it, the total number is preposterously large. From 2004 to 2009, US unfunded obligations increased
by an average of almost 50% over this six year period under both calculation methods, while US
government revenue increased by only 12%.6