The coming financial crisis

The media sets the national agenda
by informing us of what it considers the critical issues of the day,
those that must be addressed.
As of 2009, such media-defined critical issues have included:
  • The war on terrorism
  • Wars of choice, started by America,
    with Afghanistan, Iraq, possibly with Iran
  • The American financial (Wall Street) crisis
  • The soured economy, with rising unemployment,
    “stimulus” needed, “recovery” desired.
  • Health-care expansion
    (which rather deceptively often seems to get labeled as “reform”).

But what is the real situation?
I would argue that
America since sometime in the 1960s
has been living in a Potemkin world,
a world of illusions on what its true situation is.

Hype about American “greatness”, “exceptionalism”, “the power of free markets”
and the supposed desire of all the world
to live with the values of Americans
(as opposed to just enjoying the material abundance
that has been ours over these decades)
has deliberately obstructed
serious and sober analysis, discussion,
and hopefully correction and remediation
of just how bad the situation really is.

So what is the critical problem that I claim to discern
that is not getting the attention it deserves?
How about this:
No person, institution, or nation
can get away with going into debt forever.
Sooner or later, those extending the credit stop their largesse,
and the facing of reality
(in particular:
the credit limit reached,
the goods that were purchased no longer seeming so wonderful or necessary,
and the mountain of debt needing to be addressed)
must begin.

So what is the credit situation that will pull America up short?
Answer: The trade situation.
All those foreign-produced goods that Americans gleefully and gratefully buy
can only be purchased so long as
foreign nations extend to America the credit to buy them.
What if America had to live on only those goods that were produced in America?
In, say, 1950 that would not have been much of a problem.
While America then did need to import some raw materials,
as far as I am aware in manufactured goods it was essentially self-sufficient.
But look at 2009.
Look at, for example, all those delightful electronic gadgets that we enjoy.
All made in Asia.

To be continued ...

Here are the three events that are fast approaching,
unless U.S. policies are radically revised
(and there is no indication that that will happen, as of 2010-09).

  • No buyers show up to purchase Treasury bonds.
    Result: interest rates skyrocket.
  • Foreigners come to their senses and realize that
    the U.S. economy is a basket case,
    and introduce an alternative reserve currency.

    Result: the U.S. must now figure out some way
    to earn the currency in which is priced
    the imported goods to which it has become so accustomed.
  • Foreign holders of dollars dump them.
    Result: the value of the dollar approaches zero.
    Imported goods (on which we now so rely)
    skyrocket in price.
    Mass hunger and deprivation.
    Feminists ask: But what about the women?
    Where are our vitally important jobs?

Miscellaneous Articles


Welcome to America, the World’s Scariest Emerging Market
By Desmond Lachman
Washington Post Outlook, 2009-03-29

Back in the spring of 1998, when Boris Yeltsin was still at Russia’s helm,
I led a group of global investors to Moscow
to find out firsthand where the Russian economy was headed.
My long career with the International Monetary Fund and on Wall Street
had taken me to “emerging markets
throughout Asia, Eastern Europe and Latin America,
and I thought I’d seen it all.
Yet I still recall the shock I felt at a meeting in Russia’s dingy Ministry of Finance,
where I finally realized how a handful of young oligarchs
were bringing Russia’s economy to ruin
in the pursuit of their own selfish interests [cf.],
despite the supposed brilliance of Anatoly Chubais,
Russia’s economic czar at the time.

At the time,
I could not imagine that anything remotely similar
could happen in the United States.
Indeed, I shared the American conceit that
most emerging-market nations had poorly developed institutions
and would do well to emulate Washington and Wall Street.
These days, though, I’m hardly so confident.
Many economists and analysts are worrying that
the United States might go the way of Japan,
which suffered a “lost decade
after its own real estate market fell apart in the early 1990s.
But I’m more concerned that

the United States is coming to resemble
Argentina, Russia and other so-called emerging markets,

both in what led us to the crisis,
and in how we’re trying to fix it.

Over the past year, I’ve been getting Russia flashbacks
as I witness the AIG debacle
as well as the collapse of Bear Sterns and a host of other financial institutions.
Much like the oligarchs did in Russia,
a small group of traders and executives at onetime venerable institutions
have brought the U.S. and global financial systems to their knees
with their reckless risk-taking -- with other people’s money --
for their personal gain.

Negotiating with Argentina’s top officials
during their multiple financial crises in the 1990s
was always an ordeal,
and sparring with Domingo Cavallo,
the country’s Harvard-trained finance minister at the time,
was particularly trying.
One always had the sense that, despite their supreme arrogance,
the country’s leaders never had a coherent economic strategy
and that
major decisions were always made on the run.
I never thought that was how policy was made in the United States --
until, that is, I saw how totally at sea
Treasury Secretaries Henry Paulson and Timothy F. Geithner and
Federal Reserve Chairman Ben S. Bernanke
have appeared so many times during
our country’s ongoing economic and financial storm.

