The Fuzzy math behind the Massachusetts universal healthcare law is starting to add up – just as Washington studies the law as a possible model for the nation.

Because of a recession-related drop in state revenues and a surge in enrollment by the recently unemployed, the truth is emerging at an inconvenient time. Massachusetts doesn’t have enough money to pay for the coverage envisioned by the law.

In June, state officials announced they are cutting $100 million from Commonwealth Care, which subsidizes premiums for needy residents. The poorest residents, along with the newest – legal immigrants – will take the hit.

This outcome is not surprising, but it is instructive as President Obama pushes for a national healthcare plan.

The figure then being projected for this year was above the $1,000bn mark for the first time. But in the few short months since, the number has rocketed much further ”“ to $1,800bn (£1,106bn, €1,291bn) or 13 per cent of gross domestic product.

The Congressional Budget Office, a nonpartisan watchdog, forecasts that the US will post deficits in excess of a trillion dollars in each of the next 10 years. Even on its relatively optimistic assumptions for economic growth, moreover, the CBO predicts national debt will double to 82 per cent of GDP in the next decade ”“ a level not seen since the second world war.

This would push the US close to the chronic debt levels seen in Japan and Italy. “People used to talk about America’s long-term fiscal crisis,” says Douglas Elmendorf, head of the CBO. “That crisis is now.”

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US long-term interest rates rose to the highest level of the year on Wednesday, threatening the “green shoots” of recovery, after the latest sale of 10-year government debt met with a tepid response from inflation-wary investors.

Concerns about the growth of government borrowing forced the US Treasury to give investors in an auction of $19bn in 10-year notes a yield of 3.99 per cent ”“ 4 basis points higher than the yield available before the auction. That constituted the biggest yield markup since a 10-year auction in May 2003, said Morgan Stanley. Yields on the 10-year note, the benchmark rate for US mortgages, hit a high of 4 per cent during the day, up from 3.6 per cent a week ago.

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There are two basic truths about the enormous deficits that the federal government will run in the coming years.

The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.

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Members of Congress are seriously considering proposals to rein in the growth of health spending by taking tens of billions of dollars of Medicare money away from doctors and hospitals in high-cost areas and using it to help cover the uninsured or treat patients in lower-cost regions.

Those proposals have alarmed lawmakers from higher-cost states like Florida, Massachusetts, New Jersey and New York. But they have won tentative support among some lawmakers from Iowa, Minnesota, Montana, North Dakota, Oregon and Washington, who say their states have long been shortchanged by Medicare.

Nationally, according to the Dartmouth Atlas of Health Care, Medicare spent an average of $8,304 per beneficiary in 2006. Among states, New York was tops, at $9,564, and Hawaii was lowest, at $5,311.

Researchers at Dartmouth Medical School have also found wide variations within states and among cities. Medicare spent $16,351 per beneficiary in Miami in 2006, almost twice the average of $8,331 in San Francisco, they said.

Read it all from the front page of yesterday’s New York Times.

The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the United States needed to develop a plan to restore fiscal balance, even as the government builds huge budget deficits as it tries to spend its way out of the worst economic crisis since the Great Depression.

In remarks to the House Budget Committee, Mr. Bernanke said that the government must address the immediate problems of a crippling recession that has erased trillions of dollars in household wealth, hobbled investment portfolios and raised unemployment to its highest levels in a generation. Still, he said, the government needs to think about putting its fiscal house back in order.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.

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Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser.

It’s “very natural” for the world to be concerned about the U.S. government’s spending and planned record fiscal deficit, Yu said in e-mailed comments yesterday relating to a visit to Beijing by U.S. Treasury Secretary Timothy Geithner.

The Obama administration aims to reduce the fiscal deficit to “roughly” 3 percent of gross domestic product from a projected 12.9 percent this year, Geithner reaffirmed today. The treasury secretary added that China’s investments in U.S. financial assets are very safe, and that the Obama administration is committed to a strong dollar.

It may be helpful if “Geithner can show us some arithmetic,” said Yu. “We need to know how the U.S. government can achieve this objective.”

