On Government Debt...And The Writing On The Wall

"As parents, we can have no joy, knowing that this government is not sufficiently lasting to ensure any thing which we may bequeath to posterity: And by a plain method of argument, as we are running the next generation into debt, we ought to do the work of it, otherwise we use them meanly and pitifully. In order to discover the line of our duty rightly, we should take our children in our hand, and fix our station a few years farther into life; that eminence will present a prospect, which a few present fears and prejudices conceal from our sight."

Thomas Paine, Common Sense, 1776

The founding fathers had it right.

The foundering fumblers of the last fourty-some years have failed future generations.

President Obama's legacy to the United States will be one of infamy and shame: he is indeed using our children and grandchildren meanly and pitifully. There will be a day when the government of the United States, in the form of the Congress, who controls spending, will have to make the decision whether or not to live without excess and within its means in order to ensure that the reputation of the United States, in the form of its bond ratings and hence credibility and honor, is not sullied and demeaned.

I dare say at this point in time we know the answer to that question. It is increasingly apparent to me that those wielding the not insignificant power of the purse in Washington are hell-bent on leaving a permanent legacy that will damage the United States as has never been seen before: repudiation of the Federal debt and the destruction of the trust that the entire world has placed in the United States of America as the country where at least their money was safe.

President Clinton once remarked that he'd like to be reborn as the bond market, as everyone was afraid of the bond market and the power it has.

Looks like the Democratic Party, seeing the writing on the wall, are determined to ensure that if they go down, the rest of the country will go down with them.

And this is the writing that was inscribed: MENE, MENE, TEKEL, and PHARSIN. This is the interpretation of the matter: MENE, God has numbered the days of your kingdom and brought it to an end; TEKEL, you have been weighed on the scales and found wanting; PERES, your kingdom is divided and given to the Medes and Persians.

Daniel 5:25–28

Poverty in Gaza...

Poverty in Gaza appears to be a function of party membership.

Or, more exactly, the lack of party membership.

Read this and see.

And consider the source: an Egyptian journalist, published in the paper Al-Ahram.

The only reason there is poverty in Gaza is Hamas:

The problem is the vast differences in the distribution of wealth. The luxury resorts and wide range of consumer goods are enjoyed by "only a few groups," he said, primarily those who own smuggling tunnels to Egypt and those who work for international organizations such as the United Nations' UNRWA and who do not include or aid the rest of the population.

Most of the new resorts "are owned by members, or associates, of Hamas," he reported. "In addition, the Hamas municipalities charge high fees, in Gaza terms, for the use of public beaches," he added.

Al-Houl quoted political activist Mustafa Ibrahim as saying that while Gaza's rich invest in the leisure industry, 80% of residents rely on UNRWA, and unemployment is approximately 45%. "This creates a distorted picture," Ibrahim explained.

In other words, the situation in Gaza is no different than in the West Bank, or indeed anywhere else in the Arab world. A small elite, thoroughly corrupt and willing to kill to maintain power, dominates the state and economy, keeping the majority of the population in poverty, channeling the anger generated by poverty for political purposes.

There is no fundamental reason for those living in Gaza to be poor. The Israeli blockade is not the cause of poverty in Gaza.


Hamas is. End of story.

The Real Agenda...

The real agenda of the Obama Administration is control: this underscores how they are pursuing it.

It is the abandonment of the rule of law, giving power to nameless, uncontrolled bureaucrats who will be heavily influenced by special interest groups from both sides, resulting in a regulatory nightmare that will result in extensive uncertainty for everyone except for those companies who can successfully manipulate the process by lobbying (aka corrupting the process). It's called the Doff-Frank Bill, named for two Congressmen who are amongst the most corrupt in the nation.

Don't think so? Consider this:

Now, the legislation hands off to 10 regulatory agencies the discretion to write hundreds of new rules governing finance. Rather than the bill itself, it will be this process—accompanied by a lobbying blitz from banks—that will determine the precise contours of this new landscape, how strict the new regulations will be and whether they succeed in their purpose. The decisions will be made by officials from new agencies, obscure agencies and, in some cases, agencies like the Federal Reserve that faced criticism in the run-up to the crisis.

This is, of course, the Chicago school of corruption: divide and conquer, play one constituency off another, ensure that decisions are made not according to the rule of law, but rather by the rule of men.

