Thursday, August 10, 2023

Government Spending: Social Security, Part 1

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7 MIN READ - Last month the Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff) posted several articles on military spending. Today we focus on some history and problems with the federal government’s single largest 2023 budget outlay at $1.35 trillion: Social Security.

First a little history.

Social Security was founded in 1935 as one of President Franklin Roosevelt’s many New Deal programs. At its inception a 1% tax was imposed on all worker paychecks with another 1% taken from the employer for a total of 2%.

Fully aware that the number of retirees would grow over time the Social Security payroll tax was scheduled to rise to 2% + 2% in the 1950’s and stay there for good.

It didn’t take long for the government to break that promise. The tax was raised to 2.25%+2.25% in 1957, to 2.5%+2.5% in 1959, and 3%+3% in 1960. And up and up it went over two more decades despite tens of millions of baby boomers entering the workforce.

For those who haven’t checked their paycheck stubs lately, the Social Security payroll tax has been 6.2% paid by workers and 6.2% by employers since 1990 (12.4%), yet the program has been running large deficits for years now and is expected to be unable to pay promised benefits as early as 2034.


The Economics Correspondent considers himself a halfway decent retirement planner and years ago, when he first noticed the Social Security Administration was taking 12.4% out of everyone’s paycheck (subject to a salary cap that is currently set at $160,200), his first thought was “Hmmm, 12.4% is considered a *very* healthy chunk to save for one’s retirement already. Just how well could a worker do on his or her own saving 12.4% instead of Social Security doing it for him?”

So if we open a spreadsheet and plug some numbers in, we get some interesting and sadly predictable results.

Starting with a minimum wage worker right out of high school at age 18, if the employee:

-Earns the federal minimum wage of $7.25 an hour
-Works 40 hours a week
-Is lazy and never works an hour of overtime
-Is unambitious and never gets promoted
-Is unambitious and never gets a raise… only the occasional bump in minimum wage to adjust for inflation
-We assume an average annual inflation rate of 2.5%
-We take the standard 12.4% from his paycheck
-We compound a modest stock market annual return of 9% over many decades (the S&P 500 has averaged 11% for the last 50 years)…

At age 72 our minimum wage worker with zero ambition has a nest egg worth of $3.18 million earning $23,843 a month in interest.

Of course by age 72, after years of inflation, $23,843 won’t be worth what it is today. So adjusting for inflation his monthly interest payments will be $6,291 a month in today’s dollars (about $75,500 a year) but our worker also has his $3.18 million nest egg to slowly tap into.

And in deep blue states where the minimum wage is over double the federal floor all these numbers more than double to greater than $6.36 million and inflation-adjusted annual payments of $150,000.

How does Social Security treat these minimum wage workers?

According to the Social Security Administration’s online calculator, the same worker can expect at age 72 to receive $6,961 per month in the future which, in today’s dollars, is $1,300 or $15,600 a year.

$75,500 a year vs $15,600 a year.

Oh, and the worker’s nest egg, which doesn’t really exist under Social Security anyway, goes to the government.

This all assumes Social Security can keep all its promises decades from now.

And of course we’re talking about an unambitious lifetime minimum wage worker. What about a middle-class worker averaging $60,000 a year over a lifetime, starting working at age 22 right out of college (with adjustments for inflation)?

Well investing his own money, by age 72 our middle-class worker is worth $8.9 million earning $66,500 a month.

Adjusting for inflation in 2023 dollars that’s a nest egg of $2.6 million earning $19,331 a month or $232,000 a year.

According to Social Security’s online calculator that same worker gets a monthly benefit of $2,785 or $33,420 a year: one-seventh as much.

And don’t forget there’s no nest egg to tap into. His $8.9 million disappears.

Which raises an interesting question: Why would anyone who works ever want Social Security? The program pays a negative inflation-adjusted return on investment and anyone who works can do better on their own.


One of the fundamental problems behind Social Security’s lousy returns is that it was originally (and deliberately) set up as a “pay as you go” program instead of the alternative “fully funded” version.

In a “fully funded” retirement program, money is taken out of your paycheck and put in an individual investment account where it earns real returns. Once you reach retirement age your money has grown over decades and it’s waiting for you to tap into your own account. 

Self-funded retirement schemes, such as those in Singapore, Hong Kong, Chile, Poland, Sweden, Malaysia (and more) are like a mandatory IRA or 401k; the government is forcing you to save for retirement, but the money is yours and yours alone. It doesn’t get diverted to another retiree in return for only a promise to pay you later.

“Pay as you go” programs like Social Security don’t put worker proceeds into a retirement account to grow but rather instantly transfer the money to elderly retirees. Instead of investments that grow the worker’s retirement balance, today’s workers are told they will receive their pensions via direct transfers from another generation of workers 10, 25, or 50 years from now.

Hence one of the key problems with “pay as you go” programs is the payroll taxes aren’t invested in anything and don’t grow (exception, the late 1980’s/1990’s “surplus” which was spent by Congress). The only thing that grows is the size of the promises made to today’s workers regarding what they’ll get decades from now when they retire.

Also, unlike fully funded programs, worker contributions are diverted immediately for consumption spending instead of investment spending. Across the entire system there is no deferral of consumption which also trims long-term economic growth. 

Some people call this arrangement a Ponzi scheme, but is it? Well, one definition of Ponzi scheme the Correspondent found is:

“A fraudulent investment scheme in which an operator pays returns on investments from capital derived from new investors, rather than from legitimate investment profits… … Ponzi schemes generally fall apart when there is not enough new capital to pay the ever-growing pool of existing investors.”

In which case Social Security is technically not a Ponzi scheme. Because private investors can choose not to hand their money to a bankrupt Ponzi scheme whereas Social Security simply confiscates workers’ money by force.

So why did Congress and FDR set up Social Security as an inefficient pay as you go program? Two reasons mostly.

The first was to get votes *now* and *today*, not decades later. In 1935 FDR’s reelection was coming up in one year, and telling seniors that “sorry, the program isn’t going to give you much by Election Day because your contributions won’t have added up in one year” wasn’t going to get him the votes he wanted to win in 1936. Instead FDR told seniors they would start receiving large payments funded by workers ASAP, and many of them rewarded the incumbent president with their votes.

The other reason was more cynical. There is documented evidence that FDR or at minimum FDR’s New Dealer aides wanted Social Security to be a program that no one could ever get rid of.

According to liberal historian Arthur Schlesinger, FDR explained in 1941 that…

“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.”

Today the Social Security Administration argues that these weren’t really FDR’s words but rather one of his top New Dealers, Luther Gulick.

Either way, it’s the program FDR approved and signed into law, and the vision turned out to be quite prescient. Like a hook in a fish, there’s now no easy way to transform Social Security into a fully funded program or wind it down.

If anyone tries to change Social Security to a fully funded program, payroll taxes taken from worker paychecks will go into the workers’ individual accounts instead of directly into retired seniors’ pockets—and seniors who were promised decades ago that they would get their regular Social Security payments at retirement will scream bloody murder (rightfully so) that they aren’t getting their money back as promised.

So if any politician tries to make Social Security more sustainable or fully funded, an entire generation of retirees will get stiffed and rise up in revolt, something FDR and his New Dealers foresaw.

The only ways the Economic Correspondent can see Social Security mathematically transforming into a fully funded program are:

1) Bankruptcy and restructuring (i.e. someone doesn’t get at least part of what they were promised).

2) Attempting to divert some contributions into higher yielding investments to plug the gap over many years. George W. Bush proposed this in his second term and was instantly excoriated by senior citizen lobbies who feared it would mean fewer payments—egged on by Democratic politicians who argued George W. Bush planned to bankrupt Social Security in the “Wall Street casino.”

3) Plugging the hole with a large one-time transfer from general tax revenues.

4) Going back to 1935 in a time machine and starting over.

