Doug Casey on US government debt

Some juicy excerpts from the legendary investor Doug Casey at his International Man website: (bold mine)

The only way a society (or an individual) can grow in wealth is by producing more than it consumes; the difference is called “saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production. Saving increases one’s future standard of living; debt reduces it.

If you were to borrow a million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain. If you don’t repay your debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop. Until that moment comes, debt can look like the key to prosperity, even though it’s more commonly the forerunner of disaster.

Of course, debt is not in itself necessarily a bad thing. Not all debt is for consumption; it can be used to finance capital goods, intended to produce further wealth. But most US debt today finances consumption—home mortgages, car loans, student loans, and credit card debt among other things.

Government Debt

It took the US government from 1791 to 1916 (125 years) to accumulate $1 billion in debt. World War I took it to $24 billion in 1920; World War II raised it to $270 billion in 1946. Another 24 years were needed to add another $100 billion, for a total of $370 billion in 1970. The debt almost tripled in the following decade, with debt crossing the trillion-dollar mark in October 1981. Only four and half years later the debt had doubled to $2 trillion in April 1986; four years more added another trillion by 1990; and then in only 34 months it reached $4.2 trillion in February 1993. The exponential growth continued unabated. US government debt stood at $18 trillion in early 2015. Off-balance-sheet borrowing and the buildup of massive contingent liabilities aren’t included. That may add another $50 trillion or so.

In 1964—the year Lyndon Johnson was elected—US federal debt stood at $316 billion, and interest on it was $10.7 billion, which was equal to 14.8% of personal and corporate tax revenues. When Reagan left office in 1989, the debt stood at $3.2 trillion, and interest was $214 billion, taking 43% of tax revenues. When Bush left office in 1993, the debt stood at $4.2 trillion and interest at $293 billion, consuming 52% of personal and corporate income taxes.

As of fiscal-year 2013, there was $16.8 trillion in federal debt and $416 billion in interest payments, which consumed about 15% of tax revenues. When interest rates rise again, even to their historical average, the US government will find most of its tax revenue is going just to pay interest. There will be little left over for the military and domestic transfer payments.

When the government borrows just to pay interest, a tipping point will be reached. It will have no flexibility at all, and that will be the end of the game.

In principle, an unsustainable amount of government debt should be a matter of concern only to the government (which is not at all the same thing as society at large) and to those who foolishly lent them money. But the government is in a position to extract tax revenues from its subjects, or to inflate the currency to keep the ball rolling. Its debt indirectly, therefore, becomes everyone’s burden.

The consequences of all this are grim, but the timing is hard to predict. Perhaps the government can somehow borrow amounts that no one previously thought possible. But its creditors will look for repayment. Either the creditors are going to walk away unhappy (in the case of default), or the holders of all dollars are going to be stuck with worthless paper (in the case of hyperinflation), or the taxpayers’ pockets will be looted (the longer things muddle along), or most likely a combination of all three will happen. This will not be a happy story for all but a few of us.

US Politics: Despite the all the Theatrics the GOP Sells out, Debt Ceiling Raised

Today's US debt ceiling drama reminds me of a favorite Filipino proverb by my best friend and foreign client “Pagkahaba-haba man daw ng prusisyon, sa simbahan din ang tuloy” (“No matter how long the procession, it still ends up in church”)

Despite all the rhetoric, drama and theatrics about supposed "principles", the end game, as expected, has been to accommodate the perpetual propagation of debt.

As I previously noted

This means that despite the hullabaloo in the US Congress, which really is just a vaudeville, as congress people will fear the wrath of (the voting public-added Benson), losing political power and privileges from entitlement dependent-parasitical voters, eventually the debt ceiling will be raised. (charts from the Heritage Foundation).

Like actions of central banks led by the US Federal Reserve, America’s welfare state will be pushed to the brink of a crisis or will fall into a crisis first, before real reforms will be made.

In the world of politics, cost-benefit tradeoffs has been reduced to short term expediencies.

Now the compromise fires up the debt starved stock markets again, from the Bloomberg

U.S. stocks rallied, sending the Standard & Poor’s 500 Index (SPX) toward a record, as the Senate crafted a deal to end the government shutdown and raise the debt ceiling before tomorrow’s deadline.

The reported Senate deal: (bold mine)

The bipartisan leaders of the Senate reached an agreement to end the fiscal impasse and to increase U.S. borrowing authority. The Senate and House plan to vote on it later today, and the White House press secretary said President Barack Obama supports the deal.

The framework negotiated by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell would fund the government through Jan. 15, 2014, and suspend the debt limit until Feb. 7, setting up another round of confrontations.

