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Deficits (and Massive Debt Overhangs) DO Matter
- Afghanistan
- China
- default
- Demographics
- Department Of Energy
- Department of the Treasury
- Federal Reserve
- Federal Reserve Bank
- Fox News
- Germany
- Global Economy
- Gross Domestic Product
- International Monetary Fund
- Iraq
- Japan
- Karl Denninger
- Krugman
- Medicare
- National Debt
- New York Times
- Nouriel
- Nouriel Roubini
- Paul Krugman
- Sovereign Debt
- Tyler Durden
- White House
The New York Times has a good essay on debt:
But that happy situation, aided by ultralow interest rates, may not last much longer.
Treasury
officials now face a trifecta of headaches: a mountain of new debt, a
balloon of short-term borrowings that come due in the months ahead, and
interest rates that are sure to climb back to normal as soon as the
Federal Reserve decides that the emergency has passed.
Even as
Treasury officials are racing to lock in today’s low rates by
exchanging short-term borrowings for long-term bonds, the government
faces a payment shock similar to those that sent legions of
overstretched homeowners into default on their mortgages.
With
the national debt now topping $12 trillion, the White House estimates
that the government’s tab for servicing the debt will exceed $700
billion a year in 2019, up from $202 billion this year, even if annual
budget deficits shrink drastically. Other forecasters say the figure
could be much higher.
In concrete terms, an additional $500
billion a year in interest expense would total more than the combined
federal budgets this year for education, energy, homeland security and
the wars in Iraq and Afghanistan.
The potential for rapidly
escalating interest payouts is just one of the wrenching challenges
facing the United States after decades of living beyond its
means....There is little doubt that the United States’ long-term budget
crisis is becoming too big to postpone.
Americans now have to
climb out of two deep holes: as debt-loaded consumers, whose personal
wealth sank along with housing and stock prices; and as taxpayers,
whose government debt has almost doubled in the last two years alone,
just as costs tied to benefits for retiring baby boomers are set to
explode.
The competing demands could deepen political battles
over the size and role of the government, the trade-offs between taxes
and spending, the choices between helping older generations versus
younger ones, and the bottom-line questions about who should ultimately
shoulder the burden.
For more on issues regarding age demographics, benefits and the tension between young and old, see this and this.
The Times continues:
“The
government is on teaser rates,” said Robert Bixby, executive director
of the Concord Coalition, a nonpartisan group that advocates lower
deficits. “We’re taking out a huge mortgage right now, but we won’t
feel the pain until later”...
The problem, many analysts say, is
that record government deficits have arrived just as the long-feared
explosion begins in spending on benefits under Medicare and Social
Security
The current low rates on the country’s debt were caused
by temporary factors that are already beginning to fade. One factor was
the economic crisis itself, which caused panicked investors around the
world to plow their money into the comparative safety of Treasury bills
and notes. Even though the United States was the epicenter of the
global crisis, investors viewed Treasury securities as the least
dangerous place to park their money.
On top of that, the Fed used
almost every tool in its arsenal to push interest rates down even
further. It cut the overnight federal funds rate, the rate at which
banks lend reserves to one another, to almost zero. And to reduce
longer-term rates, it bought more than $1.5 trillion worth of Treasury
bonds and government-guaranteed securities linked to mortgages...
The
Fed, meanwhile, is already halting its efforts at tamping down
long-term interest rates. Fed officials ended their $300 billion
program to buy up Treasury bonds last month, and they have announced
plans to stop buying mortgage-backed securities by the end of next
March.
Eventually, though probably not until at least mid-2010,
the Fed will also start raising its benchmark interest rate back to
more historically normal levels...
Even a small increase in
interest rates has a big impact. An increase of one percentage point in
the Treasury’s average cost of borrowing would cost American taxpayers
an extra $80 billion this year — about equal to the combined budgets of
the Department of Energy and the Department of Education...
The
White House estimates that the government will have to borrow about
$3.5 trillion more over the next three years. On top of that, the
Treasury has to refinance, or roll over, a huge amount of short-term
debt that was issued during the financial crisis. Treasury officials
estimate that about 36 percent of the government’s marketable debt —
about $1.6 trillion — is coming due in the months ahead.
As Karl Denninger
has repeatedly pointed out, we are on an unsustainable track guaranteed
to lead to a debt crisis. Denninger posts the following chart to make
his point:
Under any scenario, debt gets further and further ahead of GDP, and America slowly digs its own grave.
