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NEW YORK, April 7 (Reuters) - With time running out for a budget deal in Congress, Fitch expects Democratic and Republican leaders will set differences aside and recognize the "dire consequences of failing to raise the debt ceiling in a timely manner."
The ceiling is currently set at $14.294 trillion. As of March 31, the debt subject to that limit totaled $14.218 trillion -- or $76 billion shy of the cap.
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." -Ben Bernanke, current chairman of the federal reserve, speaking in 2002 (source)
The U.S. Federal Debt - A look at the numbers
According to the United States Department of the Treasury, Bureau of the Public Debt, as of March 25, 2011, the Total Public Debt Outstanding of the United States of America was $14.26 trillion and was 97.3% of calender year 2010's annual gross domestic product (GDP) of $14.66 trillion. (source) (source) Given such a number, it does not appear that the problem of debt is insurmountable. Such a percentage of GDP certainly represents a clear problem, but it has not reached a level that will inspire a lack of confidence in U.S. debt and therefore affect our credit rating in the near future.
What will not be reported in the official debt numbers, however, is that the United States federal government uses cash-basis, rather accrual-basis accounting, which is in violation of standard Generally Accepted Accounting Principles (GAAP), and utilizes a series of accounting labeling tricks which underscore the actual debt owed. In particular, "liabilities" are labeled transfer payments and are not considered a form of the public debt, though they do represent obligations which must be paid at some time in the future. How disingenuous it is to call these "transfer payments" can be seen in the fact that the Social Security payments have historically been used as a general slush fund for spending in the legislature and in fact is NOT transferred to future generations.
The two greatest unfunded liabilities alone, Social Security and Medicare, easily surpass $100 trillion in liability. Add to that prescription drug benefits and a host of other liabilities, and add it to the "official" debt numbers, and the estimates can reach as high as $200 trillion in total federal debt. In other words, several multiples of GDP. The total liability per taxpayer would therefore exceed $1,000,000.
How can this be possible? To quote Laurence Kotlikoff of Bloomberg news:
"Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.
"This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck."
IMF Analysis
The Selected Issues Paper released by the International Monetary Fund in July of 2010 can be found here, and includes a thorough and technical analysis of the United States Federal deficit and possible solutions for averting the coming financial crisis. To quote:
"Directors welcomed the authorities' commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.
"The U.S. fiscal gap associated with today's federal fiscal policy is huge for plausible discount rates[...] closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP."
To put this number in perspective, current federal revenue totals approximately 15 percent of GDP. So what the IMF in effect is calling for is an immediate and permanent doubling of our personal income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act. Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP rather than a 9 percent deficit.
The simple fact of the matter is, enacting such policies would be almost guaranteed to result is severe economic instability. The number of companies alone in the U.S. whose profit margin is less than such a projected increase in the tax rate reveals the unfeasability of this suggestion. The average American is already struggling under personal debt, how can they be expected to foot the bill either? It would result at the minimum in a decades long recession, at the worst a complete depression.
And how do we honestly expect to elect the politicians who will run on such a platform? Any politician suggesting the changes that NEED to be made, promising drastic tax increases coupled with drastic spending decreases and a weaker national economy would wait for hell to freeze over before being elected.
To put it bluntly, the U.S. is nearly bankrupt. There is no foreseeable solution to dig us out of the hole we are in. Our economy as it is has been artificially grown through lax interest rate policy set by the Federal Reserve perpetuating decades long mal and overinvestment throughout a long history of "bubbles," and is on weak footing already.
We have continually resorted to the dire measures of inflation, which is nothing more than an indirect form of taxation on all federal reserve note holders, countless "stimulus" bills, and absurd degrees of credit expansion. Not to mention the endless string of bailouts which have been offered to save not only American companies but even entire nations such as Greece! What can be done when the failing organization is "too big to bailout?" What else can be said on the matter?
Non-Federal Debt
The federal debt numbers are of course only a part of the problem. According to the federal reserve, the total personal debt in the United States including mortgages is $16.15 trillion. That's an average debt per citizen of $51,912. (source) You can add that on to the million dollar federal debt share you owe. But wait, let's not forget about the state level. In my home state of California, you can expect an additional $14,800 per citizen. (source)
There is no doubt many states are in a crisis. Their financial woes are complicated by the fact that they cannot print their own money as the previous organization we covered. States have been striving desperately to make the cuts necessary to reduce their budget deficits, but the stranglehold the American unions have on the public sector is seemingly insurmountable. Many states have already entertained the idea of default, relying on the federal government to bail them out as well. This would of course be a disaster due to the loss of confidence in public investments. But more and more it is appearing to be the only answer.
My home state of California is a case in point. We have 8 counties in the state with unemployment rates of over 20 percent. We have a budget deficit over $20 billion and expected to grow. California already has the lowest credit rating of all 50 states, and there are rumors it will go lower. Leaders from both major political parties in California have been increasingly using the word "bankrupt."
"California is deeply in debt. You could say that it's bankrupt." -Jerry Brown, Governor "We are on the verge of system failure." -Jean Ross, executive director of the California Budget Project (source)
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What does TL think about this mounting problem? It is like the elephant in the room no one wants to talk about. What are the consequences of our fiscal policies going to be? Do you think people are in denial as to the severity of the problem, or do you think the problem is exaggerated? In either case, I would hope you offer some actual reasons or arguments as to why, instead of stating matter-of-fact conclusions which I hear so often on these forums.