The agreement concludes a four-week standoff that began with Republicans demanding defunding of Obama’s 2010 health-care law, and objecting to raising the debt limit and funding the government without policy concessions. House Speaker John Boehner said in a statement that Republicans won’t block the Senate compromise.

With no deal, the U.S. would exhaust its borrowing authority tomorrow and the government may start missing payments at some point between Oct. 22 and Oct. 31, according to the Congressional Budget Office. Fitch Ratings put the world’s biggest economy on watch for a possible credit downgrade yesterday, citing lawmakers’ inability to agree.

UPDATE the House of Representatives has reportedly acquiesced to the US Senate compromise.

And as I previously anticipated the GOP will sellout

And the fear of the wrath of the public which means losing political power have become a potent force in the shaping of the supposed deal…the American public has been putting the blame on the GOP (Republicans).

Here is House Speaker John Boehner statement on the Senate deal (hat tip Zero Hedge) [bold mine]

The House has fought with everything it has to convince the president of the United States to engage in bipartisan negotiations aimed at addressing our country's debt and providing fairness for the American people under ObamaCare.  That fight will continue.  But blocking the bipartisan agreement reached today by the members of the Senate will not be a tactic for us.  In addition to the risk of default, doing so would open the door for the Democratic majority in Washington to raise taxes again on the American people and undo the spending caps in the 2011 Budget Control Act without replacing them with better spending cuts.  With our nation's economy still struggling under years of the president's policies, raising taxes is not a viable option. Our drive to stop the train wreck that is the president's health care law will continue.  We will rely on aggressive oversight that highlights the law's massive flaws and smart, targeted strikes that split the legislative coalition the president has relied upon to force his health care law on the American people.

 

So the debt ceiling compromise will mark the 19th increase since March 1962. 

This also means that there will hardly be any reform until a crisis eventually hits.

At the end of the day, US politics end up where they started or from the default position of steadily raising debt. 

The Poker Bluffing circus never ends. The more things change...

A History of US Debt Defaults

Many mainstream pundits have been saying that the US hasn’t ever defaulted. This hardly represents the accurate picture of reality.

Austrian economist Joseph at the Mises Blog cites a work of another economist who noted of the previous US experience.

Ohio State economist J. Huston McCulloch actually challenges the conventional wisdom that the U.S. government has never, ever defaulted on its debts. McCulloch points out that the U.S. did indeed default on its debt in 1861 and again in 1933.  In 1861, the U.S. Treasury issued “United States Notes” to aid in financing the Civil War. These Treasury notes, known colloquially as “Greenbacks,” promised to pay the  bearer in “lawful money,” gold or silver at the government ‘s discretion, on demand. At the end of 1861, however, the government renounced its promise and suspended redemption as of January 1, 1862, putting it technically in default until 1879 when the notes were again made redeemable in gold. In 1933, President Roosevelt reneged on the promise to pay the interest and principal on Treasury bonds in gold at the rate of $20.67 per ounce, which once again put the government in technical default. In 1935, the right to redeem the bonds in gold was restored to foreign bondholders only, but at the depreciated rate of $35.00 per ounce, an option which was never offered to U.S. bondholders.

More important, the whole notion that an honest and explicit debt default by the U.S. government is an unprecedented event and the worst possible outcome in the current situation is ludicrous given that the U.S. has been continually and surreptitiously defaulting on its debt since World War 2 via inflationary finance. As McCulloch argues:

Governments often effectively default on their debts through inflation. Under a fiat money regime, they can always print enough legal tender money to pay off their debts. The only catch is that the money will not be worth as much as it was before. If it tries to cover too much deficit spending in this manner, more than a few percent of GDP, the inevitable result is hyperinflation in which money quickly becomes virtually worthless.

Disastrous though an explicit Treasury default would be, bringing down the entire economy with a hyperinflation or even a partial inflationary default would be even worse. But if we keep charging current deficits to future taxpayers at our current rate, the inevitable result will be a revolt in which they either explicitly repudiate all or part of the debt, or, worse yet, inflate it away.

Even the Wikipedia, as shown above, has an account of the history of US debt defaults as I previously posted here

Of course relationships have materially changed. This means that the effects of the previous defaults may or may not be the same as today.

However populist politics, which has been deeply immersed in the culture of debt, have used the default bogeyman as leverage to spook the markets in order to impel for the raising of the debt ceiling. Raising the debt ceiling means to persist on the path of a debt financed spending splurge. 

But this would be tantamount to playing with fire.

As I previously pointed out, the likelihood is that a debt deal will be struck perhaps in the last minute of the deadline, as politicians will hardly be fighting for principle, but for social standings and the maintenance of political privilege. Importantly a default would likely mean the end of the US dollar hegemony.