The Economics Correspondent sees a combination of #2 and mostly #3 as the best option for making sure everyone gets what was promised to them while spreading the pain around as evenly as possible, but even #2 faces harsh political realities which will probably make it impossible.

Hence when Social Security is forecast to hit the wall in 2034 and no longer fully pay promised benefits the Correspondent suspects the federal government will either raise the payroll tax even higher, cut benefits for wealthier retirees (aka. “means testing” or reneging on promises to evil, comfortable retirees who committed the sin of being responsible during their working years), raise the retirement age by a few years to lower its overall payouts, or some combination of all three.

Wednesday, August 2, 2023

Where We Are in the Interest Rate Cycle

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An update on economic soft-landings from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

The Economics Correspondent apologizes for his extended absence as he’s been travelling and has found less time for writing than he anticipated.

One of the many things that makes CO a super-cool party dude who knows things and does stuff is the freedom he gives his columnists and CO Nation as a whole to share differing ideas and disagree without employing the iron fist of New York Times, Facebook, or pre-Elon Twitter censorship.

So regarding economic soft-landings and the rallying stock market, the Economics Correspondent is going to go out on a limb and take the risky proposition of questioning the near-term (12-24 months) staying power of both the +2.4% GDP economy and the stock market… using data from the St. Louis Federal Reserve’s own charts.

Cautious Rockers can draw their own conclusions looking back at a straightforward graph of nearly four decades of business cycles and the temporal relationship between Fed interest rake hike campaigns and recessions (in vertical grey areas). Then readers can judge for themselves at what point temporally the United States economy lies within that process today—at the extreme right of the chart—assuming history likes to repeat itself.

ps. The Economics Correspondent remembers in 1999, early 2000, 2006, and 2007 countless Wall Street strategists and economists (some working for the government) declaring:

“The interest rate hikes are over and there’s no recession in sight. The Fed has achieved a soft landing and it’s all clear skies from here!” 

He even remembers in late 2007 the Dow and S&P hitting record highs among calls that:

“The Fed is now LOWERING interest rates and there’s been no recession.”


“The bears and doom-and-gloomers have warned of recession for more than a year and it hasn’t happened. They’ve been proven wrong. With rates now going DOWN this is the best time to be an aggressive buyer of equities. Go all in!”

Tuesday, July 18, 2023

Foreshadowing Marxism: Labor Theory of Value Errors

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff is giving some serious consideration to writing a series of columns this fall about Marxism and communism.

In the meantime this little cartoon does a good job of exposing just one logical fallacy prevalent in several key Marxist tenets including its reliance on the labor theory of value, the alleged extraction of surplus value from the workers, and the "violent exploitation" (their words, not mine) of the laboring classes by the parasitic capitalist.

ps. The Economics Correspondent found this meme on a Reddit post commenting that it proves workers do everything and are being robbed by CEO's. Said meme poster evidently had no idea the whole point of the cartoon is exactly the opposite but hey, it would hardly be the first time in history that Marxists were lacking any connection to reality.

Tuesday, July 11, 2023

Fed's Interest on Reserves Payments Swell to $160 Billion in 2023

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2 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff posts an update on the Federal Reserve’s ballooning interest on reserves payments to commercial banks, which are approaching $160 billion this year.

Click to enlarge

The Fed’s yearlong campaign of interest rate hikes has dominated financial news headlines for some time now, but buried deep in the Fed’s latest quarterly report is a little-reported yet huge offshoot of its rapid tightening policy.

The Fed is on track to pay U.S. commercial banks over $160 billion in risk-free interest payments in 2023.

But before CO Nation harps on the banks, it’s worth noting the payments are the result of three major monetary policy shifts, all championed by the Fed itself.

1) Even since 2008 the Fed has conducted monetary policy on a “floor system” where it creates trillions of dollars in new reserves to buy assets from banks, but pays them interest to sequester those reserves and discourages them from lending aggressively which would make inflation far worse than it already is.

2) Instead of reducing its balance sheet as it tried from 2015 to 2019, the Fed ballooned it again in early 2020 as a response to the Covid pandemic. So instead of paying interest on $1.5 trillion in banking system reserves in September 2019, the Fed now finds itself paying interest on $3.2 trillion in reserves today.

3) Lastly, paying interest even on $3.2 trillion in reserves may not have been a big deal when the Fed’s “interest on reserves” policy rate was only 0.15% in early 2022. But over the last year the Fed has completed its Bermuda Triangle trifecta by rapidly hiking the interest on reserves rate to 5.15% as of this writing, and it’s likely to climb even further after the Federal Open Market Committee’s July 25th meeting.

Anyone with a calculator who understands Fed policy can estimate paying an interest on reserves rate of 5.15% on $3.2 trillion will equal a windfall for the commercial banks (about $160 billion), but nothing confirms it more than the Fed’s own quarterly income statement.

Scanning the Fed’s finances under expenses (picture attached) the Fed’s Q1 interest on reserves payments to banks is denoted as “Interest Expense: Depository Institutions and Others.” 

Amount paid? $37.852 billion vs. just $1.955 billion a year ago.

Also keep in mind these numbers reflect the first quarter of 2023 (Jan 1-Mar 31) when the interest on reserves policy rate sat anywhere from 4.4% to 4.9%. Now that it’s up to 5.15%, and going even higher soon, subsequent interest payments will be that much greater.

And that translates to a bottom line of more than $160 billion in risk-free, zero maturity interest for U.S. commercial banks by the time 2023 is over.

The Economics Correspondent isn’t particularly on the bash-the-banks bandwagon and doesn’t blame them for the current arrangement. Rather, the floor system and payment of interest on reserves was entirely the brainchild of academic theorists at the Fed who lobbied Congress hard for authority to implement their new operating system in the mid 2000’s.

Even when they put it into action during the 2008 financial crisis, the interest on excess reserves rate was 0.25% on $1.1 trillion of reserves in late 2009 (just $2.75 billion per year in payments) and 0.25% on a peak $2.84 trillion of reserves in 2015 (still only $6.9 billion per year).

But as of 2022 the Fed has really screwed the pooch ballooning system reserves to $4.2 trillion in 2022 and struggling to bring it down to $3.2 trillion today, all while dropping the ball on inflation and being forced to raise the interest on reserves rate to 5.15% and climbing.

Data source links:

1) Federal Reserve 1Q2023 quarterly financial report (page 3 for interest expense).

2) Reserves of depository institutions.

3) Interest on reserves rate (July 2021 to present).

4) Interest on excess reserves rate (October 2008 to July 2021).

Sunday, July 9, 2023

Left Coast Correspondent: Just Another Poop Day in San Francisco

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The Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomena shares just another day in the progressive workers paradise that is far-left San Francisco.

OK not quite just another day as it appears some maverick prefers canine poop over the human variety.

Tuesday, July 4, 2023

The Fed vs The Roman Empire's Debasement of the Denarius

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3 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff dedicates the CO chart of the day to Cautious Optimism regular Keith Shapiro who follows silver and the silver market.

Inflation and devaluation of money weren’t invented only when governments first bestowed central banks with legal monopolies over printing currency—the first such western monopoly granted in 1844 Great Britain.

The Roman Empire and even some provinces of ancient Greece played a similar game, only they did it with precious metal coins instead of paper bills.

At one time the Roman denarius coin was widely admired for its fineness and around the year 100 A.D. was composed of nearly 99% silver. Over time successive Roman emperors melted down and reminted the denarius, using lesser and lesser amounts of silver to facilitate additional production of coins (i.e. inflation) and service their growing government debts, incurred to finance wars of territorial expansion and the growing Roman welfare state.

