Tuesday 27 March 2012

Now, how about that debt?

In case you hadn’t noticed, the world’s largest economy is having its lifeblood sucked out of it. Between now and 2014 the US Federal government will have taken $20 trillion out of the US economy and poured it down a black hole—transferring real resources that could have grown real businesses to the sort of bottomless pit favoured by John Maynard Keynes: you know, “wars, earthquakes, pyramid building…,” and the modern equivalent of these: “green jobs.”

Austerity? There’s no frickin’ austerity out there. All the world’s “statesmen” look more like this bozo:

And don’t think anything will change once the political season finishes in November.

A second-term Obama would roar full throttle to the cliff edge [notes Mark Steyn], while a President Romney would be unlikely to do much more than ease off to third gear. At this point, it's traditional for pundits to warn that if we don't change course we're going to wind up like Greece. Presumably they mean that, right now, our national debt, which crossed the Rubicon of 100 percent of GDP just before Christmas, is not as bad as that of Athens, although it's worse than Britain, Canada, Australia, Sweden, Denmark, and every other European nation except Portugal, Ireland, and Italy. Or perhaps they mean that America's current deficit-to-GDP ratio is not quite as bad as Greece's, although it's worse than that of Britain, Canada, France, Germany, Italy, Spain, Belgium, and every other European nation except Ireland.

But these comparisons tend to understate the insolvency of America, failing as they do to take into account state and municipal debts and public pension liabilities. When Morgan Stanley ran those numbers in 2009, the debt-to-revenue ratio in Greece was 312 percent; in the United States it was 358 percent [and climbing!].

If Greece has been knocking back the ouzo, we're face down in the vat. Michael Tanner of the Cato Institute calculates that, if you take into account unfunded liabilities of Social Security and Medicare versus their European equivalents, Greece owes 875 percent of GDP; the United States owes 911 percent - or getting on for twice as much as the second-most-insolvent Continental: France at 549 percent.

And if you're thinking, Wow, all these percentages are making my head hurt, forget 'em: When you're spending on the scale Washington does, what matters is the hard dollar numbers. Greece's total debt is a few rinky-dink billions, a rounding error in the average Obama budget. Only America is spending trillions.

The 2011 budget deficit, for example, is about the size of the entire Russian economy. By 2010, the Obama administration was issuing about a hundred billion dollars of treasury bonds every month - or, to put it another way, Washington is dependent on the bond markets being willing to absorb an increase of U.S. debt equivalent to the GDP of Canada or India - every year. And those numbers don't take into account the huge levels of personal debt run up by Americans. College-debt alone is over a trillion dollars, or the equivalent of the entire South Korean economy - tied up just in one small boutique niche market of debt which barely exists in most other developed nations.

You think think things are bad now, just wait until the monetisation of debt gets into fourth gear! Central bank paper is already being taken like crack cocaine by the markets, causing morons to talk about “recovery” when it’s more like the last rally of a dying tubercular patient.

Data has been improving lately in the United States, if at a snail’s pace [observes a jaded Detlev Schlicter]. The ‘interventionists’ assign a lot of importance to these developments. Being interventionists, they pay little attention to the reasons for why we were in a recession in the first place. There is never much focus on the root causes of the crisis or any debate about if those have been removed. Recessions just seem to happen, so do asset bubbles and excessive leverage. All that matters is that the government creates some growth, then, with a bit of luck, this growth may just lead to more growth, and sooner or later we may just grow ourselves out of this mess. Simples.

I think the chances of that happening are pretty close to zero. And I do not care much about what present data is supposed to tell us. It does not make much of a difference.

Take the drop in official US unemployment. Could it be attributed to a decline in labour market participation as many long-term unemployed – their numbers have been growing markedly in this recession – drop out of the official labour market altogether? Or, could it be the result of the mild weather recently? Or, as the optimists will say, is it the result of additional hiring? Frankly, I don’t know and I don’t think it matters much.

We know what the problems have been and still are: misallocated capital and misdirected economic activity on a gigantic scale as a result decades of artificially cheap money. The policies of the interventionists – first and foremost zero interest rates and quantitative easing – were aimed at sustaining these imbalances, sabotaging their liquidation, discouraging deleveraging and postponing the – admittedly painful – cleansing of the economy of the accumulated dislocations. This policy has to a large degree succeeded, maybe with the exception of parts of the US housing market, which has indeed been correcting from bubble-levels. Other than that, I believe policy has so far managed to sustain the unsustainable a bit longer and thus project a false image of stability. Congratulations.

Of course, we can never exclude that this policy may also generate some additional activity here and there. Super-cheap money may not only stop the much needed deleveraging and cleansing but it may even encourage additional borrowing and additional investment. Who is to say that the trillions of new currency units will not cause some more balance sheets to get extended a bit further?

Fact is that none of what we see right now can be taken at face value. Not the equity rally, not yield levels, not headline economic data. Everything has to be taken with a sizable pinch of salt given the distortions from an outright surreal monetary policy stance.

But we can be sure about one thing: None of this should be taken as an indication of improving health. The patient is still sick but made to run laps around the track with the help of steroids, amphetamines and massive amounts of caffeine. The economy will not get fundamentally better until the underlying imbalances have been addressed and that is only possible if money printing stops and the market is again allowed to set interest rates and other prices.

I am not sure if the mainstream economists do really take a lot of encouragement from the manufactured asset price rally and the occasional green shoots in an economy that remains freakishly unbalanced and fundamentally sick. I don’t know what the economic data will tell us over coming months or quarters. I am confident that we are far from closing the book on the present depression.

In the meantime, the debasement of paper money continues.

Listen here to Don Boudreaux talking to Russ Roberts about the debt problem, answering the question: “is it so bad if we owe the debt to ourselves?”

4 comments:

the drunken watchman said...

"causing morons to talk about “recovery” when it’s more like the last rally of a dying tubercular patient."

But how long can the tubercular patient linger on, isn't that the point? or perhaps they can be kept alive indefinitely. Not particularly healthily, but not dead either.

Peter Cresswell said...

Oh, true, the zombies could be made to walk for years by consuming real capital while issuing debt, debt and more debt, and by printing paper, paper and more paper to back it up--could keep going for decades by resuscitating the zombies, like Japan has at the expense of creditor nations("Not particularly healthily, but not dead either")--but eventually the capital, resources, pool of real savings, and creditors run out, especially when the whole world is in the same parlous state and all are borrowing off each other.

And when confidence collapses in a currency unit, as is increasingly likely to happen the more the printing presses are used, history shows the collapse can happen very quickly.

the drunken watchman said...

but should I be holding my breath?

I've been waiting 32 years since Doug Casey first convinced me that paper money was about to collapse.

the drunken watchman said...

"especially when the whole world is in the same parlous state and all are borrowing off each other"

wouldn't such debt cancel itself out, then?

Besides, Japan is still there. Go there and I doubt you could notice it was peopled by zombies on life support. Trick is to brainwash the sheep into thinking that they are making money, then steal their savings through inflation. They never know they are being conned. They go to work and they eat their lunch.

Tell them that it's all going to collapse, maybe they will stay home.