The economic landscape still looks pretty gloomy despite (because of?) massive increases in federal government spending by Congress. Want something else to worry about? What if your government suddenly went “belly up” on some or all of its public debt IOU’s?
Impossible you say? Not really.
When individuals or businesses have long-run expenses that exceed anticipated income—and have neither capital nor savings to fill in the gap—they often declare bankruptcy. And though it is rare, even some city governments (i.e., Vallejo, Calif.) have been plunged recently into insolvency and bankruptcy, and some state governments (with heavy pension costs) might consider it. But could it happen to our own federal government?
Most economists have always regarded this possibility as nearly unthinkable. After all, the U.S. government has never defaulted on a penny of its debt obligations in over 220 years. What this means is that when the Treasury sold government bonds, the bondholders have always received their interest payment and have always had their original principal returned at maturity. In that sense, U.S. government bonds have been 100 percent safe.
There are several ways that U.S. debt could become risky and unsafe and increase the likelihood of a general or partial default. The most obvious problem would be that Congress becomes unwilling or unable to raise taxes sufficient to pay, by law, the interest on the national debt.
So far this has not been an insurmountable problem despite the fact that in FY 2009, the interest cost to “carry” the U.S. public debt was $383 billion. (For a frame of reference, the budget for NASA last year was $19 billion.) The carrying costs by year 2019 are estimated to be more than $700 billion.
But these historical costs and projections are based on conservative guesses about deficits and interest rates. What if annual deficits now become trillion dollar holes (as they have) and rising interest rates (as are likely) force governments to pay far more to fund their increasing debt? Armentano at The Independent Institute
There's a major political fraud underway: the GOP is once again donning their libertarian, limited-government masks in order to re-invent itself and, more important, to co-opt the energy and passion of the Ron-Paul-faction that spawned and sustains the "tea party" movement. The Party that spat contempt at Paul during the Bush years and was diametrically opposed to most of his platform now pretends to share his views. Standard-issue Republicans and Ron Paul libertarians are as incompatible as two factions can be -- recall that the most celebrated right-wing moment of the 2008 presidential campaign was when Rudy Giuliani all but accused Paul of being an America-hating Terrorist-lover for daring to suggest that America's conduct might contribute to Islamic radicalism -- yet the Republicans, aided by the media, are pretending that this is one unified, harmonious, "small government" political movement.
The Right is petrified that this fraud will be exposed and is thus bending over backwards to sustain the myth. Paul was not only invited to be a featured speaker at the Conservative Political Action Conference but also won its presidential straw poll. Sarah Palin endorsed Ron Paul's son in the Kentucky Senate race. National Review is lavishly praising Paul, while Ann Coulter "felt compelled [in her CPAC speech] to give a shout out to Paul-mania, saying she agreed with everything he stands for outside of foreign policy -- a statement met with cheers." Glenn Beck -- who literally cheered for the Wall Street bailout and Bush's endlessly expanding surveillance state -- now parades around as though he shares the libertarians' contempt for them. Red State's Erick Erickson, defending the new so-called conservative "manifesto," touts the need for Congress to be confined to the express powers of Article I, Section 8, all while lauding a GOP Congress that supported countless intrusive laws -- from federalized restrictions on assisted suicide, marriage, gambling, abortion and drugs to intervention in Terri Schiavo's end-of-life state court proceeding -- nowhere to be found in that Constitutional clause. With the GOP out of power, Fox News suddenly started featuring anti-government libertarians such as John Stossel and Reason Magazine commentators, whereas, when Bush was in power, there was no government power too expanded or limitless for Fox propagandists to praise. Glenn Greenwald at Salon
The Daily Bell is pleased to present an exclusive interview with Lew Rockwell (left).
Introduction: Lew Rockwell is a seminal proponent of the modern free-market movement and a chief orchestrator of the Austrian economic resurgence in America and abroad. Rockwell was Ludwig von Mises' own editor in the 1960s and later served as Congressman Ron Paul's chief of staff. He is founder of the Auburn, Alabama-based Mises Institute and the highly successful blog LewRockwell.com. Together, these entities are among the highest- frequented free-market Internet sites in the world.
Daily Bell: You have almost singlehandedly led a revolution in thought that has changed the world. How does that make you feel?
Rockwell: Well, thank you, but that's not how ideas work. Without donors, faculty, students, collaborators, distribution media, and the division of labor, we are all just isolated scribblers. That has always been true, from the ancient world and today. We like to say that one person can make a difference, but it is only true to some extent. All forms of production, including in the world of ideas, require as much cooperation with others as possible. And while we were making great progress before 1995, the advent of digital media has made a vast difference precisely because it has dramatically expanded opportunities for communication and cooperation. Read the rest...
It’s not talked about much, at least by mainstream analysts, but make no mistake, it’s a time bomb, locked and loaded, and it’s set to blow the U.S. government’s budget sky high.
That time bomb? The interest cost on the government’s debt.
