Posts Tagged ‘debt crisis’

When market forces bring down the American eagle

November 26, 2012

U.S. politics has been pre-occupied since November 6 with short-term fiscal problems. Will the fiscal cliff be avoided and if so, by what measures?  This is the seventh order of economic smalls.

The crucial issue – all but ignored by a people who have lost all interest in the long-term future of their nation – is what will happen if the United States continues down its current path to an unsustainable rise in the national debt.

At best, current fiscal cliff discussions will leave in place annual federal deficits of the order of $1 trillion. By 2016, the nation’s national debt will approach $20 trillion. Global markets will not tolerate levels of debt that so outreach the nation’s gross domestic product.

Just when the adverse market reactions will occur cannot be predicted. But when they do so, the U.S. economy will be crushed by an avalanche of unstoppable magnitude.

Once creditors determine that U.S. Treasury’s are no longer the safest form of investment available, demand for those Treasury’s will decline, interest rates will rise, and the cost of servicing the debt will explode.  Even a modest 1 per cent interest rate increase, for example,  would wipe out all the deficit reduction included in last year’s Budget Control Act.  In other words, all the pain envisaged in the fiscal cliff would provide no deficit relief at all.

In reality, if market forces move against U.S. Treasury’s they would not impose a 1 per cent cost. Interest rates would increase more likely to 5 or 6 per cent per annum on the initial tranche. Such penalties would require massive and immediate cuts to Social Security Medicare and National defense and most likely would take Medicaid right off the federal accounts. Even the Congressional Budget Office projects that, under the most likely scenario, in 30 years from now,  net interest payments on the U.S. national debt will amount to $3.8 trillion per annum in real 2012 dollars. That is more than total government spending in 2011.

“As Harvard economist Kenneth Rogoff recently explained, ‘By the time (markets) lose confidence, it’s too late: The option to tighten from a position of strength has evaporated.’ Senator Mike Lee, ‘After fiscal cliff comes fiscal avalanche’, The Washington Times, November 26, 2012

No one expects a seeming economics’ ignoramous like Barack Obama to be able contemplate such reality. A majority of the electorate, in its collective stupidity, chose economic incompetence over experienced success.  Now every American will have to live with the sad consequence of the economic avalanche that is sure to come.

Let’s not twist again

September 22, 2011

“Come on let’s twist again like we did last summer

Yea, let’s twist again like we did last year

Do you remember when things were really hummin’

Yea, let’s twist again, twistin’ time is here

Yeah round  ‘n up ‘n down we go again

Yea, let’s twist again, twistin’ time is here.

Chubby Checker Lyrics, 1961”

 Chubby Checker’s  twistin’ time is here again!  On September 21, 2011, The Federal Reserve Open Market Committee  announced its decision to revert to a 1961 policy twist designed to reboot the United States economy.  The stock market saw the policy for what is was worth: the Dow Jones Industrial Average dropped 283.82 points on the news flash.

 Ben Bernanke has done it again! When Bad Ben is about to make a policy statement, sell the U.S. stockmarket short and you will make a packet. That is what happens when progressive socialists occupy positions of authority in a market economy.

To be fair, the problem does not lie entirely with Bernanke and the other six stagflationers on the Federal Reserve Open Market Committee who voted with him, though it surely does not lie with the three dissenters who stood up for price stability and sound money.  The problem lies also with the dual  mandate Congress gave the Fed – to pursue maximum employment and stable prices over the long term. 

 This dual mandate is not required of central banks in the rest of the world, where the pursuit of stable prices is the only mandate imposed.   The current state of economic knowledge does not support the dual mandate, since the goals of maximum employment and price stability often appear to be in conflict. Monetary policy should be restricted to promoting sound money and price stability. Laissez-faire capitalism,  operating under sound money and the rule of law, will do the rest. 

The F-twist, in its 2011 manifestation, involves the Federal Reserve selling off immediately $400 billion of  its  Treasury notes due to mature within three years or less while simultaneously purchasing $400 billion of  Treasury bonds  at the long end of the market – with six to 30 year maturities.  The intent of the F-twist is is to put further downward pressure on longer-term interest rates and to help to make broader financial conditions more accommodative. With long-term interest rates already at historic lows, this policy is unlikely to promote an investment boom across the United States.

The F-twist goes further than this.  The Fed will also invest the principal payments that it receives on its asset holdings into mortgage-backed securities, rather than into U.S. Treasuries.  The objective here is to reduce yet further mortgage rates, thus supporting the housing market.  With mortgage rates already at historic lows, this policy is unlikely to reverse the downward trend in house prices or materially to reduce the foreclosure overhang that is the key symptom of house-market disequilibrium in the United States.

The F-twist clearly worsens the balance sheet of the Federal Reserve. With its balance sheet distorted  by excessive long maturity holdings, should sound money require significant increases in long-term rates of interest, the Fed’s assets could be halved or more as bond prices collapse.  With its balance sheet distorted by holding high risk securitized mortgages, if foreclosures get back on track, significant portions of the Fed’s assets may turn out to be worthless.  Both possibilities render the Fed a hostage to fortune.

If the Fed were restricted to a single mandate of  ensuring sound money, it would more likely acknowledge the evident truth of September 2011. The United States economy is experiencing a capital strike that will continue until President Obama is removed from office, be it in 2012 or in 2016.  Few firms will invest in market development or will hire new employees while uncertainty about the future of the federal debt and question-marks over the direction of progressive socialism hang over the market-place.

