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An America divided against itself: US debt is way past the ceiling

by Mitch Feierstein about 1 year 4 months ago

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.”

Change - A Hollywood production; Coming in 2016 the sequel staring HRC

Change - A Hollywood production; Coming in 2016 the sequel staring Hillary Rodham Clinton

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.

More connections than Verizon and tentacles everywhere

More connections than Verizon and tentacles everywhere

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?

3 Responses to: An America divided against itself: US debt is way past the ceiling

  1. Tim Bonder says:

    We are now watching the American attempt of national ritual suicide with the Tea-party in charge of special effects. Eventually they will make a 3D movie of how to unwind a nation in reverse mode. Storyline to include the Alamo with shades of the Day of the Locusts and Bye Bye Miss American pie. Once upon a time in the West when time stopped……..with the climax on 17 October like some Wagnerian penny opera. Maybe Midnight at the oasis will be the sequel?

  2. Francois Barnard says:

    Dear Mr Mitch Feierstein
    Firstly, thank you for your excellent blog. It is heart-warming to see some US-brains still functioning!
    When one is in trouble, it is sometimes difficult to see the troublesome surroundings in the right perspective:
    1. Apartheid South Africa was at the time severely criticized for its racial policies, and the US was one of the first to sanction against it. Yes, many things were wrong here in my motherland, but it was as if we failed to recognize our own wrongs. We were blinded by God-knows-what, and it took drastic measures to set it straight.
    2. During WWII many German citizens failed to see what the Nazis were doing. Most were shocked as they realized the truth of the Holocaust. It took them losing the war to realize how wrong they were.
    It is my opinion that the majority of US-citizens are today still too blind to realize what is going on around them:
    • You can tell them the reality of their country being bankrupt, and they don’t believe you;
    • You can tell them that Washington is a terrorist organisation, invading sovereign countries and killing innocent civilians, and they don’t believe you;
    • You can tell them that their own government is holding them indebted and financially at ransom, and they think you are crazy;
    • You can tell them that their protection of the “American Way of Life” is at the expense of the rest of the world, making it not the “United States of America” but rather the “Narcissistic States of America”, and they think you are just anti-American.
    My apologies if anyone perceives me to be anti-American, or just plain negative, or insulting. That is not my idea. I have many friends and relatives, US-citizens, residing in the USA. The USA has been extremely good to them.
    But I also recognize their blindness. I recognize it because we have been there. So have the Germans.
    The USA is imploding upon itself because the blind is leading the blind, and they are heading towards the edge of a cliff. I can only pray that your broad base of citizens will have their eyes opened and recognize Washington for what it is: The Wolf in sheep’s clothing, about to devour you.
    Your own Constitution is largely being ignored. Instead of playing a facilitating role, your central government ignores the powers of your state governments and overrule them. The tail is wagging the dog. Many of your states are financially powerful enough to become sovereign states. I think it is time that they rise up and declare their independence from Washington.
    Why should Washington send your kids off to war, and you have to pay to have them crippled and emotionally scarred for life? Why on earth do you have more than 150 military bases on foreign soil? What are you afraid of? Why does Washington have all these covert government institutions spying on its own people as well as on foreigners? Why are your police allowed to kill your own unarmed citizens? You honestly think that you live in a democracy, but there is no real difference between Democrats and Republicans. The ruling party makes no real difference in how Washington misbehaves.
    The Britons may have called the press the “Fourth Estate”, but you have made the Lobbyists the “Fifth Estate”. Is that what a democracy is about? That the weight of money determines the direction of your policies?
    Can you see what you have become? Or do you prefer this blindness? You do not know it, but your “American Way of Life” is at the expense of the rest of the world. I do not claim to understand exactly why, by the demise thereof seems to be doing the same.
    Dear God, save the Americans from themselves, and us from the fruit of their actions!

    • Mitch Feierstein says:

      Thanks Francois,
      Your Email raises important points, some of which I broadly agree with, to start a “national dialogue” which unfortunately, will never take place. The world needs to wake up to the fact that MSM reporting is heavily influenced by politicians controlled by lobbyists publishing articles rife with bias. Planet Ponzi provides that wake up call, it’s up to everyone to read, digest and act!