US is beyond point where cuts and raising taxes sharply enough can prevent exponential debt growth?

America can now only defer its debt crisis

Whatever action its politicians do or don’t take this week, the US is already bust, writes Jeff Randall.
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Without a deal to raise the country’s $14.3 trillion debt ceiling, the US will default on August 2.

It has come to this: the world’s biggest economy, head of the triple-A club and home of the financial system’s reserve currency, can pay its bills only if it borrows more money. America needs to increase its credit limit by $2.5 trillion simply to get through to next year’s presidential election.

Billions, trillions, schmillions, chill out, why fret over a few more zeros? Well, for context, America’s 2011 GDP (annual output) will be the same as its “official” debt, $14 trillion to $15 trillion.

This doesn’t tell the whole story. The good news is that $4.6 trillion of America’s debt is accounted for by intra-government loans, money the US owes itself. The bad news is that on top of the $9.7 trillion Washington must repay to outside investors ($1.1 trillion to China), it has $60 trillion of unfunded social security and Medicare obligations, ie, welfare pledges to its own citizens for which there is no pot of savings, only the taxes of future generations.

As Dolly Parton nearly said, it cost a lot of money to sink this deep. America’s commercial and military hegemony came at a terrifyingly high price.

In 1835, US federal debt was zero; the country owed nothing. Two centuries later, having become the richest and most powerful nation on earth, America is, quite literally, running out of cash. The problem was explained by Addison Wiggin and Bill Bonner in their best-seller Empire of Debt: not many people can afford to live like Americans; the trouble is, neither can they.

Last year, the difference between what the US paid for imports and received from exports was almost $500 billion. This year, the trade gap with China alone is running at $25 billion a month. As a result of ambitious welfare programmes and military adventures, the Obama administration is running a budget deficit of $1.3 trillion.
According to Warren Buffett, America’s most successful investor, the country has “relied on the labour of others to provide things that can be used every day… this can continue for a long time and on a large scale – but not forever”.
There speaks the voice of common sense. On the other side of the hospital screens, we have media dons, Princeton’s Paul Krugman and British-born David Blanchflower, professor of economics at Dartmouth College, championing fiscal incontinence as the route to salvation.

Aside from their links with Ivy League universities, Krugman and Blanchflower have something else in common: they both admire Gordon Brown, who clocked up £160bn of budget deficits in the boom years of 2003-07. At the core of their thinking, and his, is an unshakeable belief that government spending sparks growth, which is the sine qua non of life, liberty and happiness – and also debt reduction.

But hang on a minute, how come Greece required two multi-billion-euro rescue packages? Did the Greeks economise themselves into penury? Were they guilty of criminal parsimony? Or was it that, thanks to its fraudulent entry into the euro, Athens was able to borrow recklessly, allowing vote-crazed leaders to bribe the electorate with money the country did not have and could never afford? Ah, say the professional spendthrifts, the US is not like Greece. True, it is vastly bigger and so are its debts – and they’re not going away.

A study by Harvard professor Kenneth Rogoff and Carmen Reinhart from the Peterson Institute shows that when public debt tops 90 per cent of GDP it acts as a brake on growth. Their study of 44 countries, going back 200 years, concludes that it would be foolish to interpret today’s low borrowing costs as a green light for further debt. “Politicians everywhere like to argue that their country will expand its way out of debt, [but] our research suggests growth alone is rarely enough to achieve that with the debt levels we have today.”

Boston University’s Professor Laurence Kotlikoff goes further: America is already bankrupt. Writing for Bloomberg, he explained that US debt is much greater than has been declared: “Congress has been very careful… to label most of its liabilities as 'unoffical’ to keep them off the books and far into the future… This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.”
Ponzi schemes survive as long as they are able to attract increasingly bigger contributions from ever more participants. Eventually they collapse under the burden of impossibility. This is where America is heading. It is beyond the point at which it can cut benefits or raise taxes sharply enough to prevent exponential debt growth.
If Democrats and Republicans can cobble together a compromise this week – and the markets still give them the benefit of the doubt – their fix will be nothing more than crisis deferral. Capitol Hill is in the business of Micawberism. What price the Fed resorts again to printing money?

