Wednesday, December 17, 2008

Imaginary Money

Last night I mentioned the imaginary money that is being used to bail out the favorites of Treasury Secretary Paulson and other members of the Washington Mandarin class. The government has paid off bad bank loans and bailed out failing businesses by borrowing enormous quantities of money from — well, from future taxpayers who will somehow become three or four times richer than they are now under the new Socialist regime.

But it’s even worse than I thought: the level of federal indebtedness has moved beyond mere profligacy into a new realm of total financial fantasy. The national debt is about to surpass the net worth of every man, woman, and child in the USA.

According to The Washington Times:

Federal spending soars 25% before bailout

Taxpayers get $1 trillion debt


The government’s spending commitments exploded by 25 percent in 2008, putting taxpayers more than $1 trillion in the hole even before the astronomical costs of the economic bailout were taken into account, according to an annual report released Monday by the White House.

A joint report by the White House budget office and Treasury Department said that much of the increase in obligations came from an unexpected jump in veterans benefits liabilities, while revenues remained mostly flat because of the recession that began a year ago.

Jim Nussle, director of the White House Office of Management and Budget, called the report “sobering.”

Sobering??

On the contrary, it’s enough to make a man run down to the liquor store with what little money remains to him and clear the shelves of Jim Beam before all the distilleries file for Chapter 11.
- - - - - - - - -
The report showed that U.S. debts and liabilities are close to passing the value of the U.S. population’s net worth, said Peter G. Peterson Foundation, a nonprofit organization devoted to promoting fiscal responsibility.

That’s the bad news.

The good news is that this situation is not going to last long. One way or another, the current mess will be resolved, and soon.

Here are some possible outcomes:

1. The federal government declares bankruptcy.
2. The incoming Obama administration caps all the federal COLAs and then prints a lot of new money, thereby inflating its way out of the crisis. Everybody’s 401k would be reduced permanently to 10% of its former value, and pensioners would be living on dog food, but, hey — it’s worth it to keep the CEOs of GM and Ford in plush corner offices, right? Sometimes we have to sacrifice our own needs in a good cause.
3. A mass flight from the dollar forces a severe devaluation on the USA. What happens after that is anybody’s guess.

Readers with more financial expertise than I have are welcome to add their own prognostications to this list.

The government is counting on us. We’ll have to find that money somewhere. Reach into the cookie jar or under the mattress and see if you can dig out another sawbuck or two.

Uncle Sam wants YOU.

20 comments:

Henrik R Clausen said...

My take:

The collapse of the dollar, as such, is a very real possibility. US securitys (ony the federal system) re what guarantees the value of the dollar. If the federal state defaults on its debt, the dollar is tanked along with it.

I can't imagine that Obama has the guts to address the problem head on.

Tuan Jim said...

Just for the record - as I've studied in economics years ago - the measure of national debt to GDP is the real indicator (unfortunately that article didn't give a solid number there). A country is generally fiscally solid up to and around having national debt of 1.5x GDP. Last I saw the numbers (maybe a few years ago), we were still below 1x GDP. On the other hand Japan at the height of it's boom/bust in the early 90s was over 1.5xGDP - and yet - with all the crazy overspending and overinvesting and price inflation, they still made it out ok - at least to continue limping along since they failed to properly deal with certain financial issues as well.

Any large country with this much in assets (monetary and non-monetary) is still not going to be in nearly as much danger of "failing" as some country like Iceland or Latvia or somewhere else that can't afford to divest or diversify assets (or have the people to back them up).

James Higham said...

We begin with fiat money and go to imaginary money. We're in safe hands, all right.

xlbrl said...

I suspect the socialist have no fear of digging deeper or permament holes inasmuch as they their instinct tells them that is their natural playing field.

Bilgeman said...

Baron:

We've seen the next step before In South America.

New currency. The Brazilains went from the cruzeiro to the cruzado to God knows what.
I reckon we'll do the same, in one way or the other.

And then we can follow the examples of our Mexican neighbors during the 80's, and buy bricks with our new "Obamas", since the brick, in a month, will STILL be a brick,(and therefore inherently useful), as opposed to the devaluation where 100 "Obamas" will exchange for 1 "Pelosi".

Bilgeman said...

Baron:

We've seen the next step before In South America.

New currency. The Brazilains went from the cruzeiro to the cruzado to God knows what.
I reckon we'll do the same, in one way or the other.

And then we can follow the examples of our Mexican neighbors during the 80's, and buy bricks with our new "Obamas", since the brick, in a month, will STILL be a brick,(and therefore inherently useful), as opposed to the devaluation where 100 "Obamas" will exchange for 1 "Pelosi".

NJArtist said...

100 "Obamas" will exchange for 1 "Pelosi"

That's proof that Pelosi is a real bitch.

Sorry, it was just hanging there to be plucked.

sioe said...