The legislation creates a council of regulators to monitor economic risks; establishes a new agency to police consumer financial products; and sets new standards for the way derivatives are traded. "These reforms will benefit the prudent and constrain the imprudent," Treasury Secretary Timothy Geithner said in a press conference. "Strong banks, the well-managed financial innovators, will adapt and thrive under the new rules of the road."

Secretary Geithner isn't being entirely parsimonious with the truth: what he is really saying is that strong banks, the well-managed financial innovators, are those who will know who to pay off at the end of the day so that they can continue to operate at the whim of their political masters. Those new masters are the "council of regulators" who are neither vetted nor elected, outside of the control of the Congress.

This establishes the rule of men and not the rule of law.

The finance overhaul will be implemented in a volatile environment. Profits on Wall Street are soaring, with J.P. Morgan reporting $4.8 billion in net profit in the second quarter. But the banking sector is contracting, with close to 300 banks failing since January 2008. Many businesses and borrowers are struggling to obtain loans.

While some might see a contradiction here, with many banks failing and some banks making money hand over foot, the reality is that the Democrats are hand-picking the banks that they want to survive, re-writing the market so that their fat-cat cronies will continue to pay their tithe to their masters, the Democratic Party. This is about as transparent and appalling attempt to institutionalize corruption in the best Chicago tradition as one can imagine. It is all about destroying independent operators in a field of business and making sure that your cronies are operating the companies left: I fail to see the difference between this and organized crime, to be bluntly and brutally honest.

Treasury Department officials have taken initial steps to prepare the new consumer agency, called the Bureau of Consumer Financial Protection and housed within the Federal Reserve. Regulators are in the process of creating a system so that large, complex and failing financial companies can be broken up and liquidated without disrupting markets.

Right. Sorry: you cannot break up large, complex and failing financial companies without disrupting markets. This is like saying you can take bricks out of a building without ever endangering the building itself: in short time, the building will collapse, just as markets will collapse.

But that is the whole point: the goal is not to have markets, but rather to control the banks and ensure that financial activity only flows to the politically correct.

Despite creating the new consumer watchdog, the bill leaves America's patchwork regulatory framework largely intact, and most of the players will be familiar. That has irked critics on the left and right who say one of the bill's key flaws is that it relies on the judgment of officials rather than hard rules.

Bingo: it replace the rule of law - the hard rules, the inflexible rules - with judgment calls, with the law of men deciding what the law will be and imposing it.

"The same regulators who ignored consumer advocates' warnings about predatory lending have veto power over the consumer agency," said John Taylor, chief executive of the National Community Reinvestment Coalition. "That club of regulators is very insular, and usually in agreement."

In other words, the regulators have been, are and will continue to be compromised.


Fundamentally, the problem is that this opens the entire banking system to abuse: regulators will have enormous powers that can be abused at will, and which will be abused at will. This will be, bluntly, a nightmare for the country, because rooting out the corruption that will result will be extremely difficult.

The quotes above are from the link.

I'm still on the road and will be for some time, but seeing this being passed: what a nightmare.

It shows the true agenda of the Obama Administration: bringing the kind of institutional corruption that the citizens of Chicago "enjoy" in order to have basic services delivered in a timely manner to the entire United States. I've said it before and I'll say it again: this is the true agenda of the Obama Administration.

The result?

We're entering a period of serious instability, with classic correction methods failing. Inflation, exchange rates, interest rates are all failing to correct massive instabilities, leading to even more massive instabilities building up.

For the US to correct its current economic situation, it needs to massively devalue the dollar and wipe out the savings of a generation by inflating its way out of the debt trap it is in. This isn't happening. Interest rates need to move up strongly in order to dry up cheap credit that led to massive, truly epic failures in allocation of capital: this isn't happening.

If the control mechanisms fail, the result is going to be ... interesting at best and truly dismal at worst.

On The Road...

I'm on the road for a few days and won't have much access: go forth and enjoy yourselves. :-)

The Long View...

In these long, scorching days of summer, where the acuity of the mind is dulled by mint juleps and it's just too damned hot to do anything more sensible, my thoughts turn towards the long view.

Where are we going to be in five years? In 2015?

First and foremost: some things aren't going to change.

China will continue to be a sweltering, sodden bullet-time slow motion train wreck of a country, polluting like there is no tomorrow, bereft of the rule of law, corrupt and bustling like Ninsei Street, Chiba City (Chiba-shi) in Gibson's Cyberpunk Japan. The people will keep on trying to live their Confucian-values dominated lives of savings, education and ambition, held down by the government's need to keep the masses under control.

