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I apologize for what you’re about to read

November 6, 2012,
Dallas, Texas.

It’s really hard to ignore what’s happening today; the election phenomenon is global.

Over the last several weeks, I’ve traveled to so many countries, and EVERYWHERE it seems, the US presidential election is big news. Even when I was in Myanmar ten days ago, local pundits were engaged in the Obamney debate. Chile. Spain. Germany. Finland. Hong Kong. Thailand. Singapore. It was inescapable.

The entire world seems fixated on this belief that it actually matters who becomes the President of the United States anymore… or that one of these two guys is going to ‘fix’ things.

Fact is, it doesn’t matter. Not one bit. And I’ll show you mathematically:

  1. When the US federal government spends money, expenses are officially categorized in three different ways:

    Discretionary spending includes nearly everything we think of related to government– the US military, Air Force One, the Department of Homeland Security, TSA agents who sexually assault passengers, etc.

    Mandatory spending includes entitlements like Medicare, Social Security, VA benefits, etc. which are REQUIRED by law to be paid.

    The final category is interest on the debt. It is non-negotiable.

    Mandatory spending and debt interest go out the door automatically. It’s like having your mortgage payment autodrafted from your bank account– Congress doesn’t even see the money, it’s automatically deducted.

  2. With the rise of baby boomer entitlements and steady increase in overall debt levels, mandatory spending and interest payments have exploded in recent years. In fact, the Congressional Budget Office predicted in 2010 that the US government’s TOTAL revenue would be exceeded by mandatory spending and interest expense within 15-years.

    That’s a scary thought. Except it happened the very next year.

  3. In Fiscal Year 2011, the federal government collected $2.303 trillion in tax revenue. Interest on the debt that year totaled $454.4 billion, and mandatory spending totaled $2,025 billion. In sum, mandatory spending plus debt interest totaled $2.479 trillion… exceeding total revenue by $176.4 billion.

    For Fiscal Year 2012 which just ended 37 days ago, that shortfall increased 43% to $251.8 billion.

    In other words, they could cut the entirety of the Federal Government’s discretionary budget— no more military, SEC, FBI, EPA, TSA, DHS, IRS, etc.– and they would still be in the hole by a quarter of a trillion dollars.

  4. Raising taxes won’t help. Since the end of World War II, tax receipts in the US have averaged 17.7% of GDP in a very tight range. The low has been 14.4% of GDP, and the high has been 20.6% of GDP.

    During that period, however, tax rates have been all over the board. Individual rates have ranged from 10% to 91%. Corporate rates from 15% to 53%. Gift taxes, estate taxes, etc. have all varied. And yet, total tax revenue has stayed nearly constant at 17.7% of GDP.

    It doesn’t matter how much they increase tax rates— they won’t collect any more money.

  5. GDP growth prospects are tepid at best. Facing so many headwinds like quickening inflation, an enormous debt load, and debilitating regulatory burdens, the US economy is barely keeping pace with population growth.
  6. The only thing registering any meaningful growth in the US is the national debt. It took over 200 years for the US government to accumulate its first trillion dollars in debt. It took just 286 days to accumulate the most recent trillion (from $15 trillion to $16 trillion).

    Last month alone, the first full month of Fiscal Year 2013, the US government accumulated nearly $200 billion in new debt– 20% of the way to a fresh trillion in just 31 days.

  7. Not to mention, the numbers will only continue to get worse. 10,000 people each day begin receiving mandatory entitlements. Fewer people remain behind to pay into the system. The debt keeps rising, and interest payments will continue rising.
  8. Curiously, a series of polls taken by ABC News/Washington Post and NBC News/Wall Street Journal show that while 80% of Americans are concerned about the debt, roughly the same amount (78%) oppose cutbacks to mandatory entitlements like Medicare.
  9. Bottom line, the US government is legally bound to spend more money on mandatory entitlements and interest than it can raise in tax revenue. It won’t make a difference how high they raise taxes, or even if they cut everything else that remains in government as we know it.

This is not a political problem, it’s a mathematical one. Facts are facts, no matter how uncomfortable they may be. Today’s election is merely a choice of who is going to captain the sinking Titanic.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • http://www.facebook.com/hip.moma Dani Ela

    Rombama will take care of us!