Why does this topic take a backseat to so many other issues when the consequences are so much more powerful than any of the current discussions on Libya, Planned Parenthood, or any other of the topics of the day?
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The way I see it, America is in a world of shit. My advice is to find a relative who stays in the countryside and get to grow their own food, suck up to them real quick and plan for arrangements to move in with them when shit hits the fan.
Also, buy silver. Lots of it. Gold is much too matured and silver is only starting to pick up.
Why? Since the Marshall Plan, the US Dollar replaced the Pound Sterling as the world's reserve currency. (Historical note: Pound Sterling was the world reserve currency for ~200 years). America manages to stay afloat because unlike other countries who have to exchange real money with real GDP value into US$ in order to pay for oil, all America needs to do is to print more US$ to pay for the oil. That's how America manages to have one of the cheapest gasoline prices in the world.
The US$ declined by about 10% over the course of 2010 and it doesn't look like it will rise for a very long time. People around the world are starting to see that happen and last year, China, France, the Gulf Arab states and Russia had a secret meeting to talk about paying for oil using a basket of their respective currencies.
All of these trends point to the likely future that the US$ will lose its position as the world's reserve currency. Gasoline prices will go through the roof. And seeing how the USA's infrastructure almost exclusively depends on the internal combustion engine, you guys are in a world of shit.
Or, comedy troll suggestion: Get America to force the UN to ratify the 2nd Amendment universally. When everyone gets to buy and bear their own arms, America is the world's largest boutique, producer and supplier for civilian gun ownership and for the military. That's one way to produce and sell your way out of all that impossible debt.
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To be honest, I never saw the national debt as a problem. Sure it ends up cutting social services, but America will never cut it to the point of hacking it to pieces.
And sure it decreases America's dollar value, but that raises our manufacturing industry that's been struggling.
Problems associated with the national debt are more fear based than anything. We fear that we have hundreds of trillions of dollars in debts, and that becomes the scare, that we're in debt.
Is there a threat of bankruptcy? No. China will never let that happen, nor will the international community. Is there a threat of government shutdown? Yes, but not to the extent that it's going to drastically affect the majority of Americans as critical services remain open and unnecessary jobs get temporarily removed and then there's backpay once the government starts running again.
I believe that it's not an acceptable mentality to have, but the reasons to be super scared about the national debt is minimal at best.
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On April 09 2011 12:10 Zergneedsfood wrote:
And sure it decreases America's dollar value, but that raises our manufacturing industry that's been struggling.
This isn't about the decrease of the dollar value now. It's universally accepted that a lowered currency value will render exports more competitive, but I think the US$'s place as world reserve currency is at stake. Energy costs in USA will skyrocket because of it and will cancel out any gains in export competitiveness.
Problems associated with the national debt are more fear based than anything. We fear that we have hundreds of trillions of dollars in debts, and that becomes the scare, that we're in debt.
Is there a threat of bankruptcy? No. China will never let that happen, nor will the international community.
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
Take a good look and you will see that since 4Q 2010 towards Jan 2011, many of the major holders of T-bills are starting to offload their T-bills as soon as it is reasonably possible. The corpse has been rotting for a while in open air but the stink is starting to get to them and they're trying to cut their losses while they can.
Is there a threat of government shutdown? Yes, but not to the extent that it's going to drastically affect the majority of Americans as critical services remain open and unnecessary jobs get temporarily removed and then there's backpay once the government starts running again.
I think you forget the critically important part where such a government shutdown can shake investor confidence. Are foreign investors willing to make their bets on America despite the heavy debts now that it looks like the government is going to shut down every 10 ~ 15 years because of Congressional squabbling? The world sees the American Congress as the legislative stumbling block of the world, and with good reason. Double-tiered legislative bodies might've sounded great, and might've worked great in the more sedate pace in the world of the 18th, 19th and 20th century, but the 21st century world isn't going to sit around and wait for America's politicians to get done with their Pass-The-Hot-Potato game to and fro the different branches of government.
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On April 09 2011 12:02 NEWater wrote:
The way I see it, America is in a world of shit. My advice is to find a relative who stays in the countryside and get to grow their own food, suck up to them real quick and plan for arrangements to move in with them when shit hits the fan.
Also, buy silver. Lots of it. Gold is much too matured and silver is only starting to pick up.
Why? Since the Marshall Plan, the US Dollar replaced the Pound Sterling as the world's reserve currency. (Historical note: Pound Sterling was the world reserve currency for ~200 years). America manages to stay afloat because unlike other countries who have to exchange real money with real GDP value into US$ in order to pay for oil, all America needs to do is to print more US$ to pay for the oil. That's how America manages to have one of the cheapest gasoline prices in the world.
The US$ declined by about 10% over the course of 2010 and it doesn't look like it will rise for a very long time. People around the world are starting to see that happen and last year, China, France, the Gulf Arab states and Russia had a secret meeting to talk about paying for oil using a basket of their respective currencies.
All of these trends point to the likely future that the US$ will lose its position as the world's reserve currency. Gasoline prices will go through the roof. And seeing how the USA's infrastructure almost exclusively depends on the internal combustion engine, you guys are in a world of shit.
