by Karl Denninger, Market Ticker:

The fiscal disaster upon us is clear to anyone who has ever looked at a balance sheet.

The trope of we’re kicking the can down the road to future generations was a reasonable statement 40, 30, even 20 years ago.  It no longer is, because the forward projections I (and others) made back in the 1980s and 1990s are now here within the next five years.

You can’t grow a human from zero in five years, ergo, there is no future generation anymore; we are the generation that must address this problem.

The problem statement is simple, and comes in the following components, all of which are facts:

1. The Federal Government is, at present, running approximately a 25% cash operating deficit.  That is, it spends 25% more than it takes in via taxes in a given year.  Despite the screaming from the left about the tax cuts and the right about “Taxed Enough Already” (the original meaning of the TEA Party) this progression of deficits as a percentage of the budget has, with a decent amount of oscillation, been trending this way for more than 20 years through both Democrat and Republican administrations and Congressional holdings.

2. This operating deficit is an exponential series because every dollar of deficit winds up as permanent debt that then demands an interest payment forevermore into the future.  The only two ways to stop paying the interest are to (1) default, which instantly cuts off your ability to borrow at all, or (2) pay down the debt which requires you cut spending immediately and permanently by more than 25%.

3. A fiscal deficit that is greater than nominal GDP expansion, both stated as percentages, makes the problem worse rather than better at an exponentially expanding rate.  At present the fiscal deficit is approximately equal to GDP in percentage growth terms which means there is no actual GDP expansion — that is, growth — going on at all.

4. The only way to stop that is to either (1) reduce the amount spent or (2) increase the amount taxed, thereby making the fiscal deficit as a percentage of GDP smaller than the expansion of GDP, both in nominal terms.

If we do not do this now within the next five years the nation is screwed as CMS will run out of stashed-back bonds.  When it does the difference between what is claimed to be the deficit impact due to CMS and the actual impact, which is in the hundreds of billions of dollars a year, will all immediately and permanently show up on the fiscal deficit.  There is no possible way to raise taxes enough to close that gap.

But there is a way to take about $400 billion a year off federal spending without killing anyone, which a straight-line whack to social spending (specifically, Medicare and Medicaid) would do.  Politically we could also pass this bill, which would do even more; in fact that bill would likely resolve the federal and state budget deficit problem forever.  The politics of such an action are difficult because 1 in 5 people work in the medical industry and if you did that 90% of them would lose their jobs.  Nonetheless it does remain an incredibly popular political issue if framed correctly; there are basically no 80% political winning issues but this is one.  That it would be rabidly opposed by 20% doesn’t change the math on that.

Nonetheless there has been zero willingness on either side of the aisle to take this on.  Everyone on both sides has lied like crazy, including Trump.  In fact Trump is probably one of the worst in this regard, but really, when you get down to it, that’s a matter of degree rather than substance.

There is a somewhat less scream-inducing option: The Low-Hanging Fruit.

There would be screaming coming from that change too, but it wouldn’t last long.  In as little as a few months not only would the budget impact show up and be incredibly positive so would the personal health impact.  The number of people who would have their pants literally fall off would be in the millions.  The improvement in health on an aggregate basis would be incredible.  The expected boost to productivity and those able to return to work, or do more and harder work, than they are doing today would add even more to government revenues and private prosperity.

While this would not take enough off spending to stop the deterioration it would slow it dramatically.  It would likely extend CMS’ exhaustion date by five to ten years and quite possibly more, especially if it results in people with serious morbidity today having some of that disappear and thus they’re able to return to work or make more money, on which, of course, they would pay more in taxes.

I can’t quantify what it would do to the stock market.  Clearly, it would crash certain stocks, such as those making diabetes meds, and those making a lot of money on amputations, blindness and dialysis.  In fact it might put 80% of the dialysis centers out of business; their remaining customer base would be those undergoing chemo or similar.  But the net positives would be enormous both in the private economy and in government budgets.

Never mind the personal health improvements.  Hell, Trump could even demonstrate it by eating his infamous cheeseburgers without the bun.  No problem with that burger, sir, here’s a knife and fork!

In addition it’s time we faced reality — our current health policy when it comes to the matter of carbs and metabolic disease is insanely racist.  It may not be intentionally so, but it is so.  Black people, and to a somewhat-lesser extent Hispanics, are impacted by metabolic disorders related to insulin and weight at a higher rate than those of white European descent.  We don’t know exactly why this is the case but there’s plenty of good reason to understand it — you can find, for example, similar issues among the Inuit.  The simplest explanation is that white Europeans have been exposed to unrestricted high-carbohydrate diets for longer, and thus they have selected naturally for a greater (but still not good!) tolerance.  Quite frankly in a few hundred thousand years, assuming humans survive that long on this rock, we may well develop enough tolerance to be able to safely consume a nearly-100% carbohydrate plant-based diet — as does, for example, a rabbit.

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