Apr 182012
 April 18, 2012  Posted by at 7:51 pm Finance

When the Treasury defense of TARP came out a few days ago, I happened to stumble upon a one paragraph summary of it from Dutch public broadcaster NOS. Undoubtedly inadvertently, it described the reality behind the report just brilliantly. In a quick translation, this is about what it came down to:

The US will turn a small profit on the financial support banks, mortgage lenders and car manufacturers received during the financial crisis. So reports the US Treasury. Especially the support for more than 700 banks was profitable.

The support for car manufacturers has cost billions of dollars, but the Treasury says it has resulted in 230.000 new jobs.

American households have lost $12.3 trillion since the crisis.

That's what US reality has become: Tim Geithner attempting to paint a positive spin on one piece of financial politics among many, claiming that supporting Wall Street has been good for Americans. That they lost millions of jobs and close to an entire year's GDP in wealth in the process is not all that important.

Of course this all comes in the spirit of: not doing it would have caused a disaster! Losing $12.3 trillion apparently does not constitute one. It's all about the choices we make, or allow others to make for us who have completely different interests from ours.

John Mauldin had a good quote from Lacy Hunt at Hoisington, another good summary of American reality in the spring of 2012:

"Efforts by fiscal and monetary authorities to sustain growth by further debt accumulation may produce some short-term benefit. Sadly, these interludes fade quickly as the debt becomes more destabilizing. The net result of increased indebtedness then becomes the opposite of what policymakers intend when they promote economic growth by either borrowing funds for increased government expenditures or encourage consumers to borrow with artificial and temporary incentives."

In other words, you can't get to real, sustained growth of an economy by growing debt after a certain point –one that, sadly, we have already reached.

It gets worse, because, since 2009, private debt-to-GDP has fallen while government debt-to-GDP has surged. And, as Lacy notes, "United States government spending carries a zero expenditure multiplier, as do operating expenditures of state and local governments. Thus, each dollar spent by the federal government creates no sustainable income, yet the interest payment incurred with each borrowed dollar creates a subtraction from future revenue streams of the private sector."

That is, unproductive government debt is killing us. So what gives? It's simple: we either make some big, tough collective decisions, and make them soon; or we come to the "bang point" documented by Reinhart and Rogoff, where the bond market no longer believes the US will pay its bills. Europe and Japan will get there before we do, but the writing is on the wall: we must get our national-deficit act together.

I don't think Mauldin's (or rather: Reinhart and Rogoff 's) bang point is near for the US. There are many countries in line before the US to reach their bang point. But the issue of accumulating additional debt in order to make matters look better today in exchange for worse conditions tomorrow, stands. For every country. It's madness that originates in the human talent for discounting the future.

It seems obvious that "the grinding halt" will be reached sooner in Greece, Spain, Italy et al than it will in America. Selling Treasuries, therefore, will be easy for the US for a while to come. Increasingly easy even. A lot of money will be looking for a safe haven. America will be perceived as that safe haven, simply because it is the least worst option. The US dollar will rise substantially because of this, as well as the fact that most international debt is denominated in US dollars, which will greatly raise demand.

Talk of hyperinflation is, as a consequence of this, greatly exaggerated. The American government is as addicted to credit as any government is, and its continuing access to bond markets will make printing money a non-issue, since it would only serve to raise interest rates.

The US is in dire straits. Just not as dire as many other nations. For the moment.


Home Forums The Grinding Halt: Reality Falls to Bits and Pieces

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    When the Treasury defense of TARP came out a few days ago, I happened to stumble upon a one paragraph summary of it from Dutch public broadcaster NOS.
    [See the full post at: The Grinding Halt: Reality Falls to Bits and Pieces]


    Thanks for passing through Hamilton earlier this week. Nice to have faces to put to names. I enjoyed (if that’s the right word!) Stoneleighs presentation despite it being a roundup/summary of what I’ve learned here the last 20mths. Had to get back to work during question time so wasn’t able to meet you – but thanks for doing what you’re doing. As far as the above craziness goes; well it’s pretty impossible to respect authority that doesn’t respect us. Lies = disrespect. We need leaders who are servants of the truth whatever the personal/professional cost to themselves.

    Ken Barrows

    But isn’t Mr. Mauldin just as deluded as Tim Geithner when he prattles on about growth? GDP/total credit market debt has been in recession for 40 years.


    Safe Haven?! In five years the yuan will be fully convertible. Who in their right mind would invest in dollars when yuan are available, as well as the other BRICS currencies.

    steve from virginia

    Hmmm … interesting the masses (of analysts) are becoming frustrated by the lack of imagination on the part of administrators. At the same time, there isn’t much administrators are willing do without the masses having to (horrors!) give up something.

    There are many reasons why the Titanic is the perfect metaphor for our times: the enterprise was (and is) gigantic, hubristic and overdone. The managers were (and are) greedy and stupid, the end had (has) the quest for the ultimate in luxury and decadence blowing up in everyone’s faces.

    Reformers could re-imagine the Titanic today: load a giant cruise ship with entrepreneurs, bankers, auto company executives; innovators, politicians and hedge fund managers and send it out with Captain Jack Sparrow looking for an ice field. Sorry, five life boats. If no ice is to be found after a day or two (climate change) the Navy can fire a missile into the ship and the Iranians can be blamed. Any ‘complications’ and the lawyers would be loaded onto a giant cruise ship … etc.

    Fixing what’s wrong with America is remarkably easy, if you put your mind to it.


    In my latest text (in Finnish, of course) I laughed at precisely this “making profit” notion. Our current PM used essentially the same words two years ago saying “we (Finland) will earn from Greek bail-out”. Didn’t play out that well, did it?

    Off-topic but still in a bit of similar note, not long ago Mr Krugman pointed out our PM’s hollow defenses about succesful austerity measures in Latvia and Ireland (there improved employment numbers are largely due to young people emigrating…). Of course no Finnish news picked up this poking as our dear leaders are unfallible. Oh well… (>_


    Just a back of the envelope computation. $12.3T is about $40,000 per person. Or for a family of four, loss is $160,000. Octomom is behind more than $700,000 considering her other children.


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