"The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon."
David M. Walker
David Walker served as Comptroller General of the United States from 1998 through 2008. He is now the CEO of the Peter G. Peterson Foundation and leader of the Fiscal Wake Up Tour. He has been a lone voice in the wilderness for the last decade regarding our looming fiscal disaster. As head of the General Accounting Office he would go before Congress and explain that the country need to change course before we flounder in a Perfect Storm of debt. They listened to him respectfully and proceeded to add $5 trillion to the National Debt in the next eight years. The borrowing binge is now entering a hyper-speed phase. President Obama has been only concerned with speed rather than long term corrective actions.
I don't believe it's too late to change course, but it will be if we don't take dramatic action as soon as possible. If nothing is done, this recession could linger for years. That is why we need to act boldly and act now to reverse these cycles.
I prefer the wisdom of Thomas Jefferson and Abraham Lincoln.
“Delay is preferable to error.” – Jefferson
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” – Lincoln
The $787 billion 1,074 page stimulus bill has been passed. President Obama has signed it. The market immediately dropped 500 points. It will have no impact on the economy in 2009. The bill will stimulate nothing but the National Debt. Within months, plans for another stimulus plan will be demanded by the Democratic led Congress because speed and the appearance of action are how politicians get reelected. When I see Senator Charles Schumer of New York make a speech on the floor of the Senate saying, "And let me say this to all of the chattering class that so much focuses on those little, tiny, yes, porky amendments, the American people really don't care", I want to throttle him. Only a U.S. Senator would consider $100 billion a little tiny pork. His words prove that our leaders are so corrupted and disconnected from real Americans that they are running this country for their own self interest and the interests of their corporate money backers. Abraham Lincoln, an honest and wise man by most accounts, knew that calling pork spending stimulus doesn’t make it stimulus.
“If you call a tail a leg, how many legs has a dog? Five? No, calling a tail a leg don't make it a leg.”
When I see annual deficits of $2 trillion to $3 trillion that Congress has committed the country to in the coming years, I can’t help but associate our country’s situation with the last voyage of the Andrea Gail. Anyone who has seen the movie A Perfect Storm or read the book knows the story of the sword-fishing crew that got caught in the Halloween Nor’easter of 1991, known as the perfect storm. The story is a precise analogy to what will happen if our country doesn’t change course now.
The Andrea Gail (United States) is captained by Billy Tyne (Barack Obama) with his young first mate Bobby Shatford (Timothy Geithner). Their fishing boat was fighting the rough waves of the North Atlantic (Financial Crisis) as they sought their prize of swordfish (Economic Recovery). While they were concentrating on the task at hand, the remnants of Hurricane Grace (Unfunded Liabilities of $53 trillion) was moving up the Atlantic coast. A low pressure system ($787 billion stimulus bill) moved off the East Coast and a strong disturbance (Bank Bailout) along a cold front coming from Canada combined to create a strong Nor’easter. The intensifying storm was already dangerous (Causing Unemployment and Bankruptcies), but when the subtropical power of Hurricane Grace was sucked into the maelstrom, it became a Perfect Storm (Financial Crisis of Epic Proportions). With 75 mph winds (Deficits) and 60 foot waves (Unsustainable Spending on Social Programs & Military Spending), the storm had become enormously treacherous.
Captain Tyne (Barack Obama) received frantic warning calls from Captain Linda Greenlaw (David Walker) that the storm had grown into a killer and must be avoided. Cocky Captain Tyne (Barack Obama) thought he knew better and could make it through the storm and safely back to port in Gloucester to reap the riches of his catch. Instead of maneuvering (Reigning in spending and allowing banks to fail) to avoid the storm, Captain Tyne (Barack Obama) decides to double down and plough full speed ahead into the heart of the Perfect Storm. The Adrea Gail (United States) gets caught in the vortex of the storm. Ultimately, Captain Tyne (Barack Obama) and Bobby (Timothy Geithner) realize they will never get out alive. They make one last effort to climb a 60 foot wave and the Andrea Gail (United States) capsizes (Collapse of American Financial System), and all men are lost at sea.
Unsustainable Policies & Practices
The definition of unsustainable is, not able to be maintained or supported in the future. To me, a picture is worth a thousand words.
NYT chart updated by The Big Picture reader Steve Barry.
As Congressional moron after Congressional moron goes on the usual Sunday talk show circuit and says we must stop home prices from falling, I wonder whether these people took basic math in high school. Are they capable of looking at a chart and understanding a long-term average? The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%. You will know we are at the bottom when the top shows on cable are Foreclose That House and Homeless Housewives of Orange County.
Instead of allowing the housing market to correct to its fair value, President Obama and Barney Frank will attempt to “mitigate” foreclosures. Mr. Frank has big plans for your tax dollars, "We may need more than $50 billion for foreclosure [mitigation]". What this means is that you will be making your monthly mortgage payment and in addition you will be making a $100 payment per month for a deadbeat who bought more house than he could afford, is still watching a 52 inch HDTV, still eating in his perfect kitchen with granite countertops and stainless steel appliances. Barney thinks he can reverse the law of supply and demand by throwing your money at the problem. He will succeed in wasting billions of tax dollars and home prices will still fall 20% to 30%. Unsustainably high home prices can not be sustained. I would normally say that even a third grader could understand this concept. But, instead I’ll say that even a U.S. Congressman should understand this.
