Our country is in deep financial trouble, with the mismanagement of federal debt looking like an outsized reflection of the mismanagement that led to the 2008 housing crisis.
That was one of several conclusions of a panel of experts discussing the hard numbers defining the government’s debt crisis, on the August 11 episode of “Federal Spending.” The online analysis program also examined the spectrum of the US debt, the ramifications of increasing the debt ceiling, and the ways in which information technology might ease the burden.
Using data from Mary Meeker’s “A Basic Summary of America’s Financial Statements,” host Eric Kavanagh said that while the government is paying an historically low 2.2% interest rate on its debt, the recent credit downgrade means we are considered a greater financial risk. “If interest rates go up, that’s going to magnify the amount of debt we owe,” said Kavanagh. With the current debt level topping $9 trillion, that will be no small chunk of change. While Standard & Poor’s defends its actions, the downgrade to AA has left congressmen pointing fingers. “It’s not the wisest strategy to blame the referee, even if the referee is wrong,” said Kavanagh.
How did we get to such level of debt? Meeker’s report paints a stark picture of the obvious: we spent more than we made, and borrowed to pay the bills.
Over the last 40 years nearly all tax revenue has fallen below GDP growth, while entitlement spending – Medicaid, Medicare, Unemployment and Social Security – has increased more than 10-fold. Add that to the plethora of bailouts in recent years, and it’s easy to see how the federal checkbook has become unbalanced. And so we borrowed. Foreign countries and investors currently own 46% of our debt, making our financial stability of global interest.
Analyst Robin Bloor, Ph.D., Chief Analyst and Co-Founder of The Bloor Group, said that we haven’t seen the worst of the economic woes. “We are moving into a period of severe depression, so it’s not so much rising commodity prices we should be looking at, it’s collapsing debt that’s going to be the problem,” said Bloor
The debt mismanagement mirrors the housing crisis of 2008, in which Fannie Mae and Freddie Mac became insolvent as foreclosures skyrocketed. Malcolm Chisholm, Ph.D., President of AskGet.com, said that securitized mortgages bounced around so much that they became nearly impossible to document. The market, he said, has made the same mistake. “It’s a failure in data management combined with a failure in the operationalization of the financial system,” said Chisholm.
Author and Research Analyst Russell Ruggiero said that modernizing will help Washington regain some of its financial footing. “As we look at the short and medium-term, we could possibly say that IT expenditures will stay stable or even increase because there’s manpower needed to deploy these solutions that will improve the efficiencies within the government,” said Ruggiero.
Although there may be a sense of urgency, change is often best made incrementally. “People want to see quick results,” said Ruggiero, “but if we look at Washington as a battleship, it’s a very big battleship to turn quickly.”
Pre-Show Abstract
The United States debt just surpassed current Gross Domestic Product (GDP), which means if every cent of value generated in this country all year long were somehow dedicated to paying the debt down, there would still be money owed. What does that mean for the trajectory of federal spending? How do we compare with countries like Portugal, Italy, Ireland, Greece and Spain (a group that speculators call PIIGS)? It’s really a numbers game with many unpredictable variables but at least one certain outcome: paying the piper.
The keynote will be delivered by Robin Bloor, Ph.D., with insights provided by Malcolm Chisholm and Russ Ruggiero. We’ll use modern analytical software to examine what’s happening. With the help of an online audience, we’ll reveal significant aspects of how this debt burden continues to impact public policy and the execution of federal services.<
Guests
Keynote: Robin Bloor, Ph.D., Chief Analyst and Co-Founder of The Bloor Group
Malcolm Chisholm, Ph.D., President of AskGet.com
Russ Ruggiero, Research Analyst, and Digital Content Publisher at Examiner.com<
Points of Discussion
Analysis of Mary Meeker’s report on Federal debt
Managing short and long-term expectations given the current federal and state debt
The mandatory 2-year pay freeze for Federal employees
The Federal IT efforts to move to Cloud Computing
How contractors in the private sector will be affected by potential spending cuts
The impact on the international sector
Key Questions
Why has debt risen so much?
How will the decrease in federal spending impact overall programs?
How will it affect high-federal areas such as D.C, Maryland and Virginia?
