Tea Party is Drinking Too Much Decaf

On December 16th, 1773 the Sons of Liberty in Boston, in protest of the Tea Act, destroyed an entire shipment of tea sent by the East India Company, in a political protest referred to as the Boston Tea Party.

Following the Wall Street bail-outs in 2009, a political movement also protesting their lack of representation in government sought a reduction of the U.S. national debt and deficits by reducing government spending and lowering taxes. They were referred to as The Tea Party, named from the aforementioned Boston variety.

Since then, supporters of the Tea Party have had a major impact on the internal politics of Republicans and have helped secure both houses of congress. But these representatives who were elected to bring fiscal discipline to Washington have failed to deliver on their promises.

A year before The Great Recession the Federal deficit was $162 billion, it peaked in 2009 at $1.45 trillion and this year came in at $439 billion, and is projected to increase significantly after 2018. All this overspend has driven our national debt to over $18 trillion dollars, which is already north of 100% of the Gross Domestic Product.

The Congressional Budget Office (CBO) is on record stating the relationship between debt and GDP is on, “a trend that cannot be sustained indefinitely,”

Just recently, the Treasury department announced the government will reach its borrowing limit around Nov. 3th, causing Republicans to circle the wagons and threaten to shut the government down. But their threats were not really aimed at Washington’s overspend, instead the Tea Party Republicans are linking the battle over the continuing resolution to keep the government operational, with the fight to defund Planned Parenthood.

Whatever your opinion is on Planned Parenthood, my own is that it is an institution that doesn’t need government funding and its practice of selling aborted babies’ body parts is beyond despicable, it still doesn’t solve our long-term trend towards insolvency.

In fact, the United States government has recorded surpluses for only five years since 1969. In 1995–96 the Republicans shut down government as a result of conflicts over the funding of Medicare, education, the environment, and public health in the 1996 Federal budget. They suffered the consequences of unpopular press that led to the re-election of Bill Clinton and the resignation of House Speaker Newt Gingrich. But the positive impacts of the shutdown included the balanced-budget deal in 1997 and the first four consecutive balanced budgets since the 1920s.

The US government's total revenue is projected to be $3.525 trillion for Fiscal Year 2016, this will only pay for 88% of spending, creating an estimated $474 billion deficit. And that rosy revenue projection includes a GDP estimate of 3.1%--a growth rate not seen in the last 10 years. Also, the U.S. economy is in the sixth year of expansion and a recession is more than likely next year.

$2.543 trillion of this 2016 spending is deemed as “mandatory”.  Social Security is the largest mandatory expense, at $938 billion. Medicare is next, at $583 billion, followed by Medicaid at $351 billion.

Social Security is split into two parts Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI); the combined acronym for both is OASDI.

Both programs have their challenges, however since the Great Recession DI has been misused as an extension of unemployment benefits and is set to run out of funds in 2016.

Until 2010, there was more collected in tax revenue paid into the OASI Social Security Trust Fund than being paid out. That surplus was just lent to the Federal government to cover general expenses. Thanks to interest on those “investments”, the OASI Trust Fund is still running a surplus. However, the Board of the Fund estimates that this “surplus” will be depleted by 2036. At that time, Social Security revenue from payroll taxes will cover only 77% of the benefits promised to retirees.

Then we have Medicare which is already underfunded. Medicare taxes don't pay for all benefits, so this program relies on general tax dollars to pay for a portion of it.  

According to the Medicare Trustee Report projections indicate that Medicare faces a substantial financial shortfall and is not adequately financed. The trust fund becomes depleted in 2030. The Trustee report states: “Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers. The Board recommends that Congress and the executive branch work closely together with a sense of urgency to address these challenges.”

The respective boards are petitioning Washington to address the solvency of the Social Security and Medicare Programs, yet President Obama prefers to preach about Global Warming. When these programs become insolvent due to Washington’s inaction the next generation of seniors are going to hope the planet really gets a lot warmer because many will be forced to live on the street.

The fastest growing mandatory payment is the interest on our ballooning national debt. The U.S. has been fortunate for the past few years because interest rates have been artificially manipulated to record lows. However, eventually yields will mean revert and so will interest payments.

The greatest real risk to all Americans is the burden of future interest payments on government debt. The CBO’s baseline projects that net interest payments will more than triple under current law, climbing from $231 billion in 2014, or 1.3 percent of GDP, to $799 billion in 2024, or 3.0 percent of GDP.

Discretionary spending is the part of the U.S. federal budget negotiated between the President and Congress each year as part of the budget process. The Constitution gives Congress, not the President, the authority to raise and spend money for the Federal government. Therefore spending can be changed or even reduced to zero if Congress desires.

This is where the remaining 37% of spending is divvied up. Discretionary spending is projected to be $1.168 trillion.  About 2/3 of this goes toward military spending; $563 billion pays for other domestic programs like Health and Human Services ($79.9 billion), Education ($70.7 billion), Housing ($41 billion) and the judicial system ($14.9 billion).

In 2013 Congress passed a budget sequestration aimed at reducing discretionary spending. These were automatic spending cuts that came out of the Budget Control Act of 2011 (BCA).  The Sequester sought to lower spending by a total of $1.1 trillion versus pre-sequester levels over the 8-year period from 2013 to 2021, with reductions coming equally from defense and other domestic discretionary spending. However the recent passage of the National Defense Authorization Act serves to nullify the promised reduction in defense spending and it is becoming clear both Democrats and Republicans prefer to remove the sequestration spending handcuffs all together.

With the current system of career politicians in place, our elected officials are incapable of fiscal responsibility. Government agencies are warning that our out of control deficit spending is unsustainable. It may take runaway inflation, a deflationary depression, or maybe an inflationary depression—leading to a massive default on the nation’s debt--before fiscal responsibility is forced on Washington.

The Tea Party Representatives need the guts to take on the old two-party establishment system, just like the Sons of Liberty for whom they are named did 240 years ago. As a speaker at a rally back in 2009, I warned the Tea Party not to lose focus on its core platform of hard money and balanced budgets; or to become co-opted by main stream Republicans---unfortunately that is exactly what has occurred.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”