2009 November 25 Wednesday
Americans Bad Financial Squirrels
The nation is not saving nuts for long winters. The US government has taken out a massive $12 trillion Adjustable Rate Mortgage and ARM rates are going to go up.
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.
Another $500 billion per year to debt interest payments is going to put a big crimp in the plans of the Democrats to grow the social welfare state. Rationing of health care is therefore inevitable. Blank checks for every test and expert consultation just won't be possible for everyone. Higher taxes to pay for these higher costs will lower living standards and slow economic growth.
This reminds me: I was explaining to someone this morning why Boeing is a bad long term stock hold. Peak Oil will kill airplane demand while the building US federal debt crisis will cause a slashing of US defense spending. The US global footprint is headed for a big pruning. Just as well, the US elites can't conduct a competent foreign policy anyway.
The next generation of America's work force isn't going to be as productive as the retiring Baby Boomers.
The American people are bad squirrels.
“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”
Economist James Hamilton worries that the future trajectory of US federal deficits is headed for a wall.
But European politics may not import all that well to this side of the Atlantic. Receipts of the U.S. federal government have never exceeded 21% of U.S. GDP, even at the height of World War II. A permanent move to taxation levels significantly above that would require a major shift in the political landscape, for which I see no consensus of support. To me that implies that any spending trajectory inconsistent with the long-established U.S. norm may be headed for a political brick wall.
Hamilton disagrees with people who argue we can grow our way out of the forecasted much larger debt. I agree for a reason he doesn't mention: We can't count on economic growth. First off, America's demographics are deteriorating. Second, Peak Oil is going to cause a series of recessions followed by weak recoveries. If the economy stagnates then the deficit will swell and debt servicing costs will balloon.
China wants higher interest rates on US debt to boost their earnings. Failing that, the Chinese want their money back:
But seriously, if the Chinese would not lend to the United States then Americans would be better off. The US government couldn't run up as much debt if demand for that debt declined. Plus, the US dollar would fall and this would increase demand for US goods and help balance the trade deficit.
"But seriously, if the Chinese would not lend to the United States then Americans would be better off."
But China wouldn't neccessarily be better off, in the long term.
How dare the Chinese agree to lend you money. Its all their fault.
How dare big banks lend too much money to tens of millions of home buyers. Its all their fault.
How dare the US government lend too much to high risk home buyers. Its all their fault.
You agree with those two statements or not?
No, I don't agree with either statement. No one forced the customer to borrow, no one forced the lender to lend.
Let each party reap profit and loss in proportion to the quality of their decision making.
In the case of China and the US, someone did force each to borrow or lend. I remember not all that long ago when massive unemployment in China was a real problem that if left to worsen might have threatened the Party leadership. China was forced to lend massive amounts to the US and devalue their own currency to keep the Party in power.
Because China's actions effectively reduced the money supply in the US, which would have had immediate and dire consequences for the US domestic economy, the electorate forced the Fed to borrow more money to keep the money supply adequate. If Clinton had allowed the economy to grind quickly to a halt, the voters would have pounded him in the forehead chanting "It's the economy, stupid." They would have done the same to all their elected representatives. So, instead, we had happy, happy fun day: "Oooooh, look at all our assets inflate! Hey! Check out all the shiny, new, cheap Chinese stuff we can buy at Walmart with the equity! Pr-i-i-i-i-tty..."
Then again, the high risk home buyers were just responding to market signals. What screwed up the signals?
Bob, why does what China did/does lower our money supply?
Stephen, people who go bankrupt cost you money via taxes. Coercive force! People who smoke tobacco, say, dont cost you money, because on average they pay taxes for a long time and then die before receiving much government entitlements.
When the Federal Reserve buys Federal Treasury Securities, the money supply increases. When the Federal Reserve sells Federal Treasury Securities, the money supply decreases.
Think about it for a moment. China sells shit to folks in the US for $US. Instead of opening a bank account at Chase and depositing the funds, China buys Federal Treasury Securities that the Fed sold and circulates renminbi in place of the $US it took out of circulation. The securities China holds are no longer available to the Fed for increasing money supply--at least until China decides to sell them again.
That has the effect of decreasing the money supply. It's as if a large bank (China) were putting 100% of its deposits in reserve instead of only a fraction of them.
Where I misspoke is I said the US borrows money in response. It doesn't. It lends money to counter the effect on the money supply. The money it lends gets deposited having the effect of increasing the money supply again.
The whole process had the effect of driving down interest rates and consumer goods prices while assets inflated like crazy--first in the stock market and then in the housing market and then in the stock market again.
Apparently the meltdown wasn't bad enough last time, Obama and his Goldman Sachs cronies are doing everything they can to set up the house of cards for another big fall.
Ask yourself: What happens if China reverses its policy and starts selling securities?
P.S. Your analysis of the costs of smoking ignore the respiratory illness caused by second-hand smoke plus the costs of treating chronic conditions like COPD and emphysema before the junkies croak.
Stephen said at November 26, 2009 11:19 PM:
"No, I don't agree with either statement. No one forced the customer to borrow, no one forced the lender to lend.
Let each party reap profit and loss in proportion to the quality of their decision making."
Um, actually, we were forced to lend by our representatives in Congress, and now we are forced to cover the loss.
We need a constitutional amendment eliminating and prohibiting GSE's.
Our "government" borrows from China instead of raising taxes to cover its spending and voila, Americans have lots of disposable income with which to buy cheap Chinese-made crap at Wal-Mart. In addition they can bribe our "government" to look the other way when they steal our intellectual property, which they do on a massive basis. They get a lot out of their loans. Clinton let US defense technology secrets go to the Chinese and should have been charged for treason for doing so.