AP: Debt bomb will build even under rosiest Obama scenarios

posted at 1:05 pm on February 14, 2010 by Ed Morrissey

Here’s your happy thought of the day.  Even under the most optimistic scenarios of the Obama administration, the US will hurtle towards a debt crisis resembling that of Greece under the proposed spending initiatives and commitments to entitlement plans made by the White House.  The Associated Press’ Tom Raum warns that continued deficit spending could create a real global collapse from a normal recession:

It’s bad enough that Greece’s debt problems have rattled global financial markets. In the world’s largest economic and military power, there’s a far more serious debt dilemma.

For the U.S., the crushing weight of its debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial scenario _ a full recovery and a return to prerecession employment levels.

The government already has made so many promises to so many expanding “mandatory” programs. Just keeping these commitments, without major changes in taxing and spending, will lead to deficits that cannot be sustained. …

Carmen Reinhart, an economics professor at the University of Maryland and a former IMF official, suggested the nation’s fast-growing indebtedness may not have a visible impact at this point on ordinary Americans. But some day it will pounce.

“One thing we can say with a fair amount of certainty,” she said. “We never know when the wolf will be at our door. The wolf is very fickle and markets can turn very quickly. And a high debt level makes us very vulnerable to shifts in sentiment that we cannot predict.”

Obama demanded fiscal austerity this week … at the same time he lifted the cap on US debt from $12.4 trillion to $14.3 trillion.  The difference between the two is about what the federal government spent for all of FY1999.  It’s half of what Obama proposes to spend in FY2011.  Democrats have raised spending by over a trillion dollars a year since taking control of Congress in 2007.

Which party needs to be told to get serious about fiscal responsibility?

We may rebuild the economy with cheap credit based on a borrowing spree by the federal government, but we’re about to reach our limit on how much we can keep borrowing.  China, which holds a significant amount of our debt, has already begun making noises about dumping it in retaliation for our foreign policy towards Taiwan.  We’re buying our own debt these days just to keep interest low.  It won’t take much more than a single hard push to collapse the financial house of cards we’ve built — and if that happens, the resulting disaster will make 2008-9 look like a picnic.

Americans need to learn that we can’t maintain the Ponzi schemes of entitlement programs we’ve built.  We have to greatly reduce our future commitments and our present spending, and start to dismantle the Leviathan of federal bureaucracy that has exploded over the last several decades.  Otherwise, the only way we will keep from destroying the Western financial system is to become a command economy with property rights and individual choice becoming relics of a golden age long since passed.


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NoLeftTurn on February 14, 2010 at 4:06 PM
As the Eurozone defaults pile up, the Dollar will rise for a few years before the jig is up. Precious metals will be the only place to go for a time until the currency debacle is solved. Stick with Gold/Silver or something of the like. The stock market should crash again in the next year or two. Expect incoming interest rate increases.

The Calibur on February 14, 2010 at 4:12 PM

I’d also toss in Australia & Canada as safe havens both as reasonalbly safe geographically and in terms of their currencies. Aussie & Canadian dollars have been remarkably steady through every monetary debacle to come down the pike.

Disclosure: I’ve moved substantially into Aussies and some into Canadians. The idea being that Austrailia is fairly cushioned from much of the economic turmoil, is culturally, compatible, & same (give or take) language. Cnada as that when the shyt hits, I’ll need Canadians in the interim as I’ll bolt over the border and disembark from there.

If I am allowed to that is. A funny thing about Canada is in that they’ve only had people from 3rd party countries seek asylum coming from the states, the only point of entry to Canada you cannot ask for asylum from is the US-Canadian border. They never even contemplated Americans needing refuge, come to think of it until recently, neither had I!

Archimedes on February 14, 2010 at 4:28 PM

echosyst on February 14, 2010 at 4:25 PM

AP has been on vacation.
Joe the Plumber doesn’t Sarah Palin is up there.

Knucklehead on February 14, 2010 at 4:28 PM


Knucklehead on February 14, 2010 at 4:17 PM

We should grab a beer some time, you game?

Archimedes on February 14, 2010 at 4:31 PM

CK -

I saw the headline, I just can’t find anything to support that assertion at the link or on the internet.

echosyst on February 14, 2010 at 4:32 PM

Ah I see it now, thanks. He is pissed because she is stumping for McCain. OK. I get it, don’t blame him either.

echosyst on February 14, 2010 at 4:33 PM

Canada as that when the shyt hits, I’ll need Canadians in the interim as I’ll bolt over the border and disembark from there.