Proof of this can be seen in the recent editorial by the Chinese state press agency, Xinhua, which even called for the de-Americanization of the world where they claim that “effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant U.S. dollar”

Nonetheless given the path of unsustainable debt absorption by the US government…

…which has also been reflected on the entire US political economy, the issue of default, directly (restructuring or repudiation) or indirectly (via massive inflation) is a question of when and not an if. 

This means that US politics should reform the system even at the cost of temporary instability, to prevent the day of reckoning.

Quote of the Day: The Sanctity of US Government Debts

The notion that the US government won’t default on its debt is simply historically inaccurate.

As recently as 1979 in the midst of another debt-ceiling debacle, the government failed to pay on $120 million in Treasuries according to stated terms, resulting in a class-action lawsuit Barton vs. United States.

And in 1934, FDR unilaterally abrogated the repayment terms for Liberty Bonds that were supposed to have been paid back in gold… or at least gold-backed currency.

Roosevelt refused to repay the bonds in gold, then devalued the dollar by as much as 40%, paying back bondholders in worthless paper.

But probably the most ignorant economic postulate is that the debt doesn’t matter because ‘we owe it to ourselves…’

It is accurate that only a third of the official US debt is owed to foreigners. The rest is owed to intragovernmental agencies like the Social Security Trust Fund, or to the US Federal Reserve.

But I’m mystified at how people find this comforting.

The US government fails to collect enough tax revenue to meet its mandatory entitlement spending and interest on the debt. In other words, they have to borrow more money just to be able to pay interest on what they already owe.

At some point, the music is going to stop and one of these major stakeholders will be left without a chair.

If they default on foreigners, it would destroy the foundation of the global financial system and shut the US government out of international debt markets.

But if they default on the Federal Reserve, then it would create an unprecedented currency crisis that the United States hasn’t seen since the Confederate Dollar collapsed in 1864.

If they default on the Social Security Trust Fund, then everyone in the Land of the Free who currently receives a public pension is going to get screwed.

It’s astounding that people think this doesn’t matter, as if we could just ‘default on ourselves’ and everything will be OK.

Yet, again, through sheer repetition, this has become the truth. It’s sacrosanct. And to challenge the truth is tantamount to blasphemy. Anyone who does challenge it is ridiculed and branded a lunatic.

Such close-mindedness is dangerous, especially in economics. People’s lives and livelihoods depend on an objective understanding of the facts, not this altered reality.

This from Sovereign Man’s Simon Black

Detroit: US Largest City to File for Bankruptcy

As US stock markets soar to record highs, Michigan’s most populous city of Detroit once the cradle of the US automobile industry files for bankruptcy

From the BBC:

The US city of Detroit in Michigan has become the largest American city ever to file for bankruptcy, with debts of at least $15bn (£10bn).

State-appointed emergency manager Kevyn Orr asked a federal judge to place the city into bankruptcy protection.

If it is approved, he would be allowed to liquidate city assets to satisfy creditors and pensions.

Detroit stopped unsecured-debt payments last month to keep the city running as Mr Orr negotiated with creditors.

He proposed a deal last month in which creditors would accept 10 cents for every dollar they were owed.

But two pension funds representing retired city workers resisted the plan. Thursday's bankruptcy filing comes days ahead of a hearing that would have tried to stop the city from making such a move.

A Wall Street Journal report estimates “Municipal-worker retirees are set to get less than 10% of what they are owed under the plan.” Ouch.

Detroit's riches to rags synopsis from the same BBC article:

The city, once renowned as a manufacturing powerhouse, has struggled with its finances for some time, driven by a number of factors, including a steep population loss.

The murder rate is at a 40-year high and only one third of the its ambulances were in service in early 2013.

Declining investment in street lights and emergency services have made it difficult to police the city.

And Detroit's government has been hit by a string of corruption scandals over the years.

Between 2000-10, the number of residents declined by 250,000 as residents moved away.

Detroit is only the latest US city to file for bankruptcy in recent years.

In 2012, three California cities - Stockton, Mammoth Lakes and San Bernardino - took the step.

In 2011, Harrisburg, Pennsylvania tried to file for bankruptcy but the move was ruled illegal.

But Thursday's move in Detroit is significantly larger than any of the earlier filings.

Detroit ranks 9th in terms of highest taxes based on US cities according to the Marketwatch.com. On the obverse side of high taxes has been unsustainable government spending from bureaucracy to welfare.

From Reuters:

Detroit's state and local tax burden as a percentage of annual family income surpassed the average for other large U.S. cities. For example, the tax burden at the $25,000 income level was 13.1 percent in Detroit versus an average of 12.3 percent.