Federal Debt Grows at a Rate of 25 Times GDP, Two Years in a Row

This is the most frightening Post I have put up on this site. It is frightening because it is based on demonstrable facts and our own logical experience.

According to Stockman, $700 billion to $1 trillion in structural deficit reduction is needed and that cannot be done by spending cuts alone. Politically, he is correct. The Democrats and many of the Republicans do not want to cut anything and the Republicans are against any tax increase.

Tax increases without dramatic spending cuts will accomplish nothing and would probably make things worse.
Misapplied tax increases will hurt economic growth and will reduce the revenue available to the government.

Governmental spending cuts will reduce somebody's income by an amount equal to the cuts. That will be deflationary and increase unemployment. There is no painless or simple way to get out of this mess. It is not going to spontaneously disappear.

As an aside, the Democrats are back in town to save governmental union jobs with $20 Billion more in new debt.

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Beware the light at the end of the tunnel
Commentary: It's a debt train about to collide with federal obligations

By David Stockman

David Stockman served in the House of Representatives and was President Reagan's budget director. He was a founding partner at The Blackstone Group and now runs Heartland Industrial Partners, a private-equity fund. This article first appeared on Minyanville.com .

GREENWICH, Conn. (MarketWatch) --

The federal deficit is no longer an abstract long-term problem; it's a financially critical freight train hurtling down the track at alarming speed.

Here's a dramatic way to look at it: Nominal GDP is only $100 billion higher than it was back in the third quarter of 2008. That means it has been growing at only $4 billion per month, while new federal debt has been accumulating at around $100 billion per month.

Yes, this period represents the worst of the so-called Great Recession, but never in history has the federal debt grown at a rate of 25 times GDP for two years running! See "The Road to Recovery: Are We There Yet?"

This time is markedly different in terms of the business-cycle impact on the budget. During the past three quarters of "recovery" -- with real growth of 5.0%, 3.7%, and 2.4%, respectively -- nominal GDP growth has averaged only about 4%. This is steeply below the figure for past cycles when we had 7-10% nominal GDP growth due to higher real growth and much higher inflation.

Consequently, nominal GDP -- the true driver of federal revenue since they tax our "money" income, not the statistical "real" income confected by the Bureau of Economic Analysis and the Commerce Department -- has only grown at $50 billion per month during the last three quarters. In other words, the federal debt still has grown at two times the rate of GDP during what looks to be the strongest phase of the recovery.

Further, if we're in a period of sustained debt deflation, it's extremely likely the GDP deflator will shrink toward zero and real growth will struggle to make 2-3%. Hence, nominal GDP growth is almost certain to be even slower in the quarters ahead -- say 3% or $40 billion per month -- than it has been since last summer. This "realistic" outlook compares with the Office of Management and Budget forecast, which assumes double this level of nominal GDP growth of a 6% annualized rate, or about $75 billion per month.

At the same time, there's virtually no chance unemployment will drop much below 10% in the context of a deflationary "recovery," meaning that budget costs for unemployment, food stamps, etc. will remain elevated, not come down by hundreds of billions as currently projected, either.

Consequently, under the current policy baseline and including extension of the Bush tax cuts -- at a cost of about $300 billion per year -- and with even mildly deflationary economic assumptions, it's not possible for the baseline deficit to drop much below $1.5 trillion any time before 2015.

Triple the debt

So we have baked into the cake a rather frightening scenario: monthly federal debt growth upwards of $125 billion, or three times the likely nominal GDP growth of $40 billion per month -- as far as the eye can see. See "The Main Event: Inflation vs. Deflation."

The publicly held federal debt will be about $9 trillion when the fiscal year ends in September, and since it now is growing at 3 times that of GDP, it should reach $12 trillion at the next presidential inauguration in January 2013. Adding in state and local debt, we'd be at $15 trillion, or a Greek-scale 100% of GDP before the next cabinet is picked.

Every reason of prudence says not to tempt the financial gods of the global bond and currency markets with this freight-train scenario: Do something big to close the deficit, and do it now.

Also, there's no possibility in either this world or the next of obtaining the needed $700 billion to $1 trillion in structural deficit reduction by spending cuts alone. We've had a rolling referendum since the first Reagan budget plan in 1981, and progressively over these three decades the Republican party has exempted every material component of the budget from cuts, including middle-class entitlements, defense, veterans, education, housing, farm subsidies and even Amtrak!

