Thursday, November 13, 2008
- Not Blaming Obama
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.