Buss said that Detroit has seen a significant expansion in deficit spending over the last two years, reaching an accumulated $326.6 million at the end of fiscal 2012 from an accumulated deficit of $196.6 million in fiscal 2011. The city has had a budget deficit every year since 2003…

Total revenue in Detroit has fallen sharply over the last 10 years by over $400 million or 22 percent, according to the analysis. State revenue sharing has also been cut, although the city, which accounts for 7 percent of the state's residents, gets by far the biggest amount on a per capita basis -- $335 per resident -- far more than other Michigan cities with populations over 50,000.

Half of Detroit's top 10 employers are governmental entities, led by the city itself with nearly 11,400 workers, down from 20,800 in 2003, followed by the Detroit Public Schools at 10,951, the report said. Two health care systems and the federal government round out the top five. Chrysler, the only automaker in the group, ranks eighth, employing 4,150 workers, a drop of more than a half from 2003.

Also part of the decline of Detroit has attributed to “raced based” policies which sparked a “White Flight” according to economist Walter Williams.

Local politics shaped by labor activism or labor unions likewise compounded on the loss of competitiveness.

So Detroit seems as the US version of Greece: declining economy predicated on the lack of competitiveness shaped by repressive social policies and by excess political baggage via the welfare and bureaucratic state.

Detroit signifies a harbinger for a world addicted to debt based 'political' consumption spending.

Nonetheless The USA Today lays out “What happens next” or the possible legal steps on the Detroit Bankruptcy 

And furthermore, while Detroit represents the largest city or the largest municipal bankruptcy in history, there are yet other local troubled spots (graphic from New York Times).

Yet if the current inflationary boom in the US morphs into a bust, then we will see even more candidates similar to Detroit. 

Worse, even the US government is at the risk of becoming a Detroit, especially if interest rates (as expressed by the bond markets or of the return of the bond vigilantes) continue with its upside trek.

Mayhem in the US Treasury Markets, No Problem, China to the Rescue!

When you're down and troubled and you need a helping hand and nothing, whoa, nothing is going right.

Close your eyes and think of me and soon I will be there to brighten up even your darkest nights. —James Taylor, You’ve got a friend

China’s government has played the role of “savior” to what could have been a US treasury market crash last May. 

As the US Treasury markets seized up, the Chinese government added $25.2 billion to its US treasury holdings which represents the highest hoard ever.

From China Daily USA:

China, the biggest creditor to the United States, increased its holdings of US Treasury bonds by 2 percent in May to $1.32 trillion, even as foreign demand for the bonds fell for a second consecutive month, according to the US Treasury.

China had increased its holdings of US bonds by 1.6 percent in April, which was revised higher after an initially 0.4 percent drop. Japan, the second-largest buyer, trimmed its holdings 0.2 percent to $1.11 trillion in May…

US residents increased their holdings of long-term foreign securities, with net purchases of $27.2 billion, while foreign investors decreased their holdings by $39.2 billion, said the Treasury report.

The sum total in May of all net foreign acquisitions of long-term securities, short-term US securities, and banking flows was a monthly net of $56.4 billion, said the Treasury Department. Net foreign private inflows were $46.6 billion, and net foreign official inflows were $10 billion.

TIC data shows that total foreign ownership of USTs reached a fresh record of $4097.9 billion in May, surpassing the February highs of $4097.4. 

China’s additional acquisition of $25.2 billion of USTs has been the swing factor. This implies that China’s actions played a crucial role in providing counterbalance to the resurfacing of the bond vigilantes. [The Philippines joined the "you've got a friend" movement adding $.2 billion last May]

This also demonstrates of the deepening dependency by the US government on her Chinese counterpart.

Austrian economist Gary North explains;

The U.S. government is running about a $650 billion deficit this fiscal year. The People’s Bank of China is doing its part to help out. It just bought another $25 billion of this deficit last month.

Why is it doing this? To hold up the value of the dollar.

Why is it holding up the value of the dollar? To make it less expensive for Americans to buy goods made in China.

But then protectionists in Congress scream bloody murder, because China is subsidizing exports to Americans. Then they vote for federal spending that runs a huge deficit. So, in order to hold down government interest rates, the Treasury Department must find buyers of this debt, other than the Federal Reserve System. The Chinese central bank is a large buyer.

So, every time Senator Chuck Schumer of New York insists that China must be stopped from rigging its currency, he is really saying that the Chinese central bank should stop buying IOUs issued by Congress. Then he votes for another spending program.

