Hi y'all!
Captain Cheerful(TM) here: I've been taking advantage of time off to put a weather eye to economic data (predigested: I'm not a propeller-headed econ-boffin; I read other people's opinions having identified their biases and/or financial interests -- but so far I've been unpleasantly unsurprised, FWIW), and 2010 isn't looking so spiffy.
First, and foremost, here's the first thing everyone needs to know:
THE U.S. IS NOT OUT OF THE "PREVIOUS" RECESSION.
Fine print: the way that the financial stats are calculated, debt-based spending by the federal government counts as economic activity -- when you remove the amount that the Obama administration has run been running up the credit cards to stave off fiscal armageddon (and thankfully so: it has been giving the responsible among us time time to de-leverage our housholds before the shit REALLY hits the fan). The private economy is still collapsing like Eddie Izzard's proverbial "flan in a cupboard".
The second thing that everyone needs to understand is that, in spite of the fact that the economy is being propped up on Uncle Sam's credit-card, everyone else in the whole world either is panicking to issue more debt or is ceasing their overseas investing to focus on their own situation. For examples, check up on Greece or China, respectively. In order for the economy to continue collapsing like a flan in a cupboard (instead of collapsing faster), we need people to buy a ton of t-bonds. There are only a few ways this'll happen:
1) A collapse in the stock market. (This's probably overdue anyway -- folks have been cheering the return to overblown stock prices for a while now and, while I'm not enough of a fool to bet against the stock market directly (the famous saying is "the market can stay irrational longer than you can stay solvent"), my money's where my mouth is here -- what little we have for retirement's all in the sadly dreadful fixed-income market.) This would cause "main street" investors to panic again and flock to Treasuries as a "safe haven" investment. The open question here is whether or not, in such a scenario, that there will be enough extracted from the market "on the way down" to fund 2010's scheduled credit-card binge -- a lot would depend on how fast the market cratered. Let's not hope for this scenario.
2) A return of interest rates worth investing in. Tired of trying to fund your retirement on 1% returns? So are all the retirement fund managers out there who've been forced to borrow money to invest (capitalized by their client's investments) so they can eek a decent return out of the market. They'd love to be able to deleverage their funds without being put out of business when the fund next door shows five times their earnings while keeping its larger risk profile buried. This would get a lot of folks who're tired of waiting for the P/E bomb in equities to go off (P/E ratios have been insane for over a decade now and will get visibly worse with worsening economic conditions) while sitting in cash right now to plunk down for Treasuries and maybe keep armageddon from happening for another year, but the problem is that with so many households on the brink of ruin already, for Bernanke to decide to pull up on the interest-rate lever would be disastrous -- every household with significant floating-interest-rate debt would decrease their spending by the difference needed to pay the extra interest, assuming they don't default to such a huge extent that even the schmucks on Wall Street can't sweep the carnage under the rug. This would be like setting off a fusion bomb in the center of the economy. Lets not hope for this one, either.
3) For Treasury yields to increase. Unlike increasing the "official" interest rate (the "coupon" rate) of treasury bonds, the market could force the effective interest rates of treasuries to explod upwards simply by paying less for each bond at auction. This would be something that Bernanke & Geitner cannot control, but would have similar economic impacts on #2, above. This would also smash the prices of the T-bonds in people's existing portfolios -- and since the existing bonds scheduled interest payments are so miniscule, this would demolish a lot of pension funding. Another for the not-hoped-for bucket.
4) For complete cessation of all non-entitlement social spending and all spending on both Iraq and Afghanistan, effective immediately. This might cut out the need for the bond issuances in the first place (mostly -- Bush's medicare sellout to the grey-panthers will still bite us), but the political and, more importantly, diplomatic bloodletting that we'd suffer would be egregious in the extreme -- the government would lose all credibility both here and abroad. (The folks in Taiwan, for example, would buy a lot of Depends.) This one's not going to happen, nor, frankly should it. But even if it did, I'm not convinced that it'd keep the rate of collapse where it is.
5) Something happens that I'm not smart enough to think of, that either saves our bacon or at least kicks the can down the road so we can have an even greater mess a year from now. This would be great. Anyone feeling both smart and influential?
Personally, I'm rooting for #5.
P.S. If anyone thinks I'm just being a worry-wort here, put on your thinking cap and ponder what it means that, of all companies, Arrow Trucking(! WTBFF !) is going bankrupt. Anyone from a "flyover state", aka "where all the shit we take for granted comes from" will be racing for a malt whiskey right about now. Everyone else'll start to get it in about a week... .