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Another, more helpful way of looking at what is happening is to see it as a change in perception of where risk lies. Of course, there is risk in equities ”“ how could there not be with the prospect of the once-mighty General Motors filing for bankruptcy? But there is also risk in bonds, including dollar bonds issued by AAA governments. So, as you can see in the graphs, the dollar/sterling rate has come sharply back, reflecting a change in the relative perception of risk between the two countries. More significant still has been the rise in the interest rate on 10-year bonds issued by the US, the UK and eurozone governments. As you can see, the interest rate on 10-year US bonds spun down from about 4 per cent in the middle of last year, to close to 2 per cent at the turn of the year. Now it is heading back to 4 per cent again. Those are astounding swings. If you have bought at the right moment last summer, and then sold at the right moment, you could just about have doubled your money. December buyers would now be facing a large loss.

Now look ahead. What will happen over the next decade, particularly in the US? Tax revenues have collapsed, while spending has soared, as the third graph shows. The US federal government is raising only about 55 cents in taxation for every dollar it spends. The rest has to be borrowed, either from foreign countries such as China and Japan, or by artificially creating the stuff by borrowing from the US Federal Reserve system. In the latter case the debt is being “monetised”, the practice that normally happens only in wartime or in Latin America and which threatens massive inflation (the US mechanism for monetising debt is slightly different from our own “quantitative easing”, but the effect is pretty much the same).

This cannot go on, as President Barack Obama acknowledges. “We are,” as he puts it, “out of money.” So what will happen?

It is very hard to know because there are no obvious precedents.

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If the US government had a FICA score it would be around 245 according to University of Washington Professor Telda Wang.

Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows.

The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security.

That’s the biggest leap in the long-term burden on taxpayers since a Medicare prescription drug benefit was added in 2003.

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They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.

Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong, as long as investors were looking for the safest financial port amid the post-September panic. But as risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.

They have cause to be worried, given Washington’s astonishing bet on fiscal and monetary reflation. The Obama Administration’s epic spending spree means the Treasury will have to float trillions of dollars in new debt in the next two or three years alone….

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A quick follow up to yesterday’s post With Each Interest Rate Tick Higher Another “Green Shoot” Dies….

We are drowning under the weight of near term supply for sure but I guess I think something else is afoot here.

Look at the breakeven spread on the 10 year TIPS bond. That spread is currently 185 basis points. I do not believe that we have been that wide since the advent of the financial crisis in 2007. I think that investors are uttering a gigantic and collective nyet regarding the implementation of monetary policy and fiscal policy in the US.That is why the curve is steepening so dramatically.

Yuck. Read it all and follow the links.

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax — called a value-added tax, or VAT — has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government’s budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama’s policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

“There is a growing awareness of the need for fundamental tax reform,” Sen. Kent Conrad (D-N.D.) said in an interview. “I think a VAT and a high-end income tax have got to be on the table.”

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Leaders in both Washington and Beijing have been fretting openly about the mutual dependence ”” some would say codependence ”” created by China’s vast holdings of United States bonds. But beyond the talk, the relationship is already changing with surprising speed.

China is growing more picky about which American debt it is willing to finance, and is changing laws to make it easier for Chinese companies to invest abroad the billions of dollars they take in each year by exporting to America. For its part, the United States is becoming relatively less dependent on Chinese financing.

China has actually bought Treasury bonds at an accelerating pace over the last year ”” notwithstanding Chinese officials’ complaints about American profligacy. But the borrowing needs of the United States government have grown even faster. So China represents a rapidly shrinking share of overall purchases of Treasury securities. “China’s demand for Treasuries has increased over the past year, but it hasn’t increased at anything like the pace of the Treasury’s sale of new Treasury bonds,” said Brad W. Setser, a specialist in Chinese financial flows at the Council on Foreign Relations.

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President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

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It has been widely reported that Treasury Secretary Hank Paulson and Fed chief Ben Bernanke summoned the CEOs of America’s nine largest financial institutions to a meeting on October 13, 2008, at which they were told that their banks would be required to accept TARP money and give the federal government an ownership interest in their institutions, whether they wanted to do so or not. We have it on good authority that some of the bankers, at least, were told that they would not be allowed to leave the room until they signed documents that were presented to them at that meeting.

