U.S. Debt - Is There a Limit?

by: Economic Disconnect

Great Reads
Had the pleasure of extra time to read a couple of longer pieces Friday that would be worth a look by all.

Eric Janzen of Itulip offers the first part of a market commentary for free (the other you have to pay for) and it had so much in it about gold, the dollar, and banking that anyone trying to get a grip on things would do well to ponder over it:
Asylum Markets of the post FIRE Economy – Part I: Locked Up
Wow. Just wow.

The second show stopper comes from The Automatic Earth author Ilargi, and no I am not a paid advertiser for TAE, just a big fan:

There is No Recovery
Ilargi: Jim Rogers is right. There is no recovery in the American economy. Things have only gotten worse, and a lot too. Still, Rogers can’t help seeing the world through his own subjective eyes either, distorted by his age and his professional views. He makes money as an investor, and can’t imagine a world in which investors like him are not part of the landscape.

And that’s the big blind spot for most analysts, publications and websites that occupy themselves with finance and the economy. They're written by people who make a living because the economy is organized a certain way, and they see a situation in which that will mostly continue to be so, with some more or less minor tweaking. Rogers understands a lot of what’s coming, but he stops short of pondering himself as a victim. This may be completely natural and logical, but it does potentially cloud his vision. For him, the question is where to invest, not whether to invest at all.

There is much, much more so check it out.

Just a Jumble of Contradictory Babble
There were a few "what was that?" moments for me Friday as I read the daily rounds. I think the current morass is such a mess that people do not even know how to formulate a coherent thought anymore, and maybe they no longer want to try.

How about these two headlines from Yahoo Finance Friday:

Democrats plan nearly $2 trillion debt limit hike
WASHINGTON (AP) -- Democrats plan to allow the government's debt to swell by nearly $2 trillion as part of a bill next week to pay for wars in Afghanistan and Iraq. The amount pretty much equals the total of a year-end spending spree by lawmakers and is big enough to ensure that Congress doesn't have to vote again on going further into debt until after the 2010 elections.

The move has anxious moderate Democrats maneuvering to win new deficit-cutting tools as the price for their votes, igniting battles between the House and the Senate and with powerful interest groups on both the right and the left.

The record increase in the so-called debt limit -- the legal cap on the amount of money the government can borrow -- is likely to be in the neighborhood of $1.8 trillion to $1.9 trillion, House Majority Leader Steny Hoyer, D-Md., said Friday.

That eye-popping figure is making Democrats woozy but is what is needed to make sure they don't have to vote again before next year's midterm elections. The government's total debt has nearly doubled in the past seven years and is expected to exceed the current ceiling of $12.1 trillion before Jan. 1.

I have to hand it to Congress, they are well aware that 90% of American voters will either be unaware about this or forget about it come election time so get it out of the way. Unreal. Some want deficit reduction provisions applied AFTER they approve another raise on the debt ceiling? What?

Note the swelling of the debt ceiling by another 2 Trillion in no doubt "short term" deficits. Of course right on the heels of this news comes:

Moody's sees no threat to U.S. top rating for now
HONG KONG (Reuters) - The top sovereign credit ratings of Britain and the United States are not under threat of a downgrade right now, but a worst case scenario foresees a cut by 2013, analysts from Moody's Investors Service said on Friday.

The comments, which reiterated an analysis from the ratings agency released on Tuesday, helped to lift the pound to session highs.

"Only the UK and the U.S. are classified as 'resilient,' rather than 'resistant.' Their resiliency will be tested in the next couple of years, but for now they have a high degree of financeability and debt affordability," the analysts said in a presentation.

"The rise in debt and higher interest costs could test the ratings under some scenarios, but not right away."

Well I feel better now.

Of course I can always rely on Paul Krugman to put together the kind of government spending plan idea that dwarfs anything ever seen on Earth. Friday's missive by Krugman may well be over the top by even his standards. Excerpt from his piece below with my comments mixed in for comic relief:

Bernanke’s Unfinished Mission
Ben Bernanke, the Federal Reserve chairman, recently had some downbeat things to say about our economic prospects. The economy, he warned, “confronts some formidable headwinds.” All we can expect, he said, is “modest economic growth next year — sufficient to bring down the unemployment rate, but at a pace slower than we would like.”