Only the political market-place can clear those uncertainties and determine whether the United States will continue on its current trajectory into Second World status, or whether it will recover its exceptionalism and, once again, show other nations a clean pair of economic heels.

Unfortunately no agency of government can twist its way around that epochal  choice. It can only take the economy round ‘n round and up ‘n down again!

U.S. credit rating downgrade well-deserved

August 6, 2011

On Friday August 5, 2011, the United States government was rapped sharply over the knuckles by Standard and Poor’s, the credit rating agency. The agency lowered the government’s AAA rating to AA+ with a negative outlook. The U.S. had enjoyed a AAA rating for a period of 70 years.  The rapped fingers of President Obama, Treasury Secretary Timothy Geithner, Senate Leader Harry Reid, and House Speaker John Boehner, will be smarting badly as I write this column.  It is a moment of shame for all Americans.

The shame is of our own making.  We have elected into office since 2000 two presidents unfitted by reason of low ability and unacceptably inadequate economic education for the responsibilities that they assumed.  We have elected into office for many years members of Congress whose dedication is more to raising campaign monies through pork-barrel spending than to effecting sound policies for a nation in long-term relative decline.

The implications of this folly were publicized worldwide by the childish tantrums and humiliating lack of economic knowledge displayed by all major actors in the debt ceiling debate  that took place on a world-wide stage through a period of three excruciatingly painful months.

The world well knows that budget cuts of $2.1 trillion problematic dollars spread over ten long years amounts to a non- response to a U.S. federal debt present value of some $100 trillion.  S & P has simply reflected that reality. The sad truth is that the United States – as a consequence of its Constitution – is now locked into an 18-month policy paralysis, during which interest rates will rise, economic growth will be throttled and inflation will rear its ugly head.

In a parliamentary system, the government would collapse and new elections would be called. In the United States, no such reaction is allowed. The honorable reaction to news as devastating for the U.S. economy as that just recorded, would be for President Obama to dismiss his Treasury Secretary, Timothy Geithner, and then to resign his own position, allowing Vice President Joe Biden to succeed him.  The honorable reaction would be for Harry Reid and John Boehner to resign their leadership positions, to allow successors more suited to economic crisis and debt reduction to emerge from their respective party caucuses. Senator Mark Warner (Democrat)  and Representative Paul Ryan (Republican) would bring much-needed economic intelligence to the leadership of Congress.

But such responses are off the table in a Washington environment where inadequate political leaders stalk the Capital like Roman Emperors during the final corrupt years of Empire. For Washington has now morphed into a Rome, not of the glorious era of  Senatus Populusque Romanus– SPQR – but rather of  the last decadent era of its Imperial decline and fall:

“the greatest, perhaps, and most awful scene in the history of mankind.” Edward Gibbon, The History of  The Decline and Fall of the Roman Empire.

Give us Barabbas!

July 31, 2011

And it was the preparation of the passover, and about the sixth hour: and he saith unto the Jews, Behold your King!  But they cried out, Away with him, crucify him.  Pilate saith unto them, Shall I crucify your King?  The chief priests answered, we have no king but Caesar.  Then delivered he him therefore unto them, to be crucified.  And they took Jesus, and led him away.” St. John, Chapter 19, versus 14-16

The corrupt priests of the Washington temple are working as I write this column to deliver the balanced budget to an eagerly awaiting  Caesar for public execution on Capitol Hill before a chanting multitude of  assembled profligates.  There will not even be a Pontius Pilate to ask that its fate be spared.  The common thief that  will be  released in some scrambled deal to satisfy the assembled masses will be a modern-day Barabbas. How the foolish masses will rejoice that one of their own kind has been released while their fiscal savior is appended to the Cross.

Sic transit gloria mundi!

(Thus passes the glory of the world)

United States has no government; the state of nature beckons

July 30, 2011

The Founding Fathers crafted well to ensure that checks and balances limited the reach of the political system.  On the assumption that checks and balances work, government would never overreach, and debt crises would not occur. 

Unfortunately, the checks and balances have eroded over two centuries, partly as a consequence of three major wars (1860-65, 1917-18, 1941-45), partly as a consequence of three presidents prepared to violate the Constitution (Abraham Lincoln, Woodrow Wilson, and FDR), partly as a consequence of increasing rent-seeking and rent-extraction within the legislative branch, and partly as a consequence of a Supreme Court that repeatedly has mis-interpreted the Constitution. 

The result is the debt crisis now confronting the United States economy and the absence of any effective government to resolve that crisis.

When a country has no government, it essentially returns to the state of nature, where individuals fend for themselves under a law of nature. The law of nature provides individuals with a natural right to life, liberty, and property.  The rights to life and liberty are inalienable (i.e. no one morally may take away those rights nor may individuals morally voluntarily sacrifice those rights).  The right to property is imprescriptible (i.e. no one may morally seize those rights but individuals voluntarily may alienate themselves from such rights).

A state of nature is not always a terrible place to inhabit. A population accustomed to honoring the moral code will develop mechanisms for protecting their natural rights without recourse to a central government. It is a place endowed with some uncertainty and some inconvenience – individuals cannot always protect their rights against non-conforming predators.  It may well be superior to a political society that is in the final stages of internal collapse – such as the United States in the late summer of 2011.

If the non-government of the United States fails to resolve in a timely fashion  the debt crisis that it has created the People may sensibly choose to shut down their political society and to return to the state of nature that they perhaps unwisely chose to leave behind at the end of the War of Revolution in the late eighteeenth century.


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