The Canary in the Mine

Before we had modern air detection devices for mines, the miners would carry a canary into the mine. If the air was bad and the canary died, the miners could leave and save their lives. 

While this is an overused cliché, sometimes the old clichés are the best clichés. 

Looking around the economy I see plenty of dead canaries. Here is one from the Wall Street Journal:

The U.S. Postal Service on Thursday reported a $5.2 billion quarterly loss and said it was nearly out of cash and likely to exhaust its government credit line in coming months.  

The agency said the loss was its widest since it began releasing quarterly financials in 2007. But Postmaster General Patrick Donahoe said the Postal Service would do whatever it takes to maintain its operations, even if that means defaulting on a second multibillion-dollar retiree obligation in as many months. 

How can a monopoly lose this much money? 

One reason is that the Post Office is required by law to fund the retirement of postal workers—really in a sense pre-fund the workers' retirement. But only about 50% of the loss seems to be from this source. 

While the Post office should fund its retirement benefits every year, pre-funding 75 years of retirement over 10 years does seem excessive. It should fund the annual increase in obligations every year, like other government agencies. Oh, wait a minute, that is not true. 

This brings us to my main dead canary for the day. While the budget deficit is reported as 1.3 trillion, in fact it is much larger. The unfunded liabilities of the government keep growing. How large a deficit are we really running? No one knows. I have heard estimates that it is ten trillion a year. I doubt it is that large, but who knows? The only way to know is if you have a crystal ball and can predict future unemployment rates, future interest rates, and so on. In any event, it is clear that the true deficit is two or three times as large as is admitted under modern bogus accounting rules.  

A good example of what I am talking about is Part D Medicare. Bush rammed it though the congress. The main argument I heard in favor of it was that the Democrats had a worse version of it. Right. Bush, with one signature, added ten trillion to the unfunded liabilities of Medicare. I will not be pushing “like” on Bush's Facebook page anytime soon. This may be the single worst act of any president ever. 

About once a month at my house I have to sweep a dead bird off my back porch. I have very large windows and the birds think that the window is open. Get your broom ready folks, for soon the canaries will be dropping like flies. 

What will be the effect of the total unfunded liability of Medicare? We will find out in 3 to 7 years when the government defaults.