The parallels between U.S. policymaking and what we see in emerging markets
are clearest
in how we’ve mishandled the banking crisis.
We delude ourselves that our banks face liquidity problems,
rather than deeper solvency problems,
and we try to fix it all on the cheap
just like any run-of-the-mill emerging market economy would try to do.
And after years of lecturing Asian and Latin American leaders
about the importance of consistency and transparency
in sorting out financial crises,
we fail on both counts:
In March 2008, one investment bank, Bear Stearns,
is bailed out because it is thought to be
too interconnected with the rest of the banking system to fail.
However, six months later, another investment bank, Lehman Brothers --
for all intents and purposes indistinguishable from Bear Stearns
in its financial market inter-connectedness --
is allowed to fail,
with catastrophic effects on global financial markets.

In visits to Asian capitals
during the region’s financial crisis in the late 1990s,
I often heard Asian reformers
such as Singapore’s Lee Kuan Yew or Japan’s Eisuke Sakakibara
complain about how the incestuous relationship
between governments and large Asian corporate conglomerates
stymied real economic change.
How fortunate, I thought then,
that the United States was not similarly plagued by crony capitalism!
However, watching
Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs
as well as the way that Republicans and Democrats alike
tiptoed around reforming Freddie Mac and Fannie Mae --
among the largest campaign contributors to Congress --
made me wonder if
the differences between the United States and the Asian economies
were only a matter of degree.

On Wall Street there is an old joke that
the longest river in the emerging-market economies is “de Nile.”
Yet how often do U.S. leaders
respond to growing signs of economic dysfunctionality
by spouting nationalistic rhetoric
that echoes the speeches of Latin American demagogues
like Peru’s Alan Garcia in the 1980s and Argentina’s Carlos Menem in the 1990s?
(Even Garcia, currently in his second go-around as Peru’s president,
seems to have grown up somewhat.)
instead of facing our problems we
extol the resilience of the U.S. economy,
praise the most productive workers in the world, and
go on and on
about America’s inherent ability to extricate itself from any crisis.
And we ignore our proclivity as a nation to

spend, year in year out, more than we produce,
put off dealing with long-term problems, and
engage in grandiose long-term programs
that as a nation we can ill afford.

A singular characteristic of an emerging market heading for deep trouble is
a seemingly suicidal tendency
to become overly indebted to foreign creditors.

That tendency underlay
the spectacular collapse of the Thai, Indonesian and Korean currencies in 1997.
It also led Russia to default on its debt in 1998
and plunged Argentina into its economic depression in 2001.
Yet we too seem to have little difficulty
becoming increasingly indebted
to the tune of a few hundred billion dollars a year.
To make matters worse, we do so to countries like
China, Russia and an assortment of Middle Eastern oil producers --
none of which is particularly well disposed to us.

Like Argentina in its worst moments,
we never seem to question whether
it is reasonable to expect foreigners to keep financing our extravagance,
and we forget
the bad things that happen to the Argentinas or Hungarys of the world
when foreigners stop financing their excesses.
So instead of laying out a realistic plan for increasing our national savings,
we choose not to face up to the Social Security and Medicare crises
that lie ahead,
embarking instead on massive spending programs that --
whatever their long-run merits might be --
we simply cannot afford

After experiencing a few emerging-market crises,
I get the sense of watching the same movie over and over.
All too often, a tragic part of that movie is
the failure of the countries’ policymakers to hear
the loud cries of canaries in the coal mine.
Before running up further outsized budget deficits,
should we not heed the markets that now see a 10 percent probability that
the U.S. government will default on its sovereign debt in the next five years?
And should we not be paying close attention to
the Chinese central bank governor’s musings that
he does not feel comfortable with the $1 trillion of U.S. government debt
that the Chinese central bank already owns,
let alone adding to those holdings?

In the twilight of my career, when I am hopefully wiser than before,
I have come to regret how
the IMF and the U.S. Treasury all too often lectured leaders in emerging markets
on how to “get their house in order” --
without the slightest thought that
the United States might fare no better when facing a major economic crisis.
Now, I fear time is running out for our own policymakers
to mend their ways
and offer real leadership
to extricate the United States from its worst economic calamity since the 1930s.
If we insist on improvising and not facing our real problems,
we might soon lose our status as a country to be emulated
and join the ranks of those nations we have patronized for so long.

Desmond Lachman, a fellow at the American Enterprise Institute,
was previously chief emerging market strategist at Salomon Smith Barney
and deputy director of
the International Monetary Fund’s Policy and Review Department.

Catastrophic budget failure
by Leonard Burman
Washington Times, 2009-07-14

[Also available at the Urban Institute.]

Last month, the Congressional Budget Office (CBO) published
the latest version of what has become a very scary document called
The Long-Term Budget Outlook.”
CBO Director Doug Elmendorf is scheduled to
walk the Senate Budget Committee through it on Thursday.

CBO, famous for understatement, concludes that
“current policies are unsustainable.”
This is true whether it looks at the Obama administration’s official budget
or a future in which all of the Bush tax cuts expire
and the middle class gets swallowed by the alternative minimum tax.
What CBO means is, either way, we are doomed.

Here’s what CBO predicts will happen if we continue current policies:

Next year,
our debt will exceed 60 percent of our total economic output,
or gross domestic product (GDP).
We would not meet the standards Poland and Estonia needed
to qualify for admission into the European Union.