Europe will still be treading water, much the way it has since the 1990s. It's not getting tired doing that, and given the increasing paucity of trained workers, it's all they can do.

Japan will still be trying to figure out how a country is supposed to work when the population declines and not nearly enough are being born.

The US will see that living in a straitjacket really, really sucks. It's a bit of an eye-opener, but the institutionalized corruption of the Chicago system will have become the major driving force behind the Democrats. Gerrymandering and divisive politics - hallmarks of the Chicago system - will ensure that both parties have to agree on anything to get anything done, but both don't want to be a part of any success of the other side. The lawyers are exploring just how much money they can exploit from the health care system's "reform," but are also discovering that there's not much money left. A serious rejectionist movement is developing, demanding that the sins of the fathers are not forced upon their children, and baby boomer becomes a disparaging phrase.

South America will be mixed: abject poverty and political strife will dominate those countries where there are no adults in charge, and in those countries with a backbone to reject state intervention and crony capitalism, economies are moving increasingly towards development.

Australia remains Australia.

The rest of Asia? The countries with functioning societies will prosper. The countries with tribal societies won't.

Africa remains Africa. The Arabs and Persians continue to hate the Jews, who continue to ask "why me?"

Russia will increasingly resemble Japan, at least in terms of being clueless.

Second of all: things are going to change.

Pollution in China is going to start killing more and more, with the government covering it up more and more. People are going to realize that they can't eat money and that coughing your lungs up because the air is caustic sucks even more when you're middle class and finally have some leisure time and money to enjoy. China survives only because the Godless Communists (tm) are able to claim that it was they who allow people to improve their standards of living: once these start to decline, all bets are off.

Europe will start to come to terms with debt and will suck it up to survive. The Euro will survive, but European countries will increasingly lose their sovereignty to the Faceless Bureaucrats (tm) who are able to claim it was they who allow people to improve their standards of living.

Japan? It's hard for old people to change. The younger generation will increasingly be a generation of slackers, looking out for themselves rather than becoming a cog in the machine. Serious potential conflicts there as it makes little sense to work when taking care of your parents, your grandparents, three uncles and two aunts falls on your shoulders and leaves you with little cash (but lots of inherited properties that no one wants to buy). Japan is the canary in the system, the example of what will happen to Europe, China and Russia if they don't shape up, the proverbial example of what not to do.

In the US, you'll see outright disgust with mainstream politicians as people realize just how corrupt and nearly criminal they are. The death of Senator Byrd marked the turning point of the culture of pork, with earmarks increasingly viewed as being just a small, small step from outright bribery. The ability to bring federal money into a district will lose its appeal when it is largely done at the cost of other districts (that's how it is now, but no one cares). The Democrats will be firmly placed as the party of tax and spend and will be completely aghast when the classic Chicago political methods fail to work: minorities will be instrumentalized more than they are now, but the Democrats will lose the independents entirely. The Republicans will try to hang on to this, but are still struggling to do a mea culpa for the pork that they lived off during the Naughts. Disgust with politicians and with the parties incapable of change will change the political landscape: local politicians, this is your cue, and we will see natural leaders re-emerge (in sharp contrast to the appointed elites who think they are natural leaders and then go on to prove that they are not).

South America will go through the throes of re-discovering that socialism only works as long as you can use other people's money. Countries like Peru, Guatemala, Chile and Brazil are run by adults: the rest fail and revert to type.

There will be quite some changes in the Middle East: either Israel will be attacked and heavily damaged, ceasing to be a viable state because entire cities were wiped out, or Israel will be attacked and heavily damaged, wreaking vengeance of biblical proportions on those attacking them. In any case, antisemitism remains the driving force of the failed societies of the Middle East.

Finally, some things aren't going to happen.

There will not be a second term for the Obama presidency.

There will not be a permanent Democratic majority.

There won't be political hearings on corruption and fraud, since these would find so much that no one wants to destroy the facade of respectability.

There won't be a constitutional convention, despite it being talked about to "update the Constitution".

There won't be a withdrawal from Afghanistan or Iraq. Too little stability to leave, too few casualties to leave.

There won't be any political unrest or revolution, but there will be lots of people who are thoroughly disgusted and who do not trust the government.

Oh, and there won't be a break-down of the EU, neither will the Euro be abandoned. Too much political capital is tied up with both.

That's my long view. This is the 21st century schizoid man, and I approve of this message.

Keynes, Straitjackets and Cash-flow...

