Bill Baker

The mellow stock market decline through mid-2008 (measured by historical yardsticks) and the bull market in U.S. Treasuries of all maturities belied not a crisis but some dreadful disease that had been effectively quarantined.

Perhaps as in history’s great epidemics, the doctors in this case had not seen this sort of sickness before and had yet to understand completely what strain of bug was at work. Although having DNA similar to pathogens seen in wartime debt buildups, this season’s strain encoded itself with the pattern of socialism: entitlements, bloated and intrusive government, and punitive taxation exclusively directed at the top brackets. Its vector of transmission is fiat currency.

Our culture leaves the body politic and the investment community with no antibodies to recognize this threat. In earlier eras such as the 1980s, the bond vigilantes watched the money supply and government outlays closely. At the turn of the century, leading bankers looked over their shoulder for signs of the next wave of panic from others who might have lent speculatively, and they kept their balance sheets in good shape for that rainy day.

Today, those who took defensive action through short selling or exchanging their money for commodities were instead pilloried in public hearings and damned for being speculators.

Even before the stock market panic that began in 2008, lenders were willing to accept historically low returns on short- and long-dated treasuries even if these nominal returns were being eroded by a CPI-U that pierced through 5 percent from June through August, or worse, by that and taxation, too.

The low interest rates then may have anticipated the risks revealed once the stock market collapsed. More joined this wary camp to push nominal returns below zero once deflation became evident. It may be this contagion is a virus capable of fooling the body’s defenses, sort of an HIV look-alike, since with long-term Treasury rates in the low single digits and a public that is not alarmed (or even aware) of the dangers of $60 trillion of national obligations, a message is being sent to the government that it might have unlimited supplies of free money that it might spend.

Private debt of $40 trillion plus $60 trillion of public debt and entitlements might have been enough moisture to feed a hurricane. But it might just as well require more, due to the behavioral aspects of the system and its complexity, so no economist might know what the breaking point may be.

Unfortunately, sometimes markets, like ocean skies, can be clear before bed but stormy in the morning. The storm that could break hardest would be the downgrading of the credit rating of the United States. For if we expect to pay off the obligations of the government through concentrating tax increases on the top brackets, foisting debts of somewhere between $500,000 and $2 million upon each rich household (depending on where the cut-point is drawn), no longer would the Treasury have the resources to honor its obligations.

Yes, complete dismantling of the socialist entitlement state would fix the problem. But the political will to do something this drastic could never come out of thin air; it would only come once we as a society as a whole hit rock bottom.


Bill Baker,
for The Daily Reckoning

[Editor’s note: This passage is reprinted from William W. Baker’s book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy of his book here.]

Bill Baker

Bill Baker is author of Endless Money: The Moral Hazards of Socialism and founder of the Conservative Economist web site. He developed the firms GARP Research & Securities Co. and Gaineswood Investment Management. Before this he was at Reich & Tang, Oppenheimer Funds, and Van Kampen American Capital. An Oppenheimer fund he managed was awarded a Morningstar five-star rating. Baker received his MBA from Dartmouth College and his bachelor in economics from the University of Pennsylvania. He is vice president and a trustee of Baltimore's Harbour League.

  • Small Thought

    If you are in cold or fever, it is very normal. If you are obese or in hypertension, you are ill. If you are diabetic, then you are very sick. If you have contacted cancer or HIV, then gold wil bless you.

  • athensguy

    The tax burden of the rich is at the lowest point in 50+ years. Much of the debt is still related to wasteful spending on the military. Increasing spending while cutting taxes on the rich didn’t help our fiscal situation much either. Not that that was the goal. A country is much easier to rule with no middle class, and that is what the Republicans have been reaching for.

  • kenn

    and now the organism feeds upon itself…

  • Ben Franklin

    Obama and his criminal gang (Bernanke, Geithner and Summers) should be executed for treason. Real change will come when Americans march on Washington, burn it to the ground and kill everyone there.