  • http://www.facebook.com/profile.php?id=100003042475960 Greling Jackson
  • Alex

    One of the best articles I’ve read in a long while, thank you sir

    • $5708171

      It has always fascinated me how the general public can be so incredibly stupid and oblivious. We, as a species, are not nearly as advanced beyond monkeys as we like to think. We believe in magic – i.e. that the economy is somehow going to heal itself with just our wishful thinking. The Titanic is a wonderful analogy. I’m glad I’m old. The younger people are going to have a very rugged time of it in years to come.

  • http://www.facebook.com/peter.nebres.9 Peter Nebres

    the reason why the election is so interesting to the rest of the world is that according to “mr. gold” jim sinclair, americans have the privilege of choosing if we will have global hyperinflation in 9 months or collapse in 2014-2015. pick your poison folks. i’d rather see it over and done with earlier. romney: 9 months. obama: 24 months.

  • highlanderjuan

    And to think that small potatoes Bernie Madoff went to jail for pulling the same kind of Ponzi scheme as the government does every day.

  • clearmorning7

    If we are hurting so bad, and if and it goes in! entitlements are strangeling us,,then why,,why do we send money overseas?2 billion to afganistan, 10 million to Palestine,10 billion to Israel 600,000.to Peru,Ecuador, 70 billion to date to Eqypt, lord knows to Africa,plus how about shrimp on tread mills, bovine urine studies, much,much mire to the FEW, God to many to mention,,,but amazingly all they ever talj about is entitelments REALLY?!? In Pennsylvania alone, 10,000government cars

    • http://www.facebook.com/ryan.d.simms Ryan David Simms

      ^All of the above is discretionary spending and foreign aid which are not increasing. To the contrary, they have been and are decreasing as it is the only thing that both Repubs and Dems are willing to cut. It is entitlements (specifically Healthcare ones) that are growing at a ludicrous rate. Medicare/Medicaid/Obamacare will equal our total current government spending (~$4 trillion) in about 15 years. Social Security is growing steadily and is a problem but not nearly as much as healthcare.

    • $5708171

      Yes, but these are our sacred cows. Even though we have no money, we must support these things. We are idiots.

  • Contrarianism

    Yes indeed! Great article …a non-violent non-voting revolution is the only way we will ever get “hope and change” in the USSA. http://www.contrarianism.net/2012/10/30/the-reason-i-do-not-vote/

  • http://twitter.com/_Candidate The Frankenstein

    Yeah, we know. It’s one reason I want O to win, so capitalism can’t take the blame as much as it would if Mitt wins. And your interest numbers are based on very low interest rates, don’t even think about what happens if rates treble, albeit weighted average coupon is still catching up with Uncle Ben’s perennial easing. Repudiation of debt is the only way out of this. Not default. Absolute repudiation. Or wholesale printing away the whole outstanding debt in one hit.

    • RegT

      Nice try. Capitalism will continue to be blamed just as Bush continued to be blamed even after four years (not that he was _much_ better as far as spending is concerned). The Left always has some (else) to blame. That should be obvious by now.

  • http://www.facebook.com/ong.kangwei.9 Ong Kang Wei

    Great Article!

  • fromaway46

    Is there not a typo in section 3)? 2,025 billion should read 2,025 trillion?

    • Pete Petepete

      Look at the comma.

      2,025 billion = 2.025 trillion

  • Mersaul4

    — The US can issue bonds with NEGATIVE real interest rates at the moment (inflation is higher than the interest paid on a 10-year bond). Issuing more debt is actually a pretty sweet deal. Repayment amount in real terms will be less than what was borrowed. Ouch, didn’t think that far, did you?
    — On point 3), a country CAN have a budget deficit and keep its debt-to-GDP ratio CONSTANT, as long as its growing. So permanent budget deficits are absolutely feasible. 2% budged deficit every year and 2% growth will leave the debt-to-GDP ratio unchanged. Or is this point simply too subtle for your kind of writing?
    — Is Point 5) really true? GDP growth is 2%, population growth is 1%. Isn’t 2% minus 1% is larger than 0%? Let’s recheck the maths there.
    — Point 6) is a confusing mess of a misrepresentation. You are using nominal numbers when talking about debt and ignoring that the US is a VASTLY bigger economy now than 200 years ago. Hear this: in nominal terms, the US economy is 30.000 times (yes, thirty-thousand times) bigger than it was in 1800. It is only natural that it accumulates nominal debt at a much faster rate now than before. (US nominal GDP in 2012 $15,000 billion, in 1800 $0.5 billion).
    — Isn’t looking at nominal debt numbers on a standalone basis, as you did, complete and utter non-sense? I mean, what do these numbers even mean? US debt as a % of GDP would have been a much more appropriate measure to look at when talking about the creditworthiness of the US government. Once one takes this more appropriate measure, things don’t look that bad anymore. The US debt-to-GDP ratio was much higher during WWII than now.
    — Facts are facts. Your misrepresentations are not political, they are mathematical.