Like Casey, the GOP has been in the anti-spending batter's box for 30 years, and has never stopped whiffing the ball. The final proof is that the one GOP spending cut plan with any integrity -- the "roadmap" of Congressman Paul Ryan -- has the grand sum of 13 co-sponsors, and I dare say half would call in sick if it ever came to a vote. Therefore, tax increases are now needed because it's too late and too urgent for anything else.

Plus, both the Keynesians and the supply-siders are wrong about the alleged detrimental impact on the business-cycle recovery of a big deficit reduction package, including major tax increases. The reason is that both focus on GDP flows, with Keynesians pointing to a subtraction from consumer "spending" and the supply-siders emphasizing a detriment to output and investment.

Blocking the flow

Under present realities, though, the problem isn't the flows; it's the massive, never-before-seen stock of combined public and private debt that's depressing the economy, which overwhelms any "flow" effects from fiscal policy. Specifically, at $52 trillion, credit-market debt today is 3.6 times that of GDP, compared with 1.6 times that of GDP when the original argument of supply-side versus Keynesians opened up back in 1980.

Moreover, this 1980 total economy "leverage ratio" hadn't fluctuated appreciably for 110 years going back to 1870. So I call it the "golden constant," and note that had the total economy-leverage ratio not gone parabolic after 1980, credit-market debt today would be $22 trillion at the 1.6 times ratio.

In short, the economy is freighted down with $30 trillion in excess debt. The process of liquidating the household and business portion of this -- about $24 trillion -- will swamp the normal cyclical recovery mechanisms for years to come. And it's insane to keep adding the mushrooming public-sector portion of the debt or order to artificially juice the GDP numbers for a few more quarters.

Finally, in the context of secular debt deflation, the overwhelming priority is public-sector solvency, not conventional growth. So policy needs to be geared to long-term balance-sheet repair, not short-term flows. In every sector -- household, government, business -- the numbers are awful, and far worse than the bullish mainstream seems to recognize. See "Why Government Spending, Public Sector Jobs Are Burden to Society"

Let me close with one example: At least once a day someone on CNBC talks about the $1.5 trillion in corporate cash on the sidelines and how healthy business-sector balance sheets are.

That's pure baloney. If you peruse the flow of funds, and you'll see that corporate-sector cash assets have increased by $279 billion since the December 2007 peak, and now total $1.72 trillion. According to the same data, non-financial, corporate-sector debt has increased by $480 billion and now stands at $7.2 trillion. Corporate debt net of cash has actually increased by $200 billion during the Great Recession.

Stated differently, corporate debt net of cash was $5.3 trillion or 36.7% of GDP at December 2007 and is now $5.5 trillion or 37.6% of GDP. There's been no de-leveraging in the business sector either -- especially when its noted that tangible assets have also declined by 20% on a market basis and are flat on a book basis during the same period.

Many experts think the € may tumble on the back of the Greek debt crisis

Something very ugly is happening with currencies and to this observer, it looks like the beginning stages of competitive devaluation.

The problem's roots are in the unsustainable amount of government debt, borrowing and spending. We hear about Greece, by any measure a very small country, but Greece does not stand alone with some very bleak statistics, discussed in the video and article. Those statistics are not that far of from those of The United States.

In the most optimistic reading of events, Greece is said to have to cut spending and reduce their budget deficit by 4%. Easily said, but dangerously difficult to do. Greece, like all members of the euro zone, has another problem. It cannot devalue its currency. It uses the euro.

Either at the top, the Germans or French people are going to get tired of bailing out the lesser members of the European Union, or the smaller members will take the easy way out, drop the euro and return to their own currencies.

Unfortunately for the United States, we have a president in Barack Obama who sees nothing but increasing the size of government as the answer to every problem. He is probably the least fit person to fill that office at this time.

We are in trouble, big trouble, but at least we control our own printing presses.

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Can anyone fix the euro puzzle?