Over time the denarius’ steadily falling silver content caused its luster to fade and the public began to discount the coin. So in 215 the emperor Caracalla added 50% more silver back but restamped one denarius coins with the new denomination of two denarii—the so-called “double denarius.” Hence the denarius regained its visual luster, but the silver content per unit of currency had been further eroded by 25%.

By 268 A.D. just 2% of the denarius’ silver content remained, applied exclusively upon the coin’s surface to conceal its bronze base. However as the coins circulated the thin silver sheen quickly wore off revealing the denarius’ unremarkable base metal composition. 

Shortly afterwards the empire switched exclusively to bronze coinage inaugurating the famous Roman hyperinflation that defined the Crisis of the Third Century. In 301 the emperor Diocletian enacted some of history’s first price control laws to halt the inflation but they failed, leading only to widespread shortages of goods.

If the Roman Empire debasing coins from 99% to 2% over 168 years sounds terrible, it was. But consider comparing the denarius’ rate of debasement to that of modern-day currencies.

According to the Minneapolis Federal Reserve’s online inflation calculator the Fed has devalued the U.S. dollar by 96.9% since opening its doors in 1914, an annualized inflation rate of 3.2277%.

At that continued rate the dollar’s debasement will equal the denarius’, but after just 123 years compared to the Roman Empire’s 168.

Incidentally 123 years from the Fed’s establishment will be the year 2037. Which means the Fed will have pulled off a denarius-like devaluation of the U.S. dollar fourteen years from now, and done it 45 years faster than a succession of corrupt Roman emperors.

If the same average rate of devaluation continues for a total of 168 years, as it did in Rome, the U.S. dollar’s final purchasing power will settle at 0.48 cents (lower than the denarius’ roughly 2 cents) in the year 2082—right before the Fed resumes devaluing it even further.

ps. Under America’s bimetallic (1792-1879) and then classical gold standards (1879-1914) the U.S. dollar’s purchasing power fell from $1 in 1792 to…. 

…well, actually it rose slightly to $1.04 by 1914. But a currency whose purchasing power rises from $1 to $1.04 over 122 years is for all practical purposes unchanged, although mathematically that’s an annual inflation rate of negative 0.033%

Tuesday, June 27, 2023

Government Spending Addendum: Military Spending and the Discretionary vs Mandatory Budgets

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2 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff shouts kudos to CO regular Lisa Dennis Lee for a comment reminding him about one more defense spending statistic.

As mentioned in a previous column on government military spending, one of the more common fallacies/deceits you’ll hear from the political Left is “Half your tax dollars go to war,” proven with pie charts of federal discretionary spending (example attached, left).

The Economics Correspondent knows firsthand. Being a resident of San Francisco he's seen activist flyers with the same slogans and charts taped to his apartment building's front door.

The key word here of course is “discretionary,” which the same sophists never define.

Because the federal discretionary budget is only one third of the overall federal budget, the other two-thirds being the ***mandatory budget*** which is dominated by Social Security, unemployment, Medicare, and Medicaid (attached chart, right).

The mandatory budget is consistently twice the size of the discretionary budget, although in 2022 it was even larger (73% versus 27%) due to higher Covid-related medical spending. 

And according to the White House's budget website the 73/27 ratio isn't scheduled to subside anytime soon, but we'll be generous and assume discretionary spending remains one-third.

So if defense is one-half of the discretionary budget, and we know the discretionary budget is only one-third of the overall federal budget, then grade school math tells us...

Military spending = one-half of one-third = one-sixth of the federal budget: right in line with the 17.6% that we already calculated in previous articles.

(Actually defense was only 12.2% of federal spending in 2022, but it creeps higher once veterans affairs and Department of Energy nuclear-arsenal related costs are added)

Yep, that’s pretty misleading to tell folks half of all federal spending is military when at most it’s only one-sixth, but most of these people aren’t in the honesty business and many of their readers/followers don't shop for honesty anyway.

BTW even if you don't do fractions you still have to know something is amiss when the FY22 discretionary budget you're being fed was $1.5 trillion yet the federal government ran a $1.4 trillion deficit. Did the IRS only collect $100 billion in taxes last year? No, it collected $4.9 trillion... fifty times more.

So maybe the government actually spent a few trillion dollars more somewhere that are missing from that misleading chart on the left.

Finally, a commonsense impression.

The Economics Correspondent has always found it strange that military spending is considered “discretionary” while micromanaging Americans’ retirements and healthcare into insolvency is classified “mandatory.”

Most people with a dictionary would think if any function of government is “mandatory” it’s protecting its citizens from violence, both domestic and from abroad.

But in the world of Newspeak keeping people safe is considered a “discretionary” function of the state while Social Security and unemployment spending has been classified as “mandatory” going back to 1935. 

And healthcare has been classified as "mandatory" since the passage of Medicare and Medicaid in the 1960’s.

Wednesday, June 21, 2023

Government Spending, Part 3: Military Spending, the Military Industrial Complex, and "The Next Ten Countries Combined"

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff submits one last analysis of military spending in the U.S. government budget.

Click to enlarge

The last two weeks we’ve determined the following about defense spending in the USA:

1) In 1955 defense spending including veterans affairs was 69.3% of the federal budget and “human priorities” such as Social Security, healthcare, unemployment, welfare, and education was 24.6%.

Today defense spending's share has fallen by three-quarters to 17.6% of the federal budget and human priorities has nearly tripled to 64.8%.

2) Including all levels of government—federal, state, and local—defense spending is 12.6% of combined budgets. Human priorities is 61.5% or nearly five times greater.

3) In 1955 defense spending including veterans affairs was 13.1% of GDP. Today it’s 4.4% of GDP which reflects primarily the enormous growth of the U.S. economy and the improved technological efficiency of the armed forces.

4) Korean War expenditures cost 10% of GDP annually. The combined Iraq and Afghanistan wars cost 0.6% of GDP annually at a time when human priorities averaged 20% of GDP.

5) Finally the total estimated cost of operations in Iraq and Afghanistan from 2001 to 2017 was $1.2-$1.7 trillion (source: Obama’s own budget director Peter Orszag). From 2001 to 2017 the federal government alone spent $35 trillion on human priorities and state & local governments several trillion more.

Although the Economics Correspondent isn’t naïve enough to believe every penny of the military budget is spent wisely, the statistics clearly show that in the 21st century military spending and particularly wartime operations have been reduced to a drop in the bucket compared to what American government spends “helping people.”


Which brings us to the next criticism of defense spending: that it’s bloated and out of control at the behest of the military industrial complex, a cartel of giant corporate military contractors who pull the puppet strings of government to start wars so that they may sell more weapons systems to the Pentagon for unconscionable sums of money.

The Economics Correspondent agrees without doubt that large defense contractors lobby heavily to sell their systems to not only the Pentagon but also to other countries’ militaries. But just how big is this evil, shadowy corporate creature whose tentacles spread throughout and dominate the economy?

Breaking down the $814 billion 2023 defense budget (not veterans affairs, just the military) we look at the one pure “military industrial complex” budget item: procurement of new weapons.

Procurement is the third largest defense budget subitem (yes, third) after military personnel salaries/pensions and operations & maintenance. 

The 2023 cost? $170 billion.

$170 billion to buy new weapons and replace existing weapons (like munitions) is 2.9% of the $5.88 trillion the federal, state, and local governments will spend on human priorities. So while it’s not a meaningless number, $170 billion is hardly the make-or-break budget item driving 2023’s forecast $1.5 trillion deficit. 

And "buy one less aircraft carrier," which the political left forever espouses to solve all the federal government's budget woes, is going to fall far short when the cost of ***all military procurement*** is just 11% of the budget deficit.

However the USA’s recent military assistance to Ukraine will probably drive higher procurement costs spread out over the next few years to replenish depleted weapons supplies and could add several dozen billions more to future procurement budgets. This in turn could add another 0.34% to 0.68% to the equivalent of combined "human priorities" spending, assuming procurement budgets are elevated anywhere from $20-$40 billion per year down the road.

