US speeding towards financial crash

posted at 9:24 am on May 13, 2009 by Ed Morrissey

Two related stories signaled investors today to push the dollar lower in overseas trading last night.  First, former GAO chief David Walker notes a bond warning from Moody’s that US Treasury bonds may lose their top rating — and that could cost us dearly:

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

Why does McDonald’s make a better risk?  McDonald’s doesn’t run massive deficits.  And the Chinese are right to be worried about their investments, as the AP reports on how much worse those deficits will become, and much sooner than the political class admitted:

Social Security and Medicare are fading even faster under the weight of the recession, heading for insolvency years sooner than previously expected, the government warned Tuesday. Social Security will start paying out more in benefits than it collects in taxes in 2016, a year sooner than projected last year, and the giant trust fund will be depleted by 2037, four years sooner, trustees reported.

Medicare is in even worse shape. The trustees said the program for hospital expenses will pay out more in benefits than it collects this year, just as it did for the first time in 2008. The trustees project that the Medicare fund will be depleted by 2017, two years earlier than the date projected in last year’s report.

The trust funds — which exist in paper form in a filing cabinet in Parkersburg, W.Va. — are bonds that are backed by the government’s “full faith and credit” but not by any actual assets. That money has been spent over the years to fund other parts of government. To redeem the trust fund bonds, the government would have to borrow in public debt markets or raise taxes.

As the boss recalls this morning, George Bush tried in 2005 to warn about the looming crisis in entitlements.  What kind of response did that get?  Democrats like Harry Reid accused Bush of fearmongering and panic, and assured Americans that “the so-called Social Security crisis exists in only one place — the minds of Republicans.  In reality, the program is on solid ground for decades to come.”

Obviously not.  Last month, I noted several more of those Democratic demurrals in 2005, along with the news that Social Security surpluses have already disappeared.  As I wrote earlier, Treasury’s website shows that we lost money in February for the first time ever — and that will only get worse as the economy slows, unemployment rises, and more people start drawing Social Security.

Why did this hit the dollar today?  If the US loses its top rating as a bond issuer — which really only means as a borrower — we will have to pay higher interest rates on our bonds in order to attract investors.  This has already started to happen even with the top rating, but a markdown will force the issue.  That will make our debt service significantly higher than we anticipated at either the OMB or the CBO, and these deficit projections will start extending a lot farther downward in the next couple of years:

Not only will the deficits increase, the cost of deficits will increase, and eventually the debt service will become the biggest part of the federal budget — unless Washington massively increases taxes to close the gap.

And that is why Tea Parties have erupted across America.  The free-spending policies of today will lead to massive taxation or collapse in the near future, and anyone with a calculator and an iota of sense can see it.


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Watch very carefully after May 19th in California when every one of these propostion’s go down in defeat.

Well except for 1F, which will prevent legislators from voting themselves pay raises during deficit years. That one looks like it’s going to pass easily.

Doesn’t go far enough, IMO. If the state is running a deficit legislators shouldn’t get paid at all until the budget is balanced (through spending cuts, never through increased taxes).

TheMightyMonarch on May 13, 2009 at 1:13 PM

Finance? Really? Most heavily regulated? Nah. Government turned a blind eye to financial consolidation and complex instruments. Had there been more focus on that, the housing boom would not have been as out of balance, and thus growth would have been slower…but the crash would be nowhere near as harsh as it is today.

ernesto on May 13, 2009 at 1:13 PM

way to ignore the overt government interference that led to the CRA and threats by ACORN and bundling leading to misvaluated risk Ernie….did you do counter-intell work for Pearl Harbor back in ’41 by chance?

sven10077 on May 13, 2009 at 1:17 PM

bambi knows exactly what he is doing.

get yourself ready to protect your own. really.

kelley in virginia on May 13, 2009 at 1:21 PM

Here is what I posted on the other thread about this same nonsense:

We are so screwed. They will have to raise taxes. Everyone knows that taxes are punitive. They will have to raise SS taxes and push the retirement age out to age 75. We cannot pay for the debt that we have now. We are a creditor nation borrowing from other nations. Our biggest creditor is China. Then they are going to bring in a national health care plan. There isn’t enough money in the whole wide world to pay for all of this. There will be wars, disease, and starvation of the masses in the near future.

