Sunday, March 22, 2009

A Trillion Here, A Trillion There…

And pretty soon you are talking about real money. What I’m concerned about is an economic reinforcing feedback loop similar to the climate change loop that is accelerating warming. For instance, as warming melts ice and snow which reflects the sun, dark colored earth or sea, which absorb more heat, become exposed, thus intensifying the cycle.

Now we have the figurative printing presses of the fed and treasury running full speed making more than two trillion dollars of new money. Part of it is being used to buy treasury bonds with the purpose of increasing liquidity; that is, there’ll be more cash to lend in case anybody wants to borrow it. The other half will be used to exchange good (though somewhat depreciated) cash for toxic trash investments. The purpose of that is to relieve the banks of responsibility for stupid decisions and incidentally give them a lot more leeway to reward fantastic bonuses for spectacular failure. Without their ‘best and brightest’ where would the banks be today?

By the way, the US government, which owns 80% of AIG stock through $170 billion of bailout cash, considers AIG’s contracts to pay bonuses to its execs inviolable, but required GM’s employees to forego their contract benefits in order for GM to get only $14 billion. Do I see a double standard here?

The money press run immediately caused the dollar to slide 4% against the Yen and Euro. When the value of the dollar goes down, the cost of imported commodities - food, industrials – goes up to compensate. This also causes the trade deficit to go up requiring the US to borrow (print?) more money. The US already needs to borrow nearly two trillion dollars to pay for this year’s budget deficit. This will essentially flood the market, further cheapening the dollar and causing interest rates to rise. Rising interest rates means higher cost for servicing America’s ten trillion dollar debt.

Either way, printing money or borrowing, inflation will be the result. Inflation combined with today’s very low interest rates are bad for savers: saving needs to replace borrowing and spending if the US economy is ever to right itself.

While it’s true that some people understand the severity of the present downturn as equal to the Great Depression, the general feel for tackling the problem relies on thinking of it as just one more recession, albeit a grave one. That thinking allows the pundits, including some I have a lot of respect for, to use statistics like debt as a percentage of GDP to justify these great public expenditures, saying the US debt was much worse, for instance, right after WWII.

Yes, but the population of the US was less than half what it is today and the population of the world an even smaller percentage of today’s. Yes, but natural resources then were virtually, or seemingly, unlimited and thus very cheap; and besides people lived in much smaller houses and lived a much simpler, less acquisitive life. Yes, but there was no consciousness of climate change, no need to consider water shortages or fret over the world approaching - with the impacts of climate change factored in - the limits of food production.

Yes, but the US owes its senior citizens nearly three trillion dollars because it’s been borrowing from the Social Security Trust Fund for the past 25 years, using the excess received from payroll taxes to pad its general budget; funding, for instance, it’s wars and tax cuts for the wealthy. Very soon the extra 200 billion dollars a year from payroll taxes it has had access to will reverse and the government will have to start paying that back further stressing the budget.

A perfect storm is brewing for the US economy and society. Meanwhile, Europe seems relatively unconcerned. American policymakers have been pushing Europe hard to spend more money on stimulus packages to little avail. The answer can be found in Europe’s generous social safety nets. In America, barely half the unemployed are eligible for unemployment benefits, meaning the potential of widespread destitution when jobs vanish. Across the Atlantic, in contrast, all are generously covered so there is no great push to run massive budget deficits to ‘jump start’ the economy. People don’t lose their health care when they are no longer working. All in all, the crisis is seen in much less stark terms. They will not face the same crushing debts.

Prevailing wisdom says don’t worry about the debt, all we have to do is get the economy back on track and tax revenues will increase to cover it. But what if the economy isn’t resusitatable? What if it stays in the doldrums and then food prices spike? There are a lot of conditions that could bring that about. What happens if commodities like oil rise again? It’s still a limited resource and we’re still using it up at a fast pace, even if not as fast as during boom times.

I fear Obama, as smart and well-intentioned as a president can be, is making all the wrong moves. The only consolation is that everyone else who might’ve occupied that office in his stead would’ve reacted at least as poorly. Still, not much consolation when the perfect storm hits.

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