However there are two more budget items that partially pay out to military contractors. A large share of the $146 billion for “Research, Development, Test, and Evaluation” likely goes to defense contractors, and a smaller share of a larger item—”Operations and Maintenance” at $309 billion—also goes to contractors for “maintenance and modernization,” although the larger combined O&M budget items are training, recruitment, exercises, disposal, and overseas bases administration.

It's hard to find exactly how much of each subfunction is paid to contractors but Bloomberg estimates a grand total of $409 billion for the last complete year (2021) although some of those transfers include “Drugs and Pharmaceutical Products” ($36.8 billion), “Facility Related Services,” ($24.5 billion), “Management Advisory Services” ($21.7 billion), and “Construction Related Services” ($19.6 billion). 

Yes, these dollars go to contractors too, but they’re not exactly Northrop Grumman or Lockheed Martin-type weapons dealers. 

Backing those soft-contractor expenses out we get a final estimate of $306 billion for the purchase of new weapons systems, maintenance of existing systems, and R&D for weapons systems. Not an insignificant number, but again just 5.2% of what government spends on human priorities.

And while we’re speaking of industrial complexes: Medicare, Medicaid, and state/local government healthcare programs will spend $2.2 trillion of tax money in 2023, nearly all of it as reimbursements to or purchases from doctors, hospitals, clinics, laboratories, pharmaceuticals, medical device makers, etc… 

That's over seven times more than the Pentagon pays its contractors for weapons.

So who is bigger, has more to gain and has more lobbying influence over our tax dollars? The military industrial complex at $306 billion? Or the healthcare industrial complex at $2.2 trillion? 

(We won’t even talk about the welfare industrial complex) Perhaps it’s long past time people added “healthcare industrial complex” to their vocabulary and gave it seven times the weight of its military nephew.


Finally we get to the last soundbite of “the United States spends more on defense than the next ten countries combined” as if this signifies the lions share of government spending is military (when in fact only 17.6% is).

Checking the data confirms that yes, ***on a nominal basis*** the United States does spend more than other countries like Russia, China, etc… although it’s no longer the next ten countries combined, but rather “only” the next nine (yes, admittedly nine is still a lot although that number is still falling).

But the real fallacy in this comparison is ignoring the per-capita costs of running a military in the United States versus running one in China and Russia.

Starting with personnel: the standard of living of a U.S. soldier or officer is far higher than his/her Chinese or Russian counterpart, making him/her a lot more expensive to employ.

Although the best data the Correspondent could find is from 2018-2020, the Kremlin recently raised its average army lieutenant’s salary to 66,100 rubles per month. In U.S. dollars that’s about $791 per month, or $9,500 a year.

A Russian lieutenant colonel made 88,700 rubles per month ($1,062 per month, or $12,747 a year).

The Economics Correspondent has an active lieutenant colonel in his family and knows he's paid more than ten times that, and Chinese counterparts make even less than Russians.

The healthcare, pension, housing subsidies, and other benefits for U.S. service personnel are also far better/more expensive than for Russians and Chinese.

The same holds true for weapons systems, maintenance, and R&D. Try paying technicians, engineers, and factory workers developing and producing M1A2 Abrams tanks and F-35 fighters the same salary as their Russian counterparts are paid to make T-90 tanks and Su-57 aircraft (all 21 of in existence so far). 

Then watch the Americans all quit their jobs and go work in another industry.

So of course the U.S. military budget is going to be larger than a lot of other countries’ combined. It's like complaining that "America spends more than the next X countries combined on information technology." Sure, what does it cost to employ an American software engineer compared to a Chinese one?

A much more accurate measure that offsets for cost of living is military spending as a share of national GDP. Using that measure, which critics of military spending *never* mention, the United States falls to anywhere from #15 in the world (Stockholm International Peace Research Institute – 2021) to #20 (World Bank) or #24 (

In all three cases the USA is several spots lower on the list than Russia although not China (yet).

Of course if U.S. allies in Asia and particularly in Europe carried a greater share of the financial burden of military readiness/operations—say NATO members meeting or slightly exceeding their minimum 2% of GDP defense spending targets—U.S. military spending both nominally and as share of GDP would fall considerably further.

If the top five NATO members, South Korea, and Japan were to increase their defense budgets by just 15% to offset regional American cost burdens the USA would fall several more spots on the per-GDP scale—on all three aforementioned lists.
Links to data:

1) "Government Spending" articles, parts 1 and 2

2) Nominal defense spending by country

3) Defense spending as % of GDP by country

4) U.S. defense spending by subfunction

5) 2018-2020 Russian military raises (published 2018)

6) Estimated defense contractor spending

Wednesday, June 14, 2023

Government Spending, Part 2: Military Spending vs All Government Spending and GDP

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff resumes analyzing U.S. government spending with a continued focus on the military budget.

(Disclaimer: The Economics Correspondent would like to repeat he makes no claims that every penny of the military budget is spent wisely or that the Pentagon never overpays for maintenance or procurement of new weapons. Rather his objective in these columns is to place the scale of military spending into context with other forms of government spending and the overall budget.)

Last week we looked at the shrinking role of military spending as a percentage of the federal budget and its corollary: an expanding share of spending on “human priorities” such as Social Security, Medicare, Medicaid, welfare, unemployment, and education.

In 1955 military spending (including veterans affairs) constituted 69.3% of federal spending. In 2023 it will be 17.6%.

In 1955 spending on human priorities constituted 24.6% of federal spending. In 2023 it will be 64.8%.

The two have effectively changed places and defense is now one-sixth of the budget.


But these numbers only include federal spending. As everyone knows, state and local governments also impose taxes and allocate outlays. Cautious Rockers are reminded every day by their sales taxes, property taxes, gasoline taxes, utilities taxes, hotel and rental car taxes, and road tolls.

So how do the numbers change when accounting for U.S. government spending at all levels?

In 2023 the combined federal, state and local governments are forecast to spend $9.55 trillion. But state and local governments contribute very little to defense which is primarily a federal function, while they do spend a great deal more on education, unemployment, welfare, and medical assistance.

Thus total defense spending, including veterans affairs and what little state governments spend to accommodate military reserves and local infrastructure, is projected at $1.2 trillion in 2023.

However “human priorities” spending, which is $4.14 trillion at the federal level, balloons to $5.88 trillion—390% higher than military spending—with the biggest state/local increases in education and healthcare

Adjusting for these new data, “human priorities” spending across all government accounts for 61.5%, down slightly from 64.8%, offset by large state/local bumps in transportation, law enforcement, and water infrastructure.

However nominal military spending barely rises, so as a share of all government spending the defense budget falls from an already modest 17.6% of federal to 12.6% of all government spending.

Final tally? Government in the United States spends 12.6 cents of every dollar on the military and 61.5 cents on Social Security/pensions, healthcare, education, welfare, and unemployment. That’s one-eighth of all spending versus more than 60%.

So please don’t let any left-winger tell you “Half of your tax dollars go to war” (which the Correspondent sees all the time here in San Francisco). Government in the United States spends five times more on “helping people” than it does on the military.


Every now and then when quoting these statistics you’ll hear an uninformed progressive complain that the numbers are misleading and military spending is far higher than the data suggest.

Reason? The Department of Energy, they say, is almost completely dedicated to America’s nuclear weapons arsenal and needs to be factored in.

Once again we have an example of people who don’t do math making an assertion simply because they think it sounds good.

The Department of Energy’s budget for 2023 is $160 billion, and it’s an easy matter of looking up its components online (links to all data at end of article).

As anyone with eyes can see, the DOE has been allotted $26.8 billion for the “National Nuclear Security Administration” and another $13.9 billion for “Environmental and Other Defense Activities.”

