Notes From The (debt) Ceiling …



US Navy photographer: Guided missile cruiser USS Leyte Gulf in Atlantic Ocean

 

A few random thoughts about the political drama taking place in Washington .. and in Brussels as well:

– What people have to understand about our world is that it isn’t what it was of ten years ago. Austerity is here. There is no choice between austerity and ‘something else’. Our choice is between a managed form of austerity or the ‘naturally imposed’ variety. The managed form that makes best use of our human resources while the disorderly form is imposed upon us by events.

– Our best resources are our ingenuity and creativity, our willingness to sacrifice for the common good and our discipline. None of these are on display within the establishment which is intent on preserving its prerogatives.

– We are in the middle of a petroleum crisis that has emerged or manifested itself within credit. Relatively scarce fuel is becoming more expensive in both nominal and real terms. The economies are frantically jettisoning other costs — union wages, retirement benefits, interest income or yields, health care, government services — in order to afford fuel. Some costs such as high wage manufacturing jobs in the US have already been shoved overboard. Teachers, municipal workers, pension benefits and health care are all on the gangplank. We can buy fuel or we can have ‘other things’ but we cannot ‘have it all’ anymore.
 

Figure 1: This is the petroleum ‘balance sheet’ for the United States by way of Jonathan Callahan’s Energy Export Databrowser.

 
– Even though the US produces large amounts of domestic petroleum fuel it must import at great cost two-thirds of the petroleum it consumes. Funds have been borrowed to obtain fuel as well as to create the means to use (waste) it. The US has been living far beyond its energy means — as an entitlement — and is now an ‘energy insolvent’. America’s energy use cannot service its energy debts. If the US was not insolvent there would have been no need to take so much expensive finance debt as an ‘energy substitute’.

– If the progress narrative was something other than a myth the use of energy would have earned the US sufficient returns to pay its energy tab out of petty cash.

– The US is much like Italy which cannot produce enough oil for its own use, nor can it profit by what it uses (wastes). America must borrow so that it can continue to import more fuel (to waste) continually digging a deeper debt hole for itself.

– The subtext of the political argument is the death of ‘Too Big to Fail’: that various big business are too large and systemically important to be allowed by the Federal government to fail yet the government itself is somehow small enough to fail.

– The human race has learned grudgingly over centuries of bitter experience the folly of waging war against other humans. Now, the war is directed against nature and arithmetic. What is taking place in Washington and Wall Street and the EU and elsewhere is war waged against exponents.

As a side note: We are also waging all out war against our own atmosphere which has done nothing to provoke our wrath other than to support life on our little space ship.

– The blue line on the following graph represents Federal outlays while the red line represents receipts; taxes and fees. The ongoing recession has cut receipts — this is what 5+ million unemployed cost the government in forgone taxes. Meanwhile, the ongoing care and feeding of these same unemployed persons is shifted to the blue line.

– Also in the blue line are bailout payments to Wall Street since 2008. These bailouts don’t seem to have effected receipts:
 

 

 

Figure 2: The gap between Federal government receipts and outlays by St Louis Fed (FRED).

– The amounts under controversy are substantial, roughly a trillion- and a half dollars per year. The current recession is a big change from previous recessions that had little effect on expenditures one way or another.

– Reinhart and Rogoff make the economic argument for constraining debt:

 

Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown. Countries such as the U.S., Japan and the U.K. aren’t like Greece, nor does the market treat them as such.

Indeed, there is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus. If Asian nations are spinning off huge excess savings partly as a byproduct of measures that effectively force low- income savers to put their money in bank accounts with low government-imposed interest-rate ceilings — why not take advantage of the cheap money?

Although we agree that governments must exercise caution in gradually reducing crisis-response spending, we think it would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an “all clear” signal for a further explosion of debt.

 

– The system is trapped in a conundrum: In order for the economies to grow according to Reinhart and Rogoff the level of debt must be reduced. At the same time the debt cannot be paid down without growth.
 

