naked capitalism

rootless cosmopolitan says:

"The only way to climb out of a debt-induced depression is to pay down debt or to write it off. Levering up only delays the inevitable.Unfortunately Americans, and lately the Obama administration, have shown absolutely no political will to do this. Republicans decry growing deficits, but do you ever hear them enumerate cuts they would make? Clearly our plan is to keep borrowing until our lenders cut us off."

Of course. Between two bad choices, catastrophic deleveraging now with unforseeable consequences for US- and world economy and massive social disruptions in society or postponing this outcome into the future for the price of an increasing debt load, latter is being made. Japan's public debt to GDP ratio is almost 200%. The ratio for other countries is also higher than the one for US (about 70%?). Thus, way to go for United States.

rc

Richard says:

There is a fundamental error in this post and some of the comments to it. It is the false equivalence between the debts of households, the debts of businesses, the debt of state governments, and the debts of a United States Government. Instead, as Alexander Hamilton understood, each of these debts has a particular character based on entity owing the debt, which the market understands if not the posters since each of these debts carry a different price and has a different market, with the U.S. debt being the cheapest. Debts owed by apermanent and enduring Government are paid as long as the will exists to pay them. However, an individual or household's debts is limited (or should be) by the income he earns and the value of the assets he aquires. Even with individuals, there is a distinction between debt incurred for a purpose likely to increase income (education) or acquire long term assets and that debt incurred for short term consumption (almost always bad). But all individuals die, and a prudent lender should not lend to someone beyond their ability to pay or what he or she will leave in their estate to cover the debts. With businesses credit viabilty depends on its size, management skills, and the price setting nature of the business (unique product vs. commodity). But all these conditions are transitory and hence these are also relatively temporal institutions that credit should be based on income and a conservative value of its assets. The individual states are more enduring as credit risks, although a dysfunctional local culture (California) can make creditors worry. Which brings me back to Hamilton. As Secretary of the Treasury he took not only the debts of the United States incurred by the Continental and Confederation Congresses, but persuaded Congress to assume the Revolutionary war debts of the states. He argued that the Union, with its power to tax, was perpetual and that as such creditors could have faith that these debts would be repaid.

In the current situation what is going on here is the gradual cleaning up of individual and corporate balance sheets, and the transfer of the debts that are not discharged or paid off to the state primarily to ameliorate the human hardship caused by the drop in consumption, and probably an eventual increase in the tax take by the Government to pay off these debts, a necessary result that is being driven, as Tim Duy states in his blog "Fed Watch,",by the "invisible hand" that compels U.S. consumption to decline to the point where our current accounts become balanced.

rootless cosmopolitan says:

Richard wrote:

"In the current situation what is going on here is the gradual cleaning up of individual and corporate balance sheets, and the transfer of the debts that are not discharged or paid off to the state primarily to ameliorate the human hardship caused by the drop in consumption, and probably an eventual increase in the tax take by the Government to pay off these debts,…"

This is an extremely optimistic scenario according to which the US-government will be able to slowly engineer the debt bubble away by taking over a large amount of the debt onto its balance sheet. Quite possible the rational of the actions by the government is carried by the believe they can both slowly dissolve the debt bubble and prevent a depression, maybe worse than the Great Depression, and massive social disruptions and other consequences, having economic growth instead generating enough tax income to pay off the debt. Richard apparently subscribes to this scenario.

Let's talk numbers. How much debt will be moved from private and corporate balance sheets to government's balance sheet to achieve this? 20 to 30 trillion US-dollars? Or how much? And what consequences will this have for the ambitious plans of the Obama administration?

DownSouth says:

(continued)

The mechanisms put in place from 1790 to 1792–the Bank of the United States, funded long-term U.S. debt, federal assumption of state and local debt, and the forerunner of the New York Stock Exchange–became the playground of the incipient speculator class… The first American wave of securities speculation came in New York and Philadelphia in 1791, as Bank of the United States shares climb from $25 to $60, peaking at $170 in some three months. Similar speculation developed in the new U.S. bond issues, and when the bubble around Bank of the United States and other bank stocks popped, Hamilton ordered the treasury into the market in March and April of 1792 to support the price of government debt. His allies sighed with relief over what by some accounts was the first U.S. financial bailout.

While Jefferson’s now-victorious party, the Democratic-Republicans, consisted of a more homespun and egalitarian crowd, during the new century’s first decade they overwhelmed the Federalists in part through equally partisan politics. These began with the National Debt Reduction Act of 1802 to repeal all internal taxes, take on no new debt, and reduce the existing national debt through tariff receipts. Bankers were glum, while Democratic-Republican farmers and frontiersmen cheered.
~
–Kevin Phillips, Wealth and Democracy

juan says:

This excludes over $4 trillion owed to the Social Security "trust fund." More importantly, it excludes $60 trillion of unfunded future liabilities for Medicare and Social Security.

Trust Fund Assets, 2007 & 2008

Size of unfunded liabilities derive from assumptions made about, well, future conditions – dropping the assumed [75 yr or 'infinite'] future into the present while not relating the amount to an also assumed GDP for the same period(s) is a MSM scare tactic.

Saying that, yes, no doubt the U.S. healthcare system requires drastic improvement, something unlikely to occur so long as private insurers have their hands in the pot.

wintermute says:

Good post by Rolfe.

The moral flaw in Richard's comment is encapsulated here: "..transfer of the debts that are not discharged or paid off to the state..".

The people who obtain this relief are those who borrowed too much, became bankrupt, lived beyond their means, also imprudent lenders to these imprudent people, and further the financial intermediaries who profited hugely from securitization of aforesaid imprudent loans.

The people who PAY this relief are all those who were prudent, saved, and managed their affairs properly.

This transfer of debt from private to state hands is nothing short of the "Crime of the Century" (hat-tip Supertramp!).

This rewarding of financial imprudence harms the social fabric of the country for decades to come.

www.Pie-ing.com says:

Thank you!
And I just found an interesting post, http://pie-ing.blogspot.com/