And as Tyler Durden noted on November 1st:
As
the assets on the US balance sheet become increasingly long-dated,
courtesy of QE, and locking in record low rates, US liabilities in turn
have shortened their duration to a record level. Almost $3 trillion in
US debt will have to be rolled by the end of 2010. If realistic
inflation expectations are any indication, all hopes of getting
comparable interest terms on these securities once refinancing time
rolls around, will be promptly dashed (we are not saying inflation is
inevitable, even with QE 2.0 around the corner). Yet for all who claim
inflation is a good thing, the one security that will be hit the most
and the fastest will be precisely the T-bill universe, once all the
curve steepeners already in place unwind very, very quickly. The result
would be a major spike in interest expense payments by the government.
The chart below presents the historical annual interest expense on all
USTs by year. 2009 will be the first year in which the interest expense
alone will be over half a trillion dollars (Zero Hedge estimates).
The
concern is that even as the US debt, which as of Friday was at
$11,868,457,477,911.94, and looks like it will hit the $12.104 trillion
limit within a few weeks, continues to skyrocket, the interest expense
paid on holdings will continue creeping ever higher. Keep in mind, at
September 30, the average interest rate on Bills was a historically low
0.347%, and Notes yielded a QE-facilitated 3.043%. With the Fed out,
can China and US retail investors support this record low interest at a
time when UST supply keeps coming and coming?
And as the Times points out, America is competing with other countries to sell debt:
The
United States will not be the only government competing to refinance
huge debt. Japan, Germany, Britain and other industrialized countries
have even higher government debt loads, measured as a share of their
gross domestic product, and they too borrowed heavily to combat the
financial crisis and economic downturn. As the global economy recovers
and businesses raise capital to finance their growth, all that new
government debt is likely to put more upward pressure on interest rates.
Paul Krugman disagrees, believing
that debt is a "phantom menace". But this is not because Krugman is a
liberal. Government economists in the Reagan, Bush and Obama
administrations have all believed pretty much the same thing: deficits
don't matter.
But many experts disagree:
- The St. Louis Federal Reserve Bank posted a paper entitled "Is The United States Bankrupt?". The paper provides the following answer: "The United States is going broke"
- People seem to think the government has money," "said former U.S. Comptroller General David Walker. "The government doesn't have any money"
- The United States Department of the Treasury and the Office of Management and Budget published a report
stating that the U.S. cannot grow our way out of the government's
liabilities, that the liabilities are quickly growing, and that failing
to take drastic and immediate action would lead to very bad
consequences (the report was written in 2006)
- Nouriel Roubini writes:
Ultimately, deleveraging requires the writing down of debt as reflationary policies are not a free lunch and won't solve the debt overhang problem (Dr. Roubini). Important case study: Japan back into deflationary territory despite huge public debt and QE (Chinn).
- The
International Monetary Fund - which oversees third-world economies - is
so concerned about the solvency of the U.S. economy that, during the
Bush administration, it started conducting a complete audit of the whole US financial system. The IMF previously only audited banana republics (then again ...)
- The American Enterprise Institute for Public Policy Research (AEI) published a paper
indicating that “by all relevant debt indicators, the US fiscal
scenario will soon approximate the economic scenario for countries on
the verge of a sovereign debt default.” -
Obama told Fox news that the United States' climbing national debt could drag the country into a double-dip recession
Of course, all it takes is a quick read of Minsky or Keen to see that massive debt overhangs drag economies down into the abyss.
- advertisements -
Dollars will be swapped for new dollars, 100 to 1. Many businesses will switch contracts to a "basket of currencies" and trade will continue. Dollars and dollar holders, bond holders and retirees will be screwed.
Example, Zimbabwe was in total crisis while they were on Zimbabwe dollars. Now that Zimbabwe dollars are truly worthless, Zimbabwe trades in US dollars and things are fine.
As long as you own stuff and not dollars or debt, you will survive. Don't look for Gold as that is manipulated, look for commodity price rises, especially food. Then oil may rise as people start to hoard.
Dollars will be swapped for new dollars, 100 to 1. Many businesses will switch contracts to a "basket of currencies" and trade will continue. Dollars and dollar holders, bond holders and retirees will be screwed.
Example, Zimbabwe was in total crisis while they were on Zimbabwe dollars. Now that Zimbabwe dollars are truly worthless, Zimbabwe trades in US dollars and things are fine.
As long as you own stuff and not dollars or debt, you will survive. Don't look for Gold as that is manipulated, look for commodity price rises, especially food. Then oil may rise as people start to hoard.
The question should be: to whom does the debt matter? The answer becomes then self-evident: to any CB anywhere. Why? So that it can not be paid back, EVER. At least that is the plan. Smoke that for a while...
While on the subject... Have you seen the Queen's crown last night? She is sooo 18th century. And her blowers... with carpet pieces on their heads. What a circus...