  • a devils advocate

    “complete dismantling of the socialist entitlement state would fix the problem.” Name one company, one corporation, one bank that hasn’t gotten “aid,” from the state. Either in easy credit or tax breaks or just plain payoffs. So exactly what are you suggesting here? Shutting down Wall Street, The Government, and the Banks? Its a start anyway. Then you say “it would only come once we as a society as a whole hit rock bottom.” Very true then the pirates and slave traders will rule as they did once before. Remember they will also have the drones.

  • John

    the cycle of nations/peoples: bondage-faith-liberty-prosperity-complacency-apathy-dependancy-bondage. repeat. The question is where are we in the cycle? Once this question, the right question, is asked then the answer is obvious. You prepare for this not with investments in paper or gold, but in getting right with God. May God have mercy on us all

  • davo

    The weirdo comments demonstrate what a truly stuffed society you have over there in usa.


  • Expat

    I am not sure what century or crisis you are referring to. What ” punitive taxation exclusively directed at the top brackets” are you referring to? Top brackets have lower rates than under Reagan!

    If the rich are being asked to pay more, it is because they have more proportionally than they have had for a century. Speculators are hardly being crucified either, just asked a few tough questions.

    Your rant is pathetic and off-base, though I agree with the implications the debts will have on our near future.

    But to let the rich and corporations run free (run rampant) over us is hardly a desirable solution either. The system is bent and perhaps broken, but that aspersion applies to the social systems (handouts) and the financial system (hedge fund socialism).

  • http://dailyreckoning mike

    …ocean, o shining sea…spreading expanse in aqua green as far as the eye, o’er the brim ‘neath azure sky, schools of farewells…flocks of good-byes…from dusk to dawn then back to dust, wave upon wave…depth…perhaps we’ll meet some other day…some other time i trust…’til then?…pelican?….

  • Crow

    As a poor slob at the bottom of the taxed-to-death economic food chain I take exception to the fact that the corporate elite pay almost ZERO taxes to begin with and then start bi**hing at the mention of “tax increases on the top brackets,” all the while sipping Dom Pierre Perignon on their 60 foot yachts. Give me a break: I may be monetarily poor but I am not mentally–and morally–bankrupt.

  • Model T

    “Corporate elite pay almost ZERO taxes to begin with.”

    In which of the alternate universes is this? I must move there immediately.

    As a CPA I’ve done taxes for some of these mentally-and morally-bankrupt corporate elites and they all strangely paid much, much more in taxes than I earned.

    I did work for an outfit that built 60 foot yachts for greed-head pig-dog capitalist roaders. The folks that built them all had high paying blue collar jobs. Then came a luxury tax on yachts. (Gotta make the rich pay their fair share, or something). Any guess as to what happened to the number of high paying blue collar jobs?

    Ya gotta stop getting your news feed from Mother Jones…or my Marxist Granny.

  • JR

    ‘Yes, complete dismantling of the socialist entitlement state would fix the problem.’

    Complete dismantling of the Pentagon would serve the same fiscal purpose. And is about as likely.

    You mention ‘wartime debt buildups’ — This is certainly a time of war spending, but without the hardships usually requested of the populace.

  • Morpher

    We Australians look at this kind of rubbish and fall about laughing. The government has debt becasue it didn’t let the stupid banks and funds collapse. It should have let them go down under their own weight of stupidity. The government also has debt because it is spending billions every day — billions — plus the cream of the desperate end of America’s youth, on two stupid wars.

    Stop the wars, and the US can climb out of debt. Easy.

    As for cutting off the pathetically little social support US governments hand out to citizens — well, have you thought about what that would do to GDP? The US would collapse, instantly, into a paralysing depression while the rest of the world looked on — goggle-eyed at US stupidity.

  • Benny franfurt

    You can dismantle the safety net for the bottom 50% – then what?are you hoping the will die spontaneously? Or they will reduce consumption even more? Or somehow they will become more productive?
    Stop these jargon filled – accepted ideas – intellectual sounding articles. And the no-brain tea party.
    When half of Harvard grads go to wall street and zero value add jobs and specialize in getting a biggest share of the pie – there is little hope for us. We somehow need to get our best to create the future and not let wall street or Sarah palin rule the day.

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