Actually, he may have been too optimistic: There’s a good chance that unemployment will rise, not fall, over the next year. But even if it does inch down, one has to ask: Why isn’t the Fed trying to bring it down faster?

That dual mandate thing of inflation protection and full employment is tough. More:

Some background: I don’t think many people grasp just how much job creation we need to climb out of the hole we’re in. You can’t just look at the eight million jobs that America has lost since the recession began, because the nation needs to keep adding jobs — more than 100,000 a month — to keep up with a growing population. And that means that we need really big job gains, month after month, if we want to see America return to anything that feels like full employment.

How big? My back of the envelope calculation says that we need to add around 18 million jobs over the next five years, or 300,000 jobs a month. This puts last week’s employment report, which showed job losses of “only” 11,000 in November, in perspective. It was basically a terrible report, which was reported as good news only because we’ve been down so long that it looks like up to the financial press.

Wow. Krugman blasts the CNBC line of "everything is getting better." Paul, I didn't know you had it in you. Back to the article:

So if we’re going to have any real good news, someone has to take responsibility for creating a lot of additional jobs. And at this point, that someone almost has to be the Federal Reserve.

Oh no, we are taking a bad turn here, cringe and move ahead later in the piece:

The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.

Well, you knew it was coming. Another 2 trillion in Fed money for buying more "troubled assets"? Like the first few attempts were so successful? Never let facts get in the way Paul, I like that. 2 trillion, just an amazing number. Final summation and key blind spot for Krugman:

But there’s also, I believe, a question of priorities. The Fed sprang into action when faced with the prospect of wrecked banks; it doesn’t seem equally concerned about the prospect of wrecked lives.

And that is what we’re talking about here. The kind of sustained high unemployment envisaged in the Fed’s own forecasts is a recipe for immense human suffering — millions of families losing their savings and their homes, millions of young Americans never getting their working lives properly started because there are no jobs available when they graduate. If we don’t get unemployment down soon, we’ll be paying the price for a generation.

Quite the passionate plea.

Jobs are very important. I think that in a country like the US anyone that wants a job should be able to get one. While that will never be true, right now is the harshest employment picture I have ever seen in my adult life.

That said, see Krugman's myopia? We cannot allow jobless numbers to remain high because it will cost the future generation in terms of earning ability. Now just print up 2, 3, 5 Trillion dollars to make short term, non sustainable jobs and that cost will not impact the next generation one bit. Amazing logic indeed.

I actually agree with Krugman here (I know, nuts). We are not going to pay for any of this, not really, and I do not think anyone really thinks we will. When you owe say 9 Trillion, is that really different from 19 Trillion? Is there really a difference? Really? How so?

I have often discussed the possibility of a US debt Chandrasekhar Limit, which I detailed all the way back in October 2008:

Now as I am one of the sorry uneducated masses, my question for Roubini, Krugman, et al is simple:
Does the United States Have a Debt Chandrasekhar Limit?

The Chandrasekhar Limit is defined as:
"For main-sequence stars with a mass below approximately 8 solar masses, the mass of this core will remain below the Chandrasekhar limit, and they will eventually lose mass (as planetary nebulae) until only the core, which becomes a white dwarf, remains. Stars with higher mass will develop a degenerate core whose mass will grow until it exceeds the limit. At this point the star will explode in a core-collapse supernova, leaving behind either a neutron star or a black hole.".

What I am asking is whether there is a limit on the amount of debt the US can generate before a total implosion occurs (the end result of a supernova). Is there a limit? It seems Iceland could not print or generate enough debt to save itself. Zimbabwe has the market cornered in the 10 Billion dollar note market as they print away. How come the US can make all the money they want?

I realize I am being a bit sarcastic here, but the question is a serious one. At present the US has around 3 Trillion dollars committed to this "rescue" effort. Is 6 trillion too much? 9 Trillion? 30 Trillion? At what point will the system break down and go supernova? Like the Fed thinks they know what interest rates have to be in exact percentage points, do economists know how far we can push the debt envelope?

As yet, no one can offer a definite dollar amount where the US will implode. Maybe we will have to find out by getting there.