The trouble is that both socialists and capitalists believe that mass migration will solve the world economic crisis.
Mass migration has caused, or more accurately perpetuated, the world's economic crisis. A handful of people have become very wealthy(ier) on the back of this situation.
Capitalists have said for decades that a 'light touch' regulation is necessary for economies to function, but this just leaves the way open to charlatans and thieves to line thir pockets.
Socialists believe in central control and have now achieved it by allowing the thieves to do what they do best - thieve. Now we will see socialist politicians do the thieving as they have done ever since socialism crawled out of the bog.

ZZMike said...

"... hey — it’s worth it to keep the CEOs of GM and Ford in plush corner offices, right?"

I think it's more complicated than that. We (meaning us taxpayers) gave the financial sector about $700 billion, and they don't even have to tell us how that money got spent.

The auto makers' $15 billion is a drop in the bucket. Admittedly, we're throwing bad money after worse, but the Big 3 (or however many are left) are in a bind, because Congress is demanding that they build high-MPG, low-emission cars, which are going to cost a lot and nobody wants to buy them anyway.

On top of this mess is the Mother of All Ponzi Schemes, by someone I'd never heard of - Bernie Madoff, who conned his investors out of $50 billion - more than 3x the amount the Big 3 asked for, and not quite 10% of what the financial sector got.

From what I understand, his investors were "high net worth" people who bought his yarn about sheltering their investments in places like the Bahamas and Tierra del Fuego. Hedge funds liked him.

This is surely the reason for his dramatic rise, and precipitous fall:

"Fairfield Sentry and Kingate Global were among a small group of hedge funds to report positive returns for 2008; the average hedge fund was down 18 percent, according to data from Hedge Fund Research.
...
"Prior to Madoff's arrest, investors had wondered how he was able to generate annual returns in the low double digits in a variety of market environments."

It's a case of falling victim to greed.

Baron Bodissey said...

ZZMike --

GM and Ford were just convenient and well-known examples of corporate welfare beneficiaries. I could just as easily have said Citicorp, which presumably got a much larger slice of the pork.

MoneyAsWealth said...

EXACTLY!

We don't need any more "Imaginary Money". We need wealth based money, and gold is not the answer. We have to know the problem before we can solve it.

There is a solution to this. We are close to having legislation passed in Minnesota to help turn things around in a big way.

Look, we can't just, a) complain that nobody seems to have a solution b) minimize and trash-talk a solution when it comes along and c) blame someone else for the mess.

"We The People", remember? If We don't move to fix it by getting behind a solid and workable idea, when it collapses around us (does anyone know how bad that will be??) who will WE blame then?

Find some answers here:
Money As Wealth

Email us to find out how to help - find the link on the left side of the blog. No donations, just phone calls and emails. We'll let you know the details.

Tuan Jim said...

Going back to the original article and its premise of debts and liabilities vs. net worth. Aside from the veterans benefits (well-deserved) and Social Security junk, I'm curious what percentage is from inflated housing/land prices. I mean, when a 2 BR ranch house in the Bay Area sells for $750,000 or something similar and then the housing market crashes or buyers come to their senses or the whole area is re-assessed by the taxman and the actual product is worth far less than is owed on it - how much of that multiplied many times over - is reflected in numbers and figures like this?

CW said...

Of course, if the government is paying for it, I'd like Wild Turkey instead of Jim Beam.

MoneyAsWealth said...

Debts and liabilities vs net worth, is an indicator, a diagnostic tool - it is not the main problem. The main problem is not corruption, mark-to-market procedures or securitized sub-prime mortgages. They ARE problems; they are not the main problem.

The main problem is more subtle, and seemingly, out of reach to many, but not for this audience, so, here goes.

We have no mechanism to monetize an asset, debt free. Meaning, we have no money in the system that is debt free at its genesis. In other words all money is created as a loan to someone. Simply, banks create new money, when they make loans. That is according to the Federal Reserve, The Department of the Treasury and Harvard macroeconomics professor, MIT Ph.D. and advisor to the Federal Reserve Bank of Boston, N. Gregory Mankiw, in his textbook Macroeconomics, 5th edition, pg 484.

So, we know that banks create new money. What? You think that we had $8.5 trillion laying around in a vault somewhere for the government to borrow? Hardly. In April of this year, our total money supply was $7.7 trillion. That's right, they more than doubled our money supply. But they did it as debt. And they didn't "print" any of it either - it's done on computer.

Again, all new money is created by banks when they make loans. Therefore, we (government, business, personal) must borrow all of our money into existence. Pull a dollar out of your pocket and if you trace it to it's origin, it started out as a loan. Difficult to imagine, for most people, but the truth.

That is problem enough. If we borrowed it interest free, we would still have to pay back every dime, leaving us with no permanent money supply. But, what's worse is that banks charge interest on the computer generated digits that were never in existence before the loan was made. However, they never create the money that they want back in interest payments - and the banks are the sole creator of money in our economy, as of today.

Q:Where does the money come from to pay interest on all of our debt money?

A: Another loan.

This is subtle, but caustic in the extreme.
Money to pay interest does not exist in the system - it comes from someone else's loan principal.

I don't care how many knobs your turn or levers you pull, you can not get out of debt by borrowing more money, any more than you can drink yourself sober. But that is what they are trying to do - because that's all they know. That's all the law allows! We need to change the laws that forbid wealth based money.