Or, comedy troll suggestion: Get America to force the UN to ratify the 2nd Amendment universally. When everyone gets to buy and bear their own arms, America is the world's largest boutique, producer and supplier for civilian gun ownership and for the military. That's one way to produce and sell your way out of all that impossible debt.
I am extremely pleased with the quality of the first post after the OP. Before I begin, have you always lived in Singapore? Your view on the current US situation is sadly accurate, and with how many people directly living in the US are oblivious too this, it sparks my interest.
It's very important to have a "backup plan" currently. The fall of the United States social structure seems almost imminent at this point and it's much deeper then anything currently happening in the news. I was lucky enough at my past job to have some "after work at the bar talks" with people very high up in my government job, and this was at a technical work where passiveness is almost expected (NASA), and I was very surprised to hear their take on this. One person explained why their house was on a "hill" in San Francisco, and it wasn't by accident but rather strategically placed because of his preparation for the "fall" or "revolution" or as I would say "shitstorm" we are about to face. He also explained how he invested a large amount of money into guns, motion detectors, and other home defense means (self sustaining food area etc). Needless to say I was taken aback by his view on the future, and this was perhaps one of the smartest people in my field. More surprising perhaps was the other people at the table pretty much agreeing with him (I was the only rookie researcher in that group, the only one with less than 10 years experience for sure).
I've been fortunate enough to move from California back to North Carolina where the Appalachian mountains seem like the proper place to flee too. I have a lot of family in the area and most understand that they need to be armed and ready to get the hell out of the area at a moments notice. The sad part I feel is that, people aren't taking this seriously. The US is not immune to a structural collapse, but the average citizen certainly feels this way. My current peer group isn't as educated as when I was in Silicon Valley, but nearly all of them just laugh about a collapse in the United States.
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On April 09 2011 12:10 Zergneedsfood wrote:
To be honest, I never saw the national debt as a problem. Sure it ends up cutting social services, but America will never cut it to the point of hacking it to pieces.
And sure it decreases America's dollar value, but that raises our manufacturing industry that's been struggling.
Problems associated with the national debt are more fear based than anything. We fear that we have hundreds of trillions of dollars in debts, and that becomes the scare, that we're in debt.
Is there a threat of bankruptcy? No. China will never let that happen, nor will the international community. Is there a threat of government shutdown? Yes, but not to the extent that it's going to drastically affect the majority of Americans as critical services remain open and unnecessary jobs get temporarily removed and then there's backpay once the government starts running again.
I believe that it's not an acceptable mentality to have, but the reasons to be super scared about the national debt is minimal at best.
Did you pay attention much to the previous recession we just went through? Financial giants were collapsing left and right, we were on the verge of a complete financial collapse. We were able to avert the crisis simply by diluting the dollar to a significant degree, bailing out the failing institutions, and reverting to artificially low interest rates which is of course what precipitated the housing bubble in the first place.
The danger is real... it is the threat that the desperate measures we have employed in the present and in the past will no longer be effective enough due to the ever increasing debt, ever inflated dollar, and questionable US debt credit rating abroad. There is only so far the Keynesian economic policies can delay the inevitable market correction from artificial highs.
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On April 09 2011 12:24 Pufftrees wrote:Show nested quote +On April 09 2011 12:02 NEWater wrote:
The way I see it, America is in a world of shit. My advice is to find a relative who stays in the countryside and get to grow their own food, suck up to them real quick and plan for arrangements to move in with them when shit hits the fan.
Also, buy silver. Lots of it. Gold is much too matured and silver is only starting to pick up.
Why? Since the Marshall Plan, the US Dollar replaced the Pound Sterling as the world's reserve currency. (Historical note: Pound Sterling was the world reserve currency for ~200 years). America manages to stay afloat because unlike other countries who have to exchange real money with real GDP value into US$ in order to pay for oil, all America needs to do is to print more US$ to pay for the oil. That's how America manages to have one of the cheapest gasoline prices in the world.
The US$ declined by about 10% over the course of 2010 and it doesn't look like it will rise for a very long time. People around the world are starting to see that happen and last year, China, France, the Gulf Arab states and Russia had a secret meeting to talk about paying for oil using a basket of their respective currencies.
All of these trends point to the likely future that the US$ will lose its position as the world's reserve currency. Gasoline prices will go through the roof. And seeing how the USA's infrastructure almost exclusively depends on the internal combustion engine, you guys are in a world of shit.
Or, comedy troll suggestion: Get America to force the UN to ratify the 2nd Amendment universally. When everyone gets to buy and bear their own arms, America is the world's largest boutique, producer and supplier for civilian gun ownership and for the military. That's one way to produce and sell your way out of all that impossible debt. I am extremely pleased with the quality of the first post after the OP. Before I begin, have you always lived in Singapore? Your view on the current US situation is sadly accurate, and with how many people directly living in the US are oblivious too this, it sparks my interest.