These chilling reports have now been confirmed by Treasury documents that were obtained by Judicial Watch through a FOIA request. These were Paulson and Bernanke’s “talking points” for the meeting….

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Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital ”” rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

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The barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.

Historians and economists who’ve studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.

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The financial outlook for Medicare and Social Security has significantly worsened, as the bad economy and mounting job losses have pushed both programs years closer to insolvency, according to a grim report issued Tuesday by the Obama administration.

The new projection, in an annual report from the programs’ trustees, says that Medicare’s hospital insurance trust fund will be exhausted in 2017, just a year after President Obama would leave office if re-elected to a second term. Last year the trustees said they expected the fund to last until 2019.

The trustees also said that Social Security’s reserves now face depletion in 2037, four years sooner than the previous projection of 2041. The projections assume that there are no changes in current benefits, policies and tax rates.

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But the higher deficit figures and additional proposed taxes, along with details of corporate tax breaks the Obama administration wants to ax, led to sharp criticism of the White House from some Republican lawmakers and business groups. It was a taste of the battle to come on Capitol Hill, where lawmakers and lobbyists have prevented some of the proposed changes in the past.

“The administration’s displayed an insatiable appetite for spending and they need to get money wherever they can. So they use the tax code the way Willie Sutton used a gun,” said Martin A. Regalia, vice president for economic and tax policy at the U.S. Chamber of Commerce, referring to the famous bank robber.

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Senate leaders are considering new federal taxes on soda and other sugary drinks to help pay for an overhaul of the nation’s health-care system.

The taxes would pay for only a fraction of the cost to expand health-insurance coverage to all Americans and would face strong opposition from the beverage industry. They also could spark a backlash from consumers who would have to pay several cents more for a soft drink.

On Tuesday, the Senate Finance Committee is set to hear proposals from about a dozen experts about how to pay for the comprehensive health-care overhaul that President Barack Obama wants to enact this year. Early estimates put the cost of the plan at around $1.2 trillion. The administration has so far only earmarked funds for about half of that amount.

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The White House on Monday projected 2009 and 2010 federal budget deficits far higher than it forecast just two and a half months ago, even as it continued to defy most experts and predict that the economy is headed for a strong comeback starting late this year.

Economists scoffed at the latest administration predictions.

“If they keep playing this game, they’re going to have real credibility problems,” predicted Brian Bethune, the chief U.S. financial economist at IHS Global Insight, an economic research firm.

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The only thing sorrier than Obama’s effort at fiscal restraint is the reaction to it in Congress. Republicans derided Obama’s proposed cuts, but where were they when spending went out of control on their watch?

Democrats, meanwhile, built a hard-earned reputation for fiscal responsibility in the 1990s. Now they’re frittering it away. House Budget Committee Chairman John Spratt, D-S.C., essentially told Obama to forget his cuts, saying that “Congress is unlikely to agree with” all of them. Democratic lawmakers immediately vowed to oppose some of the proposed reductions. To name just a couple, Rep Maurice Hinchey of New York protested cuts in the presidential helicopter fleet, and Rep. Mike Ross of Arkansas sought to protect farm subsidies.

This sort of reflexive parochialism leaves us deeply concerned about whether either party, or Congress as an institution, is capable of addressing the nation’s dire fiscal circumstances, which will only worsen as Baby Boomers hit retirement age. Radical deficit reduction isn’t desirable at a time when the administration is spending massive amounts of money in an effort to stimulate the economy. But this is exactly the right time to hunt down serious savings from weak and wasteful spending programs ”” and to signal the financial markets that huge deficits won’t be tolerated once the economy recovers. Instead, Obama’s budget predicts deficits topping $500 billion for each of the next 10 years, adding almost $7 trillion to the national debt.Perhaps by forecasting godawful deficits now, the administration is positioning itself to claim credit for cutting them to slightly less awful levels down the road. If that’s the case, it’s cynical game playing. If that’s not the case, then it’s simply irresponsible.