P.P.S. "WTBFF" means "what the bloody flying fuck", an expletive that even potty-mouthed me generally holds in reserve for serious occasions.
10 comments:
I'll also root for #5, but I suspect if the whole world is using debt to keep things going, then one has to ask - what does that debt really mean?
Could be we're entering into totally new economics here. Debt may only matter if you say it matters. Much like how a currency is valued only because the economic community says it is valued at a particular level.
I do agree that the recession isn't over, and we're definitely in for a very long jobless recovery, if not a new permanent lowered employment and GDP level. But Arrow Trucking? You're going to have to explain that one to me. Big name companies go bankrupt all the time now, sometimes because the only thing keeping them going is credit, and other times because they were poorly managed. So I don't see what one company has to do with it. If it was hundreds of trucking companies I might be more worried, but I'm not seeing your concern on that point.
The issue with debt is that it creates an increasingly large claim on future earnings, eventually reaching a threshold beyond which it cannot be paid. Once that happens, creditors cease to lend -- unless you can pay cash for all your large expenditures, it matters. (c:
I guess what I'm trying to say is what if the debt is never paid back and our government just writes it off.
We've done it several times for money loaned to others as a govt. (post WWII), and governments have from time to time said no to repaying debt. So as for money we owe ourselves....does it really matter if there is nothing concrete to back it up anyway?
The claim on future earnings only comes true if you let someone come and collect. Very difficult for you or I to do this, but a bit easier for a whole government to simply state it won't repay the debt at those terms.
If we owe it to ourselves it does matter -- I don't owe debt to me, I owe it to someone else, and so on. It's not like our debt is just left-versus-right-pocket. If a bond is invested in by a retirement fund and the bondholder defaults, that's a lot of grannies who're worse off than otherwise. Similar examples abound. Its not just government debt that's the issue, but the supply of credit in general. Folks need loans to make businesses work, and other folks need investment income to fund their retirements (almost no-one can save enough to retire on without compound growth along the way).
Remove the credit and you remove most of our money and end up in deflation-ville.
Well if it's government debt - isn't it indeed money owed to ourselves?
I understand the need for credit to make businesses move around, but seems to me that government debt is just funny money. Even if you had enough money to buy ALL government debt in one day, you still don't own the government, nor do you have any say in what the government does. Therefore you're only hoping that buying government debt will pay off some day, and as long as that debt has some perceived value, then someone will buy into it. Right?
I think credit amongst non-government entities does need to continue, so I agree with you that more credit is needed, but I don't see that happening since the banks are more interested in holding onto more capital to cover their crazy made-up investments that got us into this.
But I'm thinking excessive government spending is really meaningless since who's going to go banging on Uncle Sam's door trying to collect? No one has the military might to do so. Therefore it seems short term, or even long-term government spending out of proportion to income coming into the government may be meaningless, and maybe is new economic ground.
Or not. Just seems like there are some historical examples out there for countries held over the financial barrel who broke lose (usually by war) and in the end, economies moved on.
Government debt isn't just funny money -- someone has lent us that money, usually foreign actors. This isn't like printing money we promise to take off the table later: we're up to our eyebrows in debt we owe to other central banks and such. Relatively little of our debt is owned by individual USians.
What happens if we don't pay up is these other central banks, oil cartels, etc. stop showing up a Treasury auctions, and the debt is never issued or created. I can write an IOU for a million bucks, but it's nothing unless someone else ponies up the money -- then it's debt. Likewise for all the creditors who've lent us that money. Then we'd be forced to live strictly according to what we can tax, resulting in massive cuts to just about everything at the time that the only thing going in the economy (on a macro scale) is knock-on activity spurred by debt.
Perhaps - still the whole thing seems like a big shell game. Seems that as long at the money is moving is more important than who actually owns it.
ARROW???
::gulps nervously and retreats to Lovecraft's more hopeful cosmos::
No, dude, it is very much NOT a shell game... who owns the money decides what is done with said money decides whether and where it moves...
My variable was a stellar effing move over the past six years, and I beat every prophet with it. But if #2 happens... unless it's ridiculous, we'll make it. If it's ridiculous, we'll have to cut losses and rent.
Russ, the current conjecture is that we're in for another round of "quantitative easing", so even if #3 occurs, #2 is looking less likely. At least, if you believe the yakkers.
Well, my gamble, as you know, has always been based on politicians being willing to eff the long-term for the sake of the photo-op...
usually a safe bet.
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