The debt crisis, the primary catalyst of the economy’s decline, is far too big for the U.S. government to control.
Here are the facts:
1. Based on the Federal Reserve’s Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S.
2. Based on estimates provided by the U.S. Government Accountability Office and other sources, it’s safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in — for Social Security, Medicare and other pensions.
3. Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion, or more than a half quadrillion. A quadrillion is a one followed by every zero ever seen by everyone who ever lived; it's a number we should be using to discuss astrophysics... not economics.
In contrast, even after the most reckless outpouring of government bailouts in recent months, the total rescue money announced in the U.S. so far is $2.7 trillion; this is a huge, unwieldy amount, but it is still minuscule in comparison to our cosmic-scale debt accumulation.
The numbers are not directly comparable, but just to get a sense of the magnitude of the problem, compare the size of the debts and bets outstanding (the first three bars in the chart) with the size of the $2.7 trillion in bailout commitments thus far (barely visible in the chart).
Still, most people insist, “If only Washington can avoid the mistakes it made in the 1930s … if only Washington can peremptorily nip this crisis in the bud … if only Washington can be our lender and spender of last resort … Great Depression II will never come to pass.”
What they don’t see is the fact that the debt build-up in the U.S. today is far greater than it was on the eve of Great Depression I. Indeed, in the chart below, Claus Vogt, the editor of Sicheres Geld (the German edition of our Safe Money Report) shows how...
Prior to the 1930s, the total debt in the U.S. was between 150% and 160% of GDP. Now it’s close to 350% of GDP.
Moreover, he reminds us that this chart does not even include derivatives, which barely existed in the 1930s but which are now sinking banks deeply into the red.
With the economy already falling, Washington cannot — and will not — fund the bailouts with higher taxes. Nor will it do this by making major cuts in government expenditures. Instead, at this phase of the crisis, the government will try to finance its folly largely by borrowing the money. Lots and lots and lots and lots and lots of money.
Three weeks ago, the U.S. Treasury department announced that it is borrowing $550 billion dollars in the fourth quarter, more than the entire deficit of fiscal year 2008.
Two weeks ago, Goldman Sachs estimated that the upcoming borrowing needs of the U.S. Treasury will be a shocking $2 trillion — to finance the bailouts, to finance the existing deficit and to refund debts coming due. That’s four times the size of the entire deficit. This means you can expect an avalanche of new Treasury bond supplies, crowding out private borrowers and putting severe upward pressure on interest rates. And, needless to say, higher interest rates cannot end the debt crisis; they can only make it worse.
The rushed, puny government bailouts, which only passed muster in the House because of pork-bribes and threats, come too little too late to end this crisis. A depression, sadly, is unavoidable.
Here are the facts:
1. Based on the Federal Reserve’s Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S.
2. Based on estimates provided by the U.S. Government Accountability Office and other sources, it’s safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in — for Social Security, Medicare and other pensions.
3. Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion, or more than a half quadrillion. A quadrillion is a one followed by every zero ever seen by everyone who ever lived; it's a number we should be using to discuss astrophysics... not economics.
In contrast, even after the most reckless outpouring of government bailouts in recent months, the total rescue money announced in the U.S. so far is $2.7 trillion; this is a huge, unwieldy amount, but it is still minuscule in comparison to our cosmic-scale debt accumulation.
The numbers are not directly comparable, but just to get a sense of the magnitude of the problem, compare the size of the debts and bets outstanding (the first three bars in the chart) with the size of the $2.7 trillion in bailout commitments thus far (barely visible in the chart).Still, most people insist, “If only Washington can avoid the mistakes it made in the 1930s … if only Washington can peremptorily nip this crisis in the bud … if only Washington can be our lender and spender of last resort … Great Depression II will never come to pass.”
What they don’t see is the fact that the debt build-up in the U.S. today is far greater than it was on the eve of Great Depression I. Indeed, in the chart below, Claus Vogt, the editor of Sicheres Geld (the German edition of our Safe Money Report) shows how...
Prior to the 1930s, the total debt in the U.S. was between 150% and 160% of GDP. Now it’s close to 350% of GDP.
Moreover, he reminds us that this chart does not even include derivatives, which barely existed in the 1930s but which are now sinking banks deeply into the red.With the economy already falling, Washington cannot — and will not — fund the bailouts with higher taxes. Nor will it do this by making major cuts in government expenditures. Instead, at this phase of the crisis, the government will try to finance its folly largely by borrowing the money. Lots and lots and lots and lots and lots of money.
Three weeks ago, the U.S. Treasury department announced that it is borrowing $550 billion dollars in the fourth quarter, more than the entire deficit of fiscal year 2008.
Two weeks ago, Goldman Sachs estimated that the upcoming borrowing needs of the U.S. Treasury will be a shocking $2 trillion — to finance the bailouts, to finance the existing deficit and to refund debts coming due. That’s four times the size of the entire deficit. This means you can expect an avalanche of new Treasury bond supplies, crowding out private borrowers and putting severe upward pressure on interest rates. And, needless to say, higher interest rates cannot end the debt crisis; they can only make it worse.
The rushed, puny government bailouts, which only passed muster in the House because of pork-bribes and threats, come too little too late to end this crisis. A depression, sadly, is unavoidable.
Posts
No comments:
Post a Comment