The Chinese central bank creates money out of nothing, just as the Federal Reserve does. Then it takes this newly counterfeited money and buys U.S. government debt, just as the Federal Reserve does. It bought $25 billion of this debt last month. The Federal Reserve bought $45 billion. So, when it comes to currency-rigging, which central bank is the greater culprit?

This is the race to the bottom. Which central bank will destroy its currency first? Or, if the central banks decide not to inflate any more, which central bank will cease counterfeiting money, thereby causing an economic depression?

The two economies, China’s and America’s, are addicted to the drug of fiat money. The first central bank to quit counterfeiting — the first one to “taper” — starts the international recession. Which will it be?  The first one to stop inflating permanently will turn the recession into a depression. Which will it be?

In May of 2012, the Chinese government has been given direct access to the US Treasury which basically bypasses the crony Wall Street. That reveals of the significance of the US-China relationship.

Such dependancy extrapolates to a Dr. Jekyll and Mr. Hyde relationship where on the financial front, the US and the Chinese government have been operating stealthily as staunchest allies, as against the geopolitical front, which media paints both parties as nemesis or adversaries.

The implication as I wrote a year ago:

Of course the inference from the above statement is that the Scarborough Shoal controversy has been mostly a false flag. What you see isn't really what has been. Politicians and media has taken the public for a ride at the circus.

I would add that not only has the media portrayed conflict between US-China been to promote the military industrial industrial complex, it serves as convenient pretext for the political class of these respective nations involved in territorial disputes, to expand control on their constituents via more financial repression, more taxes, more regulations and other forms of political control...all in the name of nationalism. 

At the end of the day, the world operates in a gamed system.

Cognitive Dissonance and the US Stock Markets

Media, politicians and the US stock market operates in a cognitive dissonance. Cognitive dissonance is the confusion arising from the state of holding (Wikipedia.org) “two or more conflicting cognitions: ideas, beliefs, values or emotional reactions”

First the record run in US stocks has been been attributed to “growing confidence in the U.S. recovery” Good news is read as good for stocks, that's as of the other day.

Then today, falling stocks have been imputed to concerns over a pushback on stimulus; “will scale back its stimulus efforts if the labor market continues to improve”. 

Here good news is seen as bad news.

From the above account, one wonders whether the “growing” economy is really good or bad for stocks? Or whether “growth” has merely served as a cosmetic for the deepening addictions by the markets on the FED's steroids?

More rhetorical conflict of rhetoric from Media, Wall Street, and the US government;

On the one hand, the economy has been exhibiting strength for some of the FED officials to propose tapering of stimulus 

A number said they were willing to taper bond buying as early as the next meeting on June 18-19 if economic reports show “evidence of sufficiently strong and sustained growth,” according to the record of the April 30-May 1 gathering released today in Washington.

“Most observed that the outlook for the labor market had shown progress” since the-bond buying program began in September, according to the minutes. “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”

On the other hand, Ben Bernanke contradicts the above by stating that the economy doesn’t seem to be strong enough for premature withdrawal of stimulus

Federal Reserve Chairman Ben S. Bernanke defended the central bank’s record stimulus program under questioning from lawmakers, telling them that ending it prematurely would endanger a recovery hampered by high unemployment and government spending cuts.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said today in testimony to the Joint Economic Committee of Congress in Washington.

From Mr. Bernanke’s point of view, “premature tightening of monetary policy could lead interest rates to rise” implies the exposing of the risks of the highly leverage markets and economy. And that such tightening would extrapolate to a bubble bust or in economic gobbledygook “the risk of slowing or ending the economic recovery and causing inflation to fall further”

So essentially, people at the Fed have been talking at different wavelengths. Bernanke's discourse has been premised on the entrenched bubble conditions, whereas other Fed officials have used statistics to generate economic forecasts (or reading history as the future).

Thus Fed officials seem as clueless as to the real direction of the economy or of the markets. Or are they?

And a bollixed FED has been used by the stock markets as a reason to retrace. From intraday gains, US stocks went from green into the red yesterday (stockcharts.com)

Record setting US stocks has been on fire rising for 19 straight sessions before today’s correction and whose winning streak was cut short by cognitive dissonance.

Why is this important? Because, aside from direct and indirect interventions, the state of bewilderment of the causal process of the current environment by the media and political agents has contributed immensely to the skewing of price signals and to the accumulation of imbalances in the system. This has also been used to sabotage gold prices.

Well, Philip Coggan of the Economist Buttonwood fame points to studies reinforcing the “parallel universe” or the growing disconnect between stocks and the real economy. (bold mine)

The annualised growth rate of the US economy in the first quarter was 2.5 per cent; the annual gain in earnings per share was 5.2%; the annualised gain in the market was 46%. Of course, as has been pointed out by the assiduous Marsh, Dimson and Staunton, or by Jay Ritter, there is no clear statistical link between GDP growth and equity returns at all.