 

 

Figure 3: The total public and private debt ‘leveraged’ against the Federal budget, the Federal expenditures are insignificant against the totality of public and private debt. The blue and red lines in this graph are the same expenses and receipts as in figure 2.

– It’s not just the Federal budget and operations at risk. A default would obviously effect service of Federal debt, it would also interfere with service of the $55 trillion public and private debt! That little dip in the green line at the top of the FRED chart is the credit deleveraging which took place beginning in 2008. It also indicates how little deleveraging has taken place and how much more is required to bring credit service costs to a level that a petroleum constrained economy can support.

– The very small amount of deleveraging was able to cause a great deal of economic pain What has been keeping further deleveraging from taking place has been the Federal deficit. The ‘poor’ recipients of Federal ‘largess’ have been conduits directing funds ultimately to service debt, which is the ‘property’ of finance. Whether Federal ‘free fiat’ is sent to individuals or corporations or paid directly to banks, the flow is always toward finance.

– Any public deficit is private surplus. The establishment’s efforts to ensure continuing private surplus — so as to continue to service private interests’ gigantic debts — is acting to undermine the the public deficit- service of private interests’ gigantic debts!

– From ‘Stupid Irony’ department: The total debt service @ an average yield of approximately 3.5% on $55 trillion is roughly the same size of the US budget deficit: $1.9 trillion vs. $1.4 trillion. To service the private/public debt the establishment demands that non- debt liabilities such as Social Security and Medicare be reduced (eliminated) and that the government’s cash flow be directed entirely toward debt service — while threatening to cut off debt service if its demands aren’t met!

Wall Street ‘Does the Paulson’, threatening a disorderly deleveraging without Federal concessions on Federal expenditures. doing what Wall Street wants would shrink rather than expand the ability of the government expenditures to service Wall Street’s debts! The establishment has put itself into a box that it does not have the wit to walk out of.

– I’m not the only one to notice the leadership cadres’ “schizophrenia” over this issue. Here’s Michael Hudson:

 

The result is a financial schizophrenia extending across the political spectrum from the Tea Party to Tim Geithner at the Treasury and Ben Bernanke at the Fed. It seems bizarre that the most reasonable understanding of why the 2008 bank crisis did not require a vast public subsidy for Wall Street occurred at Monday’s Republican presidential debate on June 13, by none other than Congressional Tea Party leader Michele Bachmann – who had boasted in a Wall Street Journal interview two days earlier, on Saturday, that she voted against the Troubled Asset Relief Program (TARP) “both times.”

She complains that no one bothered to ask about the constitutionality of these extraordinary interventions into the financial markets.

 

“During a recent hearing I asked Secretary [Timothy] Geithner three times where the constitution authorized the Treasury’s actions [just [giving] the Treasury a $700 billion blank check], and his response was, ‘Well, Congress passed the law.’ …With TARP, the government blew through the Constitutional stop sign and decided ‘Whatever it takes, that’s what we’re going to do.’”

 

Clarifying her position regarding her willingness to see the banks fail, she explained:

 

I would have. People think when you have a, quote, ‘bank failure,’ that that is the end of the bank. And it isn’t necessarily. A normal way that the American free market system has worked is that we have a process of unwinding. It’s called bankruptcy. It doesn’t mean, necessarily, that the industry is eclipsed or that it’s gone. Often times, the phoenix rises out of the ashes.

 

There were easily enough sound loans and assets in the banks to cover deposits insured by the FDIC – but not enough to pay their counterparties in the “casino capitalist” category of their transactions. This super-computerized financial horse racing is what the bailout was about, not bread-and-butter retail and business banking or insurance.

It all seems reminiscent of the 1968 presidential campaign. The economic discussion back then between Democrat Hubert Humphrey and Republican Richard Nixon was so tepid that it prompted journalist Eric Hoffer to ask why only a southern cracker, third-party candidate Alabama Governor George Wallace, was talking about the real issues. We seem to be in a similar state in preparation for the 2012 campaign, with junk economics on both sides.

