My buddy Randy runs fixed income trading for a large Japanese Bank. I asked him what he thought of my piece from yesterday and he said “It filled me with the desire to throw my chair through the window, and then follow it to the street”. Randy works on the 51st floor. He was kidding of course… but his point was that he thinks it’s just a tad pessimistic.
And he’s convinced me that it’s possible that I am. So today I’d like to put a shout out to my buds in the financial business (and all of their friends as well) and ask them a question. The question is “What do we do when the bill comes due?“ How can we address this problem in a way that will allow us to carry on as “normal”? Because when I look at the actual numbers I don’t see an answer.
Some estimates place the current notional for the bailout at 5 Trillion. We all know that it won’t cost the taxpayers nearly that much, but that’s the number that needs to be funded. So where do we get it? And when we add another 5 trillion for bailouts for various other industries and municipalities, what do we do then? Where do we get that potentially 10 Trillion from? This is a worst case of course but remember, I’m talking about total capital requirement, not actual costs.
And when the total unfunded liability for federal entitlements comes due, and that (according to the GAO) is another 53 Trillion, where do we get that?! How about after the Obama administration gets done “insuring the uninsured”, and adding all the additional expenditures they’ve promised that add another 10 Trillion to that number? That would put our total funding (not our net cost… but our total capital requirement) at 77 Trillion dollars. I’ll grant you that this looks several decades into the future, but today the entire GDP is roughly 15 Trillion. How in the world, will be able to ensure enough economic growth to keep GDP high enough to have “77 Trillion” seem like a manageable number? Today the estimated average growth for GDP (depending on who you talk to) is usually about 1.5%, and that ain’t gonna get us there.
There are only three ways to address the debt.
1. We can borrow it but since we’ll be borrowing much of it from overseas, we’ll be placing our currency at risk if we do. The demand can’t possibly keep pace with that kind of supply so interest rates will certainly rise, and that will slow economic growth. As the currency weakens it will be geometrically harder to attract investors from offshore. That will drive rates even higher and growth lower.
2. We can tax people for it. But with a current GDP of roughly 15 Trillion and a deliriously optimistic outlook of 3% growth per year, you cannot support anything like that kind of debt load. Even slowly pushing taxes higher or only taxing ‘the rich’ will greatly reduce economic growth so taxation is like trying to keep from dying of thirst by drinking our own blood. Taxes will rise of course but not enough to bear the load, and the result will be that we be forced to add all the consequences of option one as well.
3. We can inflate the currency. The treasury can simply print the money and retire the debt, but that will cause prices of actual goods to rise dramatically. Think of what it would do to civil stability when a loaf of bread costs $3,500. And by the way, that will also discourage our international investors causing economic growth to go into free-fall.
So what can we do? Or can we do anything? Roughly half the country now feels that it’s their “right” to have other people pay for their necessities. Even during what the New York Times would call the “rabidly right wing Reagan administration”, government entitlements grew substantially. And now that they’ve won the congress and Whitehouse we’ll be getting more of this thinking not less. So what can we do? How can we keep it all going? I’m not being a wise guy, I’m honestly asking for ideas. I think I’m being too pessimistic and I’m interested in other views. Because when I look at the numbers I don’t see a way out.
In a worst case, how stable is the US with an unprecedented unemployment rate, astronomical interest rates and a police force or even an Army that hasn’t been paid in several weeks? What will crime be like when unemployment gets so bad and growth slows so much as to cause supply chain interruptions? How will it affect things when you have gangs in St Louis and Newark setting up their own ‘tolls’ on Route 80 and seizing trucks to sell to the locals? What will New York City look like when the power only runs a few hours a day, and people are forced to wait in soviet style lines for basic necessities?
People find it hard to imagine a civil war in America because we are so strong. But how hard is it to imagine when we aren’t so strong anymore? When I look at the number I don’t see a way forward to strength, only weakness.
To be fair, this isn’t Obama’s fault; he’s a symptom not the cause. I don’t even think this will happen during his administration (unless he gets REALLY out of control quickly). So what can we do to make this out look anything but inevitable? Email any suggestions and I’ll post them.
Also, as an aside… I’m going to rigidly filter comments on this one post. There is no room in this discussion about how Obama’s focus on hope and social justice will save us all. I’m interested in any informed comments of course, but mostly I’d like to hear what my extended professional network has to say. I’ll be happy to post any thoughtful and substantive ideas from anyone, but this post isn’t about politics or propaganda for either side.
