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"When the going gets weird, the weird turn pro."
- Hunter S. Thompson

 When you live in interesting times it is sometimes hard to distinguish the real news from the fake news. For instance, I read this today.

 WASHINGTON—A new report has revealed that when it comes to the important matter of owing large sums of money, Americans display a level of expertise and proficiency unrivaled throughout the world.

 The same day I also read this.

 The Treasury Department said Thursday that it will sell a record total of $115 billion in new notes next week, more than market participants had expected.

 Both articles look like they could be real news, don't they?

 The first article was from The Onion, and therefore should be considered "fake". The second article was from the Wall Street Journal, so it should be considered "real"...at least that's the way it should be.

But remember the wise words of Mr. Thompson.
 Only The Onion article was telling the whole story.

 The WSJ mentioned the new debt that was being issued by the Treasury, but failed to mention the enormous mountain of existing debt that was scheduled to be rolled over just next week. Let's see if I can count this up....

70 day CMBs, $30 billion (tomorrow)
13 week Bills, $32 billion (July 27th)
26 week Bills, $31 billion (July 27th)
52 week Bills, $27 billion (July 28th)
2 year Notes, $42 billion (July 28th)
5 year Notes, $39 billion (July 29th)
7 year Notes, $28 billion (July 30th)
19 year, 6 month TIPS (reopened), $6 billion (July 27th)

Almost one quarter of a trillion in a single week.

We've been bombarded with lots of gigantic numbers over the past year, so maybe this number doesn't impress you. It needs to be put into perspective.

 For example, this was your wage last year: $42,270
 This is the average bonus that Goldman Sachs is giving their employees this year: $700,000
 And this is the amount of money the Treasury needs in just one week: $235,000,000,000

 Or to put this is another way:

 Notice how America is borrowing far more money than the entire rest of the world combined. These aren't normal times. The weird have turned pro.

Here There Be Monsters

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."
- Ernest Hemingway, "Notes on the Next War: A Serious Topical Letter" , 1935

 There are many dangers from borrowing so much money from foreign lenders. The first and most obvious danger is with interest rates.

 In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.

 Considering that this is the Federal Reserve's own prediction, this should be taken seriously. Consider what will happen to the already weak housing market if mortgage rates were to double in the next few years?
  Even a single percentage point increase could cost the Treasury an additional $50 Billion a year, and with most of the nation's debt being short-term, it would be felt almost immediately.

   It's simply a matter of supply and demand. The more debt that nations issue, without an increase in demand, means the price of that debt falls. In the bond market, price and interest rates are directly inversely related.
  The governments of America, Britain, Japan, and elsewhere have tried to compensate for that dearth in demand by monetizing the debt. However, that caused the other supply and demand problem - more money printing without more goods means the value of the currency drops.

 In 2009 and 2010, Washington will sell more than $5 trillion in new debt, according to Citigroup. A decade from now, according to the Congressional Budget office, Washington’s outstanding debt could equal 82 percent of G.D.P., or just over $17 trillion.
...
"It’s an exaggeration of course, but it’s a little like what happened to the subprime borrowers," Mr. Rogoff said. "People are just assuming the funding will always be there."

 On the demand side of this issue is the simple lack of enough capital in the world. Bill Gross of Pimco had this to say on the matter.

 The immediate question is who is going to buy all of this debt? Estimates suggest gross Treasury issuance of up to $3 trillion this calendar year and net offerings close to $2 trillion – almost four times last year’s supply. Prior to 2009, it was enough to count on the recycling of the U.S. trade/current account deficit to fund Treasury borrowing requirements. Now, however, with that amount approximating only $500 billion, it is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not. Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds.

Gross goes onto say that if the governments continue to try and spend our way out of the recession there are only two possible outcomes: 1) an immediate and enormous rise in interest rates, or 2) massive debt monetization by the central banks.
  It appears that, because of a lack of clear vision and plan, we are seeing a combination of those two things. No one wants to make the tough choices, thus we will get a little bit of all the possible problems.

   The country was more than 200 years old before America's public debt hit $1 Trillion. It hit $6 Trillion in early 2002, and then $10 Trillion in 2008.

  By the end of this year it will climb over $13 Trillion. The CBO estimates nearly $10 Trillion in new debt by 2019. In economics this trend is considered "parabolic", and all things that go parabolic are unsustainable.