In 2023, our debt will exceed 100 percent of GDP -
the highest level since World War II ended.

By 2076, debt will be more than 6.5 times GDP.
Put differently, with current policies,
there’s no chance that children born today
will get much of their promised Social Security and Medicare benefits.

The really bad news? This bleak scenario is wildly over-optimistic.
It assumes that the economy keeps growing at historical rates,
and interest rates on government bonds stay low.

But neither is likely to happen.
As CBO says, parenthetically,
“Starting in the 2060s,
projected deficits become so large and unsustainable
that CBO’s textbook growth model cannot calculate their effects.”

Translation: We’re heading over a cliff!

CBO’s projections assume that interest rates will stay low.
But with these massive deficits,
rates will eventually rise
to reflect the growing riskiness of government bonds.
Berkeley economist David Romer has shown that investors may, overnight,
go from being willing to lend to the government at low rates
to being afraid to hold T-bills at any price.
If this happens, the rise in rates could be extreme -
not just a percentage point or two.

Can’t happen?
It was just a few months ago when
exactly the same fate befell highly rated corporate bonds.
Suppose the Treasury held an auction and nobody came?

Ideally, this dismal situation will be averted.
Investors should look at the CBO report
and demand higher interest rates right now,
and progressively steeper rates in the future
if our fiscal house is not put in order.
This would put pressure on policymakers to cut deficits.

Unfortunately, there are two problems with this self-correcting scenario.
First, it might choke off a nascent recovery.
Second, it assumes financial markets are rational and foresighted.
Yeah, right.
And remember much of our debt is held by foreigners
whose cash fuels our purchases of their oil and consumer goods.
They’ll keep lending - at least for a while -
to prop up their own economies.

[This is the key point that Americans do not seem sufficiently worried about.
Our economic future, due to the massive debt held by foreigners,
and the continued trade deficit,
is not in our hands.
Think about that the next time you read or hear
the media hyping some of the “vital domestic needs”
they always manage to give some sad story about.]

When the bubble bursts, two things could happen, both bad.
One is that
the U.S. defaults on its bonds.
This would cripple financial institutions
that are legally required to hold government securities
and create a foreign policy fiasco
since other governments hold so much of our debt.

[Not only that,
that would be a dishonorable way out of the problem.]

we could print money to pay back the bonds coming due.
This creates inflation - a lot of inflation.
Think Weimar Republic or Argentina.
(CBO helpfully points out that hyperinflation is economically inefficient
since it drives people to barter.)

At the same time,
the government would have no choice but to slash spending and raise taxes.
This, plus very high interest rates,
would drive the U.S. and world economies
into a depression that could span decades -
dwarfing today’s painful downturn.

Taxes would rise to levels that would make a Scandinavian revolt.
And the government would not be able to provide anything but
the most basic public services.
We would no longer be a great power (or even a mediocre one),
and the social safety net would evaporate.

We can still avoid this disaster, but we need to act quickly.
The sooner we move to reduce our deficits,
the smaller the required tax increases and/or spending cuts will be.
The reason is straightforward:
The less debt we accumulate, the smaller our interest payments.
On our current trajectory, CBO projects that by 2031,
interest on the debt will cost more than Social Security.
And, again,
that assumes implausibly low interest rates.

So, after Mr. Elmendorf finishes explaining
why our current policies are disastrous,
I’d like all of the Senate Budget Committee members to say
what they plan to do about it.
If they answer “cut wasteful government spending”
or “tax people making over $250,000,”
Mr. Elmendorf should remind them that
we’d have to cut government spending or increase taxes
by an average of 8.2 percent of GDP over the next 75 years
to prevent the debt from increasing -
and more if we continue to defer action.
That sum equals all discretionary spending, including national defense,
or all income tax collections in 2008.
Cutting waste or taxing rich people alone isn’t enough.

It’s time to make some hard choices.
Or we’re doomed.

Leonard Burman is an Institute Fellow at the Urban Institute
and director of the Tax Policy Center.

Can the Economy Recover?
by Paul Craig Roberts
www.chroniclesmagazine.org, 2009-07-16


There is no economy left to recover.
The U.S. manufacturing economy was lost to
offshoring and free-trade ideology.
It was replaced by a mythical “New Economy.”

The “New Economy” was based on services.
Its artificial life was fed by
the Federal Reserve’s artificially low interest rates,
which produced a real-estate bubble,
and by “free market” financial deregulation,
which unleashed financial gangsters to new heights of
debt leverage and fraudulent financial products.

The real economy was traded away for a make-believe economy.
When the make-believe economy collapsed,
Americans’ wealth in their real estate, pensions and savings
collapsed dramatically
while their jobs disappeared.

The debt economy caused Americans to leverage their assets.
They refinanced their homes and spent the equity.
They maxed out numerous credit cards.
They worked as many jobs as they could find.
Debt expansion and multiple family incomes kept the economy going.

