Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stop Hyperventilating about Federal Debt: USA Is Heading for Party-Time Again

Interest-Rates / US Debt Dec 09, 2011 - 05:30 AM GMT

By: Andrew_Butter

Interest-Rates

Best Financial Markets Analysis ArticleAn interesting component of the current atmosphere of angst in America is collective amnesia. Everyone seems to forget:

1: There was a very expensive war. Whether the war was in fact “necessary” so as to Keep America Safe, is debatable. But putting that to one side, it most certainly did not generate a return on investment in the form of looting and pillaging…which always used to be the main justification for going to war in the old days, and that in the cold light of debt servitude, arguably remains the only fiscally-responsible reason for going to war…ever…so long as you win!


2: The war was “financed” by tax cuts, or in other words by debt.

3: There was a credit crunch caused by a brilliant theory which had proved beyond all reasonable doubt that (1) economic prosperity could be achieved by increasing the level of home-ownership, and (2) the best way to do that was to use the GSE’s to help to harness the magical “free-market” powers of securitization to make mountains of credit available so that the new home owners paid twice as much for their new houses than they would have in normal circumstances. There is a widespread consensus nowadays that there was what in a rare moment of lucidity Alan Greenspan called, “a flaw”, in that theory.

4: When the “flaw” was recognized, well there was a bit of consternation, because banks discovered that what they had previously thought were AAA assets, which they had bought on margins of up to 30:1 turned out to be worth a lot less than the somewhat optimistic valuations that they had used to calculate their bonuses…back in the days when there was a widespread belief that house prices would go up forever.

5: And so the “lender of last resort” stepped in, which in a fiat monetary system is the standard Plan B response when “flaws” in brilliant socio-economic theories are discovered. But even so tax revenues plummeted, particularly since they had previously been bolstered by taking a share of the “profits” that the banks had declared so as to maximize their bonuses, and thus the Federal Government had to borrow heavily to honor prior commitments, i.e. to pay for the fiscal sins of the past.

6: On top of all that, oil prices went through the roof, and since Americans don’t pay any significant tax to finance their divine right to waste imported oil, that caused even more problems.

7: Then the hyperventilating hyper-inflation doomsayers all came streaming out of the wood-work, screaming blue-murder that the end of the world was happening, and that the whole problem was caused by entitlements, unionized-teachers, illegal immigrants, and closet homosexuals in the Military; and if the “money-printing” didn’t stop This Instant then America would never be Great ever-again. That was a superb theory; although three years later there are reasons to suspect there might have been a “flaw” in that one too.

Fast forward to now:

These days everyone says that President Obama lost the plot.

They conveniently forget that he got left a stinking pile of garbage to clean up. Of course that’s the American way, all show and no trousers; everyone remembers a great party (vaguely), but no one remembers the black boy that comes-by in the morning to sweep up the mess. Except for the vocal few who wake up from their hangovers and berate the lazy bum for not working faster…so that they can all start partying again.

This is a chart of year-on year increase in US Federal debt in nominal terms; there are two lines (1) Total outstanding US Treasuries, and (2) Total outstanding US Federal debt which includes IOU’s written to entities such as the “Federal Old-Age and Survivors Trust Fund”.

End 2008 US Federal debt was going up at 25% a year, end 2011 it’s going up at less than 5% a year, which is less than nominal GDP growth, the main difference from before was that previously the Federal Government used to write about as many IOU’s to the “Federal Old-Age and Survivors Trust Fund”, as they issued Treasuries, no more.

But what’s not to like about that, given that the party-boys managed to create one of the biggest financial crises the world has ever seen?

OK that doesn’t include un-funded obligations hidden “off-balance-sheet”, but one thing at a time, you can’t mop the floor, AND polish the silver, AND show the party-boys you got a Green Card, all at the same time, multi-tasking is good, but that’s ridiculous. But the good news is definitely that the floors will be scrubbed, and the silver will be spotless, in time for the next party.

My only concern is that the cleaning-boy is doing too good a job, according to my analysis US Federal debt needs to hit 134% of GDP before it starts to go down again, less than that and effects of the anticipated de-leveraging of private sector debt will cause extreme hardship to poor Americans (although us party boys, we don’t care about that), but more important, that will constrain the recovery of the private sector, and I hate to say that I broadly agree with that bleeding-heart-communist Paul Krugman on that point; unemployed Americans did not cause the credit crunch, making them suffer won’t solve that problem.

http://www.marketoracle.co.uk/Article20418.html

But I suppose that’s a good reason for bringing back the party-boys, they sure know how to pile on debt!

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in