Posted tagged ‘debt’

Bald Faced Theft

January 13, 2013

Fallows latest is a post titled “The Two Sentences That Should Be Part of All Discussion of the Debt Ceiling,”

Victor_Dubreuil_-_Barrels_on_Money,_c._1897_oil_on_canvas

In it, he writes:

 

1) Raising the debt ceiling does not authorize one single penny in additional public spending.

2) For Congress to “decide whether” to raise the debt ceiling, for programs and tax rates it has already voted into law, makes exactly as much sense as it would for a family to “decide whether” to pay a credit-card bill for goods it has already bought.
Ayup.
Image:  Victor Debruil, Barrels of Money, c. 1897

Children With Matches, Playing in the Powder Magazine.

April 9, 2011

…That would be your present-day Republican party.

The just concluded budget skirmish was a mere amuse bouche to the gluttons-for-(other people’s)- punishment that is your modern GOP.   The New York Times reports today on what looks to be the mother of all budget battles to come over the vote to raise the debt limit.

I’m waiting for the chorus of the swaddled commentariat to tell us just how principled are Republican moves like these:

…they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling

If they don’t get what they want, and actually block the Treasury from raising more obligations, then this is how the Grey Lady (no longer) of 43rd St. rather demurely describes the consequences:

Once the limit is reached, the Treasury Department would not be able to borrow as it does routinely to finance federal operations and roll over existing debt; ultimately it would be unable to pay off maturing debt, putting the United States government — the global standard-setter for creditworthiness — into default.

The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming, more than three years after the onset of the last recession.

That is:  with still achingly high unemployment; wage stagnation; food and energy cost hikes; the rise (again) of the financial sector’s share of corporate profits nation wide; the increasingly worn safety net and all that, the GOP is threatening to make life worse on just about every economic and social axis imaginable.

The irony is that it may be our last, best hope that the monied class will be able to tame the beast they’ve unleashed.  Here’s Jamie Damon, head of JP Morgan Chase and someone often seen as one of the non-monstrous Wall St. types:

“If anyone wants to push that button, which I think would be catastrophic and unpredictable, I think they’re crazy,” Mr. Dimon said recently at the United States Chamber of Commerce.

But the problem is that this is what he — and the rest of us — have to contend with:

Representative Mick Mulvaney… dismissed warnings about default as “just posturing,” and said Democrats should bear the responsibility for passing any measure to increase the borrowing limit.

“It’s their debt,” he said. “Make them do it. That’s my attitude.”

Except, of course, this “Democrats did it” nonsense is simply false.   Here’s the key part of the Times piece, an all too rare fact-based description of where our current debt comes from:

In fact, the debt was created by both parties and past presidents as well as Mr. Obama.

Of the nearly $14.2 trillion in debt, roughly $5 trillion is money the government has borrowed from other accounts, mostly from Social Security revenues, according to federal figures. Several major policies from the past decade when Republicans controlled the White House and Congress — tax cuts, a Medicare prescription-drug benefit and wars in Iraq and Afghanistan — account for more than $3.2 trillion.

The recession cost more than $800 billion in lost revenues from businesses and individuals and in automatic spending for safety-net programs like unemployment compensation. Mr. Obama’s stimulus spending and tax cuts added about $600 billion through the fiscal year that ended Sept. 30.

The Times is being unnecessarily bipartisan here, certainly.  The two great leaps in debt as a percentage of GDP over the last several decades came under Presidents Reagan/Bush the former and then again, with turbojets, under Bush the Lesser, the undisputed heavyweight champion reckless spender.*

But the Times still got the key point right:  Obama-led policy has contributed minimally to the debt — probably too little in fact, when you recall that the stimulus money still hasn’t fully hit the street.

The debt limit is approaching now for two reasons more than any others:  years of incompetent, ideologically-driven GOP-led economic and tax policy — largely designed to transfer wealth from public to private hands and from the bottom and middle to the rich — and then the loss of revenue in the recession engendered by that shameful record of misgovernment.