And now suddenly Americans can’t borrow in order to spend.
They are over their heads in debt.
Jobs are disappearing.
America’s consumer economy,
approximately 70 percent of gross domestic product,
is dead.
Those Americans who still have jobs
are saving against the prospect of job loss.
Millions are homeless.
Some have moved in with family and friends;
others are living in tent cities.

Meanwhile, the U.S. government’s budget deficit
has jumped from $455 billion in 2008 to $1 trillion this year,
with another $2 trillion on the books for 2010.
And President Obama
has intensified America’s expensive war of aggression in Afghanistan
and initiated a new war in Pakistan.

There is no way for these deficits to be financed except by printing money
or by further collapse in stock markets
that would drive people out of equity into bonds.

The U.S. government’s budget is 50 percent in the red.
That means
half of every dollar the federal government spends
must be borrowed or printed.

Because of the worldwide debacle caused by Wall Street’s financial gangsterism,
the world needs its own money
and hasn’t $2 trillion annually to lend to Washington.

As dollars are printed,
the growing supply adds to
the pressure on the dollar’s role as reserve currency.
Already America’s largest creditor, China,
is admonishing Washington to protect China’s investment in U.S. debt
and lobbying for a new reserve currency
to replace the dollar before it collapses.
According to various reports,
China is spending down its holdings of U.S. dollars
by acquiring gold and stocks of raw materials and energy.

The price of 1 ounce gold coins is $1,000
despite efforts of the U.S. government to hold down the gold price.
How high will this price jump when the rest of the world decides that
the bankruptcy of “the world’s only superpower” is at hand?

what will happen to America’s ability to import not only oil,
but also the manufactured goods on which it is import-dependent?

When the oversupplied U.S. dollar loses the reserve currency role,
the United States will no longer be able to pay for
its massive imports of real goods and services
with pieces of paper.

Overnight, shortages will appear and Americans will be poorer.

Nothing in Presidents Bush and Obama’s economic policy
addresses the real issues.
Instead, Goldman Sachs was bailed out, more than once.
As Eliot Spitzer said, the banks made a “bloody fortune” with U.S. aid.

It was not the millions of now homeless homeowners who were bailed out.
It was not the scant remains of American manufacturing—
General Motors and Chrysler—
that were bailed out.
It was the Wall Street Banks.

According to Bloomberg.com, Goldman Sachs’ current record earnings
from their free or low-cost capital supplied by broke American taxpayers
has led the firm to decide to boost compensation and benefits by 33 percent.
On an annual basis, this comes to compensation of $773,000 per employee.

This should tell even the most dimwitted patriot
whom “their” government represents.

The worst of the economic crisis has not yet hit.
I don’t mean the rest of the real-estate crisis that is waiting in the wings.
Home prices will fall further
when the foreclosed properties currently held off the market are dumped.
Store and office closings are adversely affecting
the ability of owners of shopping malls and office buildings
to make their mortgage payments.
Commercial real-estate loans were also securitized and turned into derivatives.

The real crisis awaits us.
It is the crisis of high unemployment,
of stagnant and declining real wages confronted with
rising prices from the printing of money to pay the government’s bills,
and from the dollar’s loss of exchange value.
Suddenly, Wal-Mart prices will look like Neiman Marcus prices.

Retirees dependent on state pension systems, which cannot print money,
might not be paid, or might be paid with IOUs.
They will not even have depreciating money
with which to try to pay their bills.
Desperate tax authorities
will squeeze the remaining life out of the middle class.

Nothing in Obama’s economic policy is directed at
saving the U.S. dollar as reserve currency or
the livelihoods of the American people.
Obama’s policy, like Bush’s before him,
is keyed to the enrichment of Goldman Sachs and the armament industries.

Matt Taibbi describes Goldman Sachs as
“a great vampire squid wrapped around the face of humanity,
relentlessly jamming its blood funnel into anything that smells like money.”
Look at the Goldman Sachs representatives
in the Clinton, Bush and Obama administrations.
This bankster firm controls the economic policy of the United States.

Little wonder that Goldman Sachs has record earnings
while the rest of us grow poorer by the day.

Measuring Decline By Prices
by Paul Craig Roberts
Chronicles Magazine, August 2009

[This does not appear to be online.
Here is part of its second half.]

In FY 2008 the official federal budget deficit was $455 billion.
In 2009 it is four times larger.

In the past our budget deficits have been financed by our trading partners,
who recycle their trading surpluses by purchasing U.S. debt instruments.
Their trade surpluses can handle $400 billion deficits,
but not deficits four or five times as large.

If the U.S. stock market has another leg down
to a Dow Jones average of four, five, or six thousand,
fear may send investors fleeing equities into “safe” U.S. treasuries.
Unless this happens,
the only other way to finance a two-trillion-dollar budget deficit
is to print money.

When a Treasury bond auction is not successful,
the Federal Reserve steps in and buys the bonds.
It pays for the bonds by creating demand-deposit accounts for the Treasury..
Thus, the money supply increases by the amount of the Fed’s bond purchase.

