Debt Beyond Belief

By Alan Caruba

Have you noticed the many television advertisements urging you to buy gold, to refinance your home, to get a reverse mortgage, or to fix your personal credit score? There’s a reason for this, not just individuals are financially stressed, but the entire nation is broke.

The nation has not seen this level of debt since the end of World War Two. We have debt equal to the entire value of our Gross Domestic Product. The government cannot collect enough taxes to make a dent in it. It has to cut spending. It has to find ways to reduce the need to borrow.

Monday’s Standard & Poors' downgrade, not of the nation’s triple-A rating for its treasury securities, but a warning that the nation’s “sovereign rating” has a “negative outlook” says that America has wandered into a dangerous area in which worldwide confidence in the dollar is slipping away.

For too long, too many of the economic advisors to presidents Clinton, Bush and Obama, have been allowed to cause this damage and then, as often as not, return to their ivory tower jobs secure in the knowledge that more knucklehead economists will fail to apply the brakes.

How does a nation engaged in two foreign wars do that? The answer is that it can’t. No matter how much government waste is exposed, it rarely translates to a reduction. The bureaucrats running federal departments and agencies understand that failure to spend as much of their current budget as possible threatens their ability to ask for and get more

The responses to the S&P news, as reported in Monday’s Wall Street Journal, demonstrate that economists, tightly wrapped in their favorite theories and masses of numbers, are clueless. Mark Thomas of the University of Oregon dismissed the S&P warning, airily saying “the political process will deal with this problem.” It is the political process, specifically decades of interfering with the nation’s housing market that caused the 2008 financial crisis.

Add in interference with the energy marketplace since the days of Jimmy Carter and you have $5.00 a gallon gas by June, maybe sooner.

It is the political process that is blathering about raising the debt ceiling when all it has ever done is raise the debt ceiling. The same political process has proven incapable of eliminating federal government agencies and programs that have ballooned the debt while slowing economic growth.

Dean Baker of the Center for Economic and Policy Research noted S&Ps “horrible track record for judging credit worthiness” and, considering that it “gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse”, he’s got a point. Much of the alleged structure in place to avoid banking failures has been a failure.

Steven Richhiuto of Mizuho Securities suggested the “political realities” will make it difficult “to achieve the type of entitlement and tax reform necessary to put the deficit on a credible declining trajectory.” You think? For decades Social Security and later Medicare have been the famed “third rail” of politics.

No one wanted to address the way changing demographics—more older people, fewer working people—had rendered the systems unsustainable. Rep. Paul Ryan’s 2012 proposed budget does, in fact, address these and other problems, but if “political realities” fail to bring about the changes he and several deficit commissions have recommended, then the S&P warning is the equivalent of being on the Titanic.

Paul Krugman, Princeton University’s Nobel Prize winner, and New York Times columnist just repeats that same nonsense that “the U.S. is perfectly capable both of running large deficits now and getting its fiscal house in order over time”, cautiously adding, “but not if the parties cannot agree on any solution.”

The political parties have not been able to agree for decades. When the economy rebounded from President Reagan’s tough love, it still took a 1994 historic change in Congress to Republican control before welfare reform was embraced by President Clinton. He then took credit for an improving economy. In 2010 the voters returned control of the House to the Republicans, but the previous Democrat House and two other branches of government, the Senate and the White House, have plunged the nation into its current crisis by tripling the debt by trillions.

The bottom line is that the nation cannot continue to run large deficits because it cannot afford to pay huge interest rates on every dollar it borrows. That is a cycle that must be broken.

At the heart of present dangers is the Federal Reserve that has been printing money out of thin air for the purpose of buying the bank’s “toxic paper”, the millions in “bundled mortgages” for homes, the ownership of which is often in question. This is called “quantitative easing”. Other nations have gone this route and achieved little as a result.

Writing in November 2010, Bill Bonner, creator of newsletter The Daily Reckoning, said, “America’s own experience with quantitative easing is similarly discouraging. Between the beginning of 2009 and March 2010, the Feb bought $1.7 trillion worth of mortgage-backed securities, creating new money specifically for that purpose. Where did the new money go? Into the coffers of the banks. Did it stimulate the economy? Not so’s you’d notice.”

By April 2011, all the major economic and social indices by which a nation’s financial status is measured have been in the negative. Economists and others may choose to ignore the S&P warning, but eventually the nation’s economic system will simply collapse on its own if steps are not taken to dramatically address the issue.

You don’t have to be an economist to know that something is terribly wrong with the way all levels of government have horribly mismanaged the nation’s and the state’s fiscal affairs. You just have to watch the television commercials.

© Alan Caruba, 2011