Fuzzy Treasury Math and Its Consequences

(Note: A version of this appeared on AlterNet earlier this week). If it sounds too good to be true, it’s probably false. Especially if it involves math, the Treasury Department, and two disparate political camps championing two different economic doctrines.

Yet, so goes the current telling of the deficit story. When the Congressional Budget Office (CBO) proclaimed that its projected deficit for 2013 had dropped to $642 billion, there was nary a question asked about how that number was conceivable.

Real-wage stagnation, epic student debt, more low-paying half-jobs accepted out of desperation than moderate-paying full-ones being created, health costs out of control, an ongoing Congressional war over sequestered funds, more federal debt being created even if tempered by zero-interest-rate policy and yet, the media jumped on the make-believe-bandwagon of an incomprehensible turn-around in the government’s books, where the deficit had grown as a direct result of debt created to float the banking system. Somehow the deficit had magically nearly-halved from around $1.1 trillion last year.

A battle of philosophies

When the deficit was announced to have undergone some kind of Fastest Loser diet, Keynesian types were thrilled that their philosophy was validated. The wondrous number, the ‘smallest shortfall since 2008’,  proved fiscal stimulus would ultimately boost the economy.  (Leave aside that John Maynard Keynes was actually an asset manager and successful speculator.) 

Where there is truth to part of this  (austerity never helped anyone but those not impacted by it) it ignores the fact that a vast portion of stimulus has been mirrored by a policy of cheap money, asset bubble manufacturing and providing a parking spot for Treasury and bank debt on the Fed’s books. Nearly 80% of the Treasury debt created since the financial crisis of 2008 has not been raise to even plug a deficit, but to float a flawed financial system. Still, blind acceptance that any federal stimulus helps the population and not its financial institutions does economics and more importantly, the country, a disservice.

Free-market types also considered the reduced deficit a philosophical triumph. By not overly helping or regulating the market (score another one for watering down the already tepid Frank-Dodd Act), the economy is marching back to normal on its own. See! So more budget cuts of social, but not corporate, welfare are necessary.

But blind-belief in the headline figure weakens their cause, too. A true free-marketer would be against the Federal Reserve propping up the treasury department and the debt market by printing money, buying lots of new treasuries, or allowing banks to park them on their books (to the tune of more than $1.5 trillion worth in excess reserves) and by buying $85 billion in toxic assets per month from banks shifting their rotting positions to the Fed, thereby freeing up space to speculate in other ways, in a well-orchestrated accounting gimmick.

Those debates of course will continue on. Meanwhile, there’s the matter of what sparked them - the CBO’s estimate of the 2013 deficit, the number that measures what the government takes in vs. what it spends. Examining it, shows that not much has changed in the past three years. 

First, a hat tip to Karl Dennniger at Market Ticker for boldly going where much of the media seemed too complacent or clueless to go.  According to Denninger’s analysis of Treasury data, since September 28th 2012, “there has been a net $762.6 billion of new debt added to the Federal balance sheet, not the $488 billion the Treasury Department claims.”

He shows how the Treasury’s cash statement indicates that “At the current run rate … the deficit on a cash basis this year is $1.188 trillion” compared to $1.210 trillion last year, or,  about the same.  If you include figures through the end of April, that run rate produces a deficit of about $1.307 trillion.

Regarding the $642 billion headline deficit number, simple logic (and a read of the news) showed that neither US debts, nor its largest expenditures had dropped.  At first, I just assumed the Treasury Department was excluding something major from the figures that the CBO was using - but the math doesn't work even if it excluded lots of costs or pumped up lots of revenues.  

The Truth is In there

The evidence of the real deficit projection lies in the Treasury's own report of receipts and outlays, the Monthly Treasury Statement which compiles activity from the start of the current fiscal year (October 2012) through April 2013. 

A cursory look at this report reveals items that ulimately don't support the CBO’s cheery projections. (Warning: there’s some math coming up.) Take Table 1. Its shows there have been $1.603 trillion in budget receipts so far for fiscal year 2013 vs. $2.090 trillion in outlays. This indeed produces a value for a current deficit (outlays minus receipts) of -$487 billion.

The same table (and also Table 2) shows there were $1.383 trillion in receipts for the same period in 2012 and $2.103 trillion (about the same as this year) in outlays. Combining those figures, we do get a  comparative deficit this time last year of -$719 billion.  Okay, so far, so on point with the headline cheer.

