Monday, April 18, 2011

Debt Beyond Belief

By Alan Caruba

Have you noticed the many television advertisements urging you to buy gold, to refinance your home, to get a reverse mortgage, or to fix your personal credit score? There’s a reason for this, not just individuals are financially stressed, but the entire nation is broke.

The nation has not seen this level of debt since the end of World War Two. We have debt equal to the entire value of our Gross Domestic Product. The government cannot collect enough taxes to make a dent in it. It has to cut spending. It has to find ways to reduce the need to borrow.

Monday’s Standard & Poors' downgrade, not of the nation’s triple-A rating for its treasury securities, but a warning that the nation’s “sovereign rating” has a “negative outlook” says that America has wandered into a dangerous area in which worldwide confidence in the dollar is slipping away.

For too long, too many of the economic advisors to presidents Clinton, Bush and Obama, have been allowed to cause this damage and then, as often as not, return to their ivory tower jobs secure in the knowledge that more knucklehead economists will fail to apply the brakes.

How does a nation engaged in two foreign wars do that? The answer is that it can’t. No matter how much government waste is exposed, it rarely translates to a reduction. The bureaucrats running federal departments and agencies understand that failure to spend as much of their current budget as possible threatens their ability to ask for and get more

The responses to the S&P news, as reported in Monday’s Wall Street Journal, demonstrate that economists, tightly wrapped in their favorite theories and masses of numbers, are clueless. Mark Thomas of the University of Oregon dismissed the S&P warning, airily saying “the political process will deal with this problem.” It is the political process, specifically decades of interfering with the nation’s housing market that caused the 2008 financial crisis.

Add in interference with the energy marketplace since the days of Jimmy Carter and you have $5.00 a gallon gas by June, maybe sooner.

It is the political process that is blathering about raising the debt ceiling when all it has ever done is raise the debt ceiling. The same political process has proven incapable of eliminating federal government agencies and programs that have ballooned the debt while slowing economic growth.

Dean Baker of the Center for Economic and Policy Research noted S&Ps “horrible track record for judging credit worthiness” and, considering that it “gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse”, he’s got a point. Much of the alleged structure in place to avoid banking failures has been a failure.

Steven Richhiuto of Mizuho Securities suggested the “political realities” will make it difficult “to achieve the type of entitlement and tax reform necessary to put the deficit on a credible declining trajectory.” You think? For decades Social Security and later Medicare have been the famed “third rail” of politics.

No one wanted to address the way changing demographics—more older people, fewer working people—had rendered the systems unsustainable. Rep. Paul Ryan’s 2012 proposed budget does, in fact, address these and other problems, but if “political realities” fail to bring about the changes he and several deficit commissions have recommended, then the S&P warning is the equivalent of being on the Titanic.

Paul Krugman, Princeton University’s Nobel Prize winner, and New York Times columnist just repeats that same nonsense that “the U.S. is perfectly capable both of running large deficits now and getting its fiscal house in order over time”, cautiously adding, “but not if the parties cannot agree on any solution.”

The political parties have not been able to agree for decades. When the economy rebounded from President Reagan’s tough love, it still took a 1994 historic change in Congress to Republican control before welfare reform was embraced by President Clinton. He then took credit for an improving economy. In 2010 the voters returned control of the House to the Republicans, but the previous Democrat House and two other branches of government, the Senate and the White House, have plunged the nation into its current crisis by tripling the debt by trillions.

The bottom line is that the nation cannot continue to run large deficits because it cannot afford to pay huge interest rates on every dollar it borrows. That is a cycle that must be broken.

At the heart of present dangers is the Federal Reserve that has been printing money out of thin air for the purpose of buying the bank’s “toxic paper”, the millions in “bundled mortgages” for homes, the ownership of which is often in question. This is called “quantitative easing”. Other nations have gone this route and achieved little as a result.

Writing in November 2010, Bill Bonner, creator of newsletter The Daily Reckoning, said, “America’s own experience with quantitative easing is similarly discouraging. Between the beginning of 2009 and March 2010, the Feb bought $1.7 trillion worth of mortgage-backed securities, creating new money specifically for that purpose. Where did the new money go? Into the coffers of the banks. Did it stimulate the economy? Not so’s you’d notice.”

By April 2011, all the major economic and social indices by which a nation’s financial status is measured have been in the negative. Economists and others may choose to ignore the S&P warning, but eventually the nation’s economic system will simply collapse on its own if steps are not taken to dramatically address the issue.

You don’t have to be an economist to know that something is terribly wrong with the way all levels of government have horribly mismanaged the nation’s and the state’s fiscal affairs. You just have to watch the television commercials.

© Alan Caruba, 2011


joetote said...

How bad is it? I read today that there is not enough money in existence to pay off the American debt. That's right. TAKE 100% OF EVERYTING AND WE COULD NOT PAY OFF THE DEBT!

One needs to worry one would think.

Always On Watch said...

I feel doom.

Abbie S said...

I dont think we should call it debt. It is simply printing money, devaluing the currency. It will never be paid back.
They printed already 10 Trillion bucks, starting in Bush days.
The promises 'liabilities' amount to over 120 Trillion.
They only collect 2.1 Trillion in all taxes. (used to collect 2.5 T)

Guy in Ohio said...

I equate the people who say we can continue to run these high deficits to the guys on used car lots who slyly encourage car buyers to spend more than they can afford. They get their commission, the car lot gets their profit, and somewhere down the road, when the bottom falls out, the buyer, and the fool who extended the credit get burned.

I learned the simple lessons of economics when I was ten years old. Work hard, don't spend more than you earn, borrow only when absolutely necessary, and always save for a rainy day.

It's a damn shame that the people who claim to be our LEADERS cannot keep the best interests of America in mind and follow these simple principles.

Wendell Malone said...

The simple definition of insanity is that you keep making the same mistakes over and over again, and each time you expect a different result, always hoping for the right solution. As a nation we won't quit making these insane decisions and mistakes until the pain is great enough to cause us to stop our insane behavior.

Eddy said...

OK, here's the plan. The new President tells all Administrations to come up with a plan to cut 30% of their budget and staff. Except the EPA and the Miliatary. The Military gets increase and the EPA must be cut by 50%. If there is no realistic plan submitted within a month, the President will impose a cut of 35%; just a matter of keeping these functionaries motivated. I believe that a presidential candidate with such a program would be very popular. But better hurry up: because in a couple of year, the majority of voters will work for the government and then any reform will no longer be possible.

Will Harmon said...

Unfortunately the Washington crowd is like a drug addict high on cocaine. They will never get enough money to spend and they can’t kick the habit. We have run out of time. We will see the collapse of the American economy in the next few years and when people can’t find food on the store shelves there will be rioting in the streets that will make the Wisconsin union rallies look like a church social. Unemployment will hit 50% or more when the government has to shut down vast numbers of bureaus and departments that aren’t really needed now and haven’t been for years. Then tax revenues will really drop off. We’ve started on a death spiral (like the vortex sucking up the money at the top of this piece.) Buy gold and silver while you still can and stock up on food and water to last several months. We are going to need it.

Ronbo said...

@Will Harmon:

I've predicted a Second American Revolution since 2005 based on a number of factors, the most important one being the coming economic collapse, which could happen any day now.

Always remember the major factor in starting what I think historians will someday call "The First American Revolution" was when the British ruined the economy of New England with their closure of the port of Boston.