The only answer is to drastically cut federal discretionary spending, and some defense too, and instead use those monies to pay down our debt...
A good start would be to return the unused TARP and Stimulus funds!
I agree.
But in signing up for democracy, we also allowed special interest groups like the Neocons backed by the military-industrial complex to dictate foreign policies, so $2b a week for Iraq and somewhat less for Afghan, plus 5% GDP on defence would continue into the distant future. And the money brokers who backed the 0 administration would resist any changes to Wall Street or the Fed.
The balance of power between voters and special interest groups would be manintained in only 1 scenario - continued USD devaluation until default, after which China and RoW would be in trouble, but they are not our problems in the short term. This of course can only happen in a crisis, and the next one being engineered is a global stock/commodities market crash. The best time, ironically, is sometime in early 2010, allowing the 0 administration to go emergency mode and postpone the mid-term elections.
nothing matters
we are in a 100% pure farce
truth is immaterial to farce
the blood funnel sucked out everyone's brains
and money
right out everyone's anus
maybe they can just reboot the computer that keeps track of it all...like...oops...it's all back to 0...let's start again...
http://www.theonion.com/content/video/u_s_government_stages_fake_coup?ut...
I know all this is awful, but I also read that Japan and the UK are in even worse fiscal shape. Will all three countries default at practically the same time? Or are we just going to see printing on a scale never before seen? (also a form of default)
If they all default at once I would expect a command economy authoritarian government to take over. Democracy is an anomaly historically.
When that happens you pretty much want to be in the most quiet unimportant corner of the planet you can find. I can't decide where that is yet, but it's either remote Northern Canada or somewhere like Patagonia or the South Island of New Zealand.
You'll freeze and starve in northern Canada, and it's a bit of a playground for the US and Canadian militaries. I'd try the other two.
That would be news to the Inuit who have lived there for thousands of years. You just have to learn to love polar bear and seal meat, and sleeping with your friend's wife to keep warm.
Hardly anyone raised in US society could make it the Inuit way. And those polar bears are dying off with the lack of sea ice.
Are you sane?
" Or are we just going to see printing on a scale never before seen? "
I'll give you three guesses, and the first two don't count.
Debt be damned. Health Care Reform will reduce the deficit. We're hammerin' on a big Bush rock here, doncha' know. Gotta' get these healthcare costs under control. Amerika can't survive without .....< sarcasm >
Here's how health care will reduce the deficit:
http://www.youtube.com/watch?v=8ZXEShSIFks&feature=player_embedded#
all it takes is a nice, continuing fall in receipts compared to sustained high deficits to push our interest costs up to #1
It is all or nothing at this point. TPTB *know*, conclusively, that if we do not see a return to cyclical growth, that it is game over. I mean, fucking sovereign default game over.
Get yer dollars, stock up on those notes of a bankrupt state!
They ran out of money in April of this last fiscal year. Any decline in gov't spending will kick off a further decline in receipts.
This is the fatal dead-end that compound interest monetary systems leave you in when growth stops. We're a lost diver going deeper into the cave.
if the US confiscated gold to pay it's debts, would that drive the price up?
In the rest of the world for sure.
If gold would be US$ 16,000.00/Oz the
debt problem would be solved.
That would pay off my mortgage, and then some.
Well, we could sue china for 1 trillon dollars for stealing our IP and technology...that would get rid of some debt i think...
China is actually moving to Linux. The Microsoft stuff sold in China is mostly foreign "head-office mandated"(?).
This is old news (from 2000) but you know that Linux stands a good chance when ...
"and Red Flag, the Chinese company backed by President Jiang's son Jiang Mianhang."
From the World Socialist Web Site (I have no idea who these folks are but their web site checks out 100% clean with Norton Safe Site)
http://www.wsws.org/articles/2000/jul2000/lin-j15.shtml
And from the New York Times:
http://www.hartford-hwp.com/archives/55/424.html
The article also mentions the NSAKey (as in National Security Agency - access - Key) that was a standard part of Windows. People got a "a little bit upset" about it. But hey - they wouldn't do stuff like that anymore, now would they?
IMHO Ubuntu Linux is now the operating system of choice for most of the world. I installed it on an old notebook to test it and have stopped using Windows as a result. The old notebook works better than the "new" Windows stuff. It was easier to install Ubuntu than (for instance) Microsoft Word.
Every time that you do a Google search, you are using Linux.
What's amazing is that the cash-strapped US government hasn't decided that using Linux might be a way to save quite a lot money in USA government costs, schools, businesses and homes.
But hey - what's life without an NSAKey in your computer?
Why don't I feel safer with Windows?
all the best
Namke von Federlein
Another good article GW, thanks!