 

– The establishment’s right hand is arm- wrestling with its left while the ‘default’ position is … just that. The step after is a liquidity shortage … the chaotic deleveraging of the $55 trillion begins …

It’s a measly $20 billion per week in Federal ‘magic beans’ that props up the debt service key man. Yes, the Federal Reserve will provide liquidity, but can the (broke) Treasury guarantee money- and repo markets?

– Instead of futile meetings with various ‘leaders’ in the White House, why not take a page from Franklin Roosevelt’s presidency one step further and hold meetings on a Navy ship. A cruiser such as the USS Leyte Gulf could be used to haul the establishment’s ‘leaders’ up and down the Atlantic Coast until an agreement is reached. No lobbyists, no strippers, no pollsters, no porn, no television, no ‘political advisors’: only dedicated young men and women serving their country. A few weeks at sea would wash away the cynicism and perhaps the example of service set by Navy personnel might cause an awakening.
 

Then again, it might not.

16 thoughts on “Notes From The (debt) Ceiling …

  1. Loveandlight

    Now that we’re well in the mess, it may be pointless to dwell on how we got here, but I’m going to do that anyway. A big part of our national debt problem stems from the legacies of the previous thirty but especially ten years, namely the Bush tax-cuts for the super-rich, three wars of choice, and a bloated Department of Defense that could stand to be cut by 25% *at* *least*.

  2. Bill Hicks

    Great post…explains the situation as well as I’ve seen it explained. I don’t think putting our so-called “leaders” on a navy ship would help. They are too thoroughly corrupted by their Wall Street masters.

  3. Jb

    I think a forward operating base in Afghanistan would work too. Preferably one without air conditioning.

    “At the same time the debt cannot be paid down without growth.”

    So what’s the game plan here? The banks will extract every dime they can from the middle class debt until the system falls apart and there’s rioting in the street? The suspense is killing me.

  4. steve from virginia Post author

    A friend of mine ‘in the know’ tells me there is no motion on fixing the debt ceiling in DC, none- zip- nada.

    It’s been discouraging b/c ordinary politics buys time and tries again later. Now I do wonder if the mighty US is going to default before pathetic Greece? What a world, eh?

    With the bosses on both sides of this fracas it’s hard to see how it will be resolved. Write letters and keep fingers crossed.

    Don’t misunderstand, I don’t expect business as usual to carry on but buying time would leave some ‘transitional’ resources.

  5. Rob

    Sometimes there is no good outcome. Like when you eat unhealthy food, smoke and drink too much, and do not get any exercise for 30 years. Upon your first heart attack you wonder what you should do to fix the problem. But it’s too late, the damage is done and you will die younger than you needed to.

  6. Reverse Engineer

    The Half-Time Solution
    7/14/2011
    http://tech.groups.yahoo.com/group/reverseengineering/

    By no means do I expect this to happen, but tonight I thought I would muse on
    what would occur in the event the Pols in Washington continue to bicker and
    can’t come to some agreement of raising the debt ceiling. I mean besides the
    fact it would send the markets into a complete tizzy and there is no predicting
    what the outcome of that would be overall. Just how would it play out on Da
    Goobermint level, in terms of an orchestrated shutdown, a la the current
    “shutdown” of Goobermint in MN?

    Obama-sama has pitched out the scare tactic threat of halting SS checks.
    However, why would that be necessary? Just send out checks for half the value,
    with an IOU check for the other half to the aging senior. Now you already are
    saving a shitload in terms of your monthly expenses. Enough of them will croak
    immediately from a heart attack to save a lot more the following month as well.

    Similarly, you send out Medicaire payments to docs half of what they are
    supposed to get, other half in IOUs. The Docs will revolt, saying “I can’t make
    a living on this and I will QUIT!”. (and do what instead to make a living, I
    might ask?) Lots of docs will of course go outta biz, along with hospitals, but
    so what? Next month, that’s fewer payments to send out. Sure it would make for
    longer waits for medical care and more people would die, but again that would
    save a lot of money down the line.