If I am allowed to that is.

Archimedes on February 14, 2010 at 4:28 PM

And at that point, Americans will come to truly appreciate the vast and deep differences between a pure American and a dual citizen.

neurosculptor on February 14, 2010 at 4:48 PM

We have to greatly reduce our future commitments and our present spending, and start to dismantle the Leviathan of federal bureaucracy that has exploded over the last several decades.

Yes, but I don’t see it happening… until after some huge crash requires us to rebuild from the ruins.

petefrt on February 14, 2010 at 4:58 PM

I’ll soon take all my troubles over to Obama Rue
You know The One with the teleprompter and the never ending Hope and Change shtick
He’s got a pad down on Pennsylvania avenue
He’ll be passin’ out little bottles of Obama Potion Number Nine

I’ll tell him that I’m having trouble with my mortgage payments
It’s gotten even worse in these last few weeks
He’ll kiss me on the cheek and he’ll made a magic sign
He’ll say “What you need is Obama Potion Number Nine”

He’ll turn around and gave me a wink
He’ll say “I’m gonna have my Michelle make it up right here in the White House sink”
It’ll smell like Chicago, it’ll look like socialist printer’s ink
I’ll hold my nose, I’ll close my eyes, I’ll take a drink

I won’t know if it is day or night
I’ll start grabbin’ all the trillions that are in sight
But when a wheel barrel full of it won’t even buy a BigMac
It’ll break my little bottle of Obama Potion Number Nine
Obama Potion Number Nine
Obama Potion Number Nine
Obama Potion Number Nine

MB4 on February 14, 2010 at 5:07 PM

Don’t worry, if he spends too much he can always raise taxes.

Daggett on February 14, 2010 at 1:18 PM

Don’t worry, if the debt gets too high, he can always nudge the Fed to buy it up.

Don’t worry, if the Chinese threaten to dump our debt, he can always pay them off with Alaska.

petefrt on February 14, 2010 at 5:08 PM

Video: the next generation reacts to record-high debt limit: http://optoons.blogspot.com/2010/02/reactions-to-passage-of-record-high.html

Mervis Winter on February 14, 2010 at 5:23 PM

The problem with the national debt isnt solely due to Obama. The dems regaining Congress in 2008 is also a huge reason.

Keep in mind the last time the budget was balanced was when the GOP (When they had brains) was in control.

William Amos on February 14, 2010 at 5:50 PM

But… but… BOOSH had deficits too you teabaggers!

Lehosh on February 14, 2010 at 5:51 PM

“Maybe someone should be knitting the names of all those who will be guillotined or charged with crimes in the coming Revolution?” – Madame Defarge

Seven Percent Solution on February 14, 2010 at 5:55 PM

The dems regaining Congress in 2008 is also a huge reason.

William Amos on February 14, 2010 at 5:50 PM

2007, you meant.

neurosculptor on February 14, 2010 at 6:02 PM

The Calibur on February 14, 2010 at 4:12 PM

Archimedes on February 14, 2010 at 4:28 PM

Thanks, that helps some. I’ve actually considered Australia before; the climate is a bit more to my liking. ;o)

I’m already fixing to buy some gold, but I will research other currencies as well.

NoLeftTurn on February 14, 2010 at 6:05 PM

It’s time for the People to just take control and get it right. For men and women who run businesss and households to take these a-hole politicians by the shoulders and shake them awake.

Bottom line. We’ve had enough. You serve us, we don’t serve you. The Federal and State Governments should be audited by third party firms. Results should be posted.

I know many of us own small businesses; we always do internal audits to get a pulse on our fiscal stability.

We have a duty to audit state and federal accounts from the top down and the bottom up.

Let’s roll.

Key West Reader on February 14, 2010 at 6:06 PM

It’s time for the People to just take control and get it right. For men and women who run businesss and households to take these a-hole politicians by the shoulders and shake them awake.

Then they would all be suffering from Shaken Buffoon Syndrome.

Aviator on February 14, 2010 at 6:23 PM

I have an thought.

I get a report from S/S that shows what I should expect to receive monthly in benefits. I calculated what they would pay me over 30 years (living to age 95; way beyond current current life expectancy of 77-80 in US according to Wikipedia). It comes to ~$600,000 without cost of living increases.