Currently, the U.S. money supply is about $1.4 trillion as measured by M1
(the total amount of currency in circulation,
plus checkable deposits, plus travelers’ checks)
as of April 2008.
If the 2009 budget deficit is monetized,
the U.S. money supply will double in one year.
If the 2010 deficit is monetized,
the U.S. money supply will have tripled in two years.

Despite double-digit unemployment and falling real-estate and equity prices,
this means inflation.
Our foreign creditors, on whom we are dependent,
will cease to extend credit.
The United States, an import-dependent economy
will not be able to pay for her imports.

[It seems to me that in this (very likely) scenario
the prices of imported goods would simply rise until
there was a balance with demand.
In any case, the scenario Roberts paints next
seems to me to be a trifle exaggerated,
so I am omitting it.]


Once the Romans debased their currency, they were finished.
I have a “silver” denarius from the later empire period.
Essentially, it is lead.

But even the Roman lead is worth more than
the paper that will be printed
to finance the U.S. government’s annual budgets for 2009 and 2010,
which are 50 percent in the red.

In one lifetime
the United States will have passed
from superpower to Third World beggar.
An amazing compression of history.
The fall of Rome took centuries.

Experts: Expect the Worst for the Economy
By Arnaud de Borchgrave
Newsmax.com, 2009-08-06

Doomsday -- pros and cons
America may be forced to retrench -- militarily and fiscally
By Arnaud de Borchgrave
Washington Times, 2009-08-10


Have U.S. commitments and responsibilities outstripped resources?
The two anonymous billionaire voices
were among the many now saying so in public opinion polls.
They feel a paradigm shift is inevitable.
We are yet to wean ourselves from the old paradigm:
the $3 billion we borrow each and every day --
principally from China --
to maintain the world’s highest standard of living,
based on conspicuous consumption,

at a time of growing world shortages.
And when we are finally weaned,
it will become glaringly obvious that
we were living way beyond our means and that
major belt-tightening is long overdue.

We broke the bank!
We need to rein in our overspending
by Mike Whalen
Washington Times Op-Ed, 2009-08-11 [Alternative source: NCPA.]


The United States is functionally bankrupt.
Our collective capacity to deal with this astonishing fact
is seemingly nonexistent.
Our national politics have become show business,
a complete refusal
to strategically respond to this reality.

Let’s look at the simple numbers of our national debt.
Our on-the-books national debt is $11.6 trillion.
But off-the-books federal debt, including Medicare and Social Security,
is $107 trillion.
This is not a made-up number;
this is the money we should have in the bank,
according to the federal government’s own accountants,
to pay for our current promises to our retirees and future retirees,
and this doesn’t include unfunded obligations that we have
to the pensions and benefits promised to federal workers and veterans.
Nor does it include huge unfunded pension and benefit obligations
for other public employees at levels below the federal government.

But let’s just add the $11 trillion to the $107 trillion,
and we get $118 trillion.
These are big numbers but still just fifth-grade math.
Now our total annual national output, or gross domestic product (GDP),
is about $14.3 trillion.
Total federal receipts, or income if stated in business terms,
are about $2.5 trillion.
This means that our debt to federal income ratio is about 47,
and that ratio assumes that
the federal revenues are free to retire the obligations,
which they are not.
We must pay for defense and a myriad of other programs.
Again, in business terms,
there is no free cash flow to pay these massive obligations.

Our total national private net worth, according to the Federal Reserve Board,
is about $51.5 trillion.
That means our federal unfunded liabilities represent
2.3 times our collective net worth.
That’s pretty darn broke.

Ask any accountant, banker,
or anyone remotely familiar with simple accounting knowledge
if we can service this debt,
and the collective answer is a resounding “no.”
Any business with these ratios would be a complete basket case,
hopelessly bankrupt.
Unlike General Motors Corp.,
there is no one with the wherewithal to bail out the U.S.A.

If anyone can write an intelligent response
to how we can handle this massive problem, please respond.
I would love to see the plan.
I once asked one of my federal senators, Sen. Tom Harkin, Iowa Democrat,
how we would handle this nightmare, and he simply replied,
“We’ll grow our way out of this.”

Senator, I challenge you to lay out this cheery scenario.
We are not politically set up to grow at 8 percent or 9 percent like China.
We would have to adopt extremely aggressive pro-growth policies,
and those are not politically acceptable at this time.

Even if we significantly slash the federal entitlements by half,
we cannot fix this problem.
Even if we increase federal receipts
from the 50 year average of 18 1/2 percent of GDP
to say 27 percent, killing private-sector growth,
we cannot fix the problem.

We are collectively broke.
It is a horrible legacy we are leaving to our children.

Can common sense be restored?

Mike Whalen is founder, president and chief executive officer
of Heart of America Restaurants and Inns
and is policy chairman at the National Center for Policy Analysis.

Mother of all carry trades faces an inevitable bust
By Nouriel Roubini
Financial Times, 2009-11-01

The same article is at his www.rgemonitor.com.

The next economic bubble?
By Robert J. Samuelson
Washington Post, 2009-11-09

Gambling with the dollar
By George F. Will
Washington Post, 2009-11-12

[An excerpt:]

[Lawrence Lindsey says]

[N]o country has successfully behaved
the way the United States is behaving.