    I’m pretty sure these two steps alone would resolve the balance of payments
    problems between tax receipts and expenditures, but then again you have the
    whole Big Ass Military you could send out half-size paychecks to, with the other
    half in an IOU check. WTF are grunts in Afghanistan going to do if their
    paychecks are cut in half? Switch sides and start fighting for the Taliban?
    They can’t get home anyhow without transport from Da Military, and they can’t
    stay alive without Ammo and MREs from the Military, so they gotta keep fighting
    until Da Goobermint brings them home. Going AWOL in Afghanistan would seriously
    not be a good idea for your average grunt.

    Far as home based support staff for Da Military is concerned, if you cut their
    paychecks in half and give them half IOUs, they’ll be pissed off, but how many
    will actually quit? Like the Doctors, to do exactly what else? Take a Fast
    Food job at Mickey Ds, if they can get one?

    What about all those Treasuries currently maturing in the vault of the People’s
    Bank of China? EZ! Give the Chinese half the face value of the Treasury Bond,
    and the other half as an IOU! Will they buy any new Treasury Bonds? You might
    think not, but then again a new “Default Insured Bond”, “DIBS” could be offered
    up GUARANTEEING they would be paid! LOL. Even if they don’t buy any new
    Treasuries, the Fed will, so really there is no issue with giving the
    half-finger to the Chinese. 🙂

    Is this “Half Time” solution Deflationary? Of course it is! The Seniors, the
    Doctors and the Military personnel are going to have like ZERO discretionary
    income after this, at least until they stop paying their mortgages anyhow. Are
    the TBTF Banks going to have further balance sheet issues? Of course they will!
    No problem there though, Da Goobermint issues them IOUs also, which the FASB
    allows them to use as Tier 1 Capital.

    Now of course, some of the Oldsters with Guns who did NOT croak from a heart
    attack will likely get a little pissed off here, and Bonus Army of them will
    march on Washington. So now you have a bunch of Half Paid Social Security
    recipietns facing down a bunch of half paid National Guardsmen. Who wins that
    battle? The NGs likely, unless they are absolutely swamped by the numbers and
    also fold with respect to the idea of firing on a bunch of feeble oldsters with
    shotguns. LOL.

    Obviously this is a satire (sort of), but what I am trying to demonstrate is
    two-fold. First off, on a Goobermint level and monetary level, even in the
    event of a stalemate in the Deficit battle, many options still remain in the
    arsenal of Da Goobermint to manage the crisis. Second though is that ANY option
    taken here will result in a severe social dislocation that inevitably ends in
    some kind of dissolution of the current monetary system as well as our current
    Goobermint.

    Raising the Debt Ceiling OTOH allows for more Extend and Pretend and for the
    Shell Game to be played a while longer here. Other than for reasons of
    completely suicidal tendencies and/or the failure of political systems to
    function, CONgress Critters absolutely must vote to extend the Debt Ceiling or
    force Obama-sama to do this unilaterally, which he will do since he is basically
    a pawn of the TBTF banks, and they simply cannot continue to exist without
    further debt issuance by Da Goobermint. I am sure a similar problem faced the
    Romans in their time, and they made the obvious choice to Extend and Pretend by
    debasing their currency of the time, mainly silver Coinage, by gradually
    alloying it with base metals more commonly available. This extended the
    collapse of the Roman Empire over decades, if not a century of time. Can we
    extend this collapse to such lengths through currency debasement? I doubt that,
    but I don’t doubt that it could be extended a decade now or possibly a bit more
    than that.