Sorry about being so glum, but there it is.

cjs1943 on May 13, 2009 at 1:04 PM

cjs1943 on May 13, 2009 at 1:22 PM

Bush tried to fix it, but all the libturds said social security was just FINE.

dogsoldier on May 13, 2009 at 1:22 PM

Finance? Really? Most heavily regulated? Nah.

The Federal Reserve drives interest rates, which drive finance. Interest rates have been kept artificially low making money too cheap to get. Add to that the CRA, which all but forced banks to lower lending standards.

You can only get people with good credit to borrow so much, even at near-zero interest. When that market dried up, cheap money along with lowered lending standards made the subprime market temporarily attractive. That is until home prices crashed, which always happens in an unsustainable boom-bust cycle.

If interest rates were not regulated by an arm of the federal government, they would have quickly reverted back to realistic rates. Subprime borrowers start borrowing at higher interest rates, which drives down demand, which in turn stabilizes home prices.

So yes, government does have a hand in regulating finance, and now we’re seeing the results of what happens when you destroy the inherent ability of free markets to manage themselves.

TheMightyMonarch on May 13, 2009 at 1:27 PM

plunging, more like it

corona on May 13, 2009 at 1:31 PM

Raise the retirement age and then deny retirees medical treatment through rationed ObamaCare. Problem solved.

nico on May 13, 2009 at 1:35 PM

Raise the retirement age and then deny retirees medical treatment through rationed ObamaCare. Problem solved.

nico on May 13, 2009 at 1:35 PM

Easy to say but unless you have stood at the foot of a hospital bed and watched a loved one die then none of this will hit home to those liberals who want everything but are unwilling to work for it.

izoneguy on May 13, 2009 at 1:41 PM

Bush tried to fix it, but all the libturds said social security was just FINE.

At one point I actually supported his paltry 2% privatization plan, but then I came to my senses and remembered that the federal government would still be running it.

TheMightyMonarch on May 13, 2009 at 1:55 PM

way to ignore the overt government interference that led to the CRA and threats by ACORN and bundling leading to misvaluated risk Ernie….did you do counter-intell work for Pearl Harbor back in ‘41 by chance?

sven10077 on May 13, 2009 at 1:17 PM

And also the fact that the govt ‘insures’ failure if it happens.
With no consequences, it’s no wonder those in this industry have been able to run amok.
Govt interference almost ALWAYS leads to chaos, no matter the intentions.

Badger40 on May 13, 2009 at 2:03 PM

The joyride is already airborne off the cliff with the bumper starting to edge below the horizon. However, in typical Hollywood fashion Obambi is attempting to alter the frame rate to slow motion (using future generation’s backs) in the hope he will have left the theater before impact. Blame the guy before him. Blame the guy after him. That is all Obama stands for except partying on Scare Force One.

viking01 on May 13, 2009 at 2:20 PM

Is this really anything new? From the moment Bush led off with TARP, then gleefully handed Obamanaut 1/2 of the TARP funds to play with after his coronation, it was the beginning of game over. Suddenly a TRILLION dollars wasn’t what it was, an amount of money only addressed when taking the entire scope of the budget into account. Now a TRILLION DOLLARS was an amount to spend, and spend again.

Correct me if I’m wrong, but once the debt exceeds the GDP we’re totally screwed, no matter what they do. The only choice at that point will be to just tell everyone carrying our bonds to go fish. At that point we have a total and complete global monetary collapse. I really believe there are people in DC (read liberal socialist statists) who believe they can just ride this through to social utopia on the other side. Ironically, they’re probably the same ones who scoffed at the war planners of the 70′s and 80′s who planned to ride through a nuclear war and plan for the aftermath. Tell me, who is more insane? We never launched a single nuke, but Obama is slamming his glistening muscled finger down on the economy NUKE button over and over, he seems so impatient that nothing has blown up yet. Unfortunately for him, the economy is just as fissionable as Plutonium 239. It just takes longer to get a self sustaining chain reaction going. A one year 1.8 trillion dollar defeceit was half the critical mass, so what’s the other half? Bond default.