 It begs the question - where will the money come from?

Sometimes people ask that question, which is a very good question, but stop there.
 An even better question to ask is - is there enough money?
The IMF, which has repeatedly underestimated the economic crisis, has produced some numbers which are scary in and of themselves.

Fortunately, Carmen M. Reinhart and Kenneth S. Rogoff have studied dozens of historical examples since 1800 and tried to answer that question by basing it what that history teaches us.

 If you are like me, $33 Trillion is so far above my ability to imagine that they may as well be using another language. That's why it is important to put things into perspective by comparing this number to other asset classes.

 If you understand the significance of these numbers you have arrived at the "Oh, shit" moment. The amount of money required to bail the world out of the current economic crisis, if this crisis plays out at a historical average, is nearly equal to all the private wealth currently in the world.

  To repeat the obvious, this doesn't add up. What about the capital needed to fund the businesses of the world? What about the capital needed for private consumption?
    Britain is trying to bail out their economy. The Euro nations are bailing out their economies. So is China and Japan. There isn't enough capital in the world for all these bailouts.

 Kyle Bass from the US fund Hayman Advisors said the markets were choking on debt.

"There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there," he said. "If the US loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation.

"The bottom line is that there is no global 'get out of jail free' card for anyone", he said.

 The numbers simply don't add up. Everyone can't borrow at the same time. Someone has to lend.
  To argue otherwise is to tilt at windmills.

 So then the assumption is that China will lend us the money, right?
China isn't happy with our management of their dollar-based assets. Because of that they are cutting back on their lending.

 What about Japan, our second-largest creditor? They've been some of the world's greatest savers for over a generation.
  Japan is no longer in a position to bail out America's overspending because Japan is getting old. Unlike young people who save, old people retire to live off their savings.

 There is no "what if". The odds of all this deficit spending getting financed at an affordable rate is zero. It's simply not going to happen.
  To put it another way, I will refer back to The Onion article.

 "Their ability to consume well beyond their means, disregard all signs of approaching financial ruin, and then sit there like a fat duck waiting for solutions to appear is truly remarkable. Few nations achieve such excellence in one singular aspect of life. Bravo, America."
  The report concluded that Americans are also second to none when it comes to defaulting on long-overdue loans, be they from individuals, banks, or great and powerful nations that have absolutely no qualms about making others regret their foolish mistakes for generations to come.

 

Originally posted to gjohnsit on Fri Jul 24, 2009 at 09:30 AM PDT.

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Comment Preferences

    •  I Now Rec Before I Read (12+ / 0-)

      I'm catching up now.

      Exponential growth causes exponential collapse. FDR's remedy did not cause the Depression to disappear, but it provided jobs and livability for many of the victims.

      Obama has yet to do that. I understand the both the stimulus is not in effect in full, but it also wasn't planned for an effective 16% un- and under-employment rate.

      In other words, to adjust to the possible doomsday of debt et al, I don't see how we can't take a massive hit to our standard of living. What's important is that we can still eat well and work, even if it's not for much.

      That is all. Individually, I wish you the best, but collectively, my dearest hope is to outlive you - groovetronica

      by Nulwee on Fri Jul 24, 2009 at 09:36:41 AM PDT

      [ Parent ]

      •  Numbers don't Square (4+ / 0-)

        From 2Q07 to 1Q09, household net worth decreased by US$ 14T, or 20%.

        The stimulus package is less than US$ 1T.

        As a result, households will suffer.

        And the Dems will take a hit next November.

        Rasmussen has us down 4% point against the GOP.

        http://www.rasmussenreports.com/...

        How can we reverse our numbers...

        (i) Assure the public that under no circumstances will President Obama tax health care benefits.

        (ii) No HH earning less than US$ 250K will pay more for energy, even with CapAndTrade.  If gasoline were to increase as a result of CapAndTrade, President Obama will send every HH a check to offset the higher energy prices.

        (iii) Immediately exempt the first US$ 25K from the FICA tax, for all HHs earning less than US$ 250K, for the next two years.

        President Obama was right when he argued that working and middle-class HHs have had their incomes stagnate for the last eight years.

        And if he doesn't do something about it, the people will seek out the GOP next year.

        Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

        by PatriciaVa on Fri Jul 24, 2009 at 09:57:05 AM PDT

        [ Parent ]

        •  Polls (6+ / 0-)

          Rasmussen has us down 4% point against the GOP.

           I hadn't seen anyone else mention the polls. Thanks for bringing that up.
            It seems like everyone on DKos has hitched themselves to Obama and ignored the danger in Congress.

           We were 7 points up at the beginning of the year. Now we're 4 points down. What do you think it's going to look like in the fall of 2010 when unemployment is significantly higher than it is now?

            Everyone assumed that Obama would be an FDR, when he seems to have been set up to be a Hoover.

          "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

          by gjohnsit on Fri Jul 24, 2009 at 10:13:45 AM PDT

          [ Parent ]

          •  on the other hand (1+ / 0-)
            Recommended by:
            gjohnsit

            Everyone assumed that Obama would be an FDR, when he seems to have been set up to be a Hoover.

            Some of us were saying quite a while ago that he's been set up to be a Gorbachev.

            I guess, relatively speaking, being a Hoover would be less frightening in most people's eyes.

        •  IMO (0+ / 0-)

          if after 2000-2008 the people seek out the GOP next year, then they deserve what they get.

          And it's been more than 8 years, it's been more like 30 years that middle and working class incomes have been stagnated.  Increased working hours by the beforehand non-working spouse (usually the mother) made up the difference for awhile.  Now that's no longer an option.

          How would you make up the loss of a huge amount of FICA tax revenue?  And what about taxing the rich as proposed by Obama re: health care benefits for people in the top say 1%?

          When will we ever learn that PROFIT cannot be a part of the equation when endangering people's lives adds to a company's bottom line?--Earicicle

          by billlaurelMD on Fri Jul 24, 2009 at 10:40:07 AM PDT

          [ Parent ]

  •  If you are trying to scare me.... (4+ / 0-)

    you succeeded!  

  •  There's debt, and then there's debt (1+ / 0-)
    Recommended by:
    DBunn

    The first kind, like a car loan, you have to pay back. The second kind, like national debt, you are paying back to yourself, basically. Debt held by other nations is tradable, a commodity that can be used in various ways, or negated. We can print more money. We can default on the debt. Expectations of future growth can hold inflation in check. We can snap our finger and make it vanish. There's so much bound into the second kind of debt that alarmism over the amounts isn't meaningful at this stage. First, see if we can dodge a world-wide Depression that lasts 15 years and so forth. Second, deal with the debt stuff.

    Every day's another chance to stick it to The Man. - dls.

    by The Raven on Fri Jul 24, 2009 at 09:42:04 AM PDT

    •  Not true anymore (3+ / 0-)
      Recommended by:
      billlaurelMD, side pocket, DBunn

       The second kind, like national debt, you are paying back to yourself, basically.

       That stopped being true nearly a decade ago. Now foreigners own nearly half of our Treasuries. Not to mention a significant percentage of our Agency bonds (who are now backed by the government).

      "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

      by gjohnsit on Fri Jul 24, 2009 at 09:44:47 AM PDT

      [ Parent ]

      •  "Debt held by other nations" (0+ / 0-)

        Addressed.

        Every day's another chance to stick it to The Man. - dls.

        by The Raven on Fri Jul 24, 2009 at 09:47:13 AM PDT

        [ Parent ]

        •  I disagree (2+ / 0-)
          Recommended by:
          DBunn, ArtSchmart

          We can snap our finger and make it vanish.

          Not without serious consequences. Consequences that would surely be bad in the short-run.
            If we default or monetize most of it, it would cause foreigners to not only stop lending us money, but they would sell it en mass.
            This would cause the worldwide bond market to freeze up immediately.

          First, see if we can dodge a world-wide Depression that lasts 15 years and so forth. Second, deal with the debt stuff.

           Which was the point of my diary. It seems you missed the point.

          "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

          by gjohnsit on Fri Jul 24, 2009 at 09:52:28 AM PDT

          [ Parent ]

          •  *IS* there a solution? (0+ / 0-)

            n/t

            When will we ever learn that PROFIT cannot be a part of the equation when endangering people's lives adds to a company's bottom line?--Earicicle

            by billlaurelMD on Fri Jul 24, 2009 at 10:58:57 AM PDT

            [ Parent ]

            •  Not without some pain (0+ / 0-)

              It's sort of like a drunk who went on a bing for several weeks and now wants to avoid the hangover.

               The cure for massive malinvesting is bankruptcies and defaults.