    However, our society has a more real and immedite issue than the Romans ever
    did, which it is so dependent on Oil to run so many complex systems. Roman
    systems were very simple by comparison. Techonology has added a layer of
    complexity to this mix, and anywhere along the line of sytem failures possible,
    when critical ones fail it could be close to instantaneous and the chaos that
    would ensue instantaneous as well. The easiest one to picture is a failure of
    the Electrical Grid on a large scale, and that does not necessarily have to
    happen inside FSofA borders. If/when the Mexican Grid fails, Wetbacks will be
    swimming the Rio Grande by the thousands every day. Are we really going to
    shoot them all down? I suppose it is possible, but I just don’t see how it
    realistically would happen, control of the situation would eventually be lost
    anyhow even if such a thing was undertaken.

    So, although I think a “slow” collapse is more likely, “slow is a relative term
    here. It means it probably won;t happen overnight here in the FSofA, but over
    the next decade its going to get so bad in so many places that control will be
    lost, critical infrastructure will fail, and eventually a Tipping Point will be
    reached. The 12/21/2012 date the Mayans put up may be corect for some very big
    changes, but in fact the inexorable slide downward began quite a while back,
    pretty much when local Peak Oil was reached inside FSofA borders in the 1970s.
    We are just now reaching Critical Mass and waiting for the Big Explosion to
    come. It is not likely to come tomorrow, but come it will in the next decade or
    two, we can be sure of that. Its not going to take a Century for Industrial
    Civilization to collapse here. No way, no how.

    RE

    1. Fourier2020

      Of course we have options in the USA! Geez, when I think of all the places I have been and how bad some of them were. I watched a vendor and customer yell at each other over a 5 cent difference in price. I watched what had formerly passed for middle class people literally thrown into the streets. The problem is that Americans are spoiled and insular. Half the world would kill to be in the “mess” we have gotten ourselves into. That won’t stop us from over-reacting and making the situation far worse. Look what happened after 9/11.

  7. Josh

    “Cheap gas and the US can ride out this one. I’m looking @ gold, which might be the ‘new 2008 oil’. It might spike to $3000 (then collapse).”

    Good call, Steve. I was a major gold bull back in 2001, but then when G Gordon Liddy, Alan Greenspan, Alex Jones and Gerald Celente all got on the bandwagon I became bearish. I even had a theory that Michelle Obama’s gold inauguration dress was an occult buy signal on the metal.

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=acrGvxBXPDfk
    “What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.

    http://www.huffingtonpost.com/2009/01/20/michelle-obamas-inaugurat_n_159344.html
    “Michelle Obama looks particularly chic today in a pale yellow gown by designer Isabel Toledo.”

    Anyway, the trend is still the friend of gold bugs, and Judas sold his soul for silver, not gold, so here’s to GC-$2000.

    http://i55.tinypic.com/11klc88.jpg

  8. Jb

    From your post at ZH:

    “The cars will go b/c the fuel to run them will be too expensive and car makers won’t sell enough to keep the factory doors open.”

    http://www.zerohedge.com/article/guest-post-us-economy-extremely-vulnerable-recession-2011#comment-1464264

    I wonder what kind of drop in sales we need to see a major international car manufacturer call it quits. Cars have multiple tiers of suppliers, everything from the flat screen on the GPS, the foam in the seats, the air filters, etc. Liebig’s Law applies here.

    http://en.wikipedia.org/wiki/Liebig's_law_of_the_minimum

    Who is gonna buy a car without say, tires, for example. So maybe it’s which industry in which third world country is going belly up first because of food costs, electricity shortages, drought ( http://www.drought.unl.edu/dm/monitor.html ) – you name it. We started to see this with Honda and Toyota after the earthquake in Japan. Once that ball starts rolling, it’s time to get out of the way.

    One day we will look back and say that Japan’s 20 year ‘slump’ was really the first signs of an industrialized nation succumbing to the effects of peak energy, demographics and debt.

    Thank you.