Without knowing how much of the $13.9 billion is allotted for “environmental” and how much for “other defense” activities, if we’re extremely generous and assign all $13.9 billion to the military we get a total DOE military allocation of $40.7 billion.

That’s at most $40.7 billion atop $1.2 trillion, a military increase of 3.4%. That's like claiming the cost of your airline ticket to Dubai is wildly understated because it doesn't include the $15 fee for inflight wi-fi.

Or put into perspective, $40.7 billion of DOE money is 7/10ths of one percent of the $5.88 trillion government will spend on “human priorities.”

Another math fail for the anti-defense spending lobby.


Lastly, how much of the entire U.S. economy is devoted to the military?

FY2023 GDP is estimated to end at just shy of $27 trillion.

Therefore the $1.2 trillion government at all levels will spend on defense, veterans affairs, and yes, trinkets from the Department of Energy for nuclear arsenal security, represents 4.4% of GDP.

4.4% doesn’t sound like much and historically it’s not. If we go back to 1980 defense spending was 5.9% of GDP. And in 1980 Jimmy Carter was still president and the military was still two years away from the Reagan buildup.

Going back further to 1955, two years after the end of the Korean War, defense spending was 13.1% of GDP.

But coming back to the 21st century, if we look at 2007, when the Iraq War was sliding into insurgency and the Pentagon was launching the “surge” while simultaneously fighting in Afghanistan, military spending was 4.5% of GDP. All the while lefties were complaining that George W. Bush’s wars were bankrupting the United States even as human priorities spending (in 2007) was consuming 20% of GDP.

Incidentally, even Peter Orszag, Barack Obama’s first budget chief, testified before Congress in 2007 as CBO Director that the combined cost of operations in the Iraq and Afghanistan wars would total $1.2 trillion to $1.7 trillion for the period 2001 through 2017.

Taking the largest figure of $1.7 trillion and dividing it by 17 years, war operations budgets averaging $100 billion per year constituted 0.6% of annual GDP (in 2011). Over the same 17 years the federal government alone spent $35 trillion on “human priorities” or more than twenty times Orszag’s highest war estimate and nearly thirty times his lowest.

But yes, we’re told that war was bankrupting the United States, not the 20-30 times more spent domestically.

The Economics Correspondent is not making an editorial statement on the wisdom or effectiveness of the Iraq and Afghanistan wars, only pointing out their monetary costs were insignificant compared to what government routinely spends on payments to individuals for Social Security, healthcare programs, welfare, unemployment, and funds for education.

Which leads us to the final point. The United States has the world’s top military, protects (or overprotects) allies all over the world, and does it for a price tag that is historically a tiny sliver of economic output. If one goes back centuries or even to the more recent Korean War, military conflicts have been incredibly expensive for nations. The cost of fighting the Korean War alone (measured as the difference between military spending before and during the war) was 10% of GDP per year. Iraq and Afghanistan combined on average cost the U.S. economy 0.6% of GDP per year.

This is a testament to two factors. First, the U.S. economy has grown by such leaps and bounds even since 1953 (and far more since the 19th century) that it can support a highly effective military with a presence all over the world (rightly or wrongly) and fight two regional wars for just a tiny fraction of what used to be diverted from the nation's economic output. 

Such a decline in cost, by the way, is why Democratic complaints that “In every past war we’ve had to raise taxes but George W. Bush irresponsibly won’t do it” fell on deaf ears for those of us who understand math. War has become a much cheaper business in the 21st century than it was in the 20th century or before, and 2007 Democrats were just pushing, as always, their 5,734th excuse to raise taxes.

Second, despite all the money the Pentagon spends (and sometimes wastes) while running the military, the final product is still a historically incredible bang for the buck. 

In a regional conventional war no longer does the United States need to slug it out with conventional armies for three years, sacrifice 50,000+ American lives, and blow 10% of GDP annually to conclude a conflict like Korea. Even in Iraq, which went badly for three years after the initial invasion, about 5,000 Americans died (a tragedy for each casualty, but one-tenth the number in Korea and one-twelfth that of Vietnam), the conventional army of Saddam Hussein was routed in a matter of days, and the annual cost as a percent of GDP was less than 1/16th that of Korea.

The U.S. military is so much more effective than it was in the 1950’s that the question of winning regional conventional wars is no longer one of huge spending, years-long quagmires against enemy tanks and infantry, and racking up 50,000 deaths, but rather a question of competent management of the theater, political will, and preventing social justice crusades from rotting it from within. Thanks to economic growth and advances in technology, the ratio of the U.S. military’s effectiveness to its cost is at an all-time high in world history.

Now if only we could say the same about Social Security, Medicare, Medicaid, and government education.
All of the numbers cited in this article are easy enough to confirm via links in the comments section.

1) White House budget tables for federal spending by superfunction 1940-2023:

2) Total government spending, adjustable by year, by $$$ amount, or by share of GDP:

3) Department of Energy outlays by subfunction:

4) Peter Orszag’s 2007 testimony:

“Including both funding provided through 2007 and projected funding under the two illustrative scenarios, total spending for U.S. operations in Iraq and Afghanistan and other activities related to the war on terrorism would amount to between $1.2 trillion and $1.7 trillion for fiscal years 2001 through 2017”

Wednesday, June 7, 2023

Government Spending, Part 1: Military Spending Over Decades

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4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff offers a few columns analyzing how the U.S. government spends its/our/our grandchildren's money.

 A visual from Wikipedia of all places on where the U.S. federal
 government spends its money. Note the "massive military buildup"
of the 1980's under Ronald Reagan.
With a budget deal finally reached between Joe Biden and Kevin McCarthy a lot of commentary has been going back and forth about government revenues and outlays, both in the press and on the Internet's comment boards.

The Economics Correspondent wants to start with a focus on military spending, but first would like to state up front that he’s not naïve enough to believe every dollar of the defense budget is being spent wisely or that the Pentagon doesn’t overpay for maintenance or weapons systems. He merely wishes to place the size of the military budget in context with that of other spending programs.

So not only today, but for decades going back as far as the Correspondent can remember the political left has made defense spending the target to solve all of Washington, DC’s fiscal and deficit ills. “Cut the military budget and we wouldn’t have a deficit” we hear, along with “all those expensive aircraft carriers and weapons we buy drive the national debt.”

He’s even seen “Half of all your taxes go to war” taped to his San Francisco apartment building’s front door.

But instead let’s go back a bit in time and compare how the size of defense spending has changed over the decades against that of other major federal spending programs.

It turns out such data are easily found on the White House’s budget website. Historical statistics have been available and consistent throughout the George W Bush, Obama, Trump, and Biden administrations, with budget data going back to 1940.

To make sure we avoid tripping up one year with unusual military spending for a major war (like Korea or Vietnam) let’s look at budgets by superfunction in 1955, 1980, 1990, 2000, 2010 and 2023 and then as a percentage of total federal outlays (in parentheses).

Total spending: $68.4B
Defense including veterans: $47.4B (69.3%)
Healthcare: $291M (4.2%)
Social Security and Unemployment: $9.50B (13.9%)
Education and job training: $445M (6.5%)

Total spending: $590B
Defense including veterans: $155.2B (26.4%)
Healthcare and Medicare: $55.3B (9.4%)
Social Security and Unemployment: $205.1B (34.8%)
Education and job training: $31.8B (5.4%)

Total spending: $1.253T
Defense including veterans: $328.4B (26.2%)
Healthcare and Medicare: $155.8B (12.4%)
Social Security and Unemployment: $397.4B (31.7%)
Education and job training: $37.2B (3.0%)

Total spending: $1.789T
Defense including veterans: $341.4B (19.0%)
Healthcare and Medicare: $351.6B (19.6%)
Social Security and Unemployment: $663.1B (37.1%)
Education and job training: $53.8B (3.0%)

Total spending: $3.457T
Defense including veterans: $802.0B (23.2%)
Healthcare and Medicare: $820.7B (23.7%)
Social Security and Unemployment: $1.329T (38.4%)
Education and job training: $128.6B (3.7%)

2023 (est.)
Total spending: $6.372T
Defense including veterans: $1.120T (17.6%)
Healthcare and Medicare: $1.722T (27.0%)
Social Security and Unemployment: $2.144T (33.6%)
Education and job training: $269.0B (4.2%)

The final tally as a share of total federal spending?