[I’ve got news for you:
If you think the United States will be
the first country in history
to get away with engaging in the monetary and fiscal policies that it has,
without suffering in the long run for these policies,
you are crazy
(a category which evidently includes
Nancy Pelosi and the great majority of Democrats,
with their specious talk of
how their health-care bill will provide “affordable health care.”
Affordable to whom?
Certainly not to the nation (cf.).
But when did Democrats ever think about the welfare of the nation at large,
as opposed to the constituent groups and special interests of the Democratic Party?).]

The Fed's airheaded bubble orthodoxy
By Steven Pearlstein
Washington Post, 2009-11-13

[More on Roubini’s asset bubble prediction.
An excerpt:]

For many investors, in fact, the cost of money is effectively less than zero,
as economist Nouriel Roubini likes to point out.

If you borrow dollars at near zero percent interest in the United States,
exchange the dollars for Thai bhat,
and invest the bhat in government bonds paying 4 or 5 percent,
you not only get the benefit of the interest rate arbitrage
but you also gain when you sell the bond
and exchange the bhat back into dollars that have since depreciated.

Roubini calls it the mother of all carry trades,”
and in recent months he calculates that
it has been generating annualized returns for investors of 50 to 70 percent.


On "Black Swans," "fat-tailed sheep" and future history
by Patrick Lang
Sic Semper Tyrannis, 2010-03-05

From Greece, an economic cautionary tale for the U.S.
By Dana Milbank
Washington Post Opinion, 2010-03-09


If current trends persist,
an American president will be doing the same thing [begging for help]
in about 10 years.
He or she will probably be in Beijing,
asking for more favorable interest rates or
pleading with the Chinese government to keep speculators
from betting on an American default.

Greece’s national debt last year reached
113 percent of gross domestic product.
The United States will hit that in about 2020,
according to the Government Accountability Office,
assuming policy continues as it has.
And last year’s U.S. budget deficit amounted to 9.9 percent of GDP,
nearly rivaling Greece’s 12.7 percent.

To pull Greece back from the edge,
Papandreou has promised to cut the deficit to 3 percent of GDP by 2012.
For the U.S. government to make an equivalent cut,
it would have to shut down the Pentagon and a few other agencies: the departments of Agriculture, Commerce, Education, Health and Human Services, Energy, Homeland Security, Housing and Urban Development, the Interior, Justice, Labor, State, Transportation, the Treasury, and Veterans Affairs, plus the Environmental Protection Agency and NASA --
and even then we’d come up a few dollars short.

[Or here’s another way:
Kill the Medicaid and Medicare programs
(remember, those programs were not started until 1965 --
i.e., America got along just fine without them before 1965)
and make all of employer-paid healthcare benefits taxable
(i.e., close a loophole).]

With such a catastrophe now visible on the horizon,
what are U.S. leaders discussing this week?
Well, they’re talking about
a Republican National Committee fundraising document
that portrays President Obama as the Joker,
and the resignation of Rep. Eric Massa (D-N.Y.)
amid allegations that he sexually harassed a male staffer,
and Liz Cheney’s accusation that terrorist sympathizers
have turned the Department of Justice into the Department of Jihad.

When it appeared recently that budget hawks
had enough votes to pass an independent debt commission to propose a solution,
several Republican co-sponsors of the bill in the Senate
switched sides and voted it down.
President Obama named his own debt commission
but then named as a commissioner union official Andy Stern --
an automatic vote against serious cuts to entitlements.

All this makes it more likely that
one of Obama’s successors will one day
be delivering the same message that Papandreou did
to the Brookings Institution on Monday.


Greece had to hit bottom before it acted.
The United States seems determined to do the same.

The Debt Crisis
by Patrick Lang
Sic Semper Tyrannis, 2010-03-09


We have lived far too high on the hog.
We are in the process of going broke
and the great majority seem oblivious.
The debt crisis is THE crisis.
Unless we relieve the financial burden of public debt,
the United States is going to become a miserable place to live
in about ten years.

All those people who are fretting over
the erosion of constitutional rights in this country
are going to have a lot more pressing things to obsess over.
Americans continue to live in a dreamworld
in which they are entitled to
the best of everything,
security from violence,
enough junk food to make them the fattest people in history
and a Toyota in every driveway.
I suppose they would rather have a Ford now.

Let’s sober up folks. pl

[Only thing I would add:
an excessive dependence on healthcare.

There are some quite worthwhile comments appended to Lang’s column.]

Debt Worries Shift to Portugal, Spurred by Rising Bond Rates
New York Times, 2010-04-16

[As anyone with an ounce of sense can see,
this is a preview of what is going to happen to the United States
unless current policies are radically changed, and soon.]


Next target: Portugal.

Speculators have begun to zero in on
another small member of Europe’s troubled monetary zone,
highlighting the same economic flaw
that brought Greece to the verge of insolvency:

a chronically low savings rate that forces a reliance on
the now-diminishing appetite of foreign investors
to finance persistent deficits.

