Wednesday, August 17, 2011

3rd Grade Antics

Thanks to the Repugs’ take-no-prisoners approach to governing, and Standard and Poor’s subsequent downgrade of the US’s credit rating, people over the world think America’s in financial trouble and may not be able to meet its commitments. While America’s financial problems are real enough - actually very serious, in my opinion - the real problem is political.

S & P’s report detailing its reasons for the downgrade made very clear that the Repugs intransigence regarding raising taxes was key to its decision (bet you didn’t hear that in the corporate media). The fact that they got the mortgage backed securities debacle totally wrong, giving top rating to every toxic security that came its way, detracts but ultimately doesn’t change the impact of the downgrade. In addition to the need to raise taxes, S & P said $3 trillion in cuts over 10 years wasn’t enough, it should be $4 trillion. However, when you consider this year’s deficit is $1.5 trillion neither $3 nor $4 trillion over 10 years is taking the problem seriously.

Looking at it realistically, considering 40% of the US budget comes from borrowing, there’s no way to bring it into balance only with spending cuts. There’d need to be significant tax rises or a booming economy in addition to the cutbacks to balance the budget. Since neither is on the horizon the situation can only go from serious but tenable to total wipeout. At this point the debt is so large, it’s not enough to reduce the deficit by 25%, the budget has to balanced, and soon, because there’s no longer very much leeway for any significant deficit spending.

If you want to get a close look at the US budget and debt figures there’s a fascinating website called which gives a running count of debt, income, etc. The total budget is $3.4 t, the deficit is $1.5 t, the top three budget items are Medicare/Medicaid at $800 b, Social Security at about $725 b, and defense at $700 b, so you’d have to totally eliminate two of three to balance the budget without new taxes.

More than 70% of Americans think taxes should be raised on incomes over $250,000 - 3% of the total - and large majorities are against any cuts to Social Security, Medicare and Medicaid, but since neither Obama nor the Congress seek any longer to represent the American people, the only way forward for them, though not enough to actually make a difference to the deficit, are cuts to programs that impact everybody but the rich.

Meanwhile, US corporations are sitting on $1.9 trillion dollars of capital reserves, enough to cover the deficit with $400 billion to spare. As mentioned in an earlier post a one time 10% wealth tax on assets over $1 million would also completely cover the

deficit. The wealthy are untouchable but their greed is going to bring the system down. Tom Toles, political cartoonist for the Washington Post had a great cartoon a while back. It showed a fat cat standing in front of an imposing edifice overflowing with money labeled ‘Corporate Cash Reserves’. He’s talking to the peonage saying, We’ll start hiring again when you find the money to buy stuff. There’s no money to buy stuff because the wealthy are hoarding the resources, or collecting on the massive personal debts owed by the commoners.

Our proverbial fat cat is a ‘job creator’ according to the Repugs, and shouldn’t have to pay any additional taxes or he won’t create jobs… but clearly he’s not interested in creating jobs. If he did care to invest his $1.9 trillion of loose cash in America, the economy would be booming, a lot more people would be paying taxes and the deficit would decrease sharply.

The US debt to GDP ratio now stands at about 97%. Next year it’ll be about 107% even with the cuts now in the pipeline. In five years, it’ll be up between 140 and 150% of GDP. As long as investors are still willing to buy US Government bonds at current interest rates of 3% or less, servicing the debt will not be a great challenge. Japan has the worst debt to GDP of any country - 220% - but since its people are willing to lend it money at rates of 1% or less, the country can carry on racking up debt for at least some years in the future though certainly not indefinitely.

With the world racked with financial insecurity, many investors see safety in US bonds, but with the US government going all out to weaken the dollar with very high deficits and debt, 0% interest giveaways to the banks and large scale money printing, that cannot last. At some point the tide will turn and interest rates will shoot up. That could happen from investors looking at America’s internal problems or it could be triggered by steep inflation in commodities. Either way, the US will be where Greece is today, with the exception that the US can print money to no end. However in that case the cure would be worse than the disease.

Europe’s in trouble again because those investors that governments love to coddle are demanding high interest on sovereign debt issued by Italy and Spain. Neither country would be in serious trouble if not for those high interest rates. Both, like the US, definitely need to get their financial houses in order, but like the US, their problems are political. Deficit spending boosts economies and since growth is the all consuming quest of nearly all countries, and the wealthy are flush with ready cash they need to invest, borrowing has been very easy, too easy.

Several countries, including Spain and Italy have temporarily banned short selling of their debt. A short seller is betting on value going down and when enough short sellers get in the act it becomes a surge which is hard to control. This brings up the subject of Credit Default Swaps (CDS’s) one of those Financial Instruments of Mass Destruction. A CDS is basically an insurance policy on your bond purchase. If the bond issuer defaults, you get paid. This does make a bit of sense, except as we saw in the case of AIG, which sold mountains of toxic CDS’s, when they all went bad at once, AIG couldn’t pay and so the government stepped in with $180 billion of free money to protect the profits of the banks and other biggies who bought the CDS’s.

There’s also something called naked CDS’s. That’s where a third party buys a CDS to bet on the bond defaulting. This is problematical because the naked CDS buyer has a stake in the bond going bust and will act accordingly, trying to cause default through rumors, whatever. This is equivalent to me buying an insurance policy on your life: I have an incentive to see you offed so I can collect.

Essentially nothing has changed since the great meltdown of 2007, except the too-big-to-fail banks are even bigger. They still are on shaky footing and ready to crumble and are only kept afloat by massive subsidies from the Federal Reserve. Only minor tweaking was done, in response to the crash, to the regulatory structure that could prevent a repeat.

You’ve been hearing for two years that the Great Recession is over, that the US has been growing, albeit slowly. What you probably didn’t hear is that 88% of the growth of the past two years has gone to the corporations and the very top of the income earners. The American economy is top heavy, its foundations are weak. Without heavy taxes on the top to bring the economic ship of state into balance, it’s bound to fall of its own weight. With the combination of Obama’s fecklessness (and the bought-out status of most Dumbos in general) and the Repugs mania for protecting the wealth of the upper classes at all costs, nothing is going to change the trajectory of disaster.