              "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

              by gjohnsit on Fri Jul 24, 2009 at 11:35:14 AM PDT

              [ Parent ]

              •  I'm willing with a little bit of a safety net (1+ / 0-)
                Recommended by:
                gjohnsit

                deal with the pain.  As long as the capitalist captains of industry have to suffer as well (the finance ones, at least).

                When will we ever learn that PROFIT cannot be a part of the equation when endangering people's lives adds to a company's bottom line?--Earicicle

                by billlaurelMD on Fri Jul 24, 2009 at 01:06:43 PM PDT

                [ Parent ]

          •  it sounds like I lived just a little bit too long (0+ / 0-)

            I was hoping to avoid such a disaster scenario.

            How's that for sounding like a totally irresponsible baby boomer??

            When will we ever learn that PROFIT cannot be a part of the equation when endangering people's lives adds to a company's bottom line?--Earicicle

            by billlaurelMD on Fri Jul 24, 2009 at 11:00:40 AM PDT

            [ Parent ]

        •  If no one wants it, it's not tradable. (2+ / 0-)
          Recommended by:
          The Raven, DBunn

          Leaving the option of negating it, per your scenario.

          •  Right (0+ / 0-)

            I just suggested a half-dozen ways that debt of this type can be handled and there are many more and all of them factor into the overall equation. No single line would be sufficient in and of itself. The way some people talk, you'd think a debt collector is going to show up on the doorstep and it's not like that at all.

            Every day's another chance to stick it to The Man. - dls.

            by The Raven on Fri Jul 24, 2009 at 10:25:48 AM PDT

            [ Parent ]

  •  Cooly structured diary (6+ / 0-)

    Nice mashup of Onion and WSJ. With a great Hemingway quote thrown in to boot, you managed the unlikely achievement of somehow making me enjoy reading how fucked we are.

  •  Hooverism in California (4+ / 0-)
    Recommended by:
    gjohnsit, DarkestHour, Nulwee, glaser

    (Part of the evolving California budget train wreck where we're leading the nation into Depression. Hope you see this as an amplification of your diary, rather than a hijack.)

    As policy wonks and issues-based progressives, most of the writers at Calitics and other parts of blogtopia tend to understand the implications of the decisions in this train wreck of a budget, as California revenues have plunged. The savings are phony, but the cuts are real, and it makes you want to scream when you realize that the budget is a vast tax on the future of California.

    One dollar stolen from road maintenance easily turns into an eight dollar liability in the future when you need to tear a street down to the roadbed and replace it all, rather than continue with routine patching, overlays, and slurry seal.

    Cuts in health services and social welfare are leveraged by losses of matching Federal funds, and the savings may prove illusory. Patients who lose in-home health services may prove to be a greater burden on the state as they are still eligible under Medical for nursing home care, at a cost five times greater than the in home services.

    Cutting back on treatment programs, vocational programs in prisons, and community college programs are negative investments that will produce negative long-term returns.

    The piratization reforms, particularly outsourcing eligibility and selling part of the State Compensation Insurance Fund, are projected to save money and generate revenue, but real world experience, both in California and in other states, shows that these are more likely to be costly failures that will increase costs while wrecking services.

    I could keep this list going, but it isn't the point of this rant.

    Getting past all of the issues with the specifics, there's a fundamental failure of our state leaders to understand the macro-economic problem at hand. Our most recent California bubble was built on extraordinary leverage and reckless borrowing.

    When Mortgage Equity Withdrawal (People using their houses as ATM's) peaked in Q4 2006, an amazing 9% of consumer income, nationally, was coming from mortgage equity withdrawal. In California, ground zero for mortgage fraud, with soaring housing prices, that number was much higher. A substantial part of our entire economy was based on borrowing against assets that have now tanked.

    We have permanently lost 10% of our consumer economy, the part that was based on absolutely unsustainable leverage, and it's not coming back. Our sales tax revenues aren't coming back. Our property taxes will keep declining. Incomes will continue to sag for years as we've lost jobs that won't return in finance, real estate, insurance, construction and affiliated fields. Every sector of real estate is overbuilt, including housing, commercial, hotels, and industrial, so we won't have any upsurge in construction jobs, especially after the state raids the local funds for road maintenance and redevelopment.  And it's all still overpriced and over-leveraged, with more failures and foreclosures coming for hotels, commercial real estate, and industrial properties. Agriculture is a disaster. Read State Treasurer John Chiang's monthly reports on our plunging revenue, and follow the unemployment numbers, and you can see how the trends have accelerated.