Military vs "Human Resources"

1955: 69.3% vs 24.6%
1980: 26.4% vs 49.6%
1990: 26.2% vs 47.1%
2000: 19.0% vs 59.7%
2010: 23.2% vs 65.8%
2023: 17.6% vs 64.8% (est.)

The long-term trend is clear: Back in 1955, two years after the end of the Korean War, military spending including veterans affairs constituted 69.3% of federal spending whereas “human resources” was about 21.8%.

Today military spending is 17.6% and human resources is 64.8%, the two nearly completely switching places.

Clearly since the days of Eisenhower the federal government’s role has changed from primarily protecting the country to instead paying out medical and retirement benefits. Military spending as a % of GDP has also fallen from 10.5% of GDP to 3.1%. 

In fact, if the federal government continued paying for veterans affairs but drew the entire defense budget down to zero, leaving the U.S. completely defenseless to attack along with many of its allies and throwing all military personnel out of work, the 2023 savings would be $814 billion. 

But given the CBO projects a 2023 federal deficit of $1.5 trillion, there would still be nearly a $700 billion deficit.

The fiscal deficit has also been greater than the entire military budget for twelve of the last fifteen years, in some cases much greater such as the first four years of the Obama administration when a collective $5.1 trillion was added to the debt but a total of $2.7 trillion was spent on the military (incidentally $8.8 trillion was spent on payments to individuals during the same period).

And these figures don’t include state and local government spending, virtually none of which goes towards defense but a great deal of which is added atop healthcare, pensions, education, and other human resources at the non-federal level.

Incidentally you can pull all the tables yourself at:

Or if you forget the link just search on “White House budget tables,” select "Historical Tables | OMB," and scroll down to “3.1-Outlays by Superfunction and Function: 1940-2028.” They’ve been there for years and will probably stay there for many years more.

In the next column we’ll take a slightly more detailed look at how defense spending is broken down and we’ll also recalculate these figures accounting for state and local government spending.

ps. Even though military and human resources spending don’t add up to 100% of all spending in 2023, only 82.4%, a growing part of the difference is interest on the debt (2023: 10.4%) plus a little for smaller items like transportation, crime and justice, international affairs, and the environment (5.8%).

Wednesday, May 31, 2023

Rising Monetary Velocity Continues to Frustrate the Fed

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Another inflation update from the Cautious Economics Correspondent for Economic Affairs and Other Egghead Stuff

“From Q1 to Q4 velocity increased from 1.14 to 1.226 or up 7.5% which, when annualized, translates to an even worse yearly inflation rate of 10.1%.”

-CO Economics Correspondent
 February, 2023

Well Cautious Rockers the latest M2 velocity numbers are out, confirming the Fed’s policy efforts continue to be frustrated by the higher pace of spending.

In the last four quarters M2 velocity has risen from 1.145 to 1.259 or +10%—meaning if the Fed kept the money supply perfectly flat and GDP was breakeven prices would still rise by 10% a year.

As a reminder the formula for calculating inflation is p = mv/y where p = the price level, m = money supply, v = monetary velocity, and y = nominal dollar value of all goods and services purchased or GDP.

This is why, despite a Fed contraction of the money supply that is unprecedented going back to the 1930’s, inflation stubbornly persists.

(See chart: M2 in red is falling while velocity in blue approaches its highest level in the last half-century)

This sticky inflation, as the press calls it, is being caused by what Fed officials have fretted over for a year now: inflation expectations. As U.S. consumers and businesses expect more inflation in the future they shift their purchases forward to spend their money now before it loses any more value.

Since rising velocity itself can spur further price increases, “inflation expectations” can create a vicious cycle where Americans spend faster, their spending acceleration forces prices up faster, Americans adjust again by spending even faster, and on and on.

The last time inflation expectations generated this level of price pressure was the stagflation era of the 1970’s, and it took a huge dose of Paul Volcker’s 20% interest rates and a painful recession to finally end it.

The Economics Correspondent believes the Fed will have to continue to crack down hard on the money supply to stamp out the velocity problem—although he still doesn’t think the resulting recession will be as bad as 1981-1982 (peak 11% unemployment) *unless*  the Fed creates a major financial crisis along the way.

But it will probably be bad enough.

Thursday, May 25, 2023

Preview of Upcoming Columns on Government Spending

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff offers a preview of his next series of articles. Share of the United States' 2023 projected $9.55 trillion in federal, state, and local government spending by superfunction.

Monday, May 22, 2023

Future Prospects for the Global Reserve Dollar, Part 4: Longer Term for the Dollar and the RMB

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff closes out recent events surrounding the global reserve dollar with a few words on its longer term prospects and China’s counter strategy.

With stress in the U.S. banking system, federal spending and debt reaching new records, and inflation still lingering like a dark cloud over the economy several headlines have hit the media in recent weeks predicting the imminent collapse of the U.S. dollar’s reserve currency status, soon to be replaced by the Chinese RMB (aka yuan) or a new BRICS gold-backed reserve currency.

The Economics Correspondent is skeptical about these gloom and doom scenarios although he sees a tiny sliver of a chance that the BRICS concept might pose a real challenge to the reserve dollar in the next several years.

To read the Correspondent’s recently posted case for the dollar keeping its leading reserve status for the near-to-mid future check out links in the comments section.

However, all while defending the dollar's chances for remaining the world’s leading reserve currency for a while longer the Economics Correspondent has consistently said that over the longer term the dollar’s share of global reserve holdings and international payments will continue on a slow, steady path of decline that began as far back as the 1960’s. Hence the dollar won’t dominate the international currency reserves and payments stage forever, but the process will be gradual.

For those who know what precursors must exist for a currency to be selected by world central banks and governments to serve as a global reserve this forecast might seem self-evident.

One of the many key traits currencies must exhibit to serve as a global reserve is they must be usable in a large economic zone. Swiss francs might have a laudable reputation, but with Switzerland's GDP at about $800 billion the world’s central banks won’t be willing to hold trillions of dollars in francs that they can’t really use (collectively they hold about $6.5 trillion in dollars today).

Thus it’s no surprise that the dollar has been number one since the end of World War II since the United States has been the world's largest economy going back to the 1880’s.

Even today, when comparing national GDPs on the more meaningful nominal basis (not purchasing power parity or PPP) the USA still generates the world’s largest GDP even as China slowly closes in.

USA est. nominal GDP: $26.8 trillion (2023)
China est. nominal GDP: $19.4 trillion (2023)
Eurozone est. nominal GDP: $17.82 trillion (2023)
Source: IMF

However, just having the world’s largest economic zone isn’t good enough. The issuing country’s GDP must not be so much the largest as much as "large enough" on an absolute basis for its currency to support global trade.

Today that’s not a problem as international reserve dollar holdings are estimated at $6.5 trillion for a $26.8 trillion U.S. economy.

The longer-term problem for the dollar is the trend of the last few decades has clearly been one of many other countries’ economies growing faster than the United States—particularly India and China. Or more succinctly, U.S. GDP as a share of world GDP is on a steady path of decline even as the U.S. economy itself continues to grow.

In 1960 U.S. GDP enjoyed a 40% share of world output.
By 1985 it was 34%.
By 2000 it was 31%.
For 2023 the IMF estimates nominal U.S. GDP will represent 25.4% of world output.