So, to catch my breath, here’s the state of play:  we face a debt limit test very soon. Failure to raise it will cause significant harm to most Americans.  The GOP is playing Russian roulette with that test. This is not the behavior of people capable of governance.  They are hyperactive kindergarteners with a tendency towards pyromania.

There are surely real debates to be had.  We’ve got a long way to go to get to a satisfactory and ultimately affordable health care system.  We have to figure out how to be and feel secure without spending ourselves into oblivion.  It might be nice to figure out how to ease off an oil-centered energy path sometime soon…and so on.

But these are not discussions that can happen when one side is made up of inmates determined to burn down their asylum.

I’m not going to scream at the Democrats for perceived weakness, nor for a propensity to bargain badly.  We do not as a rule view damaging America in the pursuit of political advantage to be acceptable.  That leaves us vulnerable every time the GOP cozies up to barrel of dynamite, smoldering cigar in hand.

Even so, I do think that every political move from now to 2012 and beyond has to be considered in terms of how well it frames the GOP as an irreparably shattered institution.

There’s nothing left to save in the party of Lincoln. Whatever we can do to help them go the way of the Whigs, we must…

*The enormous increase in debt under Reagan, marks the point when we first were confronted with the great tax cut lie — what I think of as that huge steaming pile of that which emerges from the south end of a north facing horse captured beneath the Laffer Curve.  Reagan inherited a debt level of 32.5% of GDP from President Carter.  His tax cuts and profligate spending left us owing 53.1% of GDP at the end of his second term, and the Bush extension pushed that total to 66.1%.  Bill Clinton’s combination of tax increases and constraint on the rate of government growth (and, for the most part, a policy of minimal military recklessness) enabled him to leave office having pushed the debt back down to 56.4% — which model of prudent, small “c” fiscal conservatism was so wholly abandoned by Bush the Minimal that he left office having blown the debt up to unprecedented heights:  83.4%.

To sum up:  both parties have certainly played a role in the expansion of US national debt — after all, Democrats controlled one or both houses of Congress throughout the Reagan-Bush years.  But as far as presidents go, it’s all GOP since 1980…all except that spending undertaken in the last two years to dig out from the financial crater left by the utter failure of Republican governance.  So whilst I give props to the Times for highlighting the minimal contribution to the debt driven by Obama policy choices, they are a little too fair and balanced on the rest of it for my taste.

Image: Henry Holiday, The Hunting of the Snark: An Agony in Eight Fits by Lewis Carrol, Fit the Seventh: The Banker’s Fate, first published 1876.

Hieronymous Bosch, Extraction of the Stone of Folly, (detail) before 1516.

Friday (Isaac) Newton blogging (Monday edition): Isaac solves the subprime mess.

March 24, 2008

We are in a mess. How bad is it? I don’t know — but when the Fed et al. race to make sure that the most significant housing lenders in this country are less fiscally sound than they were last week, all to pump some extra dollars into the mortgage market, you know it ain’t good.

What to do? Why, suggests Tim over at Balloon Juice, let’s get the right man for the job:

Isaac Newton, of course.

Tim was joking, I think, but in fact Newton would be a more appropriate choice than just about any other physicist I could name. England in the late seventeenth century experienced a financial revolution as well as its more famous scientific one. Newton took part in both.

For example — he was among the great and the good whose advice was sought on what to do about the disappearance of England’s silver coinage in 1695 — along with such luminaries as John Locke, Charles Davenant and Christopher Wren.

Then, beginning the next year, first as Warden and then Master of the Royal Mint, he became a significant, if not the dominant player in the transformation of England’s money system from a silver to a de-facto gold denominated pound.

More to Tim’s point, Isaac Newton took up his role in England’s nascent financial bureaucracy at a time of wild, uncontrolled, truly exuberant financial engineering. This was a time when the English government’s attempts to fund a wildly expensive overseas military adventure (the Nine Years War) stretched to include licensing the issue of tickets that were at once (a) high-interest bonds (what might later be known as junk), backed by a stream of government tax revenue on malt, the key raw ingredient in making beer;* (b) entries in a lottery, offering chances to win up to a 1,000 pounds against a ten pound ticket; and (c) paper money.