Good Quotes
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“Sometimes it doesn’t pay to know better, because it can get depressing.” Eric
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“Politicians are hired to know what’s going to happen.” Eric
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In reference to blaming S&P for the credit downgrade:
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“It’s not the wisest strategy to blame the referee, even if the referee is wrong.” Eric
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“An area is a more desirable place to live if people are actually living in the houses.” Robin
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“The banks simply messed up the whole of the documentation” Robin
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“We are moving into a period of severe depression, so it’s not so much rising commodity prices we should be looking at, it’s collapsing debt that’s going to be the problem.” Robin
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“It doesn’t seem like anybody has any idea of the consequences of what they’re doing.” Robin
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“I don’t see wisdom in Washington.” Robin
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“It behooves us to pay attention to who owns our debt.” Eric
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“The whole system is not something that’s amenable to blunt policy instruments, of which there aren’t many, like keeping interest rates low.” Malcolm
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“The whole marketplace is dominated my machines.” Malcolm
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In reference to Wall Street: “They built a doomsday machine in there, and it’s all going to blow up one day.” Malcolm
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“The new technology that’s changing the market environment in things like oil trading are incredibly important and incredibly misunderstood.” Malcolm
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“It’s a failure in data management combined with a failure in the operationalization of the financial system.” Malcolm
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“Washington has to modernize.” Russ
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“As we look at it for the short and medium-term, we could possibly say that IT expenditures will stay stable or even increase because there’s manpower needed to deploy these solutions that will improve efficiencies within the government.” Russ
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“People want to see quick results.” Russ
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“If we look at Washington as a battleship, it’s a very big battleship to turn quickly.” Russ
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“Things won’t move as quickly as one would normally think.” Russ
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Good Insights
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Fannie and Freddie control some 50% of home mortgages.
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Part of the Dodd-Frank act stripped banks from using S&P and Moody’s to prove their solvency.
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The global meltdown showed us just how interconnected we are.
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When a bank forecloses on a house, you’ll only get 80% of the value.
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The government is paying an historic low of 2.2% interest on its debt.
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If interest rates go up, that’s going to magnify the amount of debt we owe.
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46% of our debt is owned by foreign investors and governments.
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The credit downgrade means that we are a greater financial risk.
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Spending for entitlement programs has increased dramatically – over 1000% change since 1965.
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Revenue, especially corporate taxes have fallen below GDP growth
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Income taxes go more or less in line with the economy
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Social Security surpluses have masked true borrowing needs by $1.4 trillion; the surpluses have been used to fund other parts of federal government operations under the unified budget accounting rules
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Public debt is predicted to rise to 146% of GDP by 2030.
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Non-conventional mortgages equal 30% of Fannie’s total, but incur 80% of losses
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Top foreign owners: China 10%, Japan 9%, UK 3%, Oil Exporters 3%, Brazil 2%, All Other 18%
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We are yielding authority over ourselves to countries to whom we owe debt.
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There are 4 main elements: the government, the central banks, main street economy, and the financial system
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The Federal Open Market Committee announced they would keep rates at 0% for 2 years.
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The Swiss currency is strengthening so much, they cannot export soundly.
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Because of globalization, the US is able to capitalize on the changing value of our debtors’ currency
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When mortgages are securitized, they are bundled up and turned into bonds and sold to insurance companies, pension plans, etc., but then they are forced to be sold through 4 different companies before put into trust.
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Because of lack of documentation, mortgage loans are bounced around, and if they are determined to be unsound or fraudulent, they are then put back to the originator.
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In terms of China, often the profit they make in US dollars from selling Chinese products gets reinvested into the US economy.
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Policy changes must be made gradually over a period of time.
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Automated trades are still determined as regular trades.
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Credit default swaps were designed to offset the risks of an organization defaulting on its debt.
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The Federal Budget deficit for fiscal year 2012 is expected to be $1.3 trillion, with the states likely to run a shortfall of $125 billion.
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There are 300K federal workers in Maryland alone.
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IT spending cuts will affect decisions to deploy or modify existing solutions such as BI, CRM, ERP and database software.
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There’s a Federal pay freeze for 2 years, not just for federal employees under the GSA, but for all civil servants.
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Because of budgetary constraints, we may not be able to deploy a new platform, but will have to work with vendor to beef up current platform.
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The CBO just released a report that stated in 2011, the government spent 10% less than July 2010.
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Expanding the use of BI tools, ERP and data can help Washington modernize.
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IT spending could remain stable or increase, because their deployment will increase efficiency.
Resources
Contact Info:<
Host: Eric Kavanagh, eric.kavanagh@bloorgroup.com – 512.426.7725
Show Manager: Rebecca Jozwiak, rebecca.jozwiak@bloorgroup.com – 817.320.3495
Robin Bloor, Chief Analyst, The Bloor Group: robin.bloor@bloorgroup.com
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