Skip to comments.Bernanke Is Getting Scared....
Posted on 05/03/2010 10:15:52 PM PDT by Neil E. Wright
You have to love this sort of utter claptrap...
Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high, Bernanke said in remarks prepared for a speech today to a White House commission on the budget deficit. Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth -- and might even put the current economic recovery at risk.
We need to review a few graphs again.
Let's start with this one:
This is the true deficit, measured simply by the amount of Treasury debt (including intergovernmental games) outstanding.
Of note is that it has never decreased materially since 2001.
Why is this important? Because every dollar that the government borrows and spends is one dollar that pulls forward demand from tomorrow and spends it today.
This game continues, as it did in the housing market, right up until you can't get any more credit to do it with.
But more importantly as you put forward this sort of distortion in the market the economy becomes habituated to that deficit spending and incorporates it into GDP!
This then turns that deficit spending into a mandate on an ongoing basis lest you have a recession - or worse.
Now let's look at how big that distortion has become, as a percentage of GDP:
This is where your problem begins. While government deficits have varied over time, during the 2000 decade they became both embedded in the economy and at a high and continuing level of about 4-5% of GDP.
That is, the so-called "recovery" in 2003-2007 was false; it did not consist of organic demand from the marketplace, but rather it consisted of government's fraudulently inflated demand.
Contrast this with the 1990s when private demand rose fast enough that the government was able to slowly withdraw stimulus via deficit spending, to the point that it actually approached zero! That's REAL economic growth.
But now we've gone even further, and in the last two calendar years have put up nearly 10% and nearly 12% of GDP distortions, respectively. Let me remind everyone that in the world of economics a 10% economic contraction is the formal definition of economic Depression; ergo, we have been in one for the last two years and are today!
The Obama administration estimates budget deficits will total $5.1 trillion over five years and hit a record $1.6 trillion in the year ending Sept. 30. The $1.4 trillion deficit in 2009 was equal to 9.9 percent of gross domestic product, the largest share since the end of the World War II.
Bernanke spoke to the National Commission on Fiscal Responsibility and Reform, established by President Barack Obama to identify policies to reduce the deficit to a sustainable level. The commissions mandate is to propose a plan to balance the budget, except for interest payments on debt, by 2015.
That cannot happen without the economy undergoing the very adjustment in matching of output and final private demand that the government has spent ten years trying to avoid.
This is the ugly truth that Bernanke doesn't want to speak of, but he knows it to be true. But neither he, nor the government budget folks, are willing to come out and tell the people the truth - since 2003 we have managed to compound a 58% distortion to our $14 trillion GDP!
To say that the adjustment occasioned by withdrawal of that support would be catastrophic would be the understatement of the year. We never got anywhere near this level of distortion in the 1920s and 30s - the distortion reached about 25%, top to bottom. The adjustment produced what we call The Great Depression.
Let me be clear: We have a $14 trillion economy that has accumulated a fifty eight percent net deficit, or more than double the distortions that had to be absorbed in the 1930s.
It is obvious that sudden withdrawal of that support would lead to an instantaneous and catastrophic economic collapse.
If you're wondering why I have spent three years arguing strenuously against the policies that our government adopted to try to "stem" the crisis, you now should understand - we are now absolutely dependent on the ability to maintain this level of distortion and will be able to withdraw it only slowly, if at all.
Any event that causes us to have to withdraw it suddenly WILL RESULT in the loss of our economy and republic.
This is not speculation - it is hard mathematical fact.
The risk taken on by those who promulgated and adopted these policies is criminally negligent. Of course since the actors who did so work for the Federal Government criminal negligence isn't punishable as it's not a felony to do this as a government employee, even though such acts in the private sector certainly are punishable.
This is the precise set of actions that has led Greece to find itself in the box it is now in. Portugal is headed down the same road, as is Spain, Ireland and Italy. All five are at risk of economic collapse.
We are inexorably headed for the same result if we do not accept the economic adjustment that is necessary to bring both private demand and GDP into balance.
There are means available to massively stimulate private demand but none of them include federal deficit spending. I have covered some of these in the past, including my particular favorite, adoption of The Fair Tax. Sadly such real reform is radically and diametrically opposed by the interests in Washington DC as doing so removes the tax system as a means of social engineering, control, and corporate lobbying.
Ben Bernanke has reason to be "concerned", as he notes.
In truth, ladies and gentlemen, he is not "concerned" - he is terrified. He, like I, is well-aware of the above graphs and facts, and since he knows how to use a calculator (or even a paper and pencil) he also knows the extent of the economic distortion that has been built up over nearly a decade of borrow and spend politics.
Our opportunity to solve this problem will expire, and as Greece has discovered that expiration is likely to come with little or no warning, and once it arrives there will be no real options available to us that avoid a disorderly economic collapse.
We’re in a heap of sh!t.
bookmark.....(in case you get an answer to your question!!)
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I’d say nine to ten times deeper than it’s ever been before.
There you go again... Waxing elequent!!! (grin)
Which brings up the point - just what is Wall Street betting on these days? Mostly foreign investments? It surely can’t be on the US’s ability to overcome corruption by both the government and corporate entities. The problems of both would overwhelm even the most optimist of investors.
So... I would guess that those that have money are just trying to make more before the apocalypse... or at least our US version of the same... That would explain why only the markets are advancing while the rest of society is suffering.
Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth — and might even put the current economic recovery at risk.
No —— Sherlock! You mean the same debt you insisted we take on? You’re nothing but a thug and criminal.
If only someone had said this sooner.
(Besides, you know, WSJ, dozens of business pundits, and just about everyone except the Dems in Congress...)