Thank you, and yeah, I've always lived in Singapore. Never even visited US before. I have been studying US politics, economy and foreign policy for the past 12 years as a personal hobby. It's always been obvious to me that whatever happens on the US affects all of us, so in a sense even if I'm a complete foreigner I still have a stake in what happens there. That also meant that I managed to develop a good nose for predicting what may happen and used that to make a fair amount of extra pocket money in Forex. :D
It really makes me worry, though. I applied to various stateside schools as a transfer undergrad for Fall this year and I don't know if shit will hit the fan before I graduate.
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On April 09 2011 12:24 NEWater wrote:Show nested quote +On April 09 2011 12:10 Zergneedsfood wrote:
And sure it decreases America's dollar value, but that raises our manufacturing industry that's been struggling. This isn't about the decrease of the dollar value now. It's universally accepted that a lowered currency value will render exports more competitive, but I think the US$'s place as world reserve currency is at stake. Energy costs in USA will skyrocket because of it and will cancel out any gains in export competitiveness. Show nested quote +Problems associated with the national debt are more fear based than anything. We fear that we have hundreds of trillions of dollars in debts, and that becomes the scare, that we're in debt.
Is there a threat of bankruptcy? No. China will never let that happen, nor will the international community. http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txtTake a good look and you will see that since 4Q 2010 towards Jan 2011, many of the major holders of T-bills are starting to offload their T-bills as soon as it is reasonably possible. The corpse has been rotting for a while in open air but the stink is starting to get to them and they're trying to cut their losses while they can. Show nested quote +Is there a threat of government shutdown? Yes, but not to the extent that it's going to drastically affect the majority of Americans as critical services remain open and unnecessary jobs get temporarily removed and then there's backpay once the government starts running again. I think you forget the critically important part where such a government shutdown can shake investor confidence. Are foreign investors willing to make their bets on America despite the heavy debts now that it looks like the government is going to shut down every 10 ~ 15 years because of Congressional squabbling? The world sees the American Congress as the legislative stumbling block of the world, and with good reason. Double-tiered legislative bodies might've sounded great, and might've worked great in the more sedate pace in the world of the 18th, 19th and 20th century, but the 21st century world isn't going to sit around and wait for America's politicians to get done with their Pass-The-Hot-Potato game to and fro the different branches of government.
Damn I'm bad at quoting.
I don't see us losing our reserve status any time soon. A large national debt might convince other countries that they need to switch currencies, but we always need to look relatively. China's yuan is nowhere the stability it needs to be because everyone criticizes China for depreciating it.
And look at the Euro, where the sovereign debt crisis has shaken investor confidence in the strength of the currency.
Granted there are people who want to get their Treasury bills/bonds paid back ASAP, but once again that to me feels more fear oriented than anything. Two years ago I read an article saying the exact same thing about investors wanting their money back. Did our government collapse? Not really.
I think you make a fair point about investor confidence, but this is pretty much empirically disproven. We've had a 13 trillion dollar debt for a while, and the minute something goes wrong in Libya, every investor on the face of the planet flocked to the American dollar as a safe haven.
That shows that the greenback, even with a decreased value, is seen as the dominant currency on the market with very little exception.
I understand people's concerns about investors and debt, but when you compare America's financial problems now relative to the financial instability of the world....you get a little different picture imo.
On April 09 2011 12:26 jdseemoreglass wrote:Show nested quote +On April 09 2011 12:10 Zergneedsfood wrote:
To be honest, I never saw the national debt as a problem. Sure it ends up cutting social services, but America will never cut it to the point of hacking it to pieces.
And sure it decreases America's dollar value, but that raises our manufacturing industry that's been struggling.
Problems associated with the national debt are more fear based than anything. We fear that we have hundreds of trillions of dollars in debts, and that becomes the scare, that we're in debt.
Is there a threat of bankruptcy? No. China will never let that happen, nor will the international community. Is there a threat of government shutdown? Yes, but not to the extent that it's going to drastically affect the majority of Americans as critical services remain open and unnecessary jobs get temporarily removed and then there's backpay once the government starts running again.
I believe that it's not an acceptable mentality to have, but the reasons to be super scared about the national debt is minimal at best. Did you pay attention much to the previous recession we just went through? Financial giants were collapsing left and right, we were on the verge of a complete financial collapse. We were able to avert the crisis simply by diluting the dollar to a significant degree, bailing out the failing institutions, and reverting to artificially low interest rates which is of course what precipitated the housing bubble in the first place. The danger is real... it is the threat that the desperate measures we have employed in the present and in the past will no longer be effective enough due to the ever increasing debt, ever inflated dollar, and questionable US debt credit rating abroad. There is only so far the Keynesian economic policies can delay the inevitable market correction from artificial highs.
I paid a lot of attention, thank you very much. 
But all of what you said has nothing to do really with national debt.
We didn't suffer a recession because we were getting owned by debt. We suffered because deregulatory policies, low interest rates set by Alan Greenspan, and abuse of financial instruments like CDOs and derivatives screwed us over.
As a result, yeah we have a national debt on our hands. But is there any immediate danger to the average citizen? Not really.
Employment has risen. GDP is rising. Manufacturing is increasing. America is still relatively insulated from world financial crises...
I don't understand why recession suddenly links to "national debt causes problems".
Edit: To answer your last paragraph. You stated that we won't be able to maintain our same desperate measures.
Um.....I don't think we have the same "desperate" measures that you're talking about. I mean granted we bailed out banks and institutions, but the parameters that we set up this time were definitely different from other times. This time, we asked that banks pay back.