The mainstream has now been recognizing this.

And as I have been pointing out this is not your daddy or your granddaddy's stock markets.

And more on why the current environment or the parallel universe is unsustainable, again from the Buttonwood… (bold mine)

The hope is that higher share prices can eventually produce a self-fulfilling cycle via a wealth effect (and on this note, the University of Michigan survey last week showed consumer confidence at a six-year high) or indeed on business investment. Mr Makin notes that real household net worth is up by about $4 trillion over the last year, helped by houses as well as stocks. He estimates the wealth effect at about 4% over a year; thus the boost to consumer spending was $160 billion, or 1% of GDP. This may indeed explain why US consumer have shaken off the effect of the rise in payroll taxes this year.

But the offset of this wealth effect is that the household savings rate fell to 2.6% in the first quarter, down from 5.1% in 2010. As Mr Makin points out, this is ominously similar to the pre-2007 pattern of high consumption based on the hope that asset prices would stay high. The potential long-term problem here is that asset prices tend to revert to the mean; people may be saving too little for their retirement on the view that markets will do all the work. As in 2007 and 2008, they may get a nasty shock later on. One could make quite a bearish case for US equities in the long run, on the grounds that share price valuations (as measured by the Shiller p/e) are higher than average and profits are at a post-1947 high as a proportion of GDP.

The lesson is whatever statistical growth seen from today is mostly a reflection of credit driven elevated prices of financial assets rather from real economic growth. The same holds true for the Philippines. 

The mirage of statistical growth. 

Hence Ben Bernanke realizes that any pullback of steroids would expose on this sham that would undermine the banking sector’s balance sheets.

Also an ‘exit’ would also mean the pulling of the proverbial rag underneath the FED’s monetization of US debts which hardly anyone talks about.

Bottom line: The protection of the banking sector and the Fed’s financing of US government debt have been the main pillars that undergirds the FED’s credit easing policies. That’s why such “exit” or “withdrawal” blarney are what I call as poker bluff. The Fed cannot afford it.

IN withholding the truth, the Fed’s communication’s strategy seems as the guileful employment of cognitive dissonance in order to confuse the public.

As English novelist Eric Arthur Blair popularly known for his pen name George Orwell wrote in Politics and the English Language (italics original)

Political language…is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. One cannot change this all in a moment, but one can at least change one's own habits, and from time to time one can even, if one jeers loudly enough, send some worn-out and useless phrase — some jackboot, Achilles’ heel, hotbed, melting pot, acid test, veritable inferno, or other lump of verbal refuse — into the dustbin where it belongs.

How the US Government Spends Money

When government lavishes away the economy’s scarce and valuable resources through the acquisition of unsustainable levels of debt for the benefit or for the interests of the political class and their cronies, then social entropy should be expected based on the predominant trend of unproductive and wealth consuming activities.

Below are excerpts on the “55 facts about the debt and U.S. government finances” from the Economic Collapse Blog 

#1 While Barack Obama has been president, the U.S. government has spent about 11 dollars for every 7 dollars of revenue that it has actually brought in. 

#2 During the fiscal year that just ended, the U.S. government took in 2.449 trillion dollars but it spent 3.538 trillion dollars. 

#3 During fiscal year 2011, over a trillion dollars of government money was spent on 83 different welfare programs, and those numbers do not even include Social Security or Medicare. 

#4 Over the past four years, welfare spending has increased by 32 percent.  In inflation-adjusted dollars, spending on those programs has risen by 378 percent over the past 30 years.  At this point, more than 100 million Americans are enrolled in at least one welfare program run by the federal government.  Once again, these figures do not even include Social Security or Medicare. 

#5 Over the past year, the number of Americans getting a free cell phone from the federal government has grown by 43 percent.  Now more than 16 million Americans are enjoying what has come to be known as an "Obamaphone". 

#6 When Barack Obama first entered the White House, about 32 million Americans were on food stamps.  Now, nearly 47 million Americans are on food stamps.  And this has happened during what Obama refers to as "an economic recovery". 

#7 The U.S. government recently spent 27 million dollars on pottery classes in Morocco. 

#8 The U.S. Department of Agriculture recently spent $300,000 to encourage Americans to eat caviar at a time when more families than ever are having a really hard time just trying to put any food on the table at all…. 

#19 The U.S. government spends more on the military than China, Russia, Japan, India, and the rest of NATO combined.  In fact, the United States accounts for 41.0% of all military spending on the planet.  China is next with only 8.2%. 