I’m not blaming Obama. It’s the change in the country that’s the real crisis. And since that’s so, I’m not interested in the politics of the discussion, just the economics of it. Please forward this around and let me know your thoughts.
5 comments:
I know this is not the thoughtful and substantive response you were looking for, but I'm just trying to understand this. Are you saying that NOT going through with these bailouts would be catastrophic, but survivable, while going through with them will be fatal? That allowing the banks and other large failing enterprises to sink would be like getting hit by a car, but bailing them out would be like getting terminal, untreatable cancer?
Sorry.. I didn't mean to discourage questions, just empty political posturing from either side.
I'm not actually saying it here but you have captured the gist of my position yes. That's precisely what I think. It's such a good analogy in fact, that if you remain a reader you'll certainly see me steal it.
The only issue is that even now, if we don't do the endless bailout upon bailout, I don't see any way to save the patient. It's a question for me of whether this worse case happens in 8 years or 18.
It seems to me that the worst thing our government can do right now is pretty much what it's been doing: knock on every door and say "Hello! I'm from the Government, and I'm here to help."
The best thing it could do, not that this will ever happen, is declare a state of national emergency and literally shut itself down to the point of providing only the most basic minimum of services. Stop collecting taxes, stop providing services, and tell the American people that they're on their own.
Sure, there would be war and famine, and God knows what else. Liberals would be out in the streets rioting, demanding the things they're "entitled" to and the things they've been promised.
Meanwhile, Conservatives would first be taking care of their own, and then, they'd be putting their heads together, trying to figure out how to ride out the storm.
They'd be out there chopping wood and growing vegetables, and raising chickens, and building their own cabins (never mind government housing); they'd be bartering with each other and trading whatever they can and going back to basics, because in an emergency, you work, not whine. (Unless you don't want to survive, that is.)
Liberals might try to attack Conservatives, physically, but unless Government intervenes, they will soon realize that Conservatives have all the guns.
Protesting, marching and shouting stupid rhymes in the streets does not put food on the table; stealing it is not a good idea, when the other side is armed.
Yeah, it's an understatement to say that things would be really bad for a while; not for the squeemish; Paris Hilton and Britney Spears probably won't make it.
But the American people are a resilient bunch. As long as Government doesn't threaten to help, when push comes to shove, we can be pretty resourceful. This would certainly separate the wheat from the chaff, and again make this the land of opportunity, rathern than the land of entitlement.
Not that this would ever happen. Asking the self-important politicians who make up this big, fat, bloated government to go home and leave us alone is never going to happen, not even for the sake of the nation's long term survival. Heck, that would be like asking Katie Couric to take her face off television for the sake of saving the media.
It's a good fantasy though. Might make an interesting book someday.
I appreciate your view but it’s not realistic. It’s not a ‘real solution’ because you can’t plant enough gardens for everyone in America to feed themselves.
New York City has less than 30 days of food in every refrigerator, grocery store and market in the entire city. 45 days after a sudden breakdown like that it would amount ot a multi-million person mob. The US government is the largest employer in the world. If everything shut down, all those people would be out on the street as well with no useful skills. The result would be an immediate collapse of law and order. Food riots and the like will be what happens, not conservatives calmly starving and planting cabbages. 90 days after your scenario begins, every whitetail dear in North America would be dead.
They wouldn’t be chopping wood, they’d be burning the furniture. And the people who did the attacking would all be mobs. And all of this says nothing about the kind of real breakdown you will see everywhere else.
Yes conservatives are different philosophically from liberals, but that doesn’t mean they can support themselves if we suddenly turn the clock back to 1880. Of course we may see all of that anyway, but we shouldn’t bring it on ourselves. The idea is to avoid it if possible. I’m just at a loss to figure out how.
Thanks for the your thoughtful posts and the obvious effort you put into them. Not being a financial professional myself, and, unfortunately, tending to agree with your grim view of the future, I'm left wondering what to do with my money to minimize the downside. I haven't seen much discussion along these lines anywhere. What should a typical 40-ish, hard working, corporate America middle management resident do with four or five hundred thousand of resources spread across 401k, cash, IRAs, home equity, etc??? Are we doomed to see it all evaporate in stock collapse, inflation, taxes, or direct confiscation? I'd appreciate the wisdom of your years in the market and suspect you may be asking yourself similar questions.
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