However. Just below Table 1 comes some small print. The Treasury Department appears to have changed some accounting methods: "The deficit figure differs by $2.23 billion due mainly to revisions in the data following the release of the Final Monthly Treasury Statement."  There’s no clarity on how those revisions worked and they are small in the scheme of things, so let’s raise an eyebrow and move on – to the good part.

The Fuzziness

Even if the rest of this year's receipts continue to come in 16% greater than they did last year (which is what this table shows so far) - and there’s no particular reason why they should -  we'd get total receipts of $1.603 trillion plus an additional $1.237 trillion. That equals $2.839 trillion in total receipts for 2013. Remember that number for a moment.

Now, consider that even if  the rest of this year's expenditures remain flat to last year, there would be $3.538 trillion in total outlays for 2013. Subtracting that $3.538 trillion in outlays from $2.839 trillion in receipts, yes, we do get a total deficit projection of around $698 billion, about $56 billion higher then the figure the CBO announced, but what’s $56 billion give or take between friends?

Yet there’s more.  There’s Table 2. According to Table 2, expenditures won't be flat; they will be higher, and reach $3.684 trillion.

Subtracting $3.684 trillion from $2.839 trillion, we get an expected deficit of $846 billion, not the $642 billion figure that the media spread. Again, what’s about $200 billion between friends? But, adding in the extra debt from Denninger’s analysis of reports, that isn’t in this report, of $275 billion could put the real deficit figure closer to $1.12 trillion, where it’s been for the past three years.

There’s always some danger in working with numbers and estimates. The financial crisis predicated on mortgage prices and related assets rising quickly after speed bumps (which is what former Treasury Secretary, Hank Paulson said they'd do in 2007) showed us that. Numbers can be massaged and shrouded with suppositions.

But, that’s not the full case here. This is a case of performing addition and subtraction using the Treasury’s own report. And doing so, even absent wondering about assumptions or potential illusions, reveals a discrepancy between the recent headline deficit number and the one in the report.

Before we can discuss whether government stimulus works or not (and more importantly how programs are designed and who they benefit; sometimes people, often banks and corporatios), we should ask why some people are so eager to accept numbers or be right about the forest, that they run smack into the trees. Let’s at least see the main tree, here – the actual deficit figure - and then, we can move onto economic doctrine discussions. 

Five Dots from Cabbie to Billionaire

Sometimes the lines connecting dots are so overwhelmingly bold and darkly obvious that, despite knowing better, I find myself concentrating too much on the dots and not the lines. At any rate, I did a segment for the Alonya Show on RtTV this afternoon that covered four dots of financial dislocation. As I left the studio in a cab, a fifth dot appeared:

In Los Angeles, traveling eastward on Santa Monica Boulevard, you pass the mansion-laden enclave of Beverly Hills on your left, and a less ornate stretch of police and office buildings on your right. While we were driving, the driver revealed a mark of inequality, seemingly secret and trivial, and yet so significant.

“See that,” he gestured to a sprawling, perfectly manicured estate. “People that order a taxi from there to the airport, pay a flat rate of $30.  But over there,” he points to my right, “you’re on the meter. Forty-five bucks.”  

He shook his head, “They make 100 times more in those homes than what other people make. You tell me why the people with all the money get the cheaper fare.”

The answer was the line connecting the dots of the show I’d just taped.  They reap the benefits, because they make, or buy, the rules. A half an hour earlier, Alonya and I had discussed four other dots.

The first was an FT piece that noted there had been no new bank applications in the United States in 2011, after only 3 in 2010.  What does this mean? It means that it’s cheaper to acquire a bank with FDIC and Fed assistance, than to start a small one. Not only that, smaller banks can’t even raise the capital required to stake out a physical location. This, while mega-banks sprout like weeds on the corner of every block, capturing spacious street-front property, rolling out expensive signage, and able to negotiate better rents for their bulk presence. It is a sign of the small being crushed by the large; a situation whose side-effects include removing choice from citizens, who are left paying collusively high fees for ATM and banking services, at omnipresent, federally subsidized institutions.

The second dot was the excellent video, accompanying a petition, that Public Citizen just released called Breaking up is Hard to Do – aimed at Bank of America (but that could equally have been addressing any member of the too-big-to-fail contingent.) Alonya asked me what I thought of the video. I replied, “It’s not going to happen.” (These goliaths will remain joined at the commercial and speculative hip.) Not because it shouldn't, but because...

