May 25, 2024

The Terminal Debt Trap

US Could Be Facing Debt “Time Bomb” This Year

WASHINGTON – With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world’s appetite for financing U.S. government spending.

Despite those actions, the economic outlook has continued to darken. Now, Obama and congressional Democrats are debating as much as $850 billion in new federal spending and tax cuts to create or preserve jobs and slow the grim, upward march of unemployment, which stood in November at 6.7 percent.

Congress is not planning to raise taxes or cut spending to cover the cost of those programs, because economists say doing so would further slow economic activity. That means the government has to borrow the money.

Economists from across the political spectrum have endorsed the idea of going deeper into debt to combat what many call the most dangerous economic conditions since the Great Depression.

“When you accumulate this amount of debt that we’re moving into, it’s not a given that our foreign friends are going to continue on the path they’ve been on,” said G. William Hoagland, a longtime Republican budget analyst who now serves as vice president for public policy at the health insurer Cigna. “There’s going to come a time when we can’t even pay the interest on the money we’ve borrowed. That’s default.”

The unanimous conclusion of the politicians and economists seems to be that we can borrow our way to prosperity via fiscal stimulus conducted with borrowed funds or printed money.

It is, of course, delusional to think that we can spend and borrow our way out of a financial crisis caused by over spending and over borrowing.   The reason we are in a financial crisis is due to excess leverage and credit at every level of our economy.  The attempt to subvert free market solutions by socializing every loss will only expand and prolong our economic mess.

Foolish politicians promising easy and painless solutions are pandering at best.   Quantitative easing, fiscal stimulus, bailouts and guarantees are no solution.   We have a crisis because we spent our future.  The solution of hard work and a lower standard of living will eventually be forced upon us.   Massive new spending and borrowing at this point only brings us closer to a terminal debt trap where we have neither the capacity to repay nor the ability to borrow.

How To Inspire Panic In An Economic Crisis

In an extraordinarily candid and chilling economic assessment, the Governor of the Bank of Spain, Miguel Ordonez, warned that the global economy is on the brink of a “total” financial meltdown.  Governor Ordonez, in an interview with the Spanish newspaper El Pais is quoted as follows:

“This is the worst financial crisis since the Great Depression”

“There is an almost total paralysis from which no-one is escaping.”

“The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.”

“If, among other variables, we observe that inflation expectations go much below two percent, it’s logical that we will lower rates.”

“The lack of confidence is total”

One thing for certain is that the Governor’s remarks will do nothing to restore confidence in the financial system.  Typically, central banker statements are reserved and constructed to restore confidence in the financial system rather than to incite panic.

As the head of Spain’s Central Bank, one of the Governor’s primary functions is the promotion of the sound working and stability of the financial system.  One may wonder exactly how seriously the Central Bank adhered to their duties when they allowed the Spanish property markets to soar to ridiculous markets values, fueled by easy Central Bank lending policies and lax oversight.  Perhaps they were following Alan Greenspan’s advice that bubbles cannot be recognized and are best dealt with after the fact.   It is statements such as this that prove the basic incompetency of Greenspan,  the man most responsible for destroying the integrity of the world’s financial system.

The central banks responsible for the insane easy money and lending policies that brought us to the brink of ruin are now in charge of restoring confidence. Their prescription for recovery is more easy credit. ( See $700 Billion Debated – $5 Trillion Ignored)    I think it is indeed time to panic.

$700 Billion Debated – $5 Trillion Ignored

When the original $700 billion TARP bailout program was proposed by Treasury Secretary Paulson and Federal Reserve Chairman Bernanke, the American public was shocked.  The size of the bailout request was colossal, representing almost 10% of the country’s entire yearly economic output.  The country’s financial meltdown hit the front pages and caused public outrage.  Realization set in that the Government had been blindsided by the crisis and that interest rate cuts alone would not solve this problem.

Opposition to the bill’s passage was intense and the initial bill was defeated.   The Treasury and Federal Reserve insisted that the money was needed to prevent a collapse of the banking system.  Scare tactics were employed to sway voters minds.   President Bush informed us that the bill was necessary to protect America’s retirement plans and financial future.

TARP was passed and $350 billion quickly dissipated with little to show for it.  Secretary Paulson is now requesting the remaining $350 which will quickly disappear as well, with little assurance of ending the financial crisis.

Meanwhile, with virtually no public debate, the Federal Reserve has put the US taxpayers at risk for over $5 trillion dollars and counting.   This $5 trillion includes direct loans (such as to AIG),  debt guarantees and asset purchases from troubled institutions.

Bernanke, the non elected head of a central bank gone wild is committing vast sums of taxpayer money with no assurance of a positive outcome.  Are we to put our trust in a man who did not see this crisis coming, predicted that it would be contained and is now in charge of solving the problem?    Is Bernanke the savior or the guide on the road to financial Armageddon?

Mr. Bernanke’s predecessor at the Federal Reserve allowed the explosive credit growth and easy lending that fueled financial bubbles.  These bubbles are now bursting and collapsing the world economy.  We now have the lunacy of the Federal Reserve trying to convince us that easy money, which caused the problem, is now also the solution.  Easy money and low interest rates are the only answer the Fed has and so far all it has caused is financial insolvency on a worldwide scale..

The fact of the matter is, the Federal Reserve is not bigger than the US economy.   The power of the Fed is derived from the US free enterprise system.   The Fed cannot change the primary trend of market forces nor can it bailout an entire nation.  All they can do is slow it down and drag it out, as happened in Japan.  The end result of the Fed’s “rescue” is likely  to be an impoverished future caused by unmanageable debt burdens.