11/07/09 Beunos Aires, Argentina – Governments are running breathtaking deficits…and accumulating alarming debts. Japan has a national debt of nearly 200% of its GDP. Where did that debt come from? It came from 20 years of trying to buy its way out of a slump with borrowed money. Of course, it didn’t work. But now, Britain and America are following the Japanese lead…and the Japanese are still at it! At the present rate, Japan’s government debt will grow to 300% of GDP in 10 years. America’s debt could grow to 100%…and then 200% of GDP…over the next decade (depending on whose projections you believe). And Britain, if we read the report in The Financial Times correctly, will have debt equal to 200% of GDP within 3 years.
Just what kind of crisis do these numbers portend? It’s hard to say. Probably a combination of confidence, followed by debt default and inflation.
Would the US actually default? We agree with Paul Samuelson; the answer is ‘maybe.’ Samuelson, writing in The Washington Post:
“The idea that the government of a major advanced country would default on its debt – that is, tell lenders that it won’t repay them all they’re owed – was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn’t. Well, it’s still a very, very long shot, but it’s no longer entirely unimaginable. Governments of rich countries are borrowing so much that it’s conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?
“…People have predicted such a crisis for decades. It hasn’t happened yet. The currency’s decline has been orderly, because the dollar retains a bedrock confidence based on America’s political stability, openness, wealth and low inflation. But something could shatter that confidence – tomorrow or 10 years from tomorrow.
“Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates – and we don’t know when, how or whether that may happen.”
Why wouldn’t the US just “print its way out of debt?”
Because it’s not that easy. In effect, the feds are trying to print their way out of debt now. They’ve added huge amounts to the monetary base. But that money is not getting into the real economy. Instead, it’s going into vaults and speculations.
“Jittery Companies Stash Cash,” says The Wall Street Journal.
And banks, too, borrow…but they don’t lend. They can borrow at negligible rates of interest…and buy US Treasury bonds on a leveraged basis…producing a 20% yield. That means, the US dollar has replaced the yen as the go-to currency for speculators.
Net effect? Lots of cash in what appears to the Mother of all Carry Trades. The Financial Times:
“The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualized – as the fall in the US dollar leads to massive capital gains on short dollar positions.”
But in the economy itself? As in Japan, very little economic progress comes from this kind of speculation.
Bankruptcies rose 7% last month. Unemployment gets worse.
The financial markets bubble up. The real economy shrivels up. And people with any sense are stocking up.
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For the most part, the politicians ignored the people gathered at the US Capitol on Thursday, and almost nothing was mentioned in the news.
It sure looks as though socialism is going to continue its forward march, at least until next year.
It would be helpful to know what kinds of enterprise tend to be most profitable when half of the economy is “feeding at the public trough” (to quote Charles Reed).
And, what kind of endeavors will do well when the fiat money printing presses are running full steam ahead.
Most publications are aimed at where to invest the big stash of money that we all hope to accumulate…. someday.
What would be helpful is advice on what has worked in other economies for the entrepreneurs who are not on the dole. Maybe this advice would be helpful for the hourly wage earner who seeks to advance through some sort of “side” job, too.
Fred McDavid said
“It would be helpful to know what kinds of enterprise tend to be most profitable when half of the economy is “feeding at the public trough” (to quote Charles Reed).
And, what kind of endeavors will do well when the fiat money printing presses are running full steam ahead.”
Maybe I’m naive, but I think there’s an old tried and true answer to that question; the enterprise that remains profitable in an economy where more than half of the participants are feeding from the public trough is the black market. Essentially capitalism becomes a crime in that economy and trade is performed illegally using goods rather than national currencies.
You don’t need to look much further than the most recent examples of socialist and communist states to see it I don’t think.
Can someone please fix the dateline? It’s been wrong for the past week. It’s Buenos Aires, not Beunos Aires.
Joe: changing a spelling error is a good thing, not that it will make a great difference in the discourse, just a good thing
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Sure miss Mogambo
I do not see anyone, ANYONE talking about the change in what is occuring; in the past, govts would simply print their way out of debt. And you know the result. Today is different, now we have banksters counterfeiting TRILLIONS of dollars over decades, and more recently Credit Default Swaps and Derivatives. They are counted as money. We have M1, M2, and M3. The government by printing, is only influencing a small part of the currency. They are selling bonds at a much higher rate, and creating money this way. But the total evaporating right now, that was actually counterfeit, is 561 trillion. So they have to, legally as opposed to the banksters, issue over 561 trillion to start any inflation. Almost all of our previous inflation was counterfeit. Answer to debt? Print and pay, and there will still be deflation, for a long, long time. They need to consider the ‘politically correct’ counterfeiting that has plagued us for decades.
I really wish people who are aware of how damaging this sweep toward socialism is would concentrate their efforts on fighting it rather than just how to profit off of it.
Anyway, unless you suck up to the ruling party elite, like the banksters who were rescued are expert at doing, you are not going to get rich off of this march toward socialism.
I suggest you read We The Living, Red Scarf Girl or any other book written first hand about the victims of communist revolutions. There is no upside to this for a rational person.
Personally, I would rather be poor than to suck up to people like Nancy Pelosi or Chris Dodd.
don’t worry lala girl, when obama is finally forced to show his birth certificate and it’s revealed that he’s a fraud, we can undo all this madness he’s starting.