Since I do expect to live to at least 95 (mom is currently 84 and going strong), I would like to propose an offer to the government. If they will pay me the ~$600k (or a bit more to cover inflation) at 66 I will accept it and put it in an PRIVATE annuity. The government will be done with me and I will absolve them of all future responsibility, including welfare.

I’ll take responsibility for managing my future. I should be OK with a small income, since I would pay off my house immediately.

I bet I’m not alone. If masses of baby boomers took this option, it would move the debt off the gov’t books. Interest payments would go down in the long run, and also, theoretically, rates. It would be a short term hit, but it would be more manageable than current gov’t obligations. It should help to reduce inflation. It would also put an immediate infusion of cash into the economy, since the money would have to be invested. I’d also make it optional, not mandatory. I can think of lots of other benefits to the country and to the economy, but I’m curious if I’m missing something.

Anyone care to share their thoughts on this?

CSK on February 14, 2010 at 6:25 PM

How about taking the TARP money that’s been paid back and moving that lockbox over to the Social Security Administration?

HotWeaver on February 14, 2010 at 6:32 PM

We need a national tax boycott, they can’t arrest us all!

abobo on February 14, 2010 at 6:36 PM

We need to let the young-uns opt out of socialist security. It’s a Madoff scheme that has come to fruition. You reap what you sow.

Mojave Mark on February 14, 2010 at 6:38 PM

The whole point of Obama-nation is to run our country into the ground, necessitating such events as:

a civilian security force
a new currency based on gov’t entitlements
a permanent dependent class
abolition of the middle class and property rights and free enterprise
abolition of elections in a national emergency and, finally,
Commandante Obama for life.

Dhuka on February 14, 2010 at 6:40 PM

Video: the next generation reacts to record-high debt limit: http://optoons.blogspot.com/2010/02/reactions-to-passage-of-record-high.html

Mervis Winter on February 14, 2010 at 5:23 PM

Now that is funny!

conservnut on February 14, 2010 at 6:41 PM

based on what I know of the debt situation & because Congressmen should know more than I, then I can only assume that when they vote to spend money, they are voting to destroy our country. they are doing this willfully, purposefully & i think the Dems are doing it with malice aforethought.

kelley in virginia on February 14, 2010 at 6:42 PM

Hudson has a very interesting take on a future system. It’s hard going – for non-economists – but I think you might find this longer piece, actually an extended interview, with Hudson interesting, especially the very speculative section where he describes his preferred tax and monetary scheme in more detail and compares it with the current system and with common gold standard-oriented schemes. I’d personally be interested in your or anyone else’s informed opinions on it, especially on his unusually strong emphasis on the importance of venture capital.

http://michael-hudson.com/interviews/0902TaxProgramRecoveryItulip.html

If you can’t get to it now, but find it interesting, feel free to bring it up sometime on a relevant reasonably current GR post or at my home blog (via name link).

CK MacLeod on February 14, 2010 at 3:53 PM

He made some very detailed and logical observations on the impact of the financial industry’s clout on tax policy and some of the detail about the accounting for real estate depreciation was stuff I sorta knew but didn’t have a good handle on.

As I read it, I was thinking of Henry George’s ideas of taxes on land and he did mention George at the end. I didn’t think anything he had to say went against the compensation changes I mentioned in the earlier post, but he is definitely aiming at a much deeper target. My gut tells me that if you can remove the incentive for excessive risk-taking, that might be the only change you’d need to make, although his more structural changes would probably accomplish what I’d like to see and more, but for that reason would also be more difficult to get legislated.

He’s absolutely correct that “the market” WAS solving the issue of how much the various debt securitizations were worth UNTIL the Feds stepped in with their various guarantees and “cash for trash” (as he calls it and I agree) programs. I’ve never been so disgusted with the Federal government in all my life as I am with the way they’ve bailed out the bank creditors. Yes, I realize that bank bonds are a major component of pension funds and that it wasn’t ONLY Wall Street “fat cats” getting bailed out but on a personal level, they are the most obvious beneficiaries.

I also found his digs at the “Chicago School” a bit tendentious. Luis Zingales has been at the forefront of those criticizing all of the various bailout plans and he is a professor at the U of C Business School. He argued quite forcefully that bankruptcy was the proper option for those banks who were insolvent, whether it be Lehman Brothers, Goldman Sachs, AIG, whomever. