Tag Archives: U.S. debt

The “Debt Super Cycle”

8 Jun

U.S.’s $13 Trillion Debt Poised to Overtake GDP: Chart of Day

By Garfield Reynolds and Wes Goodman

June 4 (Bloomberg) — President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.”

The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades.

“Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.”

Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.”

READ FULL ARTICLE HERE

A Banana Republic with No Bananas

14 Apr

Washington’s Blog

Experts on third world banana republics from the IMF and the Federal Reserve have said the U.S. has become a third world banana republic (and see this and this).

Are they right?

Well, let’s look at Wikipedia’s description of the four factors which make a country a banana republic.

Profits Privatized and Debts Socialized

The first feature of a banana republic as “A collusion between the overweening state and certain favored monopolistic concerns, whereby the profits can be privatized and the debts socialized.”

✓ Check.

As I pointed out in November:

Nouriel Roubini writes in a recent essay:

This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest…

The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.

Roubini has previously written:

We’re essentially continuing a system where profits are privatized and…losses socialized.

Nassim Nicholas Taleb says the same thing:

After finishing The Black Swan, I realized there was a cancer. The cancer was a huge buildup of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions.

[Interviewer]: But aren’t those the very problems we’re supposed to be fixing?

NT: They’re all still here. Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren. What is the effect? The doctor has shown up and relieved the patient’s symptoms – and transformed the tumour into a metastatic tumour. We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment.

[Interviewer]: Are you saying the U.S. shouldn’t have done all those bailouts? What was the alternative?

NT: Blood, sweat and tears. A lot of the growth of the past few years was fake growth from debt. So swallow the losses, be dignified and move on. Suck it up. I gather you’re not too impressed with the folks in Washington who are handling this crisis.

Ben Bernanke saved nothing! He shouldn’t be allowed in Washington. He’s like a doctor who misses the metastatic tumour and says the patient is doing very well.

Nobel prize winning economist Joseph Stiglitz calls it “socialism for the rich”. So do many others.

Devalued Paper Currency

The second characteristic of a banana republic is “Devalued paper currency in the international community.”

✓ Check. Here’s a chart of the trade weighted US Dollar from 1973-2009.

US_dollar

And here’s a bonus chart showing the decline in the dollar’s purchasing power from 1913 to 2005:

US_dollar


Politicians Use Time in Office to Maximize Their Own Gains

The third characteristic of a banana republic is:

Kleptocracy — those in positions of influence use their time in office to maximize their own gains, always ensuring that any shortfall is made up by those unfortunates whose daily life involves earning money rather than making it.

✓ Check. As I wrote last month:

Summers, Geithner, Bernanke and Congress like things just the way they are.

Of course they do … they’re bought and paid for:

  • Lobbyists from the financial industry have paid hundreds of millions to Congress and the Obama administration. They have bought virtually all of the key congress members and senators on committees overseeing finances and banking. The Congress people who receive the most money from lobbyists are the most opposed to regulation. See this, this, this, this, this, this, and this.
  • Obama received more donations from Goldman Sachs and the rest of the financial industry than almost anyone else
  • Summers and the rest of Obama’s economic team have made many millions – even in the first few months of being appointed, or right beforehand – from the financial industry

The chairman of the Department of Economics at George Mason University (Donald J. Boudreaux) says that it is inaccurate to call politicians prostitutes. Specifically, he says that they are more correct to call them “pimps”, since they are pimping out the American people to the financial giants …

Corruption Remains Unchecked, Politicians Are Only for Show

And the fourth characteristic of a banana republic is:

There must be no principle of accountability within the government so that the political corruption by which the banana republic operates is left unchecked. The members of the national legislature will be (a) largely for sale and (b) consulted only for ceremonial and rubber-stamp purposes some time after all the truly important decisions have already been made elsewhere.

✓ Check. There’s no accountability.

For example, former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout signals corruption. As ABC writes:

Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.

“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.

As I noted in October:

William K. Black – professor of economics and law, and the senior regulator during the S & L crisis – says that that the government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are (“the entire strategy is to keep people from getting the facts”).

Indeed, as I have previously documented, 7 out of the 8 giant, money center banks went bankrupt in the 1980’s during the “Latin American Crisis”, and the government’s response was to cover up their insolvency.

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.

PhD economist Dean Baker made a similar point, lambasting the Federal Reserve for blowing the bubble, and pointing out that those who caused the disaster are trying to shift the focus as fast as they can:

The current craze in DC policy circles is to create a “systematic risk regulator” to make sure that the country never experiences another economic crisis like the current one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.

Baker also says:

“Instead of striving to uncover the truth, [Congress] may seek to conceal it” and tell banksters they’re free to steal again.

Politicians are for sale.

And Congress made a big show of passing derivatives reform legislation, but actually weakened existing regulations. In fact, the legislation was “probably written by JP Morgan and Goldman Sachs” (two of the biggest derivatives players). In other words, Congress just rubber-stamped decisions which were already made elsewhere.

The same is true with every other piece of financial “reform” legislation which has been passed. See this and this.

It’s all for show, folks. Dodd, Frank, Obama and all the other politicians of both parties (with the exception of a handful trying to do the right thing) are “consulted only for ceremonial and rubber-stamp purposes some time after all the truly important decisions [about economic legislation] have already been made elsewhere”

Without the Bananas

Wikipedia gives some additional background on the term “banana republic”:

Banana republic is a pejorative term originally used to refer to a country that is politically unstable, dependent on limited agriculture (e.g. bananas), and ruled by a small, self-elected, wealthy, and corrupt clique.

Well, America isn’t dependent on limited agriculture like bananas. But just about the only areas of growth are in the military and in giant companies lavished with buckets of cash and special “favors” by Uncle Sugar.

As one commentator succinctly put it, America has become:

A banana republic with no bananas.

Let’s Hope These 4 Things Don’t Happen

16 Jan
Good news that a scathing article like this appears in the mainstream.  Although, that really shows how bad things are.  I think the question is not about hoping these 4 things don’t happen, but where we should be when they do happen.  I think that self-sufficiency is the only way.  Support your local community and help each other out.

By Rick Newman , On Wednesday January 13, 2010, 5:43 pm EST

In the cast of corporate characters, Fannie Mae and Freddie Mac are A-list villains, thanks to the central role they played in the 2008 financial meltdown. The two mortgage-finance firms failed as spectacularly as AIG, the poster child for finance-gone-wrong, with the combined Fannie-Freddie rescue totaling about $111 billion so far–the biggest bailout of all. Both firms are effectively nationalized, and the government would probably wind them down except for one thing: They underwrite about three quarters of all the mortgages issued in the United States.

[See how the government is swallowing the economy.]

You’ve probably heard that the economy is recovering, that consumers are more optimistic, and that companies might soon begin hiring more workers than they’re firing. Hooray. We’ll all be thrilled when the economy stops quivering. The only problem with an upbeat prognosis is that large chunks of the U.S. economy remain addicted to financial painkillers or dependent upon dysfunctional institutions like Fannie and Freddie, and we’ve never gone through the kind of withdrawal that’s set to take place this year. If all goes well, we’ll avoid messy complications, such as these:

Housing tanks all over again. It’s hard to believe the housing market could get any worse, with prices already down by more than 30 percent from their 2007 peak. On the other hand, it’s astounding that housing is as bad as it is, considering the massive amounts of government aid that have been transfused into this comatose market. In addition to subsidizing the entire mortgage market via Fannie and Freddie, the government has also stepped in to buy billions in mortgage-backed securities–replacing private investors who are sitting on the sidelines–to keep money flowing to consumers. Then there are the tax breaks meant to spur demand for homes and other programs to reduce foreclosures and arrest the plunge in prices.

[See how to live happily on 75 percent less.]

The tax breaks expire this year, and the government probably can’t afford to extend them (again). The Federal Reserve and other agencies have also said they’ll begin an orderly withdrawal from housing finance in 2010. Most forecasts call for a spike in foreclosures and further price declines in the first half of the year, with a possible bottom and tepid recovery in the second half. But it’s far from clear what will happen when the government aid dissipates. Will that remove one leg from the chair? Two? Three? If the private markets don’t fill the void left when the government backs out, it could trigger a fresh crisis that inflicts more collateral damage on the rest of the economy.

Stocks crash. An epic bull rally since the lows of March 2009 has probably been the single biggest contributor to the so-called recovery. Though stocks are still down from their October 2007 peak, the rebound has eased a sense of panic and helped restore some of the household wealth lost in the housing bust (for those lucky enough to have stock-market investments and to have stuck with them through the bottom). And that’s probably been a big factor helping consumer spending to recover. But while stocks have been surging, jobs have continued to disappear, and this divergence between Wall Street and Main Street must end. The conventional view is that stocks foretell a pickup in the “real economy,” which will follow the market’s recovery after a lag of some length. But what if it’s the moribund job market that exerts the stronger gravitational pull, dragging down stocks? If so, buckle in for a double-dip.

[See how to tell if you’re saving enough.]

There’s a U.S. debt crisis. Assuming the economy stabilizes, this is also the year that President Obama will start to talk tough about reducing America’s $8 trillion public debt, which amounts to more than half of our total economic output. There will be careful efforts to make sure that no deserving American feels any pain (the rich don’t count as deserving) and that Congress passes no unpopular measures that would get anybody unelected. The financial markets might buy this, allowing our government to keep borrowing and keep spending beyond its means. Or the markets might decide that America is heading toward bankruptcy and dump the dollar, forcing the world’s biggest debtor nation to pay higher rates on its securities, slash spending, and hike taxes. We should probably just relax, confident that Washington politicians always rally to head off devastating problems before they explode.

Consumers become rational. Given the painful transformation of the U.S. economy, Americans ought to be saving like crazy and buying nothing they don’t need. Some are, but it’s not clear yet if Americans as a whole will save more over the long term or go back to spending nearly everything they have. The savings rate has crept up to about 5 percent, but that’s still lower than the long-term average and far lower than you might expect after a collapse like the one we’ve endured. If savings continue to go up–a prudent move for most households–consumer spending will come down, leaving a hole in the growth of our gross domestic product, with little else to fill it. So hopes for a vigorous rebound rest on spendthrift consumers being as materialistic as ever. Now there’s a strong foundation for success.

SOURCE