Ray Dalio, the Chief Investment Officer of Bridgewater Associates, in a recent interview in Barron’s made an irrefutable argument that the United States consumers, companies and Government must accept the pain of debt restructuring to get our economy back to normal. His firm had been consistently right, years before the financial crisis hit.
Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes -- the cash flows that are being produced to service them -- or we are going to have to raise incomes by printing a lot of money.
It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue. The biggest issue is that if you look at the borrowers, you don't want to lend to them. The basic problem is that the borrowers had too much debt when their incomes were higher and their asset values were higher. Now net worth’s have gone down. The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold.
The debt service as a % of disposable income for consumers is above Great Depression levels as we enter the Next Great Depression. These levels are unsustainable. Consumers normally have a limited number of choices. They can pull a Trump and declare bankruptcy to wipe out the debt or reduce spending dramatically while paying down their debt. This is what is required to purge our capitalist system of its excesses. Instead, our Government “leaders” are coming to the rescue with your tax dollars. You have already given $7 billion to Capital One (NYSE:COF) and American Express (NYSE:AXP) so they can hand out more credit cards with $20,000 limits to pizza delivery boys. When you see someone carting a 52 inch HDTV out the door of Best Buy (NYSE:BBY), you may be making his credit card payment.
Barney Frank, and his band of merry Congressmen, has also provided $9 billion of your hard earned tax dollars to GMAC Financial and Chrysler Financial. GMAC Financial used the name Di-Tech to lure millions of gullible poor people into negative amortization no doc mortgage loans at the peak of the housing bubble. When you see a BMW 525i parked in front of a boarded up house in West Philly, know that you are making the car payment for that deadbeat.
The stimulus plan will be a complete failure. Politicians have not taken into account the damaged psychology of the American public. We have been hit over the head with a baseball bat and will not be stepping up to the feeding trough of debt financed spending for a long time. If we do not let people and companies fail, we will encourage the same behavior that caused the problem. It will make sense for every upstanding American to stop paying their mortgage and to run their credit cards up to the limit. Pastor Adrian Rogers explained how many Americans feel today.
You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.
A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned - this is the sum of good government.
The chart below, which shows our National Debt from 1938 onward, is totally outdated. The projections through 2012 were made before the current Congress unleashed its hell fury. The chart is now vertically challenged, topping out at a mere $14 trillion. The little red line that was so sedate until Richard Nixon took the United States off the gold standard in 1971, is about to take off like the Space Shuttle. The current “stimulus” package of $787 billion is more than the entire National Debt in 1978 ($771 billion). By 2012, the National Debt will easily exceed $15 trillion. If economists like Paul Krugman have their way, the debt will surpass $16 trillion. The bill has just been signed and the ultra-liberal Krugman is already saying it isn’t nearly enough spending. Keynes is his god. The man is so disconnected from the real world, it is sad. He is only comfortable in his secluded academic world at Princeton with his models and theories. He needs to shuttle kids to hockey games on the weekend so he can stop thinking of ways to spend our money. He has probably never set foot in a Wal-Mart (NYSE:WMT) or a Jiffy Lube. I truly believe that his goal in life is that 80 years from now, people will say “We’re all Krugmans now”.
The chart looks eerily similar to the previous housing chart. How far up can it go before the fat lady sings? It looks like we are going to find out if Dick Cheney was right. “Deficits don’t matter”. We all know Mr. Cheney has never been wrong before. The annual deficit for 2009 is now estimated at between $2 trillion and $3 trillion give or take a few hundred billion. These figures seem incomprehensible to the average person on the street. Some perspective is in order. If we use $2.5 trillion as the estimated deficit that means:
- We’re adding $6.85 billion per day to the National Debt
- We’re adding $285 million per hour to the National Debt
- We’re adding $475,000 per minute to the National Debt
In the time it takes to say Audacity of Hope, we’ve added $25,000 to the National Debt. There are many pundits who say the National Debt doesn’t matter. We are only paying 3.4% on our 30 Year Treasuries and there is always enough demand. The dollar continues to be steady versus the Euro. Government debt as a percentage of GDP was 122% during World War II, versus only 78% today. All of these statements are true, today. On March 1, 2008 I could have said that the American banking system was sound. I would have appeared to be right. Two weeks later Bear Stearns collapsed and the downward spiral of our worldwide financial system accelerated out of control. Are these reasonable questions to ask?
- How long will foreign countries fund our rapidly accelerating deficits for a 3.4% return which will be wiped out by a slight decline in the USD?
- Will foreign countries with their own economies contracting and pouring billions into domestic stimulus even have the funds to invest in U.S. Treasuries?
- Is there a tipping point when Bernanke has printed one too many dollars? If there is, you can be sure he won’t see it coming.
- When government debt reaches 110% of GDP next year, will we be in better or worse position as a nation than we were in 1945 as the only remaining power in the world?
- How do you solve a $53 trillion unfunded liability problem while tripling your National Debt in the space of 10 years?
The answers to these questions will determine when the great American Economic Ponzi Scheme collapses. It is only a question of timing if we continue on the current fiscal path. As we lay in our beds watching American Idol and pondering whether Britney Spears is a good mom, our beds are burning.
The time has come
To say fair's fair
To pay the rent
To pay our share
The time has come
A fact's a fact
It belongs to them
Let's give it back
How can we dance when our earth is turning
How do we sleep when our beds are burning
Beds are Burning – Midnight Oil