    • Pete Petepete

      States cannot issue bonds with negative real rates forever.

      Point 3: Debt to GDP isn’t constant. Both debt and deficits are accelerating in size. Inflation is the only way to increase GDP (aggregate spending), and inflation would have to be so high that consumer price inflation may have to be 10%, 20% per year just to finance non-discretionary spending.

      Point 5: GDP is not much more than, and probably less than when corrected for shenaigans, 1% employment.

      Point 6: The economy isn’t growing at the same rate as debt. It is not wrong to look at the accelerating rate of debt.

      • Mersaul4

        “States cannot issue bonds with negative real rates forever.”
        I agree.

        Point 3: I agree, debt-to-GDP is growing. But why was there no mention at all of debt-to-GDP in the original article? There is instead this number wizardry with “it took 31 days to accumulative $200 billion of new debt.” Typical of the populist articles on the US debt situation. What do these numbers mean??? How do you interpret the fact that in 1 day the government issued $6,000,000,000 of new debt???

        I am a reasonable guy, if we start talking reasonable measures, like debt-to-GDP, I am open for discussion. We need resonable measures of indebtedness so that we can meaningfully discuss the problem.

        Point 5: I do not belong to the conspiracy theorist — I know there are many — and I will take the 2% growth number at face value. So even though growth is really weak right now, GDP per CAPITA is still increasing.

        “It is not wrong to look at the accelerating rate of debt.”
        I agree. What’s wrong is to misrepresent the facts with analysis that incorrectly rely on nominal numbers instead of inflation-adjusted (real) figures and looking at nominal debt on a standalone basis, instead of considering debt in relation to GDP, so the numbers have a meaningful interpretation.

  • Civil Society Trust

    Fantastic article (if not completely horrifying). This is the truth that the Republicans failed to tell. Yes, it’s down in the weeds, but too bad — gotta go there.

  • Jackie

    Great article. So far, I’ve traded in my 401K for about 20K in silver. Buying more as I become able to. I knew Obama would win. That’s what happens when half the country is extremely socialist, and the other half try to beat him with a moderate socialist.

    • 48A28

      I have been researching this topic for a few years now and I have to say, that trading in your 401k for silver will be the best thing you could’ve done.

  • romed bucher

    So, in face of all those overwhelming problems you, Simon Black, suggest – – ?

  • poweljs

    I think the government’s plan is to inflate our way out of debt.

    • buffonelder101

      so true

  • http://www.facebook.com/wade.crum Wade Crum

    To Grow GDP you have to grow the economy. You grow the economy by spreading out the producers which creates competition. What has been happening for quite some time now is a shrinking economy in which the control of production and operations are much more narrow and they in turn only act like they are competitive i.e. time warner/Dish/directv. All this talk about inflation completely ignores the core problems. This engineered to fail type capitalism is the problem. You pay off debt by producing not by artificially overvaluing the product. Guess what, no one wants to take out a six year loan on a car that will only last 5 years. Build things that matter…the people are wising up to fallacy of engineering to fail.

  • http://twitter.com/gasparel Gaspare Lipari

    Are you kidding me? Your logic is so flawed it’s ridiculous!! And some idiots buy your reasoning. That’s why this country is going downhill. You mention that entitlements are the same no matter who us in office. Where do entitlements come from? Outerspace? Obama and his cohorts have created more new entitlements than anyone in history. Is that not a significant fact? Governments have a responsibility to their citizens to budget properly and rule quietly. A leader is an example for those they rule over. To be dependent on government for most of your life means you never learn how to be a responsible individual. You become a citizen who cannot function without government assistance. Is that the American dream, to be one of many in a collective never to realize your potential or make an impact? How can you say the leader we elect had no significance?

    I suggest you educate yourself. Pick up a copy of Animal Farm and see what dangers exist when citizens depend on their government for all. See how though the surface of an idea seems thoughtful and positive the dependence created stifles creativity, improvement and independence!

    • darthangel

      You’re ignoring Bush’s disastrous medicare bill as well as Bush sr. and Nixon. The Republicans have shown they don’t have any more willpower to budget properly than democrats. Both parties are criminal. Only a criminal would support either party at this point in history.