#20 In a previous article, I noted that close to 500,000 federal employees now make at least $100,000 a year. 

#21 In 2006, only 12 percent of all federal workers made $100,000 or more per year.  Now, approximately 22 percent of all federal workers do…. 

#32 When you combine all federal government spending, all state government spending and all local government spending, it comes to approximately 41 percent of U.S. GDP.  But don't worry, all of our politicians insist that this is not socialism. 

#33 As I have written about previously, less than 30 percent of all Americans lived in a home where at least one person received financial assistance from the federal government back in 1983.  Today, that number is sitting at an all-time high of 49 percent. 

#34 Back in 1990, the federal government accounted for just 32 percent of all health care spending in America.  This year, it is being projected that the federal government will account for more than 50 percent of all health care spending in the United States. 

#35 The number of Americans on Medicaid soared from 34 million in 2000 to 54 million in 2011, and it is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls… 

#36 In one of my previous articles, I discussed how it is being projected that the number of Americans on Medicare will grow from 50.7 million in 2012 to 73.2 million in 2025. 

#37 If you can believe it, Medicare is facing unfunded liabilities of more than 38 trillion dollars over the next 75 years.  That comes to approximately $328,404 for each and every household in the United States. 

#38 In the United States today, more than 61 million Americans receive some form of Social Security benefits.  By 2035, that number is projected to soar to a whopping91 million. 

#39 Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years. 

#40 When Barack Obama first took office, the U.S. national debt was about 10.6 trillion dollars.  Now it is about 16.2 trillion dollars.  That is an increase of 5.6 trillion dollars in less than 4 years… 

#55 Boston University economist Laurence Kotlikoff is warning that the U.S. government is facing a gigantic tsunami of unfunded liabilities in the coming years that we are counting on our children and our grandchildren to pay.  Kotlikoff speaks of a "fiscal gap" which he defines as "the present value difference between projected future spending and revenue".  His calculations have led him to the conclusion that the federal government is facing a fiscal gap of 222 trillion dollars in the years ahead.

Read the rest here

As the illustrious economist the late Milton Friedman once said, If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand.

Quote of the Day: The Myth of Deleveraging

Doug Noland of the Credit Bubble Bulletin at the Prudentbear.com spectacularly demolishes the popular notion that the US has been deleveraging by delving into the nitty gritty of US systemic financing [bold mine]

The three Trillion-plus contraction in FSCMD did reduce Total System Market Debt – in the process seemingly improving debt-to-GDP ratios.  It is not, however, indicative of true system deleveraging and surely doesn’t reflect an improvement in our nation’s overall Credit standing.  Far from it.  From a Macro Credit Analysis perspective, the decline in FSCMD is instead reflective of fundamental changes in both the type of debt now fueling the boom and the corresponding nature of system risk intermediation.

First of all, mortgage debt is about to wrap up its fourth straight year of post-Bubble contraction.  Problem loan charge-offs have played a significant role, as have individuals using lower debt service costs (and near-zero returns on savings!) to speed the repayment of outstanding mortgages.  And, importantly, the decline in home values and the steep drop in transaction volumes have reduced demand for new mortgage debt – hence the need to intermediate mortgage Credit.  That said, the biggest factor behind the drop in FSCMD has been the activist Federal Reserve.

The Fed’s balance sheet is separate from the Financial Sector.  Federal Reserve Assets ended 2007 at $951bn.  Fed holdings ended Q2 2012 at $2.882 TN, up $1.931 TN, or 203%, in 18 quarters.  The Fed essentially transferred $2 TN of Financial Sector liabilities to a secure new home on its balance sheet.  Some may refer to this as “deleveraging,” but I won’t.

Importantly, the Fed’s moves to collapse interest rates and monetize debt (in conjunction with mortgage assistance programs) incited a major wave of mortgage refinancing.  And through the refi process, large quantities of private-label mortgages (previously included in FSCMD as ABS) were essentially transformed into sparkling new GSE-backed mortgage securities – and many then conveniently found their way onto the Federal Reserve’s rapidly inflating balance sheet.  This provided critical liquidity that allowed highly-leveraged Wall Street proprietary trading desks, hedge funds and banks to de-risk/de-leverage.  This bailout accommodated deleveraging for the financial speculators, yet for the real economy the boom in Non-Financial debt ran unabated. 

As noted above, Total Non-Financial Market debt ended this year’s second quarter at $38.924 TN and 249% of GDP – both all-time records.  Garnering all the focus from the deleveraging crowd, Total Household Debt has indeed declined since 2008 – having dropped $787bn, or 5.8%, to $12.896 TN.  At the same time, Federal debt has increased $4.689 TN to $11.050 TN. Non-Financial Corporate debt increased $434bn since ’08 to end Q2 2012 at a record $11.990 TN.  State & Local debt has expanded $101bn since ’08, ending Q2 at about $3.0 TN.   The data is the data - and Deleveraging is a Myth.