    And don't forget that this is happening even as Obama stimulus money is filling part of the revenue gap for two years.

    State and local revenues will not miraculously return as they have in previous recessions, because this is not like previous recessions. Jobs won't bounce back as retail continues to tank, and small businesses close their doors.

    And our cuts in state spending amplify the problem, as furloughed and laid off government employees spend less, lose homes, pay less in taxes, and the people they buy from spend less, lose homes, and pay less in taxes. Twenty billion in government cuts will act push the economy into another downward leg, forcing unemployment up another two per cent, and translating into billions less in state and local government revenue.

    When legislators pretend that they will somehow have money to pay back local government or education, they show that they have failed to grasp the reality of our de-leveraging economy. We won't revert to our previous income levels any more than housing prices will return to their peak of the bubble prices. Se we won't have more revenue to pay back this ridiculous scheme of borrowing that we are taking from local government, much less paying back education.

    We need to start with the knowledge that the California economy is resetting, and that we need to restructure our government, implement national health care reform, and come up with a new basis for our tax system that is much fairer, and corrects some of the worst flaws we have written into our state Constitution.

    There is a God, but he got an MBA. How else can you explain our world?

    by Aeolus on Fri Jul 24, 2009 at 10:21:42 AM PDT

  •  OK I am ready to help (0+ / 0-)

    I have about 50K in an IRA. money Market . through dumb luck and procrastination I managed to park it there before the Market tanked. Last quarter it paid $37.00 in dividends. why aren't interest rates reflecting the need for more cash ?  

    Patriotism consists not in waving the flag, but in striving that our country shall be righteous as well as strong. ~James Bryce

    by california keefer on Fri Jul 24, 2009 at 11:19:24 AM PDT

    •  Two reasons (0+ / 0-)

      why aren't interest rates reflecting the need for more cash ?

       One reason is manipulation by the Federal Reserve to hold interest rates artificially low.
        The second reason was the destruction of so much capital from bad investments shrunk the credit markets.

      "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

      by gjohnsit on Fri Jul 24, 2009 at 11:33:48 AM PDT

      [ Parent ]

  •  But wasn't this always coming? (3+ / 0-)
    Recommended by:
    gjohnsit, disrael, glaser

    I'll probably get ripped for this (or ignored), but here goes anyway...

    Debt is a reasonable proposition only in a perpetually growing economy. People have to be able to pay back the principle, plus interest, and have something left over after that-- otherwise there's no point (or worse than no point, no ability to repay).

    But we know that our economy cannot grow forever. That is the meaning of the sustainability crisis. Therefore, we also know that at some point, the perpetual motion machine of the debt-based economy must grind to a halt.

    That being the case, I submit that we should view this debt crisis with a degree of equanimity. Not because it isn't extremely serious, but because it was always coming, and we were always going to have to deal with it.

    Perhaps you will say, but this debt crisis is not directly caused by the sustainability crisis (not this time, not yet). I agree, but I count this as a good thing. It means we have greater flexibility in dealing with it. It means that if we do deal with it, we will be in a much better position to also deal with the far more intractable limits of ecological sustainability.

    :::

    Leaving aside the matter of sustainability, the tendency to accumulate massive debt overhangs is an "as designed" feature of capitalism. This diary worries that there is not enough capital in the world to repay all that debt. I would respectfully suggest that the excessive accumulation of public and personal debt is a manifestation of too much capital, not too little. Money that should have been paid to individuals in the form of wages, and to governments in the form of taxes, instead accumulated in the form of private profits (capital), and was then loaned at interest to those same individuals and governments. In the special case of the US trade imbalance with China, money that should have been paid to our government in the form of trade tariffs, instead acculated as profits (capital) in China's sovereign wealth fund, again to be loaned back at interest.

    It seems to me that debt is actually a form of capital, in that it sits as an asset on the books of the lenders. If the lenders desire greater liquidity, they should be able to borrow against that asset. If they can't borrow against it, it is only because the asset (capital) isn't worth very much. Now, what makes an asset not be worth much? If there is too much of it, such that supply exceeds demand. Which brings us back to my point above-- the debt crisis is a symptom of too much capital.