  9. Josh

    Speaking of debt, the chart that really catches my attention right now is the 30 year treasury bond. Even though the short end of the curve is pinned at zero, the long end has been making higher lows since the big bank buying binge spike down to 2.5% in early 2009. After the too-big-to-fails finished loading up on t-bonds the thirty year ran right back to 4.75% where it was before, and it continues to run back to that level even as short rates fall.

    http://i55.tinypic.com/jajgiw.jpg

    The gold trade just looks too crowded to me, and since it regained its luster right after 9/11 when the dollar began to tank, I’m on alert for the yellow metal to become tarnished.

    If Moody’s downgrades our debt, then the market will demand higher rates. This in turn will cause the greenback to rally as a currency gains relative value as domestic interest rates rise. The tea partiers putting a cap on the debt ceiling = stronger dollar. Higher interest rates = stronger dollar. Eurozone defaults = stronger dollar.

    1. steve from virginia Post author

      I’m a dollar bull right now, too. They’re going to get scarce in the US and with most of the cash offshore, there will be (costly) strategies to repatriate enough of them to make a difference.

      I wouldn’t be surprised to see a +100 bp rise in some lending rates as a consequence. The Fed is going to trying to plug leaks in the rate dam with all of its fingers, toes, dick, etc. The spread I’m going to watch is funds rate/libor which will mimic repo rates. I’m thinking that collateral for repos is going to be one gigantic mess. Unlike 2008 when counterparties were questioned, the guarantor of counterparties will be questioned in 2011. This ‘question cost’ will be borne by someone, to the tune of $100bn per week.

      Keep in mind $50bn or so is already gone from debt service b/c of the end of QE. Watch repos and money markets.

      Gold: it has three advantages: a) it can be bubbled b/c the paper gold markets are still intact so specs can dive in and push the asset value, b) it is liquid … so far. Gold is more liquid than cash (try to get a million in cash out of a bank). A million in gold is easy to buy and it can go into a gym bag. Who’s to know? c) Gold is the best hedge for currency value to date w/ inverse correlation to dollar index. 10-15% of a hoard in gold and you’ve covered yr cash exposure to currency ‘issues’. Silver would probably work, too.

      Problem: when gold — or any other commodity — becomes too valuable it becomes far less liquid, people hoard it.

      No market is predictable you have to cover your bases …

      1. Jb

        Even James Turk talks about selling gold ‘at the right moment’:

        http://www.chrismartenson.com/blog/james-turk-gold-our-defense-against-fiat-currency-graveyard/60423

        I agree with N. Foss here: the trick is holding on to it till then. Here’s a similiar perspective from Steve Meyers: (H/T Jesse’s C.A.)

        http://www.youtube.com/watch?v=OoJRTN6ObZc&feature=channel_video_title

        Are charts useful when confronted with open war in the MENA, or a revolt in western China or cars with ‘tires sold seperately?’

      2. steve from virginia Post author

        This started out as an energy blog, I was hoping to turn it into more of a culture blog and now it is becoming a currency blog. Unintended consequences in action, eh?

        The future is unpredictable, so you have to stay ‘uncommitted’. I like currencies! We are having good discussions here about them.

        Gold is a funny animal b/c it ‘acts’ like money but almost never circulates even is specie regimes. It’s a hoardable. You get bi-metalism, tri-metalism, gold-backed fiat, semi- gold-backed fiat, this that the other and periodic abandonment of gold as money altogether. A long period of non-monetary gold just ended a few years ago.

        I think the return of the ‘gold idea’ is a part of the return to economic activities of the past. Our future will be more like the end of the 19th century without the great art, brilliant music, delicious food, fun entertainments, skill level, design, craftsmanship, intellectual depth or level of poetry. We will probably have a currency regime out of that time frame. Read your Bagehot. We may not have computers in 10 years. Nobody can predict the future.

        Nicole is right about a lot of this stuff. It’s ‘in the air’ but a lot of folks get caught up in their own propaganda. The economists obsess about money costs and leave off energy. Managing energy flows IS what economies do. Economists are like plumbers who don’t understand water.

        At the same time, I trust the charts. Markets are real albeit a bit ‘fast’ or ‘slow’. I look at petroleum prices first every day. It all means something but what …?

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