U.S. Debt Surpasses $11 Trillion But Day of Reckoning Is Still Ahead 23 comments
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The government has two “bazookas” aimed directly at the economic crisis: fiscal and monetary policy. Kicking off what I hope to be a regular post, I will be tracking the amount of ammunition fired from each. The monetary policy section below is a tutorial on why the Fed is printing money to buy assets…hopefully it’s edifying.
Fiscal Policy
Under the Obama administration our fiscal policy is to borrow and spend in order to “stimulate” the economy. A good way to track the scale of fiscal policy is to watch total public debt outstanding.
This figure is published daily by the Treasury Dept. at this website.
The big news here is that the public debt just passed $11 trillion. (click chart to enlarge)
At least $2 trillion worth of Treasurys are likely to be sold this year in order to fund the stimulus package, bank bailouts, as well as the government’s existing structural budget deficit. In other words, look for the line in the chart to continue its rapid ascent.
Monetary Policy
Under the Bernanke Fed, our monetary policy is to print massive amounts of currency in order to head off asset price deflation. Falling asset prices, combined with way too much leverage, are the chief reasons the financial system is in such deep trouble. Over-leveraged banks have very little tangible common equity to absorb losses in the value of their assets. If asset values were allowed to fall to market clearing prices (say another 25% decline in home prices), this would mean banks’ remaining assets aren’t sufficient to pay off their liabilities.
Assets = Liabilities + Equity. As the left side of the equation falls, so must the right. Liabilities are ostensibly fixed, so a decline in assets must be matched by a decline in equity. Again, financials are ridiculously over-leveraged, which means they have very little equity cushion to absorb losses on assets.
In other words, allowing asset prices to fall will bankrupt the financial sector, leading to systemic meltdown and worldwide bank runs.
To fight the fall in asset prices, Bernanke has made clear the Fed will print money at a very rapid clip in order to buy assets like Treasurys, mortgage-backed securities, asset-backed securities, etc.
The best way to track how much money is being printed by the Fed is to watch the expansion of assets on its balance sheet. (second chart above, click to enlarge)
The balance sheet equation (A = L + E) applies to the Fed just like it applies to banks. The difference is the Fed has this magical machine called a printing press which means it can manufacture its own debt in order to finance purchases of assets. The debt it manufactures is simply electronic dollars that it puts in the accounts of those from whom it buys assets.
This is not hard to grasp actually. The Fed said Wednesday that it wants to buy $300 billion worth of long-term Treasurys (in addition to another $750 billion of MBS). As an example, pretend you owned some Treasury bonds that you want to sell. Since the Fed wants to buy them, it will conjure dollars out of thin air and put them in your bank account in exchange for the Treasury securities you’re selling.
As the Fed prints money to buy assets, look for total assets on its balance sheet to expand dramatically. An Economist article published yesterday (see links) included an estimate from Capital Economics claiming the Fed’s assets are likely to expand to $4.5 trillion. That’s an awful lot of new dollars!
As I’ve argued before, this strategy is badly flawed. The Fed thinks the economy’s problem is falling asset prices. That is wrong; the economy’s problem is too much debt, which over-inflated asset prices to being with. The only “solution” is to let asset prices fall. Unfortunately, this will be very painful.
Pumping more borrowed money into the economy via fiscal and monetary policy won’t actually stop that from happening, it will just delay the day of reckoning and make it far more painful when it arrives…
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I wonder how long till they retest last year's highs.
No mentions are made of the flawed and insane policies of Voodoo economics, deregulation, fiscal immorality and the monstrous debt incurred in Afghan/Iraqi wars & 'reconstruction'.
Can't make every post a catalog of all the folks at fault, it would bore the shit out of y'all!
On Mar 20 09:52 AM Rolfe Winkler wrote:
> JD/Kelm: Here's a post I did with the debt stats you're referring
> to:
>
> bit.ly/va2mH
>
> Straight out of last week's Flow of Funds report from the Fed.
The Economist article is so yesterday. I'm a damned amateur and I wrote this in early December '08:
seekingalpha.com/artic...
