America, Inc. On the cusp of bankruptcy

america, inc

america, inc

The first speaker was Professor Gerald Swanson, Thomas R Brown Chair in Economic Education at the Eller College of Management, University of Arizona. He recently published America the Broke, which comes highly recommended although I have only managed to read snippets of it so far. He kicked off a segment on America's deficits. They matter, as anyone with common sense knows except theat we're in the middle of an election. Some talk highlights and facts:

  • The budget deficit in July was running at nearly $70 billion for the month or more than $2 billion a day. It's unsustainable as if that needs to be said. Total deficit for the year: $445bn
  • Bush is the first president in living memory not to veto a spending bill in an entire term. Flashback - his father had the same hesitancy to guard the public treasury.
  • Deficits are tolerable when they are temporary, but they are now running far beyond the oriignal causes - recession and war.
  • Neither Bush nor Kerry can live up to their promise to halve the budget deficit.
  • Fiscal year 2005 started 1 October in horrendous fashion with out of control spending and the debt ceiling broken.
  • The Republicans bought Florida, Ohio and Louisiana off with emergency spending; business with a goofy $136 billion corporate tax-cut bill.
  • Many appropriations have been levied that are not in the regular budget.
  • "We are not off to a good start"
  • The interest expense on $7.4 trillion of national debt is $321 billion a year. A rise in interest rates from current low levels will leverage that tremendously.
  • "There is fiscal insanity in the White House".
  • "Government is being run with borrowed money."
  • In the final year of the next presidential term the first wave of baby boomers retires. The money to pay social security and medicare entitlements is gone.
  • "Social Security is the biggest Ponzi scheme in history."
  • Originally, social security beneficiaries received a statement reflecting their funds. It only lasted a year before government stopped it.
  • President Franklin Roosevelt said Social Security was the third leg of old age security, complementing private savings and corporate pensions. Private savings are abysmal and you'd better hope your pension isn't paid by a steel company or airline.
  • Medicare is the worst crisis waiting to happen because of the pace at which costs are outpacing inflation.
  • If America, Inc prepares its accounts the way corporations are forced to, it has an unfunded liability exceeding $50 trillion.
  • Many governement officials understand the problem but think they can wait another term before having to deal with it.
  • A current account deficit of 6% of GDP is a trigger point for a currency collapse because it represents the percent of GDP a nation must save just to fund the deficit. No country has ever done it, instead resorting to the printing presses to solve the problem.
  • The Contract With America produced results. Something similar is required again.
  • "The Bush and Kerry campaigns know how to add, not subtract."
  • America's deficit problems are like termites in a ceiling. If they are not fumigated immediately, the roof will soon collapse.
  • America is a fiscal timebomb.
  • Federal Reserve Chairman Alan Greenspan appears to be preparing his final term to talk straighforwardly about the deficts.
  • The "PayGo" limits must be reinstituted.
  • The budgeting process has been corrupted. An omnibus bill is prepared at the last minute, reading rights are waived and members may only vote yes or no in reaction to the budget. It is designed to speed pork through the system in the dead of night.
  • The omnibus budget must be stopped.
  • Government departments must be closed.
  • "A government never resizes, rightsizes or downsizes like corporate America."

WALKER TODD

Walker Todd is director of the CMRE and too well credentialled to get into the detail.

He noted that the current era is eerily reminiscent of the miid to late '60s when the US ran a guns and butter programme. The stresses became intolerable and eventually culminated in the United States abandoning dollar convertibility.

  • Deficts became too large; they were being funded by foreigners who eventually refused to continue doing so without a devaluation.
  • The origins of the problem were in 1961-62 when the Fed organized a swaps system with foreign central banks - they supported the dollar in exchange for a pledge of assistance if they ever ran into difficulties.
  • In October 1979 Fed Chairman Paul Volcker was faced down by the foreign central banks as the US suffered stagflation. Lacking their support he embarked on savage interest rate increases.
  • "I feel we are on the cusp of another bankruptcy."
  • On the change to Bush's economic team - the wrong guys were fired and hired.
  • "Nothing in between a peg or a free float works" (and it was later said that China is essentially pegging the US currency)
  • We could be at a tipping point with China. It still needs the US to buy its goods, but eventually other markets will be large enough. Taiwan could use its US debt holdings as a bargaining chip to pull Taiwan back without any resistance from the US.

BOB HOYE

Canadian historian and newsletter writer Bob Hoye gave a delightful, witty presentation on the fact the all of history has been a single financial history. It's always a case of cycles of more government versus enough government. The cycles run in 100-year phases that are very destructive to the social fabric. There are generally two cycles - from the end of inflation to the end of a mania - in each phase. Each cycle lasts 116 months.

  • Authoritarian government has a lust for unearned money. A rich treasury always becomes not enough for the ambitions of the bureaucrats.
  • Confiscation and inflation are the tools of government.
  • Rome did not wither because of a barbarian invasion, but a small government movement.
  • Spain was all powerful and grew rich by transferring new world wealth to the old world, but even that wasn't enough and it defaulted on its debts.
  • 1573 has a parallel with September 11, 2001. In 1573 7,000 innocents were murdered in the then financial capital of the world, Antwerp. It was subsequently moved a few estuaries away to Amsterdam which was better protected.
  • Authoritarian states hate productivity and devise ways to halt it.
  • The Dark Ages were actually a quiet period of growth and small government following the fall of Rome.
  • Authortarians turn easily to mysticism - alchemy becomes chemistry and astrology becomes astronomy. Modern authoritarians have turned from the periodic table to the money printing press.
  • Read: "The New Deal in Old Rome" - where FDR got his ideas from.
  • 1797 marked a major financial panic and the Bank of England defaulted until 1819.
  • The era of high chureh and high state was eventually pushed back and more people were productive than ever before by 1900 - governemnt didn't like that one bit.
  • 1600 marked the voluntary development of the stock market. The first tech bubble was in turnpike roads.
  • The first independent market research was published in 1692.
  • The objective of the authoritarian state is to transfer private savings to the bureaucracy.
  • 100-year plagues of inflation and authoritarianism have endured despite intervention and manipulation.
  • The purpose of sound money is to regulate the ambition of the state.
  • Big governement and its absurd currency are about to be discovered.
  • Appeasement of the enemy is very dangerous (a reference to the current conflict).
  • Just because it is credit based asset inflation doesn't make inflation less of a problem.

MICHAEL DARDA

Formely of Jude Wanniski's Supply Sider University, Polyconomics, Darda now works for MKM Partners in Greenwich, CT.

He's not worried about the deficits, but he is worried about the way people are worrying about them. He says some Fed officials are talking recklessly about dollar devaluation. "Devaluation will precipitate the crisis you were worried about." He is concerned that it will trigger rampant inflation that will neutralize the presumed export advantage.

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