A crisis-strewn week has left the single currency on the edge of a precipice, write Edmund Conway and Bruno Waterfield

Published: 12:14AM GMT 14 Feb 2010
Telegraph

The summit started as it meant to go on – in chaos, confusion and unintended farce. The big moment – the heads of state meeting which is supposed to be the centrepiece of every European summit – was scheduled to begin at 10am in the wood-panelled Bibliothèque Solvay in Brussels' European quarter, but as the hour approached, it became clear that nothing was doing. As more time passed, it became clear that something was wrong. Eventually, Herman van Rompuy – the new European president, in charge of his first big set-piece – explained that a snowstorm had held up a number of the participants. The meeting would be delayed by two hours.

It was a poor excuse. Everyone knew what was really holding up the summit. Behind the scenes, in ill-tempered exchanges in private conference rooms nearby, the grand European plan to help prevent Greece sliding into economic collapse was unravelling – and fast. In a radical move, the leaders – from President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany to the European Central Bank (ECB) president Jean-Claude Trichet – had already agreed to throw out the usual European Council agenda and replace it with one topic: Greece's economy. The problem was that no one could agree on what to do about the stricken nation.

By now, the story will be painfully familiar. The southern European nation was having trouble raising money. Never the most sensibly-run economy, Greece had seen its budget deficit balloon to terrifying proportions in the wake of the recession sparked by the financial crisis. To make matters worse, the incoming government, led by Prime Minister George Papandreou, had uncovered the fact that their predecessors had hidden billions of euros worth of borrowing outside their official statistics. The combined effect was to cause a sudden sharp increase in the country's borrowing rates and its default insurance spreads, as investors speculated that it was entering a fiscal debt trap from which it could no longer escape.

In such circumstances, a country would devalue its currency, but this is not an avenue open to a member of the euro like Greece. With investors pulling their money out of the country at such a rapid rate that the interest rate spread between Greek and German government bonds hit its highest level since the creation of the euro, it became clear that someone was going to have to step in and help.

It wasn't merely that Greece, a relatively small economy, was close to collapse; it was that, left unchecked, the panic could spread to Spain, Portugal, Italy or Ireland – all of whom suffer the same ballooning budget deficits and overburdened consumers.

For a whole swathe of euro members to be allowed to crumble would beg questions about the entire euro project. Indeed, as Papandreou pointed out at the World Economic Forum at Davos last month, the attack could be seen as a speculative assault on the euro, targeted at first through its "weakest link". As if to bear out his point, figures from the Chicago Mercantile Exchange released on Monday indicated that speculators had amassed their biggest positions against the currency since its foundation more than a decade ago.

So it was that a week before Thursday's summit, in a bilateral meeting in Paris, Sarkozy told Merkel that France and Germany would have to mastermind some kind of plan to protect Greece. His broad proposal was that the northern European nations should at the least issue a statement promising to stand behind Greece, and perhaps go so far as to spell out how much they would put into a potential lifeboat. Merkel was not convinced. For one thing, she was well aware that Sarkozy had his own political motivations for such a move: the alternative, an International Monetary Fund (IMF) bail-out, would enable IMF chief Dominique Strauss-Kahn, Sarkozy's most likely opponent at the next French election, to ride in and "save the euro".

But, more fundamentally, by organising a bail-out Germany would be seen as providing unfair support for a country which had proven itself incapable of fiscal rectitude. Such a move would not only be hideously unpopular with German taxpayers, it would potentially encourage poorer countries to follow Greece's lead. Moreover, under the German constitution, such moves were legally tricky to organise.

And so the battlelines were drawn prior to a week of frantic behind-the-scenes negotiations as the French and Germans tried desperately to find common ground.

Finally, it seemed as if the ministers had patched together a deal. Some kind of bail-out package – a "firewall" provided by a "coalition of the willing", according to insiders – would be revealed at the summit.

Then came van Rompuy's excuse about the snow. But it wasn't ice and water that delayed the summit. That morning, the key players – Merkel, Sarkozy, Papandreou, Jean-Claude Juncker, head of the euro group of nations, and Trichet – held a last-minute meeting. According to insiders, voices were raised with Trichet and Merkel banging fists on the table as Sarkozy and Juncker tried to push for a bail-out plan. The statement that emerged from the meeting was a thinly-disguised compromise. Three-quarters of it seemed to be focused only on insisting that the Greeks cut their budget deficit by 4pc this year; the final paragraph, which appeared to be specifically aimed at appeasing the French, said: "Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole," before adding: "The Greek government has not requested any financial support."