At the core of ours crisis is a bet.

The bet is a simple one: that revenues will grow, in the long term, in such a way as to enable governments to finance their debt.

Much of modern finance is all about cash-flow and leveraging that cash-flow to create the greatest value with the smallest risk. This is true for corporations, it's true for governments and it is true for private persons as well. Corporations use their cash-flow to finance loans for expansion; governments use their cash-flow to finance bonds to pay for politically mandated consumption and investment; private person use their cash-flow to finance house purchases and other big-ticket items.

Fundamentally, it's all fine as long as the cash-flows continue, the business plans unwind, the mortgages are paid It goes all wrong when the business plans stumble, when governments permanently expand spending at a fast rate than the economy grows, and when someone loses their job.

Unfortunately, we've all been getting it rather wrong.

The reason? Lack of recognition that there is risk out there. It is naive for a private person to leverage their incomes to the extent that if they lose their job - something completely out of their control - they will also lose their ability to finance debt via cash-flow. For mortgages there is insurance available for such an event, but not all debt is mortgage debt, and indeed it's a rather high cost (since it only gives additional playing room to find a new job, not to pay off your mortgage in its entirety: if it were the latter, it would be prohibitively expensive), for other debt instruments it's not so simple. Risk, after all, don't merely exist for the banks: for the private consumer, it is a catastrophe if their entire life style is based on leveraging their cash flow heavily. The same is true for companies: business plans generally are expected to unwind smoothly, but usually fail to take into account the fact that they are expected to do this in the future, resulting in companies failing when their business plan stumble and the companies are heavily leveraged and dependent on that cash-flow being generated. Governments rely on their economies to grow at least as fast as government spending increases so that revenues continue to flow such that government bonds can be repaid and debt rolled over.

Boy, are we getting it wrong.


The result? A fiscal straitjacket, regardless of corporate, government or private. Debt that can no longer be financed out of cash-flow has, given the demand for risk compensation in the form of interest rates, this nasty tendency to accelerate and continue to accelerate. At some point the debt cannot be paid back, especially if the crisis that led to the stumbling of the business plan, the loss of a job or an upswing in deficit spending doesn't go away quickly.

Krugman may actually have something right (if for the wrong reasons): we have reached a point where we are starting to enter a long depression, where debt burdens crush growth because profits have to be used to pay off debt rather than be used for other purposes.

Where he is horribly wrong is his call for continuing massive increases in government spending to get us out of the crisis.

Were that times were so simple as in the era of Keynes. He correctly identified that economies go into recessions, for one reason or another (for Keynes it is the stagnation of worker's wages) and that governments can work against the recession by spending money.

If, of course, the governments weren't already carrying punishing levels of debt that, if increased, would result in the necessity of default.

That is, however, the problem: hence Krugman is completely and horribly wrong to demand that government spending generate growth. He is horribly wrong because the government is, now, at the point where it is slowly starting to notice the straitjacket that it has placed itself in: with the cost of money virtually nil, governments have acquired debt such that if interest rates rise, the debt almost immediately becomes unsustainable and default occurs.

People are put into straitjackets to prevent them from hurting themselves and others. Corporations and businesses who find themselves in dire straits impoverish their owners, either via bankruptcy or legal requirements to supply the needed capital; governments default on their sovereign debt.

You cannot apply Keynes' solutions to recession when government debt is already in dire straits because politicians leveraged the government's cash flow so heavily that any growth slowdown destroys the game plan: this is exactly what has happened over the last, oh, 40 years or so.


The sooner that a house-owner realizes that they can't pay their mortgage because an income stream was lost, the easier it is to do something about it, be it jingle mail, mea culpa and refinancing with the mortgage issuer (I first wrote "bank" here, but given the lack of bank involvement nowadays, it's the mortgage issuer...), or life-style changes to prevent bankruptcy.

The sooner that a company realizes that the business plan isn't working, the cheaper it is to cut your losses and close that business unit down, or to re-do the business plan to save the business.

The sooner that the government realizes that government spending is unsustainable, the easier it will be to make changes in entitlements, cut discretionary spending and, even, raise taxes to get government debt back under control and within a new, changed revenue stream.


Instead, we see folks like Frank and Dodds re-arranging the deck chairs on the Titanic that is government spending in the US. Their failure?

To think that it's business as usual and that nothing needs to change: failing to recognize that there is a need to change is sheer and utter insanity, the kind that leads to straitjackets.