100 Basis Points to Armageddon
Is there a fender anywhere in Christendom that the financial authorities have not dented yet?
They are lost without a compass. They are up the river without a paddle. At the automatic teller without a pin number. They have no theory that has not been discredited. They have no experience which does not contradict them.
In 2006, they couldn’t see the crisis coming. In 2008, they couldn’t understand it. In 2009-2011, they couldn’t fix it. Their theory told them they couldn’t spot a bubble; it was obvious to just about everyone else. Even here on the back page, we warned readers. Then, the financial elite mistook the problem for a lack of ready cash. Practically every American household knew what the real problem was: too much debt. And then, while everyone else knows you can’t fix a problem of too much debt by adding more debt, the authorities missed the point entirely. Since they began applying their fixes, the national debt of Italy grew $360 billion. Japan’s national debt rose $1.1 trillion. And the US added more than $2 trillion. They may have successfully ‘kicked the can down the road’; but now it is a bigger can. Last week, they tripped on it again.
In these, the world’s 3 leading debtors alone, the problem is now $3.5 trillion worse. And that is just a piece of it. These figures do not count the trillions’ worth of other monetary and fiscal duct tape the feds have run through. Congressman Ron Paul put the figure for the US alone at $5 trillion and asked Mr. Bernanke about it.
What do you think you got for all that money, he wanted to know? The Fed chief remained true to his delusions. The money wasn’t spent, he protested; it had been ‘invested.’
Then, what was the return on investment? By every measure, the US economy is worse off than it was before the fixes began. After $7 trillion in losses, housing is still falling. The jobs picture is even worse. The broad “U6” unemployment rate – which includes those who have stopped looking for a job, part-time workers who can’t get full-time jobs, etc. – increased from 15.8% to 16.2% in June. The number of Americans with jobs fell by a quarter million to 153.4 million. And the time it takes to find a new job now exceeds the time in which the jobseeker typically stops looking – a record of 39.8 weeks. Hourly wages dropped. Hours worked fell too. And the portion of the population that is employed hit a new low of 58.2%.
While the proximate problem in America is at the household level, in Europe, it is in the banks, bailouts and boondoggles. Moody’s, the giant rating company, tossed Irish debt into the junk yard last Wednesday, after already having knocked down Portuguese debt the week before. Greek debt has had junk status for months; but Fitch downgraded it anyway; last week 10-year Greek notes were selling at a 48% discount. Two year debt yielded 36% when we checked on Tuesday. Moody’s said it was looking at US debt too; a downgrade is coming sooner or later.
The bigger the pile of debt gets, the more it stinks. Last week, investors began to notice a bad smell coming from Italy, the world’s third largest debtor. The world’s other two leading debtors – the US and Japan – have $26 trillion of sovereign debt between them. Add Italy and the total is nearly half the world’s GDP. These are big numbers; they’re not going away.
There is nothing especially deadbeat about Italy. At 120% of GDP its government debt is, officially, between that of the US and Japan. Unofficially, it is about even with the US. As for deficits, Italy is a model of integrity. Its deficit is only 4.5% of GDP, compared to America’s 11%.
On these numbers you’d think that the cost of borrowing for one of these deadbeats should be about the same as for another. But recently investors decided that Italian debt could be as fatal as Spanish cucumbers. They sold it. Doing so, they sent yields on 10-year Italian bonds over 6%. Spain pierced the 6% level soon after. Since 7% is viewed as the upward practical limit – this brought all of Europe to only 100 basis points from Armageddon.
The authorities looked on like housecats watching the evening financial news. They saw the images. They heard the words. They had no idea. In Europe, they rushed to put together another bailout.
In America, meanwhile, the day of reckoning approaches too. In two weeks, unless the statutory limit is raised, America will cease making debt payments. It will be “worse than the Lehman bankruptcy,” says former US Treasury Secretary Larry Summers. Armageddon, in other words. But in light of what their fixes have wrought so far, Armageddon is looking better and better.
Regards,
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