As another excessively premature plug — I cover all this in my book on Newton as a currency cop, coming out early next year. But for now the point is that Newton was not only present while all this happened. He was in fact a fairly senior civil servant working for a government struggling to figure out how to fund and foster a transforming economy. He was a pretty smart guy too, I hear, and he thought in some detail about questions of credit, government control, and probity in financial dealings.

He came to a lot of quite sensible conclusions about the new paper instruments, and the proper role of debt and credit: “If interest be not yet low enough for the advantage of trade and designs of setting the poor on work..the only proper way to lower it is more paper credit till by trading and business we can get more money.” Keynes forshadowed, anyone?

And then there is this: “Tis mere opinion that sets a value upon money; we value it because with it we can purchase all sorts of commodities and the same opinion sets a like value upon paper security….All the difference is…that the value of the former is more universal than that of the latter.”**

Interest is certainly heading low enough for the advantages of American export trade. (evanescing dollar, anyone? I’m only complaining as one who just had to wire a fee for a researcher in London). We still have a way to go to set the poor on work, but at least Newton had that as one of his priorities, which is more than I can say for some, on the evidence. And certainly, the interesting times (in the Chinese sense) we are living in confirms the truth of the observation of the relationship of opinion and value.

But even though Newton could see what many others could not about the essentially abstract nature of money, he was not entirely immune to the confusion — or perhaps to baseline human desires — triggered by half-comprehended new notions of finance. His first investment in the South Sea Company paid off, when he sold on the rise.

But even though there could have been no other man in England better placed to grasp the mathematical implications of the unfolding scheme — he still bought back into the madness of the bubble year, 1720.

He lost, by his heirs’ estimate, some 20,000 pounds — a prodigious sum, a fortune.*** It’s hard to gauge what that means across such gaps of time, but using the Parliamentary research service’s estimate of inflation across that time, a rough guesstimate leads to the conclusion that the smartest man in Europe blew the modern equivalent of better than three million pounds on a “greater fool” dynamic of what had become, in the end, a fairly straight forward pump-and-dump stock fraud.

Newton had succumbed to greed, or perhaps the simple impetus of the common mania — but which ever it was, it still overcame both his capacity to think quantitatively (Newton!) and any prudential impulse. After all, he was rich already. He didn’t need to risk much to gain much: when he died, seven years after the bubble year, he still left a fortune of 30,000 pounds, not counting his land in Lincolnshire.

The moral of the story: This is why you need to regulate financial markets. No one, not even the cleverest, is immune to all the familiar temptations of money in flux. No wise man remains wise always; one of the most reliable inducers of folly is the possibility of gains that seem to repeal financial laws of gravity. Rules that are no respecters of persons are there to save even the Isaac Newtons among us from themselves.

*More crucial than you might think given that weak beer was the staple fluid in a society where the water supply looked like this.

**Both quotes taken from Newton’s Mint papers, and published in G. Findlay Shirras and John Craig, “Sir Isaac Newton and the Currency,” in Economic History. Subscription required.

***It’s not quite clear from the record exactly what Newton lost in the bubble. The suggestion is that he lost an investment of 20,000 pounds, but this seems unlikely, given what is known about Newton’s income throughout his career. More likely, and the more popular interpretation among Newton scholars, is that Newton converted into South Sea stock debt instruments with a total, long term future value at that rather grand number. In other words, he didn’t lose tens of thousands in cold cash; rather, he gave up income that could have added up to very satisfying amounts over time. Still a lot of money, but not the stunning out-of-pocket disaster the raw number implies.

Images: Quentin Massys, “Der Goldwäger und seine Frau,” 1591. The reproduction is part of a collection of reproductions compiled by The Yorck Project. The compilation copyright is held by Zenodot Verlagsgesellschaft mbH and licensed under the GNU Free Documentation License. Source: Wikimedia Commons.

South Sea Bubble Card, 1720. Source: Wikimedia Commons.


Follow

Get every new post delivered to your Inbox.

Join 8,396 other followers