February 17, 2011

Whistling past the bankruptcy court

My thinking has been in a state of backwardation lately because I just can't get past this game of charades that Congress and the President are playing concerning the budget. Nomi Prins wrote something kind of funny about it the other day; to wit, two firemen are standing on the sidewalk across the street from a burning house, and they're arguing about whether it would be better to use a teaspoon or a teacup to put the fire out. Think of one as the Democrats, the other as the Republicans, and that captures the essential absurdity. President Obama has talked about eliminating "$1 trillion" from the budget; however, he's talking over the next ten years. The Republicans want to cut $100 billion this year, if they can find some place to start. I'm not seeing the real difference between these two futile gestures.

The impotent paralysis of the federal government in its attempts to grapple with a budget deficit of $1.6 trillion is something to behold. Holograma has put out forecasts of tremendous growth in tax revenues over the next 4 or 5 years, increasing from its current anemic $2.2 trillion to $3.5 trillion in just a few years. This will apparently be accomplished without any real increases in taxation levels; indeed, Obama would be an odd person to lead such a change since he just got through capitulating on large tax decreases in yet a further attempt to ingratiate himself with his Stockholm Syndrome Keepers.

Here's what I think lies at the root of this collective psychosis. The Very Serious People in Washington have themselves convinced that the Depression which engulfed this country in 2007 is simply and only a function of a discrete event, to with, the securitized-mortgage (and related derivatives) meltdown which arrived in its most florid form in the fall of 2008. The financial precariousness of the banks, their inability to lend - these are the things which caused the system to "freeze up" and interrupt the Great American Wealth Creation Machine.

Your faithful diarist, however, has never seen it that way. Here among the quiet, virtual snow banks beside my virtual Pond, it seems rather to me that 2008 (the stock market meltdown really began in the summer of 2007) simply marked the endpoint of America's desperate effort to prop up a false standard of living through the relentless accumulation of unpayable debt. Real wages in this country, for the vast majority of people, have never kept pace with the liabilities assumed or with the standard of living which such debts implied. Things have been moving this way since at least 1973, and all graphs and other empirical evidence point in exactly this direction.

The housing bubble was the last gasp effort of American society to fend off the moment of recognition. The "wealth effect" of house-as-ATM, as store of value, as a substitute for making any freaking money with a job -- this kept the decade of the Aughts going for a while, sustaining the illusion. However, the inability of the populace to service the debts taken on, often in the form of loans which did not represent their real long-term carrying costs, meant that default would become epidemic, and as that happened, the market value of houses suffered a nationwide collapse. All of this has happened against the backdrop of a relentless hollowing out of the manufacturing base which once sustained the middle class, as opposed to the crap jobs of the service economy. In this view, the fall of Wall Street flowed naturally from the default of American society as a whole. None of this is to exonerate the crooks and swindlers who arranged things so that the inevitable meltdown would accelerate, perhaps even overshoot the downside implied in the collapse, and all as part of their orgy of greed. But in a larger sense, the fact that this is the sort of thing we do now to make money, participate in non-productive rackets, is symptomatic of the overall malady.

Obama, Congress, the D.C. Establishment much prefer the Meltdown-as-Interruption thesis to explain away our problems. The $2.2 trillion in national income, in this way of looking at things, is an aberration, a momentary setback, until the juggernaut of the American economy gets underway again. There is no need to scale back federal spending, the $1.6 trillion deficit is workable, the practice of the Federal Reserve in conjuring money out of thin air to buy our own debt -- all these things are just stopgaps until hiring picks up and the economy returns to those halcyon days of 2005. In the meantime, let's just keep spending as we always have, we'll borrow from ourselves if we have to, but in a few years when federal revenues have increased by 75%, this will just be an unpleasant memory.

That, I think, must be the plan. All these Very Serious People are standing around in a circle and telling themselves these things over and over. This is a great country, don't bet against America, we're innovative, entrepreneurial, it's just a matter of time.