Just as investors are turning their attention to the next vulnerable country,
Greece moved a step closer on Thursday
to activating a $61 billion rescue package,
as Prime Minister George A. Papandreou
asked the European Union and the International Monetary Fund
to meet in Athens next week.

The aid package agreed on last weekend —
aimed at calming fears of a Greek default —
has not yet had its desired effect.
The yield on Greek 10-year bonds briefly topped 7.3 percent Thursday,
not far from the 7.5 percent it was at before the rescue package was announced.
Interest rates on 10-year government bonds for Portugal have also been rising,
hitting a high of 4.5 percent on Thursday.

Though Greece’s finance ministry said its request for talks
did not necessarily mean it would draw from the funds,
it contributed to anxiety that helped push down the value of the euro by 0.008,
to 1.3576 against the dollar.

It all raises the prospect that the loan package for Greece,
the result of months of political haggling,
may be nothing more than
a bandage on a wound that shows little sign of healing.

Some analysts think the Greek bailout
may have an opposite, more harmful long-term effect.
Instead of ushering in a period of lower rates and market calm,
it could prompt investors
to test Europe’s — and in particular Germany’s — stomach for
a rescue of other troubled European economies,
beginning with Portugal.

The bailout might even create an incentive for
the coalition government in Lisbon,
which has already pushed through painful spending cuts, to ease up a bit,
knowing that
a rescue package with concessionary interest rates from Europe and the I.M.F.
could lie just around the corner.

“Now there will be more fiscal profligacy in Europe,
more political fractures and ultimately the possibility that
some countries might want to leave the euro zone,”
said Joachim Fels, an economist at Morgan Stanley.
The euro zone is made up of the 16 countries that use the euro.

That Greece and Portugal are among those in the worst trouble is well known,
with both likely to be encumbered by high debt, weak competitiveness and stagnant growth for years.
But another factor contributing to their troubles is their savings rates —
6 percent of gross domestic product for Greece and 7.5 percent for Portugal.
These are low for developed countries.
In contrast,
Italy has a savings rate of 17.5 percent,
Spain 20 percent, France 19 percent and Germany 23 percent.

For Athens and Lisbon, it is a risky combination:
low reserves of capital when the cost of new debt is increasing,
while their ability to generate tax revenue to pay for these obligations is shrinking
because of tough austerity measures.

Portugal’s debt, at just under 90 percent of gross domestic product,
is lower than Greece’s 113 percent level.
The government in Lisbon has taken pre-emptive steps
to cut spending and raise taxes.

Portugal’s financing needs for the year,
while high at 24 billion euros, or $32.7 billion,
are not as onerous as Greece’s.
On Wednesday,
the government was able to raise two billion euros comfortably
on the bond market.

But Tim Lee of pi Economics, a consultancy based in Stamford, Conn., said
a country’s savings rate, more than its deficits or debt-to-G.D.P. ratio,
is the best measure of an economy’s ability to pay down its debt.

On that basis, Greece and Portugal remain highly vulnerable.

“The severely negative net national savings rate highlights the fact that
the government deficit cannot easily be financed domestically,” Mr. Lee said,
“making it difficult for these countries to emerge from their debt trap.”

Mr. Lee pointed out that Greece and Portugal
are not the only countries so afflicted.
The United States and Britain,
with savings rates of 10 percent and 12 percent, respectively,
are also among the world’s worst savers.
But Greece and Portugal, as members of the euro zone,
do not have the luxury of printing money to depreciate their currencies
and thus export their way to recovery.

Portugal has suffered in this respect perhaps even more than Greece.
Portuguese exporters have been losing market share to competitors
since entering the common currency in 2000.
That, in turn, has pushed the government to borrow from abroad
to finance the current account deficit, pushing debt to its current levels.

More seriously, Portugal — unlike Greece, Ireland and Spain —
did not experience the positive effects of the long period of growth
reflecting low interest rates earlier this decade.
That is because it did not benefit from a housing or consumer boom
and thus did not see any improvement in its G.D.P. per capita
over the last 15 years, according to research by Deutsche Bank.

Accordingly, analysts say, it will be difficult for Portuguese politicians
to persuade their already pinched populace that more sacrifices —
like public-sector wage cuts or higher value-added taxes —
are necessary.

Fitch has already downgraded the country’s debt
over doubts that Portugal can cut its deficit of 9 percent of G.D.P.
Olli Rehn, the European commissioner for economic and monetary affairs,
warned Portugal this week that
further steps were needed to cut its deficit.

Gilles Moëc, an economist for Europe at Deutsche Bank, said,
“It is going to be a long and painful process for Portugal,
and there are questions about whether they can do it.”
He added, “It’s a reminder that there is an issue here.”

[This is a good article.
But it would have been better
if comparisons to the situation in the U.S. had been included.]

In Greek Debt Crisis, Some See Parallels to U.S.
New York Times, 2010-05-12 (front page, above the fold)

It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.

Yet in the back of your mind comes a nagging question: how different, really, is the United States?