Our regulatory and legislative systems have been supremely indulgent of these behemoths. Here and there, the big banks emerge from settlements with fines for fraudulent practices, but it doesn’t make a dent in the risk they can manufacture, or the size to which they can grow. The Federal Reserve has ultimate regulatory authority over the big banks, and under Chairman Ben Bernanke, used that authority to approve, not reject mergers, to facilitate a cheap money party to fuel, what would otherwise have been insolvent financial giants, and to allow those same giants to re-funnel their subsidies back to the books of the Federal Reserve as excess reserves that gross .25% interest per year. Separately, the tepid Dodd-Frank Act gets watered down more each day. But even at its ‘strongest’ inception state, it didn’t break up the banks, nor reduce the risk they pose our global economy. Bank of America holds 35% MORE derivatives today than before the fall of 2008.

The third dot had to do with a billionaire index that Bloomberg created.  It provides a closer to daily tracking of the wealth of the world’s 20 most ostentatiously wealthy.  I don’t really know what to say about that.  But, whoever gave the internal go-ahead to that monstrous showcase of inequality should have perhaps included a location-tracker, so people could send their daily heart-felt awe and congratulations.

The fourth dot was the income gain of the top 1% vs. the 99% over the past year. The fact that the top 1% captured 93% (basically almost all) of the growth demonstrates that the inequality gap isn’t just widening; it’s accelerating. The more one has, the greater the cushion to soften economic Depressions. It was no different going into the 1930s Great Depression as illustrated in my novel, Black Tuesday. If you’re living paycheck to paycheck, you feel each oppressive drop of an increase in health care, education, childcare, food, energy and utilities costs. If your income isn’t growing in tandem, you are comparatively falling further down an economic hole. This accelerated income-rise-to-the-top is one more sign that when the media and Washington say we’re in an economic recovery, they have an ultra-myopic definition of who constitutes ‘we’, and it’s not the majority of the population.

That’s why there’s an Occupy Movement. As I wrote on behalf of the compelling book, "The economic elite vs. the People," “Occupy Wall Street has coalesced across towns, cities, and countries. It represents people of every race, age, and disposition as the only meaningful opposition to a winner-take-all financial system that extracted untold wealth from the global population to puff up the personal portfolios of elite executives with impunity. And until a more equitable society and system prevail, the Occupy movement is not going anywhere.” (See the rest on www.ampedstatus.com)

All these dots and lines project a gamed world, where it is not sweat or merit that propels people forward, but connections and power and pedigree. Which brings me back to my cabbie friend.  As he dropped me off, he offered this morsel of wisdom, “Things won’t change until we’re all paying the same fares. At least, that’s a start.” 

Lies my Fed Chairman told me

I've often wondered whether Fed Chairman, Ben Bernanke, believes his own hype, or if he is just so personally and professionally invested in perpetuating the story of the success of the greatest bailout ever compared to the most heinous of consequences that would have befallen us without it, that it doesn't matter.  

Either way, I cringed a little inside when he told the Financial Crisis Inquiry Commission this morning, 

"The single most important lesson of this crisis is we have to end the 'too big to fail' problem."

This coming from the man who, sat at the helm of the Fed in the fall of 2008, and approved without any conditions or questions, as per the Fed charter that equally provides for rejecting:

- The acquisition of Bear, Stearns and Washington Mutual by JPM Chase - making a big bank, bigger

- The acquisition of Merrill Lynch by Bank of America - making a big bank, bigger

- The acquisition of Wachovia by Wells Fargo - making a big bank, bigger

- The re-classification of Goldman Sachs and Morgan Stanley into bank holding companies - making the arena of big banks, riskier

Of course, no one on the commission asked probing questions about those brainiac decisions and how or why other alternatives weren't considered, particularly given the substantial government subsidies these institutions enjoyed on the way to becoming bigger and more Fed co-dependent. No one asked specifics of what the remaining subsidies to Wall Street still are. No one asked Bernanke what he meant when he implied that the new so-called financial reform bill would reduce the possibility of too-big-to-fail in the future,  given that the Fed totally ignored the fact that 3 of the institutions above subsequently surpassed or hit the already existing 10% concentration limits that had been designed to keep a lid on the notion of 'too-big' to begin with, and given the fact the the Fed either by itself, or in its position beside the Treasury Secretary on the new Financial Oversight Council, can override most future bailout decisions anyway.

Yet, we are supposed to believe that Bernanke is concerned about 'too big to fail? Really??