Over those sixty-plus years the U.S. economy has been growing. In real terms it’s 6.2 times larger than in 1960. But over that same period the rest of the world has been growing even faster.

As the growth rate of the rest of the world’s economies continues to outpace that of the United States, the dollar’s ability to support the planet’s trade needs will inevitably be eroded. This mathematical reality has been reflected in the dollar’s slow decline as a share of international reserve holdings for some time: from 83% in 1970 to 71% in 2000 to 60% today.

And the Economics Correspondent doesn’t see that trend reversing.

As for what will fill the gap left by the dollar’s shrinking role, that’s been the subject of debate among international monetary  economists for quite some time with no real consensus winner. Probably the largest opinion bloc believes a basket of global currencies will serve as the global reserve—a combination of dollars, euros, yen, francs, SDR’s, possibly an unanticipated emerging economy, and/or a new BRICS regional currency.

Another faction of economists has called for John Maynard Keynes’ plan for a supranational currency, the old bancor proposal from the 1944 Bretton Woods monetary conference, to be resurrected and for the bancor to take on a leading role in settling international transactions.

An even smaller group of economists suggests returning to gold to settle balance of trade payments although their proposal probably stands the least chance of success for political reasons.

And what of China? According to many media headlines of late the Chinese yuan is in position to catapult to world's leading reserve currency any moment now.

The Economics Correspondent has written repeatedly that, despite China’s large GDP, its autocratic political system makes the yuan unsuitable to serve as a global reserve currency. Some of the yuan’s many problems include the immaturity and opaqueness of Chinese securities markets, the CCP’s regular imposition of capital controls, its manipulation of currency exchange rates, its insistence on running constant trade surpluses, the arbitrary power of its government and shaky confidence in its commitment to rule of law and property rights, and questions about the Chinese Navy’s ability and willingness to keep merchant sea lanes open for all nations.

Not only do world central banks not want to hold large balances of Chinese RMB in reserve, but the CCP itself knows the yuan has little chance of dethroning the dollar and holds no such global reserve ambitions.

However China’s geopolitical goals don’t require the yuan to take away the dollar's number one spot. And even though the CCP would certainly like to weaken the dollar’s share of reserve holdings, that’s not their primary objective either.

China’s goal, first and foremost, is to insulate its own import/export and investment activities from the dollar as much as possible so that it can achieve its geopolitical ambitions without worrying about U.S. dollar-imposed punishments.

Beijing has seen the economic pain the U.S. has been able to inflict on Russia for the invasion of Ukraine–cutting it off from the international dollar network and kneecapping much of its import, export, and financial business. The PRC worries that if one day it decides to invade Taiwan, the USA’s dollar leverage will allow Washington to impose similar pain on the Chinese economy. And Chinese officials fear any economic decline that might stir unrest among its own population, a problem that has brought down many dynasties throughout history long before the CCP dynasty.

So although China would love for the yuan to replace the dollar, something it knows is unlikely, it would still accept its own import and export business being conducted in some other currency so long as it's issued by a country that isn’t likely to punish Beijing for bad behavior... or which at least can be intimidated into abstaining.

Obviously convincing trading partners to use RMB would be ideal since Beijing controls its own currency. But even settling with its trading partners in rubles, rupees, or the recently proposed BRICS currency would be acceptable since, if one day the CCP decides to behave very badly on the world stage, the effects of a US-imposed dollar retaliation would be greatly reduced.

Thus China is working to wean itself—not necessarily the whole world, just itself—off the dollar as much as possible. Beijing couldn’t care less if the dollar retained its current 60% share of global reserve holdings and 50% share of all international transactions, so long as China itself isn't part of those numbers.

For all those reasons, the Economics Correspondent believes Chinese officials will be patient about invading Taiwan and not move until they feel enough of China's international trade is safely conducted in non-dollar currencies. Beijing will probably also first divest more of its dollar-denominated assets like U.S. Treasury bonds.

The Correspondent doesn’t guarantee China will take its time, but exercising patience while moving away from the dollar first is its most logical preparatory move if planning for a military action that could provoke a negative response from the U.S.

Wednesday, May 17, 2023

Revisit This Quote in a Year: Paul Krugman Says Recession Fear Overblown, "The economy is actually looking remarkably strong."

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A news flash from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

Well Cautious Rockers it's official. The most reliable economic predictor known to man is now pointing to 100% chance of recession.

"Those recession calls were clearly a false alarm, and the economy is actually looking remarkably strong."

-Paul Krugman

Read "Here's why the US economy is in much better shape than people think, according to top economist Paul Krugman" at:

Sunday, May 14, 2023

Now California's Projected Budget Deficit up to $32 Billion

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff reminds non-Californians that Governor Gavin Newsom's previous deficit forecast was $22 billion.

That was less than four months ago.

California also already has the highest taxes in the country with a top income tax rate of 13.3% and the middle class paying marginal rates of 9.3%.

Adding insult to injury, the recessionary effects of the Federal Reserve's recent rapid interest rate hikes haven't yet taken full effect on the national economy. While the USA technically entered a very shallow recession in the first half of 2022, the Economics Correspondent believes the real recession has yet to come at which point California's deficits will widen further.

Read "California's Newsom Sees Budget Deficit Deepening to $32 Billion" at:

Tuesday, May 9, 2023

Future Prospects for the Global Reserve Dollar, Part 3: A Gold-Backed BRICS Currency

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8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff examines the complexities of the much talked-about proposition for a gold-backed BRICS reserve currency.

With bad news rolling in for the dollar as of late, predictions of global reserve dollar collapse have been all over the Internet and even in the conservative media.

One of the most-trumpeted challengers eyed to dethrone the dollar’s eighty years of global dominance is the recently proposed but not yet real “BRICS currency” which is in early-stage discussions between Brazil, Russia, India, China, and South Africa.

Adding fireworks to the BRICS story are reports that its member countries are considering gold-backing for the reserve currency, thereby making it an upstart capable of threatening the US dollar’s reserve status practically overnight.

How would such a reserve currency work?

BRICS countries would all trade with another, and they also hope with non-BRICS countries, using a new reserve currency which we’ll call the “bric” or “brics” for plural—not to be confused with the all-capitalized “BRICS” meaning the five countries themselves.

BRICS domestic economies would still operate on local yuan, rubles, rupees, etc… but brics would be convertible into those domestic currencies at a floating exchange rate.

Even if brics turn out accepted only by BRICS countries for use only between BRICS countries, the belief is the sheer volume of BRICS-only trade might still pose a serious challenge to the dollar’s share of international payments and central bank reserve holdings. After all, the BRICS countries themselves represent 31.5% of world GDP which is larger than the G7’s 30%.

And since the bric would in theory be gold-backed—ie. convertible into a fixed unit weight of gold on demand—the supply of brics would grow slowly thereby instilling confidence that its value can’t be easily inflated away.

So given everything in concept going for the bric what are its prospects for replacing or dethroning the dollar?


If the bric took precisely the form just described here, the Economics Correspondent believes it could be the most formidable challenge to the dollar since 1944 and that it would stand a good chance, over time, of eroding real share from the dollar’s acceptance in global trade.

But that’s a big if. 

Because the Economics Correspondent sees the prospects of the bric really coming together as perfectly as promised being pretty slim. The reasons are many, but before we get into a list, first some historical background.

The idea of a supranational alternative to the reserve dollar, traded among nations but not used domestically for purchase or investment, is nothing new.

Special Drawing Rights (SDR’s), based on a basket of currencies, have been around since 1969. In over half a century the SDR’s global share of reserve holdings stands at about 2% compared to 60% for the dollar, due largely to the fact that central banks with large SDR holdings can’t buy or invest in anything with SDR’s—only with domestic currencies.

As UC Berkeley professor and international monetary systems scholar Barry Eichengreen writes, “a reserve currency isn’t much good if you can’t do anything with it.”

