Tag Archives: Federal Debt

Are Americans Rational?

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By Dmitry Orlov

Source: Club Orlov

I’ve been holding back on commenting on current events because they are far too silly. At this point it is safe to say that the elections in the US have been thoroughly botched and that, no matter who is ultimately chosen as president for the next four years, enough questions will remain in the minds of enough people to thoroughly delegitimize the national leadership in the eyes of at least half the country.

Just this morning I got a missive from Paul Craig Roberts containing the following bullet points:

• Joe Biden’s Twitter account has 20 million followers. Trump’s Twitter account has 88.8 million followers.

• Joe Biden’s Facebook account has 7.78 million followers. Trump’s Facebook account has 34.72 million followers. How likely is it that a person with four to five times the following of his rival lost the election?

• Joe Biden, declared by the biased presstitutes to be president by landslide, gave a Thanksgiving Day message and only 1,000 people watched his live statement. Where is the enthusiasm?

• Trump’s campaign appearances were heavily attended and that Biden’s were avoided. Somehow a candidate who could not draw supporters to his campaign appearances won the presidency.

• Despite Biden’s total failure to animate voters during the presidential campaign, he received 15 million more votes than Barack Obama did in his 2012 re-election.

• Biden won despite underperforming Hillary Clinton’s 2016 vote in every urban US county, but outperformed Clinton in Democrat-controlled Detroit, Milwaukee, Atlanta, and Philadelphia, the precise cities where the most obvious and most blatant electoral fraud was committed.

• Biden won despite receiving a record low share of the Democrat primary vote compared to Trump’s share of the Republican primary vote.

• Biden won despite Trump bettering his 2016 vote by ten million votes and Trump’s record support from minority voters.

• Biden won despite losing the bellwether counties that have always predicted the election outcome and the bellwether states of Ohio and Florida.

• Biden won in Georgia, a completely red state with a red governor and legislature both House and Senate. Somehow a red state voted for a blue president.

• Biden won despite the Democrats losing representation in the House.

• In Pennsylvania 47 memory cards containing more than 50,000 votes are missing.

• Pennsylvania 1.8 million ballots were mailed out to voters, but 2.5 million mail-in ballots were counted.

Roberts is a Republican and therefore believes that the Democrats stole the election. A Democrat, once it turns out that Trump won after all, would believe the opposite. But that makes no difference because, as I keep repeating, the US is not a democracy and it doesn’t matter who is its president.

It is not a democracy because the vast majority of votes—all Democratic votes in Republican states and all Republican votes in Democratic states—are simply thrown away. That’s roughly half the electorate who have no chance of making their vote count in the state where they live. Of course, they could move to a different state, in which case their vote would be thrown away for the opposite reason—lost as part of a superfluously large majority.

This is easy enough to explain to any rational person—but not to the vast majority of Americans, for whom such logic goes in one ear and comes out the other. In short, they are not rational. Worse than that, their leaders are not rational either. This brings us to the second point—that it doesn’t matter who is president.

Trump keeps talking about making America great—by bringing manufacturing back from China. Except that the opposite has happened over the past four years: China’s industrial production has continued to grow (although more slowly than before) while in the US it has continued to decline. Nor is is there any reason at all to think that this is going to change over the next four years.

Biden keeps talking about America continuing as the leader of the free world—except that America is no longer the leader of much of anything and there is no reason to think that anything can be done to reverse this slide. Thus, no matter who becomes (or remains) president, the US administration will continue to wallow in nostalgia while steadfastly refusing to admit defeat.

This defeat has multiple elements. First, the shale oil gamble is over. Drilling rates have collapsed, many shale oil companies are bankrupt, and US oil production is set to plummet from over 12 million barrels per day at its peak to around 5 million by next June (according to Art Berman, whose opinion I trust). After that point the US will once again become a major oil importer, and since no other swing producers are available this will drive up oil prices, perhaps beyond the previous all-time record of $150/barrel, resulting in a US oil import bill of half a trillion dollars a year. But it is doubtful whether that much extra oil can be produced at almost any price.

Second, national bankruptcy is looming ever closer. The federal government now overspends its revenues by a factor of two or more, meaning that for every dollar of federal revenue it borrows and spends at least two. Previously, despite its already ridiculous size and exponential growth rate, US federal debt could be given an appearance of legitimacy because enough foreign buyers could be found for it; but this is no longer the case. And so this debt is looking less and less legitimate because it is being monetized—simply printed into existence—as the Federal Reserve degenerates into a pure pyramid scheme.

Third, the US dollar (along with some other currencies to which it is tied) is poised on the edge of a hyperinflationary wipe-out. In an effort to shore up the economy a great deal of money has been unleashed into the economy and it went chasing after stocks, keeping it from triggering hyperinflation. Thus we have the truly bizarre combination of a record-high stock market along with record-high bankruptcies, foreclosures and evictions. At some point confidence in the stock market will evaporate and all of this notional money will go chasing after anything that isn’t made of paper (with the possible exception of toilet paper). Much of this notional money will evaporate as people liquidate their stock holdings, but enough will remain to result in hoarding and hyperinflation. The US dollar will devalue internationally and the US will lose access to imports.

Fourth, the US has lost its lead militarily, definitely to Russia and possibly to China and Iran. Its major military asset is its aircraft carrier fleet, which is by now completely useless because it can be destroyed using conventional weapons from a safe stand-off distance which is greater than the reach of its aircraft. Consequently, it cannot be deployed close enough to an enemy shore to make its aircraft useful. US military bases, hundreds of which are scattered all over the globe, but mostly clustered along Russia’s and China’s borders, are also useless militarily, as demonstrated by Iran’s rocket attacks against two of them in Iraq. In short, the entire US military is by now more of a liability than an asset—likely to draw the US into a military confrontation which it cannot win.

Now, do you hear these points discussed in the national media, in the course of the election campaign or otherwise? Do these points come up at all in conversations with colleagues, neighbors, friends and family? Are these topics of discussion in high school civics classes? (Wait, what high school civics classes?) No? And yet they are real, and their consequences are at this point unavoidable, and refusing to acknowledge them will only exacerbate their effects.

Collapse is bad enough when you and everyone around you can acknowledge it. But if everyone from the president (pick either one) to the lowliest convenience store clerk is incapable of accepting it as real and thinking through some of the immediate consequences, that makes it much, much worse. I refuse to accept any of the responsibility for this dreadful state of affairs; I’ve been doing all I can to warn people for a decade and a half now. It is now pointless for me to issue any more warnings. All I can do now is watch the inevitable unfold.

USA in a Debt Trap Death Spiral

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By F. William Engdahl

Source: New Eastern Outlook

The US economy and its financial structures have never recovered from the great financial meltdown of 2008 despite the passage of ten years. Little discussion has been given to the fact that the Republican Congress last year abandoned the process of mandatory budget cuts or automatic sequestration that had been voted in a feeble attempt to rein in the dramatic rise in US government debt. That was merely an added factor in what soon will be recognized as a classic debt trap. What is now looming over not just the US economy but also the global financial system is a crisis that could spell the end of the post-1944 dollar system.

First some basic background. When President Nixon, on advice of Paul Volcker, then at US Treasury, announced on August 15, 1971 the unilateral end of the Bretton Woods gold-dollar system, to replace it with a floating dollar, Washington economists and Wall Street bankers realized that the unique role of the US dollar as leading reserve currency held by all central banks and the currency for world commodity and other trade, especially oil, gave them something that appeared to be a gift from monetary heaven.

So long as the world needed US dollars, Washington could run government deficits without end. Foreign central banks, especially the Bank of Japan in the 1980’s and since the turn of the century, the Peoples’ Bank of China, would have little choice but to reinvest their surplus trade dollar earnings in interest-bearing AAA-rated US Treasury securities. This perverse dollar system allowed Washington to finance its wars in faraway places like Afghanistan or Iraq with other peoples’ money. During the Administration of George W. Bush, when Washington’s annual budget deficit exceeded annually one trillion dollars, Vice President Dick Cheney cynically quipped, “debt doesn’t matter; Reagan proved that.” Up to a point that appeared so. Now we are getting dangerously near to that “point” where debt does matter.

Federal Debt Rise

There are generally speaking three major divisions of debt measured in the US economy: Federal debt of Washington, corporate debt and private household debt. Today, owing in large part to ten years of historic low interest rates following the largest financial crisis in history–the 2007-2008 sub-prime crisis that became a global systemic crisis after September 2008–all three sectors have borrowed as if there was no tomorrow because of the near-zero Federal Reserve interest rates and their various Quantitative Easings. Nothing so radical can last forever.