    :::

    I have heard credentialed economists, albeit of the dissident variety (like Dr. Michael Hudson) argue that capitalism has a built-in tendency to over-accumulation of capital, and therefore requires periodic episodes of massive destruction of capital. Everyone knows that WW2 finally pulled us out of the Great Depression, and this is usually attributed to the stimulative effect of government spending. But what else happened in WW2? Massive destruction of built capital, in the form of most of the cities and virtually all of the industrial capacity of Europe and Japan. In the aftermath of the war, there was room for the remaining capital to be profitable again.

    Now, we probably don't want to go that route this time around. But we do need to consider whether inordinate capital surplusses are not the cause of the systemic failures we are now seeing, and by what means short of war we can restore an appropriate balance, so that capitalism does not choke on its own capital.

    •  I agree (2+ / 0-)
      Recommended by:
      DBunn, glaser

      A debt-based financial system is inherently unstable, and gets more unstable the longer it continues and the more widespread it is used.

       Right now the system is getting old and is more widespread in use than ever before. The inverted pyramid of debt keeps growing larger. The status quo keeps trying to rebalance it, but you have to wonder if it is in everyone's interest that it be rebalanced.

      "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

      by gjohnsit on Fri Jul 24, 2009 at 12:42:04 PM PDT

      [ Parent ]

      •  Absolutely true (2+ / 0-)
        Recommended by:
        gjohnsit, glaser

        Whence the Jubilee. It's the only surefire way.

        What are the odds that we'll see one before one occurs by default?

        The alternatives are: doing nothing, in which case we will become poorer and poorer and eventually default, and; invest in things that create value, boosting the ability to pay the debt and sustaining the system for a while longer.

        Politically, of course, any nation that unilaterally announced a jubilee would be universally shunned. So it may be that the best way to move forward is also politically impossible.

        [F]or too many, the cruelty of our system is part of its appeal. - eightlivesleft

        by oldjohnbrown on Fri Jul 24, 2009 at 01:14:29 PM PDT

        [ Parent ]

    •  Debt and interest (2+ / 0-)
      Recommended by:
      gjohnsit, DBunn

      I'm not sure if it's the debt that requires growth or our system of interest on debts. There have been some systems where lending was not done at interest.

      In our case we have turbo-charged debt, because our accounting standards treat it as an asset for the lending institution, and they can leverage that in certain situations to get around their reserve requirements. A lot of the derivatives "products" that the investment banks were peddling far exceeded their reserve requirements.

      It's also turbo-charged because we have compound interest for the life of a loan, or for all but a small front-loaded portion.

      Ultimately I think we could make the system better and more stable by increasing the banks' reserve requirements and hardening them against any tricky end runs. Then make all loans either simple interest or limit them to a front-loaded compound interest scheme with simple interest thereafter—say no more than 3 years of compound interest at the start of the loan, not repeatable if the loan is renegotiated.

      Of course, putting those kind of limits on the western financial system would probably cause a major depression and credit lock-up at this point, even if they led to a more stable society ten years down the road. The trouble is that everyone who thinks they have something to gain wants to keep pushing the pain off into some other generation's lap, ideally so it hits after they're no longer around to suffer through it. Procrastination should be listed as the eighth deadly sin.

    •  Yes couple of reversals in this diary (1+ / 0-)
      Recommended by:
      DBunn

      Not enough money to finance the debt - actually debt = money

      Increased debt will cause high interest rates - quite the opposite so far as America had too much debt to keep paying high interest rates (don't forget we have to roll over the old debt as well); so far increased debt has caused interest rates in America to drop

      I think we are too far along to pretend that there is any kind of economic game being played here.  I don't think Japan and China's behavior can be explained any longer by rational economic theory.  By any normal rule of supply and demand they would have to have stopped accepting our currency long ago.  This hasn't happened yet because it would mean a new world order, like after WWII, and apparently no one is willing to give up on our current unsustainable path yet.  Still its confusing.

  •  Throughout history.... (2+ / 0-)
    Recommended by:
    gjohnsit, disrael

    ... the burden of debt has brought wars to an end as often as does anything else.  It strikes me that the United States' share of the world's debt is roughly equivlane to its share of world military expenditures.

    Perhaps not exactly a coincidence.

    Blessed are those who can laugh at themselves, for they shall always be amused.

    by Land of Enchantment on Fri Jul 24, 2009 at 01:39:56 PM PDT

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