Also during the 1944 Bretton Woods monetary conference, when the dollar was selected to serve as the primary world reserve currency, British economist John Maynard Keynes proposed an alternative supranational gold-backed currency he named “bancor” (literally “bank gold” in French) which would be issued by a multinational committee known as the International Clearing Union or ICU.

The ICU would vote on how much to inflate the bancor and which countries would be forced to forfeit a small percentage of their ICU-held bancor balances every year (surplus countries such as the United States in 1944) and which countries would automatically gain bancors (uncoincidentally, deficit countries like Great Britain in 1944). The United States would be given a vote but naturally the ICU structure was designed for deficit countries to outvote the USA.

The bancor proposal was rejected in favor of the dollar which was redeemable in gold at $35/oz. But US domestic inflation quickly brought the credibility of the dollar’s gold redemption pledge into doubt as early as 1960 and the USA reneged completely in 1971.

In the 21st century countries like China, left-leaning academics, and even the IMF have called for a “new Bretton Woods” and the revival of the supranational bancor concept to replace the dollar.


So with that historical context, here are some of the challenges a new gold-backed bric will have gaining worldwide acceptance:

1) There have been many proposals over the years for a gold-backed currency, and none have ever materialized. CO readers may recall widely hailed proposals for a Russo-Chinese gold-backed currency in 2008, leveraging the dollar's vulnerability during the great financial crisis and Federal Reserve’s multiple QE's.

Despite lots of headlines and predictions by goldbugs—and the Correspondent considers himself a goldbug too—of a glorious Russo-Chinese gold-based currency to knock off the dollar, nothing ever happened. Those two countries couldn’t agree on a mutual framework and for good reason.

2) Even going back to pre-1971, when the global reserve dollar was redeemable in gold at $35/oz, no government has enacted an honest gold-standard in nearly a century and the Correspondent doesn't think they're about to start now.

Even the 1944 reserve-dollar was only redeemable in gold for foreign central banks, not private citizens, but it's still referred to somewhat incorrectly as "the gold standard." And within just a few years of Bretton Woods’ ratification the USA began inflating the dollar enough to bring even its limited gold convertibility credibility into question. France famously lost confidence in the dollar and bailed out, redeeming its dollar holdings in 1965.

In 2023, nearly a century removed from any honest gold standard, the Economics Correspondent believes the odds of the BRICS countries proposing one are nearly zero.

3) The bancor framework, which some BRICS countries are citing as a model for a future supranational currency, was lauded as a gold-backed currency too, but it was hardly a genuine gold standard either.

Under Keynes’ plan, countries low on bancors could buy more by selling their gold reserves to the ICU. However the ICU would never buy bancors back with gold, making the bancor effectively irredeemable.

This smoke-and-mirrors misrepresentation of gold-backing, a promise to buy gold at a certain price but never to sell it, is similar to Russia’s “gold ruble” that was announced in the spring of 2022. Less informed observers, many with an innate hostility to the United States, naively hailed it as a genuine gold-standard ruble, but nothing could be further from the truth. Just like Keynes’ bancor, a currency that can only be bought with gold but never redeemed for gold in return is not truly gold-backed.

Just one year later the much-hyped "gold ruble" has come to nothing.

Incidentally Keynes’ plan would also have had the convenient effect of sucking up world gold and hoarding it at the ICU, thereby reducing the quantity of gold available to world governments and making any return to a genuine gold standard impossible. Keynes was a staunch opponent of the gold standard which he called “that barbarous relic,” but the Correspondent is sure his plan’s framework was just a coincidence.

4) The 1944 gold-reserve dollar failed, the victim of Uncle Sam’s unrelenting desire for inflation, despite being administered by a single, democratic government with a better-than-average reputation for trustworthiness.

Any proposed gold-bric pledge will have to be upheld by two dictatorships (China and Russia) and at least two precarious democracies (Brazil and South Africa). The prospect of five countries with a myriad of conflicting interests and squabbles maintaining a more credible gold-backed bric currency than the failed Bretton Woods dollar are very low.

5) Despite all the talk of the BRICS countries representing 30.5% of world GDP, the reality is China is over 70% of combined BRICS output making the BRIC really a Chinese-dominated currency. China’s share of BRICS output is only expected grow in the future.

Not only does this arrangement make the other four countries junior partners in a China-dominated arrangement, but de facto administration of the bric by China would bring back all the same decades-old problems that have prevented the RMB from replacing the dollar.

See the Economics Correspondent’s columns on problems with China’s RMB at:

6) Which leaves us with probably the biggest problem of all: the same inflation temptations that led to the end of the Bretton Woods gold dollar.

Even though the bric is supposed to be gold-backed (an uncertain prospect in and of itself), the domestic currencies of the BRICS countries will still be fiat, and BRICS countries are not expected to forswear inflation from their own monetary policy anytime soon.

What does this mean for overseas holders of brics who wish to invest their reserves in BRICS countries with the same ease that they invest reserve dollars in the United States?

Under such an arrangement inflated local currencies will depreciate against the gold bric, sometimes rapidly.

Non-BRICS central banks will want to park their bric holdings in BRICS nation securities markets to earn a return, but that means they will have to convert their brics into, say, reals to buy Brazilian bonds.

Years later, when they convert their real-denominated investments back into brics the exchange rate will have moved against them, thanks to Brazilian inflation, and they could suffer a serious bric-denominated loss on their investment.

Even if the BRICS countries create some sort of brics-denomiated sovereign securities to challenge US Treasuries—a herculean feat to construct and maintain in and of itself—unlike dollar-denominated US Treasuries BRICS governments will have to back them with tax payments received in their local currencies and convert them into ever more expensive brics.

BRICS countries might pledge to keep their fiscal deficits and inflation below a certain threshold as part of the initial brics framework, but we’ve seen how well those pledges held up with the eurozone's ballooning deficits in the 2010's and eurozone inflation during just the last two years. And that currency union is comprised of far more liberal democracies than the BRICS not to mention a resolutely anti-inflationary Germany at the helm.

The Correspondent doubts a BRICS anti-inflation pledge will be any more credible.

So BRICS countries will be acutely aware that overseas brics holders are avoiding investing in their countries due to exchange rate movements and, unwilling to slow their own currencies’ inflation, will pressure the brics union to inflate the supply of brics to stabilize their own currencies’ exchange rates.

If the BRICS union succumbs to such temptation, which the Economics Correspondent sees as very likely in the medium-to-longer term, the gold-convertibility promise will quickly break down just as it did with the dollar in 1971.

Again, if this sounds like an implausible scenario just look at how much internal strife and infighting has emerged within the euro project. And the euro is a fiat currency with member states that are all more democratic and more economically advanced than the BRICS nations.

And even if the BRICS union resisted all temptations to inflate, overseas holders of brics would still have major concerns over the standard laundry-list of problems that the dollar avoids such as immaturity and transparency of BRICS securities markets, property rights for holders of brics-denominated assets, consistent trade surpluses, and imposition of capital controls. The BRICS countries might pledge to end capital controls to make the bric more attractive but China and Russia actively impose capital controls today while Brazil and India have a recent history.

So in summary it’s one thing to laud the idea of a “gold-backed BRICS currency” and write headlines about its inevitable displacement of the US dollar, but a lot of things have to fall into place perfectly for the reality to match the hype.

The Economics Correspondent can already find several conflicts of interest and priorities between politically unstable BRICS partners that could not only derail the bric shortly after its launch, but possibly prevent any true, honest “gold backing” before it even gets started.

And if the BRICS squabble among themselves enough to threaten the currency’s legitimacy, senior partner China might simply grab the reins in which case the bric becomes a de facto “international yuan” which will default back to the same trust issues that keep the RMB from becoming a major reserve holding today (see links above for more information).