"How much new money will Bernanke have to print in order to do this? Early estimates (April '08) of the amount of capital destruction ran in the $1.5 Trillion range. Roubini stopped estimating at $2 Trillion, so let's say that $2 Trillion of capital has disappeared. If that $2 Trillion blew a credit bubble at an average 30:1, you have an approximate estimate for the value of global economic activity, so the scale of this number is probably correct. Now, if $2 Trillion in capital has vanished, and if that $2 Trillion had been lent out to create "credit" at 30:1 ($60 Trillion worth of credit), how much new capital will Bernanke and the rest of the central bankers have to print in order to replace it at 10:1? Answer: $6 Trillion."
In a comment to that article I added this:
"By the way, I've done some digging and have found references where Roubini and others have estimated capital destruction at close to $3 Trillion, so maybe I should redo my math."
On December 26th I changed my number to $8 Trillion for only the Fed itself, here:
seekingalpha.com/autho...
It's just math. Math doesn't lie, except when economists use it.
Solution:
1) Abolishment of ALL confiscatory taxation; move to a sales-tax based system of funding government. By doing so, control of our purse-strings returns to the people! The Fair Tax is one such system (fairtax.org); there are other variations -- the main point being the abolition of income and property taxation, as well as gains & estate taxes.
2) Passage of a Balanced Budget Amendment.
3) Term limits for Congress.
Either they are in total in denial of the reality or they are preparing a revolution and/or a civil war in the USA.
On Mar 20 10:50 AM Rolfe Winkler wrote:
> Buddy, don't get me wrong. The Bush administration deserves an equal
> share of blame. Along with credit rating agencies, banks, over-levered
> funds (of the hedge and LBO variety), unscrupulous lenders, irresponsible
> borrowers, the list goes on...
>
> Can't make every post a catalog of all the folks at fault, it would
> bore the shit out of y'all!
On Mar 20 01:17 PM nova wrote:
> I am watching the reckless and crazy Obama's administration and the
> FED monetary and fiscal policies in total disbelief.
>
> Either they are in total in denial of the reality or they are preparing
> a revolution and/or a civil war in the USA.
first by expansion then by contraction the banksters will come to own everything and we awake to find ourselves slaves in the land our forbears fought for. forgive my paraphrasing. what is the federal reserve but the banksters in cartel form on steroids?
a certain quote by samuel adams comes to mind along with a plea by patrick henry.
inflation is taxation by stealth.
During second world war the country produced thousands of liberty ships but then the ship building technology died except for aircraft carriers. Boeing should not have given the chance to Airbus for developing A380 despite many years of Boeing 747, in cars Toyota defeated GM and in railway technology America is centuries behind compared to France and Japan. And now it is still going backwards by trying to build wind turbines instead of building better nuclear reactors and breeder reactors. The next step obviously will be to drive ships using sails.
Evelyn Guzman
Debt Challenger
Beware of the member J. D. Swampfox. He is using multiple accounts to not only positively rate his own posts but to downgrade posts from others. Note that he remains in the top 20 but as soon as someone gets ahead of him by 1 or 2 points they will get bumped down considerably while he will stay the same or rise. I've seen this happen to virtually everyone now in the 16 to 30 positions. Also note that he has only roughly half the comments that others in the top 20 have yet has the same number of thumbs-up even for the most minor of comments (strange?), and also that virtually immediately after one of his posts, he gets 2 or 3 thumbs up for it. No one else gets this. Notice also that if you argue against J. D. Swampfox in any thread you will get a lot of thumbs down shorthly thereafter.
As the Fed prints money to buy assets, look for total assets on its balance sheet to expand dramatically. An Economist article published yesterday (see links) included an estimate from Capital Economics claiming the Fed’s assets are likely to expand to $4.5 trillion. That’s an awful lot of new dollars! [/quote]
AFAIK, the treasury bonds the Fed will be buying, will be from the Treasury, not you. This will help to pay for the stimulus and bailouts. So it may add to the money supply flowing in the market, but not all of it. Much will sit in bank's books, to help with their lack of capital.
Rather having the incompetence, deception, corruption and partisonship in Congress & Administration has revealed that the length & depth of this economic slide will be longer and much more costly than anyone can imagine........
My concern is that America is becoming more vulnerable to International consequences and foreign threats, economically and worse...........
What happens if China demands to redeem it's debts we owe them????? Or if oil returns to $150/barrel as is being predicted???? Or if some of those "fine men" being released from Gitmo & their friends show America the extent of their hatred ?????
And the media seems obsessed with AIG bonus' !!!!!!!!!!!