The Rich are Different?
The 1.5 Trillion Deficit per Year. Still You Say The Rich are Different?
F. Scott Fitzgerald told us decades ago that the rich are different. Pimco’s Gross passes on those sentiments with a few comments in his latest INVESTMENT OUTLOOK for June. He observes that it will be much more difficult to get “filthy rich” using other people’s money now due to all the new burdens of regulation, deleveraging, taxation increases and limits on how much one can make. Interestingly, and worrisome, is the observation that the list of big money individuals on the FORBES 400 list includes less Americans. The money is moving globally. More rich people are foreigners. He sees that as troublesome since it indicates that US wealth producing capability is less. The US standard of living will decline. Lower salaries and continued high unemployment rates will go on. Our triple A credit rating may be at risk. We were warned recently by the evaluators. We may become a double A like Japan, or suffer the UK’s embarrassment. Our debt is huge. Our predicted rate of economic growth is only 1%, not the normal 2-3 %. We can’t earn our way out of this.
We are told by the administration though that they know such a debt level cannot continue long term. We will return to fiscal responsibility and conservative budgets as soon as this crisis is over. We can’t grow out of this at a 1% growth rate… We can’t increase tax levels to do it either. There aren’t enough rich people to tax and the middle class can’t help close the gap.
Let’s look at the multiple snags we yet have to get by. First, we have a health care reform being pushed by the administration and Democratic Congress. They want it enacted by year’s end. Its cost is a 13 figure number: try 1,000,000,000,000.That’s just 13 figures to show how big it is. Other bumps need to be avoided too. Medicare, Medicaid and Social Security are the land mines everyone still ignores. If we have 11.3 trillion now in dollar debt and we add the health care tab in, we still need to look at a 40 trillion dollar unfunded liability for these programs over the next twenty years. Ration care, raise the age limits and lessen the benefits are real possibilities for the next generations to accept.
Gross reports that we have a conservative debt ratio for the US of 45%. With these liabilities (the 1.5 trillion deficit per year), that will rise to 100% quickly. How do we pay for this? Will China buy our bonds? Does anyone want them any longer? No, they are looking elsewhere to diversify. China is buying gold, and buying goods from other nations. To accommodate this debt level, interest rates will climb in Treasury bonds. We see that now. The dollar will continue to weaken. It is at its lowest levels in months. The Federal Reserve will continue to buy up 400 billion in Treasuries and Agency bills each year. The balance sheet gets more unbalanced. What to do? Balance the budget as the economy gets going. We cannot sustain this level of debt.
June 13th, 2009 at 12:53 am
Our economy basically collapsed in the summer of 2007 when the home mortgage market started to sag after 6 years of artificially low interest rates had inflated the value of property to ridiculous levels. The securitization of the mortgages also enabled this to happen as it removed individual properties as the basis of the underlying security of the loans through bundling, mixing up real estate as packages rather than individual properties. Our economy became a runaway train as the engineers kept the pedal to the metal, kept it running full speed and even started cannibalizing the train itself, running historically high deficits, throwing peices of the train into the boiler to keep it going. The real explosion occured when the boiler blew and all the hedge fund derivatives and credit swaps started to kick in. Suddenly, all those bets that the economy could only go up (derivatives) failed and all the bets to limit the losses kicked in (credit default swaps). Money lost on the up bets and the downside bets were so substantial and leveraged that there really wasn’t enough money in the system to accomodate them, especially as in the wake of the massive sell off to cover these losses, the market dropped approximately 50%. In fact, there still isn’t enough money in the system to cover all the leveraging. That doesn’t mean that the runaway train has stopped though, it’s momentum is still keeping it hurtling down the tracks and so now the engineers are trying to patch up the boiler and are printing up a bunch of new money to throw into it, in hopes of keeping the train going. If we don’t get the train going again, it will stop, we’ll all have to get off the train and start walking. Where we stop may not be to our liking, it will be unknown terrain, very possibly in inclement conditions, and perhaps far from any stations or security, perhaps amongst predators. We shouldn’t want to do that, when an economy comes to a dead halt it means that suddenly everything is tossed, lives are lost, all wealth is redistributed, governments change and not necessarily in a smooth transition. As such, we are in a race to print up as much money as we can as quickly as we can and hopefully re-create the economy. The old saw about how the last great depression was that it really didn’t end until the second world war started. But that entailed deficit spending as well, as factories were fired up to produce weapons, men were uniformed up to go kill other men, and we suspended the usual rules of economics to go and blow up all the stuff we made and others made. I think we really have to see this as a war where a cash neutron bomb was detonated, destroying all the money and leaving the buildings and people behind, what has happened is that due to a lack of regulation, gamblers got into the economic system and completely crashed it. Now, as the whole system is on its back, and discredited (must all capitalist economies boom and bust?) people are understandably wanting some security against, disease, starvation, exposure and old age. Money is a completely human invention and more an article of faith than fact, it is fake. If someone can be fed, should they starve? If someone can have shelter should they live in the open? If someone can be cured, should they suffer with disease? If someone gets old, should they be discarded. Such questions are hauntingly similar to the questions asked by religions because both are matters of beleif, not reality. It may not be to our liking, most of us having been brought up as rabid capitalists, entrepreneurs, and beleivers but the reality is overwhelming, our economy is in ruins due to speculators and a lack of prudence by those who were supposed to be gaurding the bank vaults. Improprieties were allowed and now confidence needs to be restored. Let’s try and get the train going again at any cost, because if the train stops, the cost will be incalcuable.