We then passed a bill that would enhance regulatory systems and provide a consumer protection agency. New bills being passed don't necessarily slash spending, but they do reform inefficacies and inefficiencies in our social entitlement programs.
We're not taking the same desperate measures. America is definitely changing, and the bills that we pass, albeit partisan and heavily debatable are at least a legitimate effort by our Congress to do something.
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On April 09 2011 12:26 jdseemoreglass wrote:Show nested quote +On April 09 2011 12:10 Zergneedsfood wrote:
To be honest, I never saw the national debt as a problem. Sure it ends up cutting social services, but America will never cut it to the point of hacking it to pieces.
And sure it decreases America's dollar value, but that raises our manufacturing industry that's been struggling.
Problems associated with the national debt are more fear based than anything. We fear that we have hundreds of trillions of dollars in debts, and that becomes the scare, that we're in debt.
Is there a threat of bankruptcy? No. China will never let that happen, nor will the international community. Is there a threat of government shutdown? Yes, but not to the extent that it's going to drastically affect the majority of Americans as critical services remain open and unnecessary jobs get temporarily removed and then there's backpay once the government starts running again.
I believe that it's not an acceptable mentality to have, but the reasons to be super scared about the national debt is minimal at best. Did you pay attention much to the previous recession we just went through? Financial giants were collapsing left and right, we were on the verge of a complete financial collapse. We were able to avert the crisis simply by diluting the dollar to a significant degree, bailing out the failing institutions, and reverting to artificially low interest rates which is of course what precipitated the housing bubble in the first place. The danger is real... it is the threat that the desperate measures we have employed in the present and in the past will no longer be effective enough due to the ever increasing debt, ever inflated dollar, and questionable US debt credit rating abroad. There is only so far the Keynesian economic policies can delay the inevitable market correction from artificial highs.
Yes, because TARP wound up costing probably $10 billion, all in, on the financial side. The vilification of TARP as the inflationary death of America is vastly overstated. The interest rates are an issue, but I'm not sure how long they'll stay at this point. I'd be surprised if they weren't up a couple points two years from now. QE is an inflationary concern, but the Fed has the ability to pull that cash out of the market / pump interest rates. FWIW, a large portion of the debt crisis was driven by liquidity issues as much as solvency issues, and that was where the US govt actually helped.
As for the attacks on the dollar as the reserve currency: I think those are fair, but ignore the political side of the financial issues. The only credible threat to the dollar currently is the Yuan. The Euro was a credible threat, but the ECB is pumping so much debt to fund PIIGS + the natural current instability of Germany vs. everyone else on ECB economic policy really hinders capital flows to the Euro. There are a lot of structural problems politically in the European Union that negatively affect their financial policy. The Yuan is a credible threat, and that's a strong economy, but I'm not sure most of the main cash sources of the world (Japan, Europe, etc.) are willing to tie their political futures to China, for obvious reasons (communism, the threat of China as a economic equal, the perceived unfair advantage / trade policy / business investment policy of the Chinese, and for some of the other ASEAN countries, their deep distrust of each other).
Are people really crazy enough to think there is going to be some large scale political / economic revolt in the United States that leads to its collapse? Buying houses in the hills of SF, buying solely silver, etc? This is the same country that survived Bush v. Gore with little to no political upheaval. In 95% of the world, this would have been a civil war. The underrated driver of the dollar as the reserve currency is the unique political stability of the United States. There are very legit critiques to the short and long term US economic strategy and debt load, but we are remarkably resilient at surviving crises without long term political upheaval. This drives foreign investment into the US.
The biggest threat to the US government is its massively underfunded long term transfer obligations (SS, Medicare, etc.) We're going to have to attack the plans in the next 5-10 years or else the budget will get out of hand.
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On April 09 2011 12:33 Zergneedsfood wrote:
We then passed a bill that would enhance regulatory systems and provide a consumer protection agency. New bills being passed don't necessarily slash spending, but they do reform inefficacies and inefficiencies in our social entitlement programs.
I agree with the vast majority of your post, except for this point. The banks are designed to work around pretty much any regulatory structure placed into effect. There's too much money on the line not to. The rest of your post is very good. People really understate the political aspects that drive the US as the reserve currency.
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@Broodwich and jdseemoreglass:
I agree on the point of underfunded obligations wrecking our budget in the long run, as I believe I've read a couple articles and understand that it's a big issue. But like Broodwich I agree that economically speaking, there really isn't something yet that we need to be completely panicking about.
We're taking steps to remove funding and a lot of good ideas are in circulation to cut down on Medicare and SS costs. It'll take time because these programs are decades in the making, but there's no hurry to overexaggerate the problems.
The one problem I had Broodwich with your point was on the rise of the Yuan.
To me, I feel that China has too many strict investment limits which inherently turns investors away from the Yuan. Furthermore, their artificial depreciation of their currency (which America looks down upon even though it's done also), makes it unstable and unlikely to take the world stage soon.
China doesn't want its currency to be a dominant currency because that would eliminate China's state controlled capitalistic tendencies and open up its currency for investment and free market policies that might hurt its control. Granted, that would be good for the west, but China really doesn't want it much (at least its government doesn't want it).
So the fears for the Yuan taking over are also overstated IMO. But prove me wrong if there's something I missed.
On April 09 2011 12:52 Broodwich wrote:Show nested quote +On April 09 2011 12:33 Zergneedsfood wrote:
We then passed a bill that would enhance regulatory systems and provide a consumer protection agency. New bills being passed don't necessarily slash spending, but they do reform inefficacies and inefficiencies in our social entitlement programs. I agree with the vast majority of your post, except for this point. The banks are designed to work around pretty much any regulatory structure placed into effect. There's too much money on the line not to. The rest of your post is very good. People really understate the political aspects that drive the US as the reserve currency.
lol it appears we agree on things. ^^; It appears I'm not crazy!
But I do see why people think this way. For a while myself I was a bit reluctant to accept the Dodd-Frank bill because it didn't do anything to stop moral hazard and the threat of another "too-big-to-fail" incident.
Though I try to be optimistic. ^^; I remember there being a court case in Massachusetts over Wells Fargo which ended up keeping banks from calling foreclosures on certain homes just because banks had CDOs on it....or something.
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On April 09 2011 12:53 Zergneedsfood wrote:
The one problem I had Broodwich with your point was on the rise of the Yuan.
To me, I feel that China has too many strict investment limits which inherently turns investors away from the Yuan. Furthermore, their artificial depreciation of their currency (which America looks down upon even though it's done also), makes it unstable and unlikely to take the world stage soon.
China doesn't want its currency to be a dominant currency because that would eliminate China's state controlled capitalistic tendencies and open up its currency for investment and free market policies that might hurt its control. Granted, that would be good for the west, but China really doesn't want it much (at least its government doesn't want it).
So the fears for the Yuan taking over are also overstated IMO. But prove me wrong if there's something I missed.
At first glance, you would think the ownership restrictions for foreign investors and the unique habit of the Chinese companies to copy and resell technology brought into the country by third parties (with tacit consent of the government) would keep people out, but companies just can't stop themselves from drooling at the one billion possible consumers there.
I agree that China has to strike a balance between its Yuan control policies and its desire for power / recognition on the global stage. To their credit, they know unpegging the Yuan now would be a disaster for them. They're doing it in the way that works in their best interests.
I still wonder about the stability of that economic and political structure, long term. They haven't had an economic shock since they moved to their "making money is awesome" philosophy. I'll be interested to see what happens when they do have issues, because they haven't had to respond to a real economic downturn during their growth. They've been able to count on booming exports for so long but it's getting to the point of saturation.
One other thing we've ignored: look at Rio Tinto. The Chinese need access to certain raw materials that the rest of the world seems opposed to letting them have. I see that playing out with the Yuan.
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Money is Debt
The federal reserve was created in 1913 by Woodrow Wilson. A very very short synopsis of how money has worked since goes like this....
The government needs 10 millions dollars to be put into the money supply. They call up the Fed and ask for 10 million. The Fed prints it (or makes it electronic for modern purposes), and gives it to the government and asks for 10 million in some sort of bond. However, the newly created money has interest assessed to it. The government, and the US people, now owe more money to the Fed then is actually in circulation. Multiply this by billlllions of dollars and other tricks the banks use (90% of the money a bank takes in can be used to create to currency) and we end up in a deep deep hole. The economy is meant to collapse.
I started buying gold about 5 years ago, after I finished college and could afford to, knowing that the price was going to continue to sky rocket. The rich of the rich are way ahead of this 'new' knowledge. They have been sitting back making money off this disgusting tapeworm while hard working Americans keep finding themselves trapped in this cycle.
It didn't start here in the US but it may just end...
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On April 09 2011 12:24 NEWater wrote:Show nested quote +Is there a threat of government shutdown? Yes, but not to the extent that it's going to drastically affect the majority of Americans as critical services remain open and unnecessary jobs get temporarily removed and then there's backpay once the government starts running again. I think you forget the critically important part where such a government shutdown can shake investor confidence. Are foreign investors willing to make their bets on America despite the heavy debts now that it looks like the government is going to shut down every 10 ~ 15 years because of Congressional squabbling? The world sees the American Congress as the legislative stumbling block of the world, and with good reason. Double-tiered legislative bodies might've sounded great, and might've worked great in the more sedate pace in the world of the 18th, 19th and 20th century, but the 21st century world isn't going to sit around and wait for America's politicians to get done with their Pass-The-Hot-Potato game to and fro the different branches of government
This is hyperbole, and just flat out wrong. It's pretty clear you're not from the US if you think this is case. Our federal government shutdown will have little to no effect on the US economy, just like the last one in 1996. There's no real threat of a lack of agreement or major structural changes to the US government from this, the US government is very minimally tied to the day to day economy of the country (we're much more privatized than everyone else), and in both cases (96 and the present) it's come about more as a political tool than as an actual attack on the economy / politics of the country.
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I am a commercial real estate broker by day and I can say that it seems to me, as others have pointed out, that it isn't that there aren't solutions to these problems available. The problem is that the general public doesn't understand and therefore any government official running for election wouldn't get any support whatsoever. This leaves us in a bad spot.
From a real estate point of view in this country I can say with almost absolute certainty we will have another drop in the market this year. The foreclosure moratorium fucked the market so hard it is unbelievable. Everything is backed up as a result because banks had to refile on many foreclosures. Therefore they have the choice to release a huge stream of foreclosures that butchers the market outright or to slowly release them and have a slower market drop over the next 5 years continuously.
Regarding the financial sector itself and government debt it really looks insurmountable at this point. Not because there are not possible solutions that may work but simply because no one can put those solutions to work in our political environment. I'm very worried about the future of this country and my professional future although I am lucky to be working mostly with REO properties right now so financially it is no problem unless we hit an absolute depression.
What are peoples thoughts on this actually becoming a bad depression over the next few years?
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On April 09 2011 13:04 Sajimo wrote:Money is DebtThe federal reserve was created in 1913 by Woodrow Wilson. A very very short synopsis of how money has worked since goes like this.... The government needs 10 millions dollars to be put into the money supply. They call up the Fed and ask for 10 million. The Fed prints it (or makes it electronic for modern purposes), and gives it to the government and asks for 10 million in some sort of bond. However, the newly created money has interest assessed to it. The government, and the US people, now owe more money to the Fed then is actually in circulation. Multiply this by billlllions of dollars and other tricks the banks use (90% of the money a bank takes in can be used to create to currency) and we end up in a deep deep hole. The economy is meant to collapse. I started buying gold about 5 years ago, after I finished college and could afford to, knowing that the price was going to continue to sky rocket. The rich of the rich are way ahead of this 'new' knowledge. They have been sitting back making money off this disgusting tapeworm while hard working Americans keep finding themselves trapped in this cycle. It didn't start here in the US but it may just end...
I'll ignore the anti-FIAT money commentary which ignores modern history (early 1900s gold standard collapse, Bretton Woods as an abject failure). I voted for Ron Paul in 08, but the worst part of his platform is the Gold standard trolling.
Gold is the worst hard metal investment, and most of its skyrocketing value is being driven by crazy people who think the world is going to end. If you know who Alex Jones is, the guy who owns his radio network is a gold dealer, and because of the AJ show that guy is one of the 5 largest gold dealers in the US. Crazy people are driving the price of gold through the roof.
If you're going to be crazy and invest that way, at least pick a different hard metal. Gold's value is a massive bubble currently, although I think it'll go a little higher in the short term (until the economic worries / housing stuff / unemployment stabilizes a bit more there's going to be a fear factor driving stupid people to gold). There is almost no industrial use for gold. Pretty much every major hard metal besides gold has industrial value that will limit the downside, and is also being invested in by crazy people so it's seeing the same value appreciation. Not to mention that most of the other industrial metals have China desperately driving up their value (except for the rare earth metals, which they pretty much have a monopoly on) and China is only going to keep raising demand for the non-gold industrial metals. The other doomsday guy in the thread suggested silver, which while I'm not investing in metals currently, would be the one I'd go to if I wanted a metals play.
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On April 09 2011 12:26 jdseemoreglass wrote:Show nested quote +On April 09 2011 12:10 Zergneedsfood wrote:
To be honest, I never saw the national debt as a problem. Sure it ends up cutting social services, but America will never cut it to the point of hacking it to pieces.
And sure it decreases America's dollar value, but that raises our manufacturing industry that's been struggling.
Problems associated with the national debt are more fear based than anything. We fear that we have hundreds of trillions of dollars in debts, and that becomes the scare, that we're in debt.
Is there a threat of bankruptcy? No. China will never let that happen, nor will the international community. Is there a threat of government shutdown? Yes, but not to the extent that it's going to drastically affect the majority of Americans as critical services remain open and unnecessary jobs get temporarily removed and then there's backpay once the government starts running again.
I believe that it's not an acceptable mentality to have, but the reasons to be super scared about the national debt is minimal at best. Did you pay attention much to the previous recession we just went through? Financial giants were collapsing left and right, we were on the verge of a complete financial collapse. We were able to avert the crisis simply by diluting the dollar to a significant degree, bailing out the failing institutions, and reverting to artificially low interest rates which is of course what precipitated the housing bubble in the first place. The danger is real... it is the threat that the desperate measures we have employed in the present and in the past will no longer be effective enough due to the ever increasing debt, ever inflated dollar, and questionable US debt credit rating abroad. There is only so far the Keynesian economic policies can delay the inevitable market correction from artificial highs.
Your analysis oh how we averted total collapse in the last financial crisis is mostly correct. You're explanation for the cause of the crisis to begin with, especially the housing bubble, is fundamentally wrong.
While low interest rates encouraged banks to issue loans and take some risks they may have otherwise avoided, it wasn't the main cause of the financial crisis. The issue was with the issuance of poor quality mortgages, which homeowners would be unable to pay off. Those mortgages were repackaged and sold as financial instruments. Because the regulating system is broken, they received high quality investment-grade ratings (predicted to give a modest rate of return, with virtually no risk). Investment bankers then placed bets on the same financial instruments they were selling, so when the crash finally came, it involved significantly more assets than the mortgage-backed securities themselves.
Low interest rates may have lubed the tires a bit, but the crash was engineered by private financial institutions with virtually no regulation from the government. The cause and effect relationship you're trying to make doesn't hold water.