Well, what else can they say? The alternative is pretty unthinkable. How do you cut a budget of nearly $4 trillion roughly in half? The really, really weird part is that's actually the point we're at. That's the part that isn't made up. The forecasts, the projections, the political posturing, the speeches, the blame-games, the conjured money, the pretend Treasury auctions-- those are all make-believe. That we're broke - that's the reality.

February 14, 2011

The breathtaking elegance of national debt financing

It took me a while to catch on, but I think I've figured it out. In his new budget proposals, President Holograma has forecast really awesome numbers for federal revenue over the next few years which will gradually eliminate the deficit and restore America to prosperity. Since I can't really see how this can be accomplished with the materials at hand, you know, just looking around at the jobless situation and rather ungraciously noticing that the actual number of full-time jobs in the US of A is about the same now as in the year 2000 (about 130 million), I'm tempted to ask a question with the same initials as Win The Future, only different. I mean, how can the O-Admin project revenues for the feds of over $3.0 trillion for the fiscal year two years from now, and then rising sharply to $3.5 trillion right after that, when income currently is scraping along the bottom at under $2.2 trillion? That's a 50% increase in revenue in two years, and 75% a few years out!

Then it occurred to me: aside from the fact that Congress, in order to avoid a People's Temple scenario, absolutely needs to believe that such a thing is possible, the Treasury may have an ace up its sleeve. All that debt we're drowning in? Why not put it to work for us?

This is so beautiful it's difficult to write it down cogently, because my mind wants to race ahead to the thrilling conclusion and skip any intermediate steps. It's just that good. But one or two preliminary points: We all know by now that the Federal Reserve Bank has been indulging itself in something called Quantitative Easing for quite some time. They have bought all kinds of stuff, including well over a trillion dollars in mortgage-backed securities (MBS), but lately their focus has been exclusively on buying Treasuries in the "secondary market," primarily, naturally enough, from the Primary Dealers who in many cases did not actually "own" these "assets" which the Federal Reserve "purchased" for much more than a week or so. Using this "asset purchase program," the Fed has become the world's largest holder of Treasury "securities." (I just love all these sophisticated, reasonable, business-like terms in the context of what's obviously a huge Ponzi scheme.)

The Fed now owns well north of $1 trillion of such Treasuries, and under what's euphemistically called Quantitative Easing II, the plan is to keep "purchasing" Treasuries in the "secondary" market at least through June, at which point it will be extended again through QE 3, to QE 4, to QE n, to QE to the Moon. You may think to yourself that this is a somewhat ridiculous situation, for the "money" the Fed uses to "buy" such "assets" is simply a figment of Ben Bernanke's imagination. The "quantities" he's "easing" into existence are hallucinatory. Yet, and here's the beauty shot -- once the Fed "owns" these "securities," they earn "interest" just like everything else. Maybe the Fed "bought" the Treasuries with hallucinated money, but that doesn't mean the Fed isn't entitled to a return on its "investment." And where does the Treasury get the money to pay the Federal Reserve interest, or coupon payments, on the Fed's Treasuries? Glad you asked: from the Fed's program of Quantitative Easing. And to whom or to what is the money remitted to the Fed by the Treasury ultimately paid? Well, to the Treasury, because it's the Fed that holds the Treasury's checking account.

Are you impressed yet? I sure am. Under this program, the deeper the United States Treasury goes into debt, the more money it makes on the investments it makes by buying the debt it just created. Joseph Heller's jaw must be dropping at seeing the imagination of his creation, Milo Minderbinder, one-upped in real life. This is a can't-miss, fool-proof system for national solvency. So of course the federal government's revenues are going to go through the ceiling over the next few years. The federal government will be receiving all that money it owes itself regardless of what the unemployed taxpayers chip in, and the Treasury will be receiving all that income, just to skip a couple of confusing, irrelevant steps, from the money it creates out of thin air.

I don't see any reason the rest of the world's economies should be uneasy about the way we're dealing with Earth's reserve currency, do you? So completely straightforward, fiscally sound, and ingenious. It's one of the many ways we continue to be Exceptional.