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Tuesday, September 11, 2012

Over the Cliff

A couple articles on the economic crises in the United States. First up is this article from the American Thinker noting the big picture problem--the United States is so far in debt that no one will buy our treasury bonds but the Federal Reserve. From the article:
Anyone concerned with the impending economic collapse will find Woodward's account fascinating, although not for the reasons he intended. He stumbled into truth, important truth, and seems to have missed it entirely. What follows is an excerpt from the article with the italics added by me:
Another possible outcome, Geithner said, was perhaps worse. "Suppose we have an auction and no one shows up?"
The cascading impact would be unknowable. The world could decide to dump U.S. Treasuries. Prices would plummet, interest rates would skyrocket. The one pillar of stability, the United States, the rock in the global economy, could collapse.
"So," the president said, "if we give $1.2 trillion now in spending cuts" - the amount in the House bill to get the first increase in the debt ceiling for about six to nine months - "what happens next time?" The Republicans would then come back next year, in the middle of the presidential campaign, and impose more conditions on the next debt ceiling increase. He could not give the Republicans that kind of leverage, that kind of weapon. It was hostage taking. It was blackmail. "This will forever change the relationship between the presidency and the Congress.
"Imagine if, when Nancy Pelosi had become speaker, she had said to George W. Bush, 'End the Iraq war, or I'm going to cause a global financial crisis.' "
So, Obama said, they had to break the Republicans on this. Otherwise, they would be back whenever it suited them politically.
They were out of options, Geithner said. The only one might be accepting the House bill, loathsome as it might be. "The 2008 financial crisis will be seen as a minor blip if we default," he said.
The president said, "The Republicans are forcing the risk of a default on us. I can't stop them from doing that. We can have the fight now, or we can have the fight later on, but the fight is coming to us."
So, no, Obama said, he was not going to cave. Period. He said good night, got up and left. He was very agitated.
Geithner thought there was one other consideration. He did not mention it to anyone, not even the president, but he had thought about it a great deal. It was not just that Obama faced an economic choice or a political choice. He faced a moral choice.
The president should not put himself in the position of saying unequivocally that he would veto, Geithner concluded, for one simple reason: No one could be sure how to put the American or the global economy back together again. The impact would be calamitous.
"And the people who would bear the pain of that would be the people less prepared," Geithner told others, "less able to absorb that cost. It would be something you could not cure. It is not something you can come back and say, a week later, 'Oh, we fixed it.' It would be indelible, incurable. It would last for generations."
Turbo Timmy Geithner confesses the desperate nature of the situation. The government is broke.  Geithner fears the world knows this when he says: "Suppose we have an auction and no one shows up?" Geithner knows that we cannot finance our deficits using traditional credit markets. The deficits are too large and the government has no credibility regarding the required spending cuts. Geithner was admitting that markets would not allow the US government to continue its profligate ways. That admission is major news, although not to Woodward and his politically-oriented audience.
Credit markets have (or nearly have) stopped US government debt financing. That's why we have the Federal Reserve, the counterfeiter of last resort. If government can raise the debt limit, then it would be legal for the Treasury to issue new debt. The Treasury's sibling, the Fed, would buy it by printing new money. That would allow the government to pay its bills for a while longer. 
One must wonder about the intelligence and stewardship of Timmy and the other attendees of this meeting. When Geithner declares:  "It would be indelible, incurable. It would last for generations," he is stating the inevitable. Raising the debt limit does nothing to change the US condition other than temporarily postpone his predicted outcome. 
The two italicized sentences of Geithner's reveal what the American people need to know. No one will buy US Treasuries other than the Federal Reserve. Raising the debt limit only puts the government more hopelessly in debt, ensuring that Treasuries will be even more difficult to sell. Without intending it, Geithner admits that Bernanke will be printing money until the electricity is shut off or until hyperinflation shuts everything economic down. In either case, we reach his "indelible, incurable" situation which will "last for generations."
Amazing. Truly we are being led by people that are as inexperienced and irresponsible as children.

The second article is by James Pethokaukis, and points out 9 trends that show that the United States is sliding back into a recession (or depression, if you prefer). Mr. Pehokaukis' article is succinct, and has multiple graphs, so I recommend just following the link and reading the whole thing. However, he concludes:
America is not stuck in a sluggish or disappointing economic recovery. It’s in the middle of an economic emergency with more trouble on the way. And it’s time for Washington to start acting like it.
(Both articles h/t Instapundit).

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