Falconsword on May 13, 2009 at 2:41 PM

Fred Thompson was the only one on the campaign trail that talked about tackling the problems with social security. He was accused of not having “fire in the belly”.

We’ve no right to bitch about the sheets, when we’re laying in the bed we made for ourselves.

McCain was the “candidate of choice” for the likes of Colin Powell and Bill Kristol. They got the candidate they always wanted….and they lost.

These lessons are so avoidable…if people like those two would realize that embracing the oppositions policy stances is NOT how you defend your own!

Fred Head ’till I’m dead!

Talismen on May 13, 2009 at 2:46 PM

way to ignore the overt government interference that led to the CRA…

sven10077 on May 13, 2009 at 1:17 PM

The CRA is a real issue and we need to hammer the libs on it every chance we get. That said, despite everything we’ve been told by the conservative punditry, we aren’t where we are due to the CRA. The CRA is but one of many symptoms, it’s not the disease.

We are where we are in large part due to the abuse of debt by governments at all levels, corporations, and individuals.

We are where we are due to the manipulation of monetary policy. We haven’t had honest sound money in generations. People like my grandparents scrimped and saved only to see their savings stolen by Uncle Sam’s inflation.

We are where we are because there will always be elites who believe they are smarter than the people, ergo the people need to be controlled for their own good.

We are where we are because of government interference in every aspect of America’s business life. Regulations and taxes have driven American manufacturers offshore, leaving Americans to sell crap on Ebay, make paper profits flipping highly inflated houses (before the FED-created bubble burst), etc. We need to admit that we no longer have a real economy.

We are where we are because Americans naively believed a little bit of socialism was okay, not seeing what it would do to us and where it would lead. We accepted government largesse and sold our souls to Satan.

We are where we are because we’ve accepted public schools that have ruined generations of minds, filling them with un-American nonsense.

We are where we are because we forgot that freedom isn’t really free. It requires constant vigilance.

flyfisher on May 13, 2009 at 2:48 PM

Raise the retirement age and then deny retirees medical treatment through rationed ObamaCare. Problem solved.

nico on May 13, 2009 at 1:35 PM

Easy to say but unless you have stood at the foot of a hospital bed and watched a loved one die then none of this will hit home to those liberals who want everything but are unwilling to work for it.

izoneguy on May 13, 2009 at 1:41

Those liberals will be expendable old people, too. I wonder why that fails to register.

nico on May 13, 2009 at 3:52 PM

I’ve said before, the biggest BDS liberals in my immediate family are over 65 and incredibly health challenged. They absolutely do not get that they are the first ones expendable.

ORconservative on May 13, 2009 at 6:40 PM

this new crisis will require OBAMA to ASSUME CONTROL over as much of our lives as possible!!

he’ll SAVE US!!!

all you need is this little tattoo on your forehead or hand…

right4life on May 13, 2009 at 7:33 PM

How long before the Obama administration holds a ‘meeting’ with Moody’s and their kind, discussing upcoming regulation, 90% tax brackets, press-driven slime public-education efforts, IRS audits, and other items of mutual interest, resulting in a suddenly-more-rosy outlook for US debt?

MikeInOhio on May 13, 2009 at 8:02 PM

How long before the Obama administration holds a ‘meeting’ with Moody’s and their kind, discussing upcoming regulation, 90% tax brackets, press-driven slime public-education efforts, IRS audits, and other items of mutual interest, resulting in a suddenly-more-rosy outlook for US debt?

