the things it doesn't want to do, speculation has not
taken a holiday.
As one author puts it, the US is about to miss a debt
interest payment on federal bonds. I'm sure they've
got some good will out there, but technically it
will be a default. Perhaps it is needed so that the
US can become competitive again.
i.e. they're going to cheapen the dollar so they have
to pay less (face value of debt). This will cheat
the middle class and poor.
Mitch, of Planet Ponzi says it quite clearly. I truly
thought that the US, particularly, would find a
way to keep this charade going forever. I guess
things look about ready to explode. There are
other signs. Goldman says sell gold, which
means the price is going up, i.e. out of
control.
checkit: Independent
An
America divided against itself: US debt is way past the ceiling
As
the budget row grinds the government to a halt, opinions on the world's biggest
economy are polarised to the extreme. The first voice in a two-part series,
financier Mitch Feierstein argues the country is 'bankrupt'
Wednesday
02 October 2013
Barack
Obama made a speech recently pledging his opposition to (yet another) game of
chicken over America's debt ceiling. "This is the United States of
America," he told his audience. "We're not some banana republic. This is not a deadbeat nation. We don't run out on our tab. We're the world's
bedrock investment – the entire world looks to us to make sure the world
economy is stable. We can't just not pay our bills."
His tone was presidential – a matter of rising
above the squabbling in Congress. And of course he's right that the behaviour
of congressional Republicans has been lamentable. Threatening to trash your own
country's credit rating for the sake of scoring partisan points? That's not
politics; that's treason. He's also
right that the US treasury market still forms the very foundations of the
globe's financial markets, and right to imply investors still have confidence
in Uncle Sam's creditworthiness, as demonstrated by very low borrowing rates
(albeit those rates are being manipulated on a heroic scale by the Federal
Reserve which owns nearly a third of all US treasury bonds issued.)
But
on the big point – "we don't just run out on our tab" – the President
is so wrong. The maths are simple. At $16.7
trillion (£10.3 trillion), US government debt exceeds 100 per cent of GDP.
That kind of indebtedness already implies
a country in financial trouble. Historically, advanced economies have only
seen their indebtedness reach those levels during wars. During Vietnam, for
example, US public debt consistently fell. During the Great Depression, debt never reached as much as 50 per cent of GDP.
However,
official estimates don't tell the full story. The figure that is generally
quoted for US government debt refers only to financial debt outstanding, but there
are many ways in which any entity, including governments, can accrue debt. A
promise involving future expenditure is a financial liability that any business
– compelled by law to file honest accounts – has to record. If we take only
unfunded pension promises, accrued largely at state and local level, you have
to add a trillion dollars or so (if you believe government figures) or $3
trillion if you believe independent estimates. So a debt of $16.7 trillion is
really a debt of more like $20 trillion.
That's
not quite a Greek level of indebtedness, but it's not far off; Spain is in much
better shape. And unfortunately, the US owes far more than $20 trillion. The
unfunded portion of the federal social security pension programme equates to –
on official figures – around $20 trillion. And that gaping hole is as nothing
when set against the roughly $43 trillion of unfunded Medicare obligations.
(And again, these are the official statistics, which are hardly likely to
overstate things.) In short, the financial obligations of the US Government
already far exceed its capacity to pay. They far exceed, for that matter, the
GDP of the planet.
The
size of the hole is far too great to be filled by ordinary measures – tweaking
tax rates, closing loopholes, trimming spending and the rest. Calculations
presented by Chris Cox and Bill Archer in The Wall Street Journal last year
suggested that if the federal government were to confiscate all the income of every current US taxpayer, plus all the
income of every US corporation, that would still not be sufficient to cover
that year's increase in the Government's accumulated liabilities. If you
didn't take that sentence in the first time, please read it again. And if you
did take it in but frankly didn't believe it, you should be aware that Messrs Cox and Archer served on
ex-president Bill Clinton's Bipartisan Commission on Entitlement and Tax
Reform, quite possibly the most sober and serious attempt ever made to address
these issues.
The
simple truth is that the financial mathematics can only be resolved in one way:
via a massive destruction of value.
That value can be destroyed by breaking
promises to the old and the sick, by savage inflation, by outright
financial default, or by a combination of all three. (My bet: it'll be all three.)
The
truth is that no banana republics are able to destroy value on this scale,
because they've never been trusted enough to create it in the first place. The
US Government, exploiting its position
of trust in relation to its bondholders and its citizens, will be able to do
what no Zimbabwe ever could.
The
President spoke mostly as if being a banana republic was simply a matter of not
paying bills, but it's about much more than that. It's about a lack of democracy, the presence of a kleptocratic elite, an economy hooked
on rent extraction instead of
productive investment and growth of savings. And the US ticks all these boxes too.
Democracy?
The re-election rate to the US House of
Representatives has exceeded 80 per cent in every year since 1964 and has
often nudged close to 100 per cent. That's not asking voters for their opinion;
it's getting them to rubber-stamp the business-as-usual approach to politics.
Kleptocracy?
A whole book could be written here. The insurance giant AIG collapses and is
bailed out … benefiting Goldman Sachs to
the tune of billions – while an ex-Goldman guy is running the US Treasury.
Or the Fed employs Pimco, a huge investor in bonds, to co-manage (with Goldman
and the private equity firm BlackRock) its acquisition of trillions in
mortgage-backed securities in a portfolio the Fed refuses to publicly disclose
– so helping to deliver huge profits to
Pimco's own bond holdings.
Examples
like these could be multiplied almost indefinitely. The simple fact is that the
US is bankrupt. It has politicians
who have refused for decades now to address the problem. Its politics have been
so infiltrated by Wall Street that the White House, Treasury and Fed have been
duped into believing the interests of Wall Street are the interests of the country.
And in the meantime, instead of addressing these issues in a responsible
manner, the media prefers to focus on another round of ridiculous grandstanding
over the debt ceiling. A waste of time. After all, what's the point of a ceiling when the sky is the
limit?
Mitch
Feierstein is the author of 'Planet Ponzi' and chief executive of the Glacier
Environmental Fund