May I humbly suggest you read it a time or two more and try again to understand it? Yes, it means we are hosed.
Karl has a way of being fairly blunt about these things, but IMO, folks need to work a little at understanding the magnitude of what the US is looking at, financially and fiscally.
Just as a point of reference: We have this serious oil spill in the Gulf. And it’s inarguably a really crappy situation. Damage estimates are of course premature at this point, and oil hasn’t hit the shore at this exact minute, though it looks like it will, ultimately.
But the kinds of numbers being thrown around are $10 billion, $20 billion worth of damage that BP may ultimately have to pay out. Let’s double that, $40 billion.
We paid out $787 billion and another $832 billion (IIRC) in the two installments of TARP. 40 times what may happen, damage-wise, in the Gulf. Or if we forego the doubling I did in the calcs, just over 1% of what we paid the banksters. Where’s the screaming?
Our days are numbered.
Yes, the cost to society and of cleanup by BP is a very small part of the problem when compared with the corruption involved within government and way too much of business.
If you think that this will have a large effect compared to what has happened, you are just wrong. This is a drop in the bucket compared to what has happened and what is continuing to happen with our government (and corporate) corruption. Yes, it may make an immediate effect, but it will be short lived and eventually overwhelmed by our ongoing corrupt government spending (in support of who?).
Hang on, the worst is coming... All of these piddly little diversions will not matter in the end.
Tell me again, WHY should we vote for republicans? Because they're better than the "alternative"??? What the hell's the difference these days????
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What I’m surprised no one has taken up yet is tracking the roll of Treasury debt. If you look at the Treasury’s report on the term of the US debt, you can see they’re rolling it shorter and shorter... trying to keep the interest expense down.
Well, that’s what bankers did. And then you get to the left edge of the yield curve, and you hit a hard wall.
When short-term rates finally start going up, the interest cost of the debt will explode upwards. The long end of the curve will already probably be higher than we are now (well into the 4% and up range), so there’s no retreat into long-term rates.
The Fed has the same problem as the Treasury - they have over a trillion bucks of RMBS on their balance sheet, not to mention all the crap paper from various asset-backed lending facilities. When rates start going up, the Fed has a problem - they’re going to take losses on the RMBS portfolio. That’s on top of the losses they’re going to take from defaults.
We really do need to pass a Constitutional Amendment banning the “prodigies” from the Ivy League from ever serving in any branch of government ever again. When most people do something stupid, they fess up and say “Hmmm. Let’s not do *that* again.”
But the Ivy League crowd? No way. They double down, because they know in their heart that the world was wrong the first time and the world will realize the error of its ways the second time.
You ask a good question even as you hint at the answer. Objectively, both parties bear considerable blame. Yes, the Dems were instrumental in passing the CRA and pressuring Fannie and Freddie to underwrite the goofy loans that were being forced on local banks. But the GOP was roughly equally at fault for their acquiescence to the repeal of Glass-Steagal. Glass-Steagall was a 17 page bill that kept banks who had access to the Fed lending facilities from gambling with taxpayer money. It did a damn good job from 1932 to 1987. If you’ve been watching the hearings on finan reform lately, you’ve heard mutterings along the lines of “we need to bring back Glass Steagall”, and I think Sen Levin said that, quote unquote. Both of these sagas are longish stories that I can’t precisely chronicle...(but the info is out there if you wish to delve. I believe it is helpful to understanding “how we got here”)
But I’d also suggest that the “solution” (if any actually exist) lies not in the assignment of blame to this or that party. Where it *does* lie, IMO, is along the lines of what occurred after the S&L crisis in the early nineties. After that crisis was resolved, over 1,000 successful prosecutions were carried out by the Feds and great numbers of bank executives did hard time behind bars. Now? You can count the number of bank execs who have been prosecuted on one hand with fingers to spare.
You may wish to look for a few videos by William (Bill) Black on YouTube. He has a smallish number of lectures and interviews posted there. He was the primary Fed prosecutor during the S&L fiasco, and makes it pretty clear what was going on.
Now I will say, that what you might learn from Bill Black is forensic. It’s historical. It may be that you’re more interested in what we will be facing as time goes by. It’s not pretty, but it is a serious purge and reality-confront that we almost certainly cannot avoid.
Thanks for the article.
” and as Greece has discovered that expiration is likely to come with little or no warning “
So this can happen over night, like the September 2008 event?
As usual, you’re quite right!
No, there is no mathematical solution for what we’re looking at, in all its convoluted and frankly horrific implications. It’s really hard to believe that we will be able to hang out for a decade or more all the time 1/4” from a worldwide detonation and just cruise onwards in uninterrupted bliss and prosperity. Especially with the proven incompetents we have in charge of the financial system. “No banker left behind.”
As Treasury bonds become riskier investments, yields (interest rates) will soon skyrocket. No one knows exactly when the run on bonds will occur. Those drastic interest rate hikes will spread to local governments and private business. ...more waves of foreclosures. As business slows further, sooner or later, stocks will fall hard, causing more businesses to fail. The number of unemployed will go enormously higher.
Raising property taxes and taking a national sales tax won’t work any more than such actions did in other countries. ...business killers. Revenues will shrink to a small portion of what they are now. When the federal, state, county and city governments finally discharge large percentages of employees, it will be too late. Default will no longer be de facto default. It will be undeniable.
The government can’t simply inflate its way out of this one. There’s virtually no heavy manufacturing to raise taxes on for that. Worthless dollars are every bit as worthless to government employees as to anyone else.
So you see that neither piggish political party, full of rhetoric and money, will save the day. Both are far too piggish and more interested in pandering to government employees and foreign partners than hard working men.
Enjoy the ride.