Oooh, maybe they’ll discuss it at the Bilderberg meeting this weekend in Athens. The wife and I are gonna go for a night drive and listen to George Noory talk about it so it’ll be extra spooky. =)

TheMightyMonarch on May 13, 2009 at 9:59 PM

It’ll blow over.

Akzed on May 13, 2009 at 10:50 PM

all you need is this little tattoo on your forehead or hand… right4life on May 13, 2009 at 7:33 PM

That is sooooo stoooopid.

Akzed on May 13, 2009 at 10:50 PM

I’m guessing that puts you in your early 60s or so, which means the scrap heap for you

You’re right, 63.

Don’t know if anyone recalls, but when HILLARY! was pushing her Marxist Medical Program, the statistic was released that on average, 50% of the money spent on the average American is spent during the last 6 months of their lives. So for communists/democrats/humanists/nazis/marxists/progressives and every one else who believes, that having crawled out of pool of swamp slime humans have no intrinsic value the decision is simple: take the geezers and end their lives 6 months early. Wow! We just cut health care costs in half!

Yes, we’re going to have that great government-run medical system. So when I go to the doctor under Obamacare, doesn’t matter what the symptoms, the prescription will be the same; “Go home, take two aspirin, and put your affairs in order. You’re gonna die.”

oldleprechaun on May 13, 2009 at 11:15 PM

listen to George Noory talk about it

I do hope you’ll make copies available on cassette or CD!

Or 8-track.

Or wax cylinder.

oldleprechaun on May 13, 2009 at 11:18 PM

So I went looking for federal deficit numbers by year and was unable to find them.

It looks like in one year, even using Obama’s optimistic numbers, he will rack up more debt then Bush did in the 6 years the Republicans controlled (or shared control) of Congress.

Pretty impressive.

In a bad way. But I would like a bit better proof…can anyone help?

18-1 on May 14, 2009 at 12:28 AM

That is sooooo stoooopid.

Akzed on May 13, 2009 at 10:50 PM

looks like the truth hurts…guess you don’t believe that Book you say you believe in…no surprise…since you sound like a left-wing wacko…

oh yeah NERO did that…they just forgot to mention it in any history books….right…get a clue…moron.

right4life on May 14, 2009 at 7:49 AM

This poor sick economy just keeps on falling and Obama just keeps on spending. As my old pappy once said . . . ” where there’s no sense there’s no feeling”. Before too long it will be impossible to crawl out of the hole he’s digging.

rplat on May 14, 2009 at 9:28 AM

Tea parties are the answer until the Democrats understand the protests are about SPENDING and nothing else. With their brain power there is little hope that will ever happen.

Herb on May 14, 2009 at 9:54 AM

Meanwhile, back at the depression

corona on May 14, 2009 at 10:23 AM

And that is why Tea Parties have erupted across America.

Americans remain lazy and stupid. That is why so few show up to the Tea Parties. Maybe when more are unemployed they will find the time? Maybe not.

DannoJyd on May 14, 2009 at 11:59 AM

In every congressional and presidential election since at least Reagan, the Democrats have claimed that Republicans want to cut Social Security. So the only party that was even interested in fixing the problem had to promise every time that they would do no such thing.

The only reason W was willing to make an effort was that he had a way to strengthen Social Security without having to cut it, through allowing private plans at a better rate of interest.

Not only did Bush try to fix Social Security, he’s about the only president in the last 40 years that has tried.

Now, you can certainly blame Bush for a lot of things, including spending way too much money, but any honest person would have to admit that his hands are clean on Social Security.

The Democrats own the current crisis. They should never be allowed to shift the blame.

tom on May 14, 2009 at 1:57 PM

Sorry about being so glum, but there it is.

You are SUCH a gloomy Gus! Don’t you realize B. Hussein Obambam has a great plan to save us? He’s going to tax soft drinks! With a new tax on Coke, Pepsi, and 7-UP of $100,000.00 per can, that nasty ol’ national debt’s gonna be history by the 5th of July!

YAHOO!

oldleprechaun on May 14, 2009 at 5:40 PM

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