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

[He leaves out the media,
which surely plays the dominant role in setting the nation’s agenda
through what issues, facts, and values it chooses to present and emphasize.
For example:
During the year-long run-up in 2009 to
the Congressional vote that passed
the Democrats’ trillion-dollar healthcare boondoggle,
there was any number of stories about needy people
who could surely use more money being spent by someone, anyone,
on their health problems.
There were far less stories about the fiscal shoals towards which
the ship of state was surely heading, even then.]


U.S. suffers from same afflictions now causing turmoil in Europe
By Steven Pearlstein
Washington Post Opinion, 2010-05-19

[This is posted in both
The coming financial crisis” and
Bailouts versus responsibility ”.]


The moral we should draw from this European story is that
while government rescues may be necessary to stabilize markets,

there can be no real recovery until
the causes of the underlying imbalances are dealt with.

For the United States, those root causes are
an overvalued currency
a penchant for living beyond our means by
consuming more than we produce.




Although the above cartoon shows European nations worried about how they will maintain their ability to receive future loans from investors,
there should be no doubt that the United States will be in exactly the same position
if congressional leaders cannot come to an agreement to stop the debt from rising at a high rate.


Demand for U.S. Debt Is Not Limitless
by Lawrence Goodman
Wall Street Journal Op-Ed, 2012-03-27

In 2011, the Fed purchased a stunning 61% of Treasury issuance.
That can't last.


The next financial crisis?
By Robert J. Samuelson
Washington Post, 2015-06-28

A central economic question of our time is whether the policies undertaken to recover from the last financial crisis are laying the groundwork for the next. We now have two reports from reputable groups suggesting just that.

The first comes from the Bank for International Settlements (BIS), which was created in 1930 to handle reparations payments from World War I — reparations that were soon canceled. The BIS is now a major source of economic research and statistics. Recently, it has acted as the loyal opposition to the easy-money policies adopted in the United States, Europe, Japan and elsewhere. Its just-released annual report continues its dissent.

The BIS critique goes like this. Low interest rates have sustained the recovery, but the support is fragile. The economy relies too much on debt, which cannot build forever, and artificially high asset prices (stocks, homes, bonds) may someday tumble from unrealistic levels. A new crisis could be severe because governments have already deployed their standard anti-recession tools: cheap credit and big deficits.

The BIS’s most intriguing point is that a new recession or financial crisis might originate with emerging-market countries: China, Brazil, India, Turkey and the like. Although there has been debt repayment in the United States, the opposite has happened in some emerging-market countries, the BIS says. Private firms have assumed dollar loans worth $3 trillion, even though their “debt servicing capacity . . . has deteriorated.” Will defaults follow?

Overvalued stocks pose another threat. China is a case in point. Its Shanghai stock index advanced an eye-popping 125 percent from mid-2014 to late May 2015 — a leap widely attributed to speculation (and now being partially reversed). Emerging-market countries constitute about half the world economy, up from a third in the late 1990s, so any setbacks could spread to advanced countries. Weaker exports would be one channel; losses to internationally diversified investors would be another.

The second warning comes from the Organization for Economic Cooperation and Development (OECD), a group of 34 mostly wealthy nations. In a new study, it cautions that “low interest rates threaten [the] solvency of pension funds and insurers.” The problem is that today’s unanticipated low interest rates may not be high enough to pay the benefits promised to retirees.

Not all pensions or life insurance policies are vulnerable. The main threats involve defined-benefit pensions and life insurance annuities. Still, these are huge. In 2013, U.S. insurance companies had $3.3 trillion in reserves to back annuities, according to the American Council of Life Insurers. Defined-benefit pensions had $2.7 trillion of reserves in 2013, the Pensions & Investments newspaper reports.

By pledging to pay fixed amounts, defined-benefit plans and annuities offer security. Unfortunately, the guarantees were given when interest rates were higher and hardly anyone imagined them going as low as they have — and staying low. Some plans and insurers might miss their guarantees. Worse, says the OECD, some might try to boost returns by shifting to riskier investments. Bad bets could lead to insolvency. Similar dangers afflict pensions and annuities in other advanced countries.

Most financial crises are surprises. If they had been anticipated, chances are they could have been prevented. The fact that these dangers are now being discussed suggests that, though they may pose problems, they won’t trigger a panic akin to the Lehman Brothers collapse in 2008. (The same logic, incidentally, applies to a possible Greek debt default. It’s been so long discussed and analyzed that the side effects outside Greece are likely to be limited.)

“Interest rates have never been so low for so long,” the BIS report says. “Yet exceptional as this situation may be, many expect it to continue. There is something deeply troubling when the unthinkable threatens to become routine.”

The trouble with this analysis is not that it’s wrong but that it raises the practical question: What’s the alternative to low interest rates? It’s hard to argue (and the BIS doesn’t) that the weak global recovery would have been stronger if interest rates had been higher.

But it’s also true that persistently low rates may become destabilizing. Global capital is mobile. Investors with hundreds of billions of dollars scour the world to find slight differences in returns. These massive inflows and outflows of funds can spawn booms and busts. If the Federal Reserve raises interest rates, will spillover effects hurt other economies?

“There is great uncertainty about how the economy works,” the BIS says. This is more than a throwaway line. Ignorance subverts confidence, and doubt hampers a vigorous recovery.

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