A 100% increase in Federal debt and 200% growth in the Federal Reserve’s balance sheet are surely not indicative of system de-leveraging.  Such extraordinary Credit developments do, however, have profound effects throughout the markets and real economy. The ongoing Credit expansion has inflated incomes, spending, corporate earnings and securities prices, in the process sustaining for now the U.S. economy’s Bubble structure.  And I would argue strongly that the data support the thesis that our system remains dominated by Bubble Dynamics. 

Also keep in mind that, in contrast to risky mortgage debt, federal debt requires little intermediation.  The marketplace absolutely loves it just the way it is, conspicuous warts and all.  For now, at least, it is “money” and shares money’s dangerous attribute of enjoying virtually insatiable demand.  The only alchemy necessary is to keep those electronic “printing presses” running 24/7.  It is, after all, the massive inflation of federal debt that is inflating incomes, cash-flows and profits, equities and fixed-income securities prices, and government tax receipts and expenditures – in the process validating the “moneyness” of the ever-expanding level of system debt (Ponzi Finance).

To validate Mr. Noland’s point, here are some charts from the US Flow of Funds for the period ended September 28, 2012 (courtesy of Dr. Ed Yardeni’s Blog)

Total US Debt as % of GDP

Non financial debt broken down into domestic sectors as % of GDP

Transformation of US debts from the household to Federal Debt and…

…and the US Federal Reserve’s balance sheet. (also from Dr. Ed Yardeni’s Blog on Central Banks and QE)

And the Fed balance sheet assets has increasingly been concentrated on US Treasuries.

Systemic deleveraging has indeed been nonexistent.

The Coming Global Default Binge: German Officials Raise US Debt Concerns

German officials say that they are worried over US debt levels

From Reuters.

German Finance Minister Wolfgang Schaeuble questioned on Tuesday how the United States could deal with its high levels of government debt after November's presidential election.

In a speech to the Bundestag lower house of parliament to open a debate on the 2013 German budget, Schaeuble said worries about U.S. debt were a burden for the global economy, hitting back at Washington which has criticized Europe for failing to get a grip on its own debt crisis.

In private, German officials often express concern about U.S. debt levels and the inability of politicians there to reach a consensus on how to reduce it, but Schaeuble's public remarks underscore the extent of the worries in Germany.

US debt levels have indeed been a major source of concern.

But so has been the debt levels of Germany, the Eurozone, UK and Japan. This has mainly been driven by the insatiable spending appetite of these governments.

The worries by German politicians seem no more than an attempt to deflect on their domestic (regional) problems through pot calling the kettle black.(chart from Zero Hedge)

All of them will default in the fullness of time.

US Debt at $16 Trillion, a Precarious Confidence Game

Great stuff from Sovereign Man’s Simon Black,

If you haven’t heard yet, the United States of America just hit $16 trillion in debt yesterday. On a gross, nominal basis, this makes the US, by far, the greatest debtor in the history of the world.

It took the United States government over 200 years to accumulate its first trillion dollars of debt. It took only 286 days to accumulate the most recent trillion dollars of debt. 200 years vs. 286 days. This portends two key points:

1. Anyone who thinks that inflation doesn’t exist is a complete idiot;

2. To say that the trend is unsustainable is a massive understatement.

At an average interest rate of 2.130%, Uncle Sam will shuffle $340 billion out the door just in interest payments this year… and it’s a number that’s only going up. To put it in context, China owns so much US debt that the INTEREST INCOME they receive from the Treasury Department is nearly enough to fund their entire military budget.

It’s rather disgusting when you think about it.

Many mainstream observers (who largely are apologists of the government) argue that because US debt is denominated in the domestic currency, this has been nothing to worry about, as the US Federal Reserve can do the bidding.

Well they are to be proven eventually wrong, because economic reality will prevail. Again Simon Black

History is full of examples of superpowers bucking under the weight of their debt. This is not the first time that it’s happened, and it won’t be the last.

Sovereign debt is a giant confidence game. Investors buy bonds on the belief that governments can (and will) pay. When that confidence is chipped away, the cost of capital becomes debilitating. And people tend to notice a $16 trillion debt burden.

This is banana republic stuff, plain and simple… and smart, thinking people ought to be planning on capital controls, wage and price controls, pension confiscation, and selective default. Because the next trillion will be here before you know it.

Include political and other social controls, banana republic stuff…like totally.