The hope was that the statement alone would be enough to reassure markets that in the event of a proper "sudden stop" in funding to Greece, the rest of the euro area would step in. However, the financial crisis has proven that without concerted plans to back them up, statements of broad intent are pretty useless at containing market concerns.

Within moments of the statement, the euro dropped to a nine-month low against the dollar and share prices in the euro area stalled. The rot continued on Friday and, according to economists, will persist unless finance ministers meeting tomorrow provide any detail on what a rescue package might involve.

What makes any hopes for clarity appear forlorn is that the euro has no mechanism for dealing with crises of this sort. It is monetary rather than fiscal union. As Martin Feldstein, a Harvard professor, puts it: "There's too much incentive for countries to run up big deficits as there's no feedback until a crisis."

The ECB could offer the country extra liquidity support, but there is a sense that unless other euro nations dip into their pockets the suspicions over Greece will linger – and those about the rest of the euro's debt recidivists. Juncker's plan would involve a web of bilateral loans from euro members, perhaps being made not directly but through state-owned banks, so as to circumvent those German constitutional obstacles.

However, it is an open question as to how the populations of those donor countries will take the proposal that they once again come to the rescue of their misbehaving neighbours. Nor indeed how the Greeks will take it when it emerges that their coruscating deficit cuts and public sector wage cuts are being overseen by the Germans. Although the political will is clearly still strong in Brussels to fight off any talk about a euro crisis, it is clear even to fans of the single currency that this is its single greatest test. According to Albert Edwards of Société Générale (himself not, it should be pointed out, a fan), "any 'help' given to Greece merely delays the inevitable break-up of the eurozone". The problem, he adds, is a "lack of competitiveness within the eurozone – an inevitable consequence of the one-size-fits-all interest rate policy.

"Even if the PIGS [Portugal, Ireland, Greece and Spain] could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative [and probably absolute] deflation."

This problem – that under eurozone rules Germany is able to pursue an entirely divergent economic strategy to its Mediterranean counterparts – suggests that the best course of action may be for Germany to pull out of the currency union, according to former Bank of England policymaker David Blanchflower.

"That might be the only solution," he says. "At the moment it simply isn't working. And the imbalance makes it almost impossible for countries like Greece or Ireland to escape from this situation."

It is not merely economists who have clocked on to this inherent weakness. According to Simon Derrick, of Bank of New York Mellon, the mood among investors feels not dissimilar to the time the Exchange Rate Mechanism faced speculative attack in the early 1990s.

Back then the targets were currencies; this time they are government bonds. But the objective is the same – to test whether governments really have the political will to persevere with a system plagued by inherent economic weakness and illogicality.

Has any hedge fund put its head above the parapet in this destructive trade, as George Soros did back then, owning up to shorting the pound before successfully "breaking" the Bank of England? Not yet, though the rumours are that John Paulson, the man who made billions betting against the US housing market, has significant positions against some of the weaker euro members. But a currency union is rather more difficult to break than an exchange rate agreement. Betting against the Europeans' political will to further integration remains a gamble.
Still, the difficulties have at least offered Gordon Brown a rare opportunity for genuine self-satisfaction. After all, he decided in 2003 – against Tony Blair's wishes – not to join the single currency, and only now is it clear how wise that decision was. Britain, though marred with similar fiscal difficulties as Greece, has at least had the luxury of being able to devalue the pound.

Business Secretary Lord Mandelson, the arch europhile, still clings on to the dream, saying last week: "I think in the longer term it would be in Britain's interests to be part of the eurozone."

Even with sterling, the UK can hardly rest easy. For one thing, British banks have a large balance sheet exposure to the troubled Club Med nations – estimated by the Bank for International Settlements to be around £240bn – so any collapse there would trigger a secondary crisis in London.

Second, the Greek crisis serves as a reminder that no country is immune to a sudden investor exodus. And if one runs one's finger down the list of leading nations, no prizes for guessing which country has a Greek-style combination of rocketing budget deficits, high current account shortfalls and rising national debt.

Obama, wasting your wealth, wrecking your future.

Think this run-away national debt it bad? It gets worse. Look at THIS