Here's a story to illustrate:

Shawn wants to go to bed.
It's a bit chilly - cold, in fact.
She has no blanket.
I tell her that I have one.
I offer to loan it to her.
She needs a blanket, so she agrees.
She also agrees to pay interest.
I loan her a blanket.

About 2 AM, I come and take my blanket - plus a pillow case as interest.
Minutes later, she's cold again, so I loan her the blanket.

About 3 AM I come back for my blanket - plus a sheet as interest.
Minutes later, she's really cold, so I loan her a blanket.

At 4 AM I come in and take my blanket - plus the alarm clock as interest.

Q: How long can I play this game before I own everything that Shawn has?

Q: As long as she borrows it, does Shawn ever get to own the blanket?

Q: What makes you (We the People) think that you can borrow all of your money into existence (now, that IS how it's done) and ever expect to own it, and then, pay it all back, plus interest, and keep from losing your stuff? Remember, rights to your property = liberty, A. Rand

That's how our money system works.
Banks own all the money.
Americans can only borrow it.

Beep... Beep... Beep... It's the alarm clock.

Time to wake up.

Answers at: Money As Wealth

Henrik R Clausen said...

Tuan Jim, I'd like to slightly challenge a couple of the ideas you set forth.

Debt / GNP in the US, last time I checked (recently), was around 65 %. That does not sound like cause for immediate alarm, as some European economies (Greece, Italy, Belgium) are much worse off.

However, Debt / Tax revenue might be a more useful indicator. Here in Europe, we are used to high taxes, which means the government can shoulder and pay off larger debt burdens. I doubt the US citizens would be willing to shoulder significant higher taxes, which means the federal debt, even well below 1.5 X GNP, is more difficult to get rid of.

Second, the US economy is so huge that the rules might shift slightly. In particular, the US government needs to, on a running basis, renew securities (bonds) that expire. That is an ongoing process, handled by the Fed who auctions off the securities. If, for any reason, it becomes difficult to refinance these existing loans, the system might go into a tailspin.

With federal spending ballooning and the economy shrinking, I can only say: "Hold on to your horses."

Terry Morris said...

The government has paid off bad bank loans and bailed out failing businesses by borrowing enormous quantities of money from — well, from future taxpayers who will somehow become three or four times richer than they are now under the new Socialist regime.

By borrowing from? Doesn't that imply that the money will eventually be paid back?

I certainly have no economic expertise and claim none, but I can add. Do we have, in the U.S., a growing or a shrinking net taxpayer base, and what is the size of that base (currently) in terms of percentages? Moreover, what will be the size of that base in ten or twenty years?

Someone correct me, but it seems to me that (1) we have a shrinking net taxpayer base, and (2) it will therefore, barring a reversal of the trend, be smaller in terms of percentages in ten or twenty years.

Baron Bodissey said...

Henrik,

The debt is about to almost double, which was the point of that article. What had been 65% of GDP will soon be 120% of GDP, and it will keep growing, because we're not done with bailouts, and Obama has promised us a tax cut AND increased spending on every Progressive cause under the sun. Not to mention the extended unemployment benefits, fuel assistance, etc., that every recession requires.

I don't think he really will decrease taxes -- liberals just generally don't do that, especially when they have a compliant Democrat Congress -- but he will increase spending, because he owes too many favors to his core backers, and they require government outlays.

Add to this the fact that we're in a contraction -- negative growth -- and 150% of GDP is attainable within a year or two. Wait and see.

Baron Bodissey said...

Terry --

Yes, that was my point.

"Borrowing" was intended to be ironic. The federal government takes our money coercively and then promises to do certain things with it -- in this case, make sure that their high-flying friends in the banking, insurance, and auto industries don't have to reduce their standard of living.

Call Me Mom said...

ZZMike said: "We (meaning us taxpayers) gave the financial sector about $700 billion, and they don't even have to tell us how that money got spent."
I beg your pardon? I did no such thing. My elected representatives did that without so much as a by "your leave", and ignoring every poll that showed the American people overwhelmingly disapproved of the bailout.

Terry, You are correct about the size of the taxpayer base as far as I'm aware. I'm no financial expert either, but doesn't that shed a whole new light on immigration issues? Our country needs more immigrants to expand our taxpayer base so the govt. can keep on spending and promising pie in the sky instead of making the unpopular decisions that need to be made. If we just have more taxpayers, everything will be fine-right?(please add a significant amount of sarcasm to the previous comment.)

Baron,
Have you seen the movie
produced by the Peterson Foundation before the bailout? I wonder what they would add to it to update the figures now.

Henrik R Clausen said...

This is a very scary movie...

The most effective countermove would probably be increasing the age of pension, radically.

The 'debt addiction' is core to the problem. Since 1980, with the exception of Clinton's balanced budget, the federal government has come to look increasingly like a leveraged investment company, where obligations are expanded at an unsustainable rate.

Oh. What did the Fed just do? Cut interest rate to .25, presumably to encourage more debt...