Since the financial crisis erupted in 2008 US Federal debt has more than doubled from $10 trillion to over $21 trillion today. Yet conditions were made manageable by a Federal Reserve emergency policy that dealt with the financial and banking crisis by buying almost $500 billion annually of that debt. Much of the remainder was bought by China, Japan and even Russia and Saudi Arabia. Further debt levels were restrained by the bipartisan spending caps established in the Budget Control Act of 2011 that had kept recent deficits partially in check.

Now conditions of future US Federal debt and deficit growth are pre-programmed for systemic crisis over the next several years.

‘Trumponomics’ Disaster

The economics of the Trump Tax Cuts Act of 2017, signed in December, dramatically cut certain taxes on business corporations from 35% to 21%, but did not offset that with revenue increases elsewhere. The promise is that cheaper taxes will spur economic growth. This is a myth under present economic conditions and overall public and private debt burdens. Instead, the new tax law, assuming ideal economic conditions, will decrease expected revenues by a total of $1 trillion over the next 10 years. If the economy goes into severe recession, highly likely, tax revenues will plunge and the deficits will explode even more.

What the new Trump tax cut act will do is dramatically increase the size of the US annual budget deficit. The Congressional Budget Office estimates that as early as Fiscal Year 2019 the annual deficit that must be financed by debt will reach $1 trillion. Then the Treasury Borrowing Advisory Committee expects government debt issues of $ 955 billion for FY2018, compared with $ 519 billion in FY 2017. Then for FY 2019 and 2020 the deficit will exceed $1 trillion. By 2028, ten years from now, under mild economic assumptions, the size of the USA Federal debt will rise to an untenable $34 trillion from roughly $21 trillion today, and the deficit in 2028 will exceed $1.5 trillion. And this year 2018 alone, with historically low interest rates the cost of interest only on the total Federal debt will reach $500 billion.

Zombie borrowers…time bombs

Now after almost a decade of unprecedented low interest rates to bail out Wall Street and create new asset inflation in stocks, bonds and housing, the Fed is in the early stages of what some call QT or Quantitative Tightening. Interest rates are rising and have been for the past year, so far very gradually as the Fed is being cautious. The Fed however is continuing to raise rates, and now the Fed Funds stands at 1.75% after nearly ten years at effectively zero. Were they to stop now it would signal a market panic that the Fed knew something far worse than they say.

Because never in its history has the Federal Reserve indulged in such a monetary experiment with so low rates so long, the effects of reversing are going to be as well unprecedented. At the onset of the 2008 financial crisis the Fed rates were around 5%. That is what the Fed is aiming at to return to “normal.” However, with rising interest rates, the lowest credit sector, so-called non-investment grade or “junk bonds” face domino style defaults.

Moody’s Credit Rating has just issued a warning that, barring some sort of miracle, as US interest rates rise, and they are, as much as 22% of US corporations that are being kept alive borrowing at historically low interest, not only in shale oil but in construction and utilities, so-called “zombie” corporations, will face an avalanche of mass defaults on their debt. Moody’s writes that, “low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors.” The Moody’s report goes on to state some alarming numbers: since 2009, the level of global non-financial junk-rated companies has soared by 58%, representing $3.7 trillion in outstanding debt, the highest ever. Some 40%, or $2 trillion, are rated B1 or lower. Since 2009, US corporate debt has increased by 49%, hitting a record total of $8.8 trillion. Much of that debt has been used to fund stock repurchases by the companies to boost their stock price, the main reason for the unprecedented Wall Street stock market bubble.

Fully 75% of federal spending is economically non-productive including military, debt service, social security. Unlike during the 1930s Great Depression when levels of Federal debt were almost nil, today the debt is 105% of GDP and rising. Spending on national economic infrastructure including the Tennessee Valley Authority and a network of federally-build dams and other infrastructure resulted in the great economic boom of the 1950s. Spending $1.5 trillion on a dysfunctional F-35 all-purpose fighter jet program won’t do it.

Into this precarious situation Washington is doing its very best to antagonize the very countries that it needs to finance these deficits and buy the US debt—China, Russia and even Japan. As financial investors demand more interest to invest in US debt, the higher rates will trigger the default avalanche Moody’s warns. This is the real backdrop to the dangerous US foreign policy actions of the recent period. No one in Washington seems to care and that’s the alarming fact.