Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Unsound Banking: Why Most of the World's Banks Are Headed for Collapse - 21st Apr 15
Bitcoin Recent Low Price Volatility Might Be Deceptive - 21st Apr 15
Currency Wars Back As Russia Buys Gold - One Million Ounces in March Alone - 21st Apr 15
The Greece 'Grexit' Issue and the Problem of Free Trade - 21st Apr 15
Why Europe Lets People Drown - 21st Apr 15
Wealth Destruction for the 99.9 Percent - 21st Apr 15
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15
Gold & Silver Alert: Silver Stocks’ Signal - 20th Apr 15
Now is the Time to Buy Resource Stocks, Especially Gold Equities - 20th Apr 15
DJ Transportation & Utility Averages Suggest Stocks Bull Market Is Over - 20th Apr 15
Crude Oil Price Bull Market Hope - 20th Apr 15
Stock Market Bears Get Slaughtered Despite Greece Counting Down to Grexit Financial Armageddon - 20th Apr 15
The Rise of the Paper Machines - 20th Apr 15
Gold and Silver Inflection Point - 20th Apr 15
SP500: A Butcher's Stock Market (Chop Chop Chop) - 20th Apr 15
Are Stock Market Bears Slowly Gaining Control? - 20th Apr 15
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15
Inflation, Central Banks, and Business Cycles - 18th Apr 15
Stock Market Correction May be Nearing End - 18th Apr 15
UK Housing Crisis, Immigration, Population Growth, Election Forecast 2015 - Video - 18th Apr 15
Q1 Corporate Earnings Risky for Stocks - 17th Apr 15
US Stock Market Getting Scarier by the Day - 17th Apr 15
Stock Market Watershed Day - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
King Dollar Hurting Stock Market Corporate Earnings! - 17th Apr 15
Production Declines Hide Bigger Crude Oil Storage Issues - 17th Apr 15
Top Three Takeaways From Today’s OPEC Crude Oil Report… and How You Can Profit - 17th Apr 15
How to Profit from Australia's Healthiest Biotech Stocks - 17th Apr 15
What Is Really Driving Gold Price? - 17th Apr 15
Will Ever More Boomers Selling Retirement Assets Change Investment Prices For Decades? - 16th Apr 15
Won't Be Contagion with 'Grexit' Greece Euro-zone Exit - 16th Apr 15
Sharp Decline in USD/CAD and Its Consequences - 16th Apr 15
Blackstone is like Apple, Google, Hermes, Boeing - 16th Apr 15
The Most Dangerous Financial Headline I've Seen Since the 2008 Crisis - 16th Apr 15
Is Legal Tax Avoidance Extinct in the UK? - 16th Apr 15
Why Russia Will Send More Troops to Central Asia - 16th Apr 15
More Thoughts on the Current Crude Oil Market - 16th Apr 15
U.S. Treasury Secretary Warns Greek Exit Will Cause Enormous Disruption and Hardship - 16th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

Stop Hyperventilating about Federal Debt: USA Is Heading for Party-Time Again

Interest-Rates / US Debt Dec 09, 2011 - 05:30 AM GMT

By: Andrew_Butter

Interest-Rates

Best Financial Markets Analysis ArticleAn interesting component of the current atmosphere of angst in America is collective amnesia. Everyone seems to forget:

1: There was a very expensive war. Whether the war was in fact “necessary” so as to Keep America Safe, is debatable. But putting that to one side, it most certainly did not generate a return on investment in the form of looting and pillaging…which always used to be the main justification for going to war in the old days, and that in the cold light of debt servitude, arguably remains the only fiscally-responsible reason for going to war…ever…so long as you win!


2: The war was “financed” by tax cuts, or in other words by debt.

3: There was a credit crunch caused by a brilliant theory which had proved beyond all reasonable doubt that (1) economic prosperity could be achieved by increasing the level of home-ownership, and (2) the best way to do that was to use the GSE’s to help to harness the magical “free-market” powers of securitization to make mountains of credit available so that the new home owners paid twice as much for their new houses than they would have in normal circumstances. There is a widespread consensus nowadays that there was what in a rare moment of lucidity Alan Greenspan called, “a flaw”, in that theory.

4: When the “flaw” was recognized, well there was a bit of consternation, because banks discovered that what they had previously thought were AAA assets, which they had bought on margins of up to 30:1 turned out to be worth a lot less than the somewhat optimistic valuations that they had used to calculate their bonuses…back in the days when there was a widespread belief that house prices would go up forever.

5: And so the “lender of last resort” stepped in, which in a fiat monetary system is the standard Plan B response when “flaws” in brilliant socio-economic theories are discovered. But even so tax revenues plummeted, particularly since they had previously been bolstered by taking a share of the “profits” that the banks had declared so as to maximize their bonuses, and thus the Federal Government had to borrow heavily to honor prior commitments, i.e. to pay for the fiscal sins of the past.

6: On top of all that, oil prices went through the roof, and since Americans don’t pay any significant tax to finance their divine right to waste imported oil, that caused even more problems.

7: Then the hyperventilating hyper-inflation doomsayers all came streaming out of the wood-work, screaming blue-murder that the end of the world was happening, and that the whole problem was caused by entitlements, unionized-teachers, illegal immigrants, and closet homosexuals in the Military; and if the “money-printing” didn’t stop This Instant then America would never be Great ever-again. That was a superb theory; although three years later there are reasons to suspect there might have been a “flaw” in that one too.

Fast forward to now:

These days everyone says that President Obama lost the plot.

They conveniently forget that he got left a stinking pile of garbage to clean up. Of course that’s the American way, all show and no trousers; everyone remembers a great party (vaguely), but no one remembers the black boy that comes-by in the morning to sweep up the mess. Except for the vocal few who wake up from their hangovers and berate the lazy bum for not working faster…so that they can all start partying again.

This is a chart of year-on year increase in US Federal debt in nominal terms; there are two lines (1) Total outstanding US Treasuries, and (2) Total outstanding US Federal debt which includes IOU’s written to entities such as the “Federal Old-Age and Survivors Trust Fund”.

End 2008 US Federal debt was going up at 25% a year, end 2011 it’s going up at less than 5% a year, which is less than nominal GDP growth, the main difference from before was that previously the Federal Government used to write about as many IOU’s to the “Federal Old-Age and Survivors Trust Fund”, as they issued Treasuries, no more.

But what’s not to like about that, given that the party-boys managed to create one of the biggest financial crises the world has ever seen?

OK that doesn’t include un-funded obligations hidden “off-balance-sheet”, but one thing at a time, you can’t mop the floor, AND polish the silver, AND show the party-boys you got a Green Card, all at the same time, multi-tasking is good, but that’s ridiculous. But the good news is definitely that the floors will be scrubbed, and the silver will be spotless, in time for the next party.

My only concern is that the cleaning-boy is doing too good a job, according to my analysis US Federal debt needs to hit 134% of GDP before it starts to go down again, less than that and effects of the anticipated de-leveraging of private sector debt will cause extreme hardship to poor Americans (although us party boys, we don’t care about that), but more important, that will constrain the recovery of the private sector, and I hate to say that I broadly agree with that bleeding-heart-communist Paul Krugman on that point; unemployed Americans did not cause the credit crunch, making them suffer won’t solve that problem.

http://www.marketoracle.co.uk/Article20418.html

But I suppose that’s a good reason for bringing back the party-boys, they sure know how to pile on debt!

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014