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Yet the idea of non-traditional protesters using bottom-up organizing to foment a national movement in the span of 60 days may have marked a turning point for the tea partiers ”“ especially since the high attendance estimates rivaled the estimated 500,000 or so protesters who converged on New York City and several other major cities to oppose the Iraq War on Feb. 15, 2003.

“I think it’s not dissimilar from what we had in 2003 with the anti-war protests, where a lot of people were uncomfortable with the war, but also uncomfortable with the anti-war position, recognizing there are terrorists out there,” says Jeremi Suri, a history professor who specializes in social movements at the University of Wisconsin in Madison. “Here we have a similar thing: There are serious economic issues, and it’s unclear to many people whether the stimulus is going to deal with these.”

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. Asked about the tea parties, President Barack Obama responded that he was not aware of them. As Marie Antoinette said, “Let them drink Lapsang Souchong.” His Imperial Majesty at Barackingham Palace having declined to acknowledge the tea parties, his courtiers at the Globe and elsewhere fell into line. Talk-show host Michael Graham spoke to one attendee at the 2009 Boston Tea Party who remarked of the press embargo: “If Obama had been the king of England, the Globe wouldn’t have covered the American Revolution.”

The American media, having run their own business into the ground, are certainly qualified to run everybody else’s into the same abyss. Which is why they’ve decided that hundreds of thousands of citizens protesting taxes and out-of-control spending and government vaporization of Americans’ wealth and their children’s future is no story. Nothing to see here. As Nancy Pelosi says, it’s AstroTurf ”“ fake grass-roots, not the real thing.

Besides, what are these whiners so uptight about? CNN’s Susan Roesgen interviewed a guy in the crowd and asked why he was here:

“Because,” said the Tea Partier, “I hear a president say that he believed in what Lincoln stood for. Lincoln’s primary thing was he believed that people had the right to liberty, and had the right ”¦”

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Take a look.

Mr. Obama is betting that the totality of economic policies his team and the Federal Reserve have put in place will act, like radiation therapy, to halt the spread and reduce the size of the cancerous tumors eating away at our financial system ”” and stimulate enough new growth and optimism so that Phase II will be small enough to get past Congress and the public.

As Treasury Secretary Timothy Geithner told ABC News, “If we get to that point” ”” where more funds are needed ”” “we’ll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively.”

Have no doubt, Phase II is coming. At best, it will require hundreds of billions of dollars more, at worst more than a trillion, to deal with more bad loans and toxic assets weakening the economy ”” problems that Phase I can’t fully absorb. Because unemployment is still rising ”” ensuring that the initial spate of mortgage defaults, which came from loans to people who could never repay, will be followed by another spate of defaults from those who could repay but now can’t because the deteriorating economy has stripped them of their jobs, their businesses or their credit lines.

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A year ago, I wrote:

Think Social Security will be solvent until 2041? Think again. The next president will face rapidly growing problems by the end of his or her first term.

At the time, the concern was that the substantial Social Security surpluses we have experienced during the past 22 years would begin to shrink.

An updated version of a Congressional Budget Office chart I presented last year shows that the shrink has indeed begun…

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The Democratic-controlled House approved a budget blueprint drawn to President Barack Obama’s specifications Thursday and the Senate hastened to follow suit after administration allies rejected alternatives from liberals and conservatives alike.

The vote in the House was 233-196, largely along party lines, for a $3.6 trillion plan that includes a deficit of $1.2 trillion.

The country wants “real change, and we have come here to make a difference,” House Speaker Nancy Pelosi, D-Calif., said as both chambers worked on plans to boost spending on domestic programs, raise taxes on the wealthy in two years’ time and clear the way for action later in the year on Obama’s priority items of health care, energy and education.

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The president’s budget makes clear that a huge expansion of government is not just about today’s economic downturn. Once the recession is behind us, this budget will continue pushing for more and more government in our everyday lives.

Instead of tightening Uncle Sam’s belt the way so many American families are cutting back these days, the president’s proposal spends so aggressively that it essentially adds $1 trillion to the debt, on average, every year.

Except for some accounting gimmicks, the budget makes no attempt to cut wasteful spending or find savings. It ignores reform for major entitlement programs such as Medicare and Social Security, which are on track to cost us $67 trillion more than we have over the next 75 years.

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