The Beverley Hillbillies and the Fiscal Cliff

As the US Fiscal Cliff melodrama heads towards its climax I thought I would offer an observation based upon the 60s US TV sitcom series-the Beverley Hillbillies.

For those of you who are too young to remember, the series was about a family of backwoodsmen-the Clampett family-who discover oil on their land and become rich as a result. They move to Beverley Hills and the series was mainly based around the culture clash between the Clampetts with their unsophisticated and minimalist lifestyle, and the social mountaineers of Beverley Hills, most notably their neighbour Mr Drysdale who runs the local bank. Drysdale has to engage in increasingly   outrageous manoeuvres to keep the Clampetts in Beverley Hills and their money in his bank. It sounds like a moral tale for our time. Is life now imitating art, or at least a 60s sitcom?

In one episode, Jed the patriarch of the Clampetts decides that he doesn’t trust the bank to take care of his money (a man ahead of his time perhaps?) and goes to withdraw it. He has $7,000,000 deposited and says he is withdrawing $7 because a) he doesn’t trust the bank with that much money; and b) he thinks he only has $7 as ‘everyone knows zeroes don’t mean anything’.

What’s this got to do with the US Fiscal Cliff negotiations?

As my friend Nick Carn of Carn Macro Advisers (www.carnmacro.com) points out, the US budget numbers can be viewed in a similar fashion to Jed Clampetts view of his bank balance as follows:

* U.S. Tax revenue: $ 2,348,000,000,000

* Fed budget: $ 3,661,000,000,000

* New debt: $ 1,313,000,000,000

* National debt: $ 11,279,000,000,000

* Recent budget cuts: $ 24,000,000,000

(Sources: FY 2011 figures from Financial Report of the United States Government (FRUSG) and the President’s proposed cuts as per the White House Budget Department)

Following Jed Clampetts lead, let's now remove eight zeros and pretend it's a household budget: 

* Annual family income: $ 23,480

* Money the family spent: $ 36,610

* New annual debt on the credit card: $ 13,130

* Outstanding balance on the credit card: $ 112,790

* Total budget cuts so far: $ 240

As you can see as a result of this, the US budget situation is dire. The inadequacy of what is being proposed compared with the size of the problem is simply stunning as I hope this simple example illustrates. The reason why I have said when asked that whether or not the US goes over the so-called Fiscal Cliff is largely irrelevant is that neither the changes caused by that nor the proposals being negotiated between the President and Mr Boehner are going to have anything like enough impact to begin the necessary process of correction in America’s situation. At some point America will need massive tax increases and spending cuts.

Comments

[James W Bachman]

Thats great Terry. Im sorry thwe b of e did not take my redcommendation for you as the next head but you can see we are continuing to drift downhill. Drift is the operational word and look forwaqrd to seeing you at the boat show.

[Mike Grizaard]

Nice parallel but aren't UK & Europe in same situation?

[John Healy]

Can you do the same for the UK, Germany, France, Italy, Spain and Greece for example? That would be appreciated - and salutary I am sure.

[Algernon Percy]

Remember that this imaginary household ('back of the envelope' figures) –

1) Lives in, and owns a house worth $563,000 (total value of tangible assets in America)
2) Has total wealth of approximately $750,000 (a capital base which is growing all the time)
3) Is able to print / devalue the currency

The household is therefore approximately 15% geared, but interest cover is 40 x (GDP/ interest cost), the household is in work (becoming more busy by the day) and its income and asset base is growing all the time. Also, new joiners are joining the household (immigration).

Conclusion – It’s certainly not the way I’d run my household, but as an outside observer, I’m not too concerned that they are going to hit the rocks.

[Alan Wolstenholme]

I love everything about this article apart from the overuse of the "possessive apostrophe" in "Clampetts". When it is just a plural, it is not required.

Apologies for the pedantry, but it grates.