    • $5708171

      The “president” is utterly irrelevant. Things are NOT going to get better. The United States is dead, regardless of your pie-in-the-sky communist dreams. It matters not what kind of “inspirational leader” anybody is at this point. We are dead.

  • basspig

    This is why the powers that be want to eliminate cash, financial privacy (what little is left of it) and surveil every transaction.. it’s the only way to move towards a Total Tax to get beyond the magical 18% tax rate beyond which, in a system with the ability to hide transactions, they can never go beyond.

  • http://www.facebook.com/heddy.hidayah1 Heddy Hidayah

    which one fernandez is my son?

  • headinthesand

    Simon, do you mind sharing some of your sources for this peice? I’m trying retrieve this data on the Federal Reserves Economic Data page, but can’t quite match it. Thanks!

  • Varian Wrynn

    The solution will be to change the law, “overhaul” the entitlements. The entitlements are indexed to inflation (which the government defaulted on three years ago by claiming there was no inflation), so inflating the money supply won’t work. Only solution is the hit the reset switch, or rewrite the laws to screw the people. So whenever you hear “overhaul” they are screwing you.

    You can’t promise the public more money ($125 trillion) than exists in the whole world ($90 trillion) and expect it to work in the end.

  • C. Judd

    Is it pointless to finally send a message regarding an article that was “hot” days ago but is now read by only a few latecomers? Your comment system requires a delay until one has time to better secure one’s privacy. For those who understand the following comment you can forward the issues of concern to your own comments on more current articles.
    Stop this stupidity regarding “entitlements”. The national debt is owed almost entirely to Americans, particularly to the politician’s favorite bank the Social Security Administration, because people are easily manipulated by the evil but banal politicians they elect or select or tolerate or accomodate to back up and pay for stupid wars and ridiculous military involvements around the world. That funding would have been much better spent, through the very Social Security Administration you constantly complain about, as investment in the “human capital” of this country and even if it was thrown as cash out the windows of helicopters over Mexico it would have been better spent. We could have bought plenty of control and international “goodwill” (read: beholding politicians) with a lot less destruction and killing, furthering the business development of the world and our place in it all.

    By the way, if you are such fan of liberty and individual privacy why do you offer no easy alternatives to having one’s every move tracked by the public intelligence units of our various government agencies? I mean Facebook? Really? Are you some kind of crazy fan of  Zuckerberg’s? Maybe I’ll just use somebody else’s random email to register, so you can track that person instead of me. Still, it’s just beyond irritating to see how hypocritical are those who are supposedly so opposed to hypocrisy.

  • HenryR

    Our currency is hung up in a positive feedback loop. Most systems are designed around negative feedback loops. For instance, stationary engines normally have governors on them to prevent them from turning to many revolutions per minute (RPM). As the RPM’s increase, the governor cuts back on fuel to slow the engined down, thus preventing it from turning so many RPM that it flings itself apart. Cutting back on fuel is an example of negative feedback. RPM”s up, fuel down,

    Consider what would happen to an engine on which the governor used positive feedback. The more RPM the engine turned, the more fuel the governor would feed to the engine and then the engine would turn more RPM, thus demanding more fuel which the governor would automatically supply until the engine self-destructs. This is what the Federal Reserve Bank is doing ot our currency.

    We borrow currency from the Federal Reserve Bank to use as money, but it isn’t money. It is just debt instruments “printed” by the Federal Reserve Bank, a privately owned company. Despite its name, the Federal Reserve Bank is not part of the federal government. Where does this Federal Reserve Bank get its money? From nowhere. It simply makes up the numbers we need as need them, and it charge us interest as though it made out loans to us in real money.

    Because the currency we use is draws interest, we must borrow even more of it to pay for the money we already have in circulation. Can you see why I’m saying that our currency is in positive feedback loop? The more you spend, the more you have to borrow, and the more you borrow the bigger your debts and you cannot pay it because all you have is IOU’s so you borrow even more money and get charged more interest, so then you find yourself back at the loan window again….

    No! I am not making this up. This is the insanity our psychopathic politicians have been foisting on us since Richard Nixon was president. Yes, it is insande. It is so ludicrous that your jaw may wel be sagging with disbelief and if you think I am lying I don’t blame you. I had a very difficult time believing this when I was first told about it. Yes! It is criminal, but it is not our government alone that is pulling off this scam, it is every government on Earth.

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