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On April 09 2011 13:24 LostDevil wrote:
I am a commercial real estate broker by day and I can say that it seems to me, as others have pointed out, that it isn't that there aren't solutions to these problems available. The problem is that the general public doesn't understand and therefore any government official running for election wouldn't get any support whatsoever. This leaves us in a bad spot.
From a real estate point of view in this country I can say with almost absolute certainty we will have another drop in the market this year. The foreclosure moratorium fucked the market so hard it is unbelievable. Everything is backed up as a result because banks had to refile on many foreclosures. Therefore they have the choice to release a huge stream of foreclosures that butchers the market outright or to slowly release them and have a slower market drop over the next 5 years continuously.
Regarding the financial sector itself and government debt it really looks insurmountable at this point. Not because there are not possible solutions that may work but simply because no one can put those solutions to work in our political environment. I'm very worried about the future of this country and my professional future although I am lucky to be working mostly with REO properties right now so financially it is no problem unless we hit an absolute depression.
What are peoples thoughts on this actually becoming a bad depression over the next few years?
It's going to take YEARS for the housing stock to stabilize. This was not something that will be fixed during the Obama administration, or even the next one. We have a massive oversupply of housing stock, and also a mismatched inventory (too many people living in houses that should have been out of their price range). Internally, the Paulson Treasury Department joked that one of the best uses of TARP funds would have been to burn down a ton of homes.
That said, this is a weirdly regional crisis. Certain areas are still getting killed (especially inner cities, parts of California, Florida, etc.), but large parts of the country are hitting foreclosure bottoms and actually seeing housing prices start to rise from the bottom.
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On April 09 2011 13:04 Sajimo wrote:Money is DebtThe federal reserve was created in 1913 by Woodrow Wilson. A very very short synopsis of how money has worked since goes like this.... The government needs 10 millions dollars to be put into the money supply. They call up the Fed and ask for 10 million. The Fed prints it (or makes it electronic for modern purposes), and gives it to the government and asks for 10 million in some sort of bond. However, the newly created money has interest assessed to it. The government, and the US people, now owe more money to the Fed then is actually in circulation. Multiply this by billlllions of dollars and other tricks the banks use (90% of the money a bank takes in can be used to create to currency) and we end up in a deep deep hole. The economy is meant to collapse. I started buying gold about 5 years ago, after I finished college and could afford to, knowing that the price was going to continue to sky rocket. The rich of the rich are way ahead of this 'new' knowledge. They have been sitting back making money off this disgusting tapeworm while hard working Americans keep finding themselves trapped in this cycle. It didn't start here in the US but it may just end...
I am seriously not sure why you think gold is good. When the world turns into shit, no one cares how much gold you have. It's just a piece of crap.
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On April 09 2011 13:31 Broodwich wrote:Show nested quote +On April 09 2011 13:24 LostDevil wrote:
I am a commercial real estate broker by day and I can say that it seems to me, as others have pointed out, that it isn't that there aren't solutions to these problems available. The problem is that the general public doesn't understand and therefore any government official running for election wouldn't get any support whatsoever. This leaves us in a bad spot.
From a real estate point of view in this country I can say with almost absolute certainty we will have another drop in the market this year. The foreclosure moratorium fucked the market so hard it is unbelievable. Everything is backed up as a result because banks had to refile on many foreclosures. Therefore they have the choice to release a huge stream of foreclosures that butchers the market outright or to slowly release them and have a slower market drop over the next 5 years continuously.
Regarding the financial sector itself and government debt it really looks insurmountable at this point. Not because there are not possible solutions that may work but simply because no one can put those solutions to work in our political environment. I'm very worried about the future of this country and my professional future although I am lucky to be working mostly with REO properties right now so financially it is no problem unless we hit an absolute depression.
What are peoples thoughts on this actually becoming a bad depression over the next few years? It's going to take YEARS for the housing stock to stabilize. This was not something that will be fixed during the Obama administration, or even the next one. We have a massive oversupply of housing stock, and also a mismatched inventory (too many people living in houses that should have been out of their price range). Internally, the Paulson Treasury Department joked that one of the best uses of TARP funds would have been to burn down a ton of homes. That said, this is a weirdly regional crisis. Certain areas are still getting killed (especially inner cities, parts of California, Florida, etc.), but large parts of the country are hitting foreclosure bottoms and actually seeing housing prices start to rise from the bottom.
Yes this is true. The real estate market acts on a much smaller level than most markets. For example my neighboring town is doing quite well with home prices and many are still selling in the 500-700k range which is reasonable for there. The city I live in is completely shat on by the foreclosure crisis and it seems half of the people are being foreclosed on.
You are correct that it will take years to fix. The majority of homeowners need to downsize or head to apartment alternatives. I can go on forever about this but there are way too many Americans that tried to "own their own home" and just outright failed and were not prepared for it financially and also lacking the responsibility for it. I'm banking on apartments doing comparatively alright throughout this downturn for the next few years but that's about it overall.
I predict ~ a decade before we start to see promise in the housing market unless things start to turn. However, I am more concerned with the financial situation of this country overall. We know that we got here, as explained by a poster above me, through the mortgage crisis and lax mortgage regulations but I am afraid it is other areas that will lead to the further demise of the economy. I am interested to see how others perceive this threat and if a modern day great depression may be in the works.
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EPT