Otherwise the best illustration I've come across. Could someone knock up the UK equivalent figures? Regards Alan

[Robert]

Thank you. As I’m sure you are aware, this slow motion train economic wreck in the US, UK and elsewhere reflects what is, ultimately, a failure of the so-called liberal democracy. Politicians spend their lives spouting rhetoric and sound bites, most of which, when you analyse it, is not only meaningless but also insulting. Behind the scenes, once elected no doubt they have some big ideas about how they can put society back on the correct path. After spending the first 2 years crafting what they think might be palatable versions of these ideas, their media advisers are telling them that they are only 2 years away from the next election campaign and they need to start producing policies which will win them the next term. I suspect that there are few politicians who possess the back-bone required to prioritise what they believe the be the correct standards & values for society rather than their own personal ambition & greed (not to mention the skill required to get the support of their colleagues for this suicide mission). Additionally, for the US, there is simply no pressure from financial markets to take the pain of adjustment since they can see the massive support for the dollar & treasuries, despite the extraordinary manipulation of statistics that your colleague Tim Morgan has highlighted. Steve Forbes commented some time ago that at some stage there will be such a significant loss of confidence in US assets that it will force a return to the gold standard, in order to bring stability and a return of confidence. I don’t know whether this is likely or not, but until such time that US assets are no longer seen as the de-facto ‘risk-free’ assets, the process of deferral and denial looks set to continue (as will the incredible arrogance of the US in believing that it's their duty to force this democracy on other states where it couldn't possibly be successful). Robert.

[Iain]

but currency issuing governments are not households, they have the ability to pay any debt at any time by printing the dollars required to do so.

[David Nash of Stratford Grammar School]

Send details of the world's financial crisiis to my wife and she'll sort the lot out whilst cooking my tea with one hand, changing the grandchild's nappy with the other and talking to her sister in Spain with the phone tucked under her chin !

[CST]

Thanks,
The perfect illustration, as suggested by others can you do the same for the UK.

[Terry Smith]

Alan Wolstenholme: I have just posted a new blog which I hope addresses your UK question. Apologies about the apostrophe which has been corrected. You are right-these things matter so thank you for pointing it out.

[Terry Smith]

David Nash of Stratford Grammar School: What years were you at Stratford Grammar? I am sure your wife couldn’t do worse than the current cast of clowns.

[Terry Smith]

Iain: I hope you don’t actually think that’s a solution.

[Terry Smith]

Robert: How right you are. The irony is that the Americans don’t realise that the lack of pressure from financial markets because of their reserve currency and flight to safety status is condemning them to follow a disastrous course of action.

[Robert Mellar]

In recent blogs you have been downbeat on prospects for the US. How do you reconcile this stance with the 57% weighting (30 June 2012) given to US stocks in the Fundsmith Equity Fund.

[Terry Smith]

Robert Mellar: We are less interested in where a company is headquartered or listed than in where it does business. Almost all of the companies that Fundsmith is invested in operate internationally if not globally. As for resilience, on average they were founded in 1902 so they survived two world wars and the Great Depression so we hope and expect they will survive the present difficulties.

[Brian Sinfield]

Terry,
Wow, If the west is such debt i guess it must be to the chinese for holding US treasury bonds and the oriental suppliers of goods. Would it be worthwhile to do a similar analysis of the national data for, say, china, taiwan, south korea, etc, who must have massive credit with the west-if of course they make it available.

[Richard]

How much does it cost to service the outstanding "credit card" debt? Surely that is a number worth having in the calculations?

[Terry Smith]

Richard: Good point. In fiscal year 2011, interest expense cost the US government $251bn, or 6.9% of total spending. For the Clampetts, that’s $2,509 per year. Official projections show this number increasing dramatically in the future. You also have to ask yourself whether the government can continue to borrow as cheaply as it can right now. If the Fed de-emphasises its inflation mandate in favour of an unemployment target, perhaps signalling that inflation is going to be used to erode the real burden of accumulated debt, might bond markets respond by hiking rates? Remember that, with debt (held by the public) of $11 trillion, even a 1% rise in rates costs well over $100bn annually (or about $10,000 pa for the Clampetts).