And what you ask will light the fuse? The end of the 30 year bull market in U.S. government debt, the end of record low interest rates.
In my opinion, unless politicians decide to renege on the government’s obligations, it’s not a matter of if, it’s a matter of when. And in the end neither the U.S. government nor the Federal Reserve can do anything about it.
When Governments Need Money, They Figure Out How to Get It!
Ron Holland Discusses the Risks to Your Retirment Plans:
The largest source of liquid private wealth remaining in the United States is the $15 trillion in private retirement funds. The ultimate ownership, control and future of these funds has already been compromised and exchanged for the favorable tax treatment of private retirement plans. Congress writes the laws, so they can tax, penalize, hold your funds hostage and, although they'd never use the word "confiscate," use your assets at their discretion.
... Although the faltering dollar could rebound in the short run, the longer-term prognosis is terminal unless Washington dramatically reduces spending and borrowing. When the global run on treasury debt and the dollar develops, the current relative minor fluctuations in values today will be replaced by a virulent death spiral of historic proportions rarely seen in world history.
Sometime in the next decade, the Washington dollar collapse will take its shameful place in history at the pinnacle of fiat currency robberies by politicians and central bankers. We will lead the world in wealth lost and future generations saddled by illegitimate government debts.
... The taxpayers will be forced to become the buyer of last resort in the final collapse of Washington treasury obligations. This is sort like being forced to purchase stock in AIG weeks before the final stock crash.
Over the past three or four years a strange phenomenon has developed in the global investment markets. With some exceptions, many asset classes, in particular domestic and foreign equities, commodities, and foreign currencies have tended to move in the same direction on a day-to-day basis. The mega-correlation has lasted so long that most now take it for granted. This leaves investors with relatively simple choices: when to get in to the market in general and when to park assets in cash and U.S. Treasuries.
However, few recall that this pattern is relatively new in the annals of financial history. Fewer still realize the reason for the current anomaly. From my perspective the most logical explanation is fear, which has become global, pervasive, and persistent. Traditionally, when investors fear inflation they buy stocks, commodities, gold, and foreign currencies, and sell dollars and U.S. treasuries. When they fear deflation they sell stocks, commodities, gold, and foreign currencies, and buy dollars and U.S. treasuries. The problem is that right now, no one knows which one to fear. Depending on the news the pendulum swings from one extreme to another on a daily basis. Peter Schiff at LRC
U.S. government, on its way to bankruptcy, Part 4 by Michael Pollaro
... as the protestations of a growing number of foreign creditors over the health of the U.S. government’s finances suggest, protestations supported by actual foreign investment flows to boot, foreign based creditors may already be pulling back from U.S. government debt. And that in turn suggests the Federal Reserve is beginning to grind its monetary engines in response.
... Foreign creditors are pulling back on their combined purchases of government and GSE debt. And the Federal Reserve is buying both to fill the void, and then some. And as we saw in Part 3, this should come as no surprise when America can not possibly finance the U.S. government’s borrowing needs when these needs are a growing multiple of U.S. savings, year in and year out.
Perhaps what foreign creditors are saying is this: Sure, I’ll buy your shorter-dated U.S. government debt, if you buy my longer-dated GSE debt. But until you, the U.S. government get your house in order and prove to us you will not simply resort to the printing press to pay your bills, don’t expect too much of the former and expect a lot more of the latter.
Indeed, this is what any self respecting bond investor would do when they begin to feel the value of their investment is at risk – become cautious, shorten up on maturities and make sure you know the location of the exit door.
So now there are no fiscal rules. None. Cash for clunkers -- and for pig farmers, homebuilders, real estate speculators, and GE’s (GE) green machines, too -- will never stop flowing. Eventually -- perhaps soon -- there will be more Treasury bonds to sell than the world’s shrinking base of dollar holders can possibly absorb.
Then the Big Panic will come. In the event, some will look back and wonder why we destroyed our capacity for fiscal governance in order to save the likes of AIG (AIG), Citibank (C), and especially Goldman during the comparatively minor disorder of September ’08. Certainly, the so-called “systemic risk” will have been exposed for the cover story it was.
None of AIG’s alleged CDS time bomb, for example, really mattered. The European banks who were wrapping dodgy assets with AIG’s bogus AAA cover would have gotten bailed out by their own socialist governments, anyway. For Goldman, the loss would have meant six months of bonus accruals. For the big insured US depositories, losses would have meant their Sheila-gram would have come sooner, rather than later....
Thus, “systemic risk” was but a fig leaf for aggrandizement of the state, and especially its central banking branch. The resulting waste of resources and ballooning of moral hazard was palpable. But the real cost was in the final destruction of political discipline which resulted from the mad rush to TARP.
The debate between J.M. Keynes and F.A. Hayek, both living and teaching in Britain in the 1930s, was one of the great debates of the century. Sadly, the charming globetrotter Keynes had the podium and the audience, to the point of influencing policy the world over even to the present day. Meanwhile, the quiet and studious Hayek never really did gain an audience. Like his colleague and mentor Mises, Hayek wrote in scholarly journals and was heard only by those with skeptical minds, people who doubted the theoretical and policy conventions and looked beneath the surface.
In one sense, then, the debate between these two was one of the most critical for the shape of the world over the last 75 years. In another sense, however, this debate never really occurred, for the Hayekian point of view has been systematically marginalized and kept at bay by the political and economic establishment ever since Keynes was prematurely declared the victor in the late 1930s. Read the rest... Jeff Tucker at Mises.org
Not long after the State of the Union address, the Congress voted to substantially worsen that state, delivering a one-two punch directly at the value of the U.S. dollar. Not light jabs, but crippling body blows that will leave the prosperity of the American people reeling. The damage this combination of monetary and fiscal hits will do is being telegraphed in advance: first the monetary blow, as the Senate confirmed Federal Reserve Chairman Ben Bernanke for another four-year term; next the fiscal blow, as both the House and Senate approved another increase in the statutory national debt ceiling. The new limit, a debt increase on steroids, adds $1.9 trillion to bring the ceiling to $14.3 trillion, an amount roughly equal the U.S. gross domestic product.
When freshman Sen. Barack Obama said that a Bush debt-ceiling hike was a sign of "leadership failure," he was right. When Bush came into office the debt ceiling was less than $6 trillion dollars; it was $11.315 trillion when he went out the door. Bush presided over seven increases in eight years. In less than a full year of Obama's presidency, the debt ceiling was lifted twice. This new increase is his third.
Just the increase in the national debt under the joint leadership of Bush and Obama in the last two years is almost three times the entire federal debt accumulated between the nation's founding in 1776 and 1980.
Because long-term increases in sensitive barometers like the global price of oil and gold are a reflection of the world's assessment of the prospects for the dollar, a referendum on the U.S. debt and America's fiscal irresponsibility, it should come as no surprise that under Bush and Obama, increases in the national debt ceiling have been a harbinger of higher gold and oil prices.
Gold tells the story in detail. In November 2004....
The Empirical Evidence for Fiscal Stimulus...Anyone? Bueller? In this post Paul Krugman explains that a popular critique of the benefits of fiscal expansion is a non sequitur, since the authors improperly look at deficit spending in periods where there is no liquidity trap (and hence we shouldn't be surprised if deficit spending doesn't spur growth). A fair test of Keynesianism would only look at big deficit spending during periods where central banks had pushed interest rates down to the zero bound:
First, the whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound....Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high.
Second, they use a statistical method to identify fiscal expansions — trying to identify large changes in the structural balance. But how well does that technique work? When I want to think about Japan, I go to the work of Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.
So to put it bluntly, I’m not much persuaded by a paper that doesn’t even identify the one clear example we have in the postwar period of large Keynesian stimulus in a zero-rate environment.
Are there any papers that, in my view, do this right? Yes: Almunia et al, which uses data from the 30s — a zero-rate era — and uses defense spending as an instrument to identify spending changes. And their results look pretty Keynesian.
Everyone got that? Krugman admits that the only two examples in world history to test the effectiveness of Keynesian policies are:
(1) The world in the 1930s, and
(2) Japan in 1995.
These are the two examples to prove how good Keynesian policies are at fixing economies and stimulating growth.
By the way, don't say World War II you silly fool--Krugman has explicitly argued that that isn't a test of Keynesian fiscal remedies.
No one is more sensitive to the purchasing power of the dollar than a foreign creditor..
America is not Greece, Portugal, Spain or Ireland, at least not yet, but the fiscal state of these nations are not all that different from that of America, with one glaring exception – America can print money at a moments notice with which to pay its debts. But as we have seen, that only means that when the U.S. government’s funding crisis does come to America, it could make what’s happening to these countries look like child’s play.
So, back to the original question, what’s keeping the U.S. government’s inflation engine in the yard? The answer, foreign creditors. And when they say it’s time to exit, it won’t be long before our politician friends will have no other choice but to either come clean with Paul, and cut spending, or, and pardon the vernacular, tax the crap out of Peter via the Federal Reserve’s printing press.
CHARLES TO SPEAK AT MISES CIRCLE IN PHOENIX IN APRIL!
"THE INFLATIONARY PATH TO DESPOTISM"
April 10, 2010
Phoenix, AZ, Hilton Airport
From Ancient Rome through modern-day America, money inflation has been the means by which the state extracts wealth without recourse to taxation. Such a monetary policy leads to gutting savings, punishing investment, and the launching of economic cycles and even soaring prices and banking disasters. But perhaps the greatest cost is in human liberty itself. The intellectual tragedy here is that few make the connection between the quality of money and the rise of despostism.
This Mises Circle is devoted to exploring the relationship and providing a path toward permanent freedom.
Charles will speak on THE COMMAND ECONOMY. Other topics and distinguised speakers include:
