With the White House and Congressional Leaders deadlocked over a "Grand Bargain" to raise the debt ceiling, what they have not told you is that it is already too late. by Bill Gee
(centrist)
Tuesday, July 12, 2011
Say what you will about ideology, Laffer Curves, and Deficit-Reduction plans. In the end, what the President, and every member of Congress is not telling you is that there is nothing we can do to avoid a total collapse of the economy. In other words, no matter how much money they cut from the budget or how much money they manage to raise through new taxes, the damage is already done and the tsunami is already here. The editors at Bloomberg could not have made it any simpler with the graph they posted showing that the gap between tax revenues and expenditures is wider than it has ever been.
The Canary in the Mine
One of the common misconceptions among macroeconomists is that we can anticipate impending doom in the sovereign debt market by taking a close look at bond yield rates. A bond yield is the rate of interest that the bond will pay to the investor in exchange for purchasing a portion of that nations debt. If yield rates are high, then we assume that the risk of default is higher because the government now has to pay out a premium to investors. If yield rates are low, then we assume that risk of default is low. In reality, it does not work this way.
Instead what happens is the opposite. As the risk goes up, the interest rates go down, and as the risk goes down, the interest rates go up. There is a very simple explanation as to why this happens.
Investors want to maximize their returns on their investments. To do so, they seek the highest yields for the shortest duration. When the economy is strong, investors can get excellent returns by investing in equities (stocks). Investing in government debt is not so attractive, so in order to bring on more investors, the government will raise interest rates. When the economy is weak, then investors are looking for safer investments than stocks. Therefore, they tend to buy more Treasury bonds. As a result, the government can afford to lower the bond yield rate because they know that investors will still buy them no matter what.
The following is a quick chart of 1-year average bond yield rates for US Treasury bonds for the month of June since 2007.
June 2007
4.96%
June 2008
2.42%
June 2009
0.51%
June 2010
0.19%
June 2011
0.18%
One way we can interpret this data is that when the economy was strong in 2007, the Treasury offered a higher rate of interest in order to attract investors to buy short-duration Treasury bonds. However, as the economy got worse, interest rates were reduced due to the fact that investors were seeking safer waters to put their money even though the interest they were earning on their investment was less than inflation. If we are to believe the government that the recession ended in June 2009, we should have seen the bond yield rate go up (even slightly) to reflect this, but as we can see, the yield continued to trend downward.
If you examine the bond yield rates of every other major economy in the world, the trend is the same. We are standing on the deck of the Titanic as it is going down and Congress, as well as every other Parliament in Europe, is busy adjusting the curtains.
What Happens Next
One of two things will happen next and neither one of them is pretty.
Scenario 1: The White House and Congress fail to come to an agreement on the debt ceiling and the US Government starts to default on its bond payments. The ratings agencies downgrade US Government debt and the bond rates will shoot up to pre-recession levels. The added expense for servicing the debt forces the government to either print more money, shut down all but the most basic government functions, and the centralized government all but stops dead in its tracks. This has already happened in Portugal and it is about to happen in Italy and Ireland with Greece to follow in September. The resulting collapse of confidence in the US economy makes the US dollar worthless in world markets.
Scenario 2: The White House and Congress agree to a "Grand Bargain" that successfully cuts spending and raising revenues in the short term. The best historical comparison of such an agreement will be the infamous Compromise of 1850where Congress and the President successfully avoided a Civil War by agreeing to basically cut the nation in half between so-called "Slave States" and "Free States". At the time of its signing, the Compromise was lauded as the agreement that "Saved the Union", when in reality, it only prolonged the inevitable as the first shots of the Civil War were fired a mere 11 years later. No "Grand Compromise" can hide the fact that the Government is as deeply divided as it was in 1850, except that this time, the Government is also bankrupt. Eventually, the Government will default on its debt obligations simply due to the fact that the economy will continue to get worse with the collapse of the infrastructure and money will lose its value as more of it will be needed to service an ever-growing debt. In short, a "Grand Bargain" will give us another year or two before total collapse.
Who Takes Over After The Fall of the Government?
The seeds have already been planted for a Corporatocracy to take over after the fall of the US Government. A Corporatocracy is a government that is controlled by the strongest corporations. I would argue that the coup has already occurred and that we are witnessing the final destruction of the last vestiges of Democracy in this country. A Corporatocracy would be run much like an Aristocracy in that it would be that the CEOs of the strongest corporations would be the ones running the Government.
We are already seeing the Corporatocracy at work on a smaller scale. After the Government no longer has the ability to regulate commerce, it will get a lot worse, especially for the small business owner. It is also possible that with the collapse of sovereign governments all over the rest of the world, the Corporatocracy is likely to go global.
The major flaw with this type of government is that it is very unstable. The rule of law would be replaced with "survival of the fittest" as the government is in constant danger of changing hands whenever there is a merger, acquisition, or hostile takeover of one corporate entity over another. Individual Rights are practically non-existent under such a system as people are viewed by the State as productive units of commerce rather than human beings. Those who are unable to contribute to production will be seen of as having little to no value.
The Grand Bargain Myth
The myth of the "Grand Bargain" is that it does not exist. At best it will prolong the inevitable collapse of the legitimate government in this country to be replaced by our corporate masters (at least in an official capacity). Members of Congress, the Judiciary and the President himself is already hand-picked by the Corporate elite. After the failure of Washington, they will simply make it official in order to stem the tide of anarchy that is sure to follow.
That is, unless we can stop them by rebuilding a government and a Constitution that can keep their power in check.
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Posted By: Bill Gee
Date: July 14, 2011 06:18:15 AM
Update: Moody's Investor Services today joined Standard & Poors in the possible downgrading of US Treasuries from its current AAA status. This is a very big deal for several reasons.
1. A ratings downgrade will increase interest rates on issuances of new bonds. This will increase the deficit as the cost of servicing the Public Debt increases.
2. Many so-called "institutional investors" are required by statute to only invest in AAA rated securities or hold 80% of their portfolios invested in top-rate securities. These include pension funds, insurance companies and mutual funds. A rating downgrade would mean that the US Government would lose many of its most loyal debt customers, which would put more pressure on the Fed to buy more securities using fiat money, thus increasing the risk of hyperinflation.
3. Once a ratings downgrade has been placed on US Debt, it may take several years before the ratings go back to AAA status. That would require a total restructuring of the US Budget so that revenues would exceed expenditures.
Bottom line: A ratings downgrade would mean fewer customers for US Treasuries, higher interest rates for those who are willing to buy them, and much higher taxes in order to cover the increased debt servicing fees and to provide basic government services. In other words - a disaster.
Posted By: rwilymz
Date: July 14, 2011 10:43:12 AM
I like.
I think some of the predicted results are problematic - but then predictions usually are. The corporate oligarchy has been building for decades. The Fed is little more than the "big banks" whose job it is to regulate their own and the government's fiscal management - because the government is essentially clueless about it.
The SEC is virtually run by Goldman-Sachs; the USDA by American Farm Bureau; the FDA by Lilly and Pfizer; yadda, blah-blah...
I'm reminded of the run on the bank scene in It's A Wonderful Life: Potter kept the bank open by guaranteeing it the money needed to keep operating ... he bought the bank without buying it. Power is more valuable than money. First, it can be converted into money virtually on demand, and second, ... it's the inate ability to boss people and institutions around. When the mierde hits the fan, those corporations which have the capital to guarantee the continued operation of the government [or certain select portions thereof] will become de facto overlords to the established system of government we have defined.
"The Government" will still exist, in much the same way as the British Monarchy does: figureheads. Congress will pass laws that authorize, e.g., Microsoft to operate the FCC and the rest of the Commerce Department, Goldman-Sachs gets the Treasury Department, etc. We'll still vote for the Prez and Congress, whose job it will be to confirm the placement of this oligarchy upon the US in law, and the courts will be obliged to ratify it [assuming they allow anyone to claim enough standing to protest it] as some grand, new "interpretation" of the Commerce Clause.
But it will be the Boards of Directors of the various cabal members who are really in charge. It would be good to be a stockholder ... until individual stock ownership became illegal, that is. Remember, Goldman-Sachs runs Treasury, which houses the SEC. Institutional investors are fine: those are mutual funds run by another Board of Directors lower on the totem pole.
We are already seeing the Corporatocracy at work on a smaller scale. After the Government no longer has the ability to regulate commerce, it will get a lot worse, especially for the small business owner.
One thing I have to keep reminding the liberal and "progressive" nitwits I run across is that the more regulation there is, the more likely that the large corporations are the only ones likely to survive.
First: they are the only ones with enough money to hire staff loyyers and CPAs to wind their way through the regulatory gibberish;
Second: regulations are written by "stakeholders" of the industry being regulated, which are the megalithic outfits called "corporations". Regulations are written BY corporations for the regulator to apply TO corporations - anyone else caught up in it has to hire a loyyer to figure out what is allowed and disallowed by the regulation, because it won't be obvious;
Third: even and especially if the regulation is pointed at "large corporations", the small business is the most likely target of enforcement. The burden of proof is not on the regulator exercizing his regulatory authority; it is on the one being regulated to prove that the regulatory authority is being misdirected. Small businesses don't have the loyyers to file the administrative law paperwork; if they hire a loyyer, they likely won't stay open because a regulatory enforcement often comes with the power to seize assets and seal premises pending the outcome of hearings; when they win in the hearing process it is thoroughly pyrrhic since they've bankrupted themselves to prevent the regulator from bankrupting them.
Posted By: Bill Gee
Date: July 27, 2011 07:13:38 AM
Update: Standard & Poors has indicated that even if the debt ceiling is raised by the August 2 deadline, it is likely that they will still downgrade the nation's debt to AA status with a negative outlook. Some people are wondering why the markets have not yet reacted with a massive selloff. The answer to that question is quite simple. The markets have a tendency to be "reactionary" rather than "proactive". In other words, the markets will wait until after the tsunami has struck before getting their assets out of the way.
On the Marketplace Morning Report this morning, the economics editor for the Wall Street Journal advised investors to hold steady until the crisis passes. I see that as a sign that if small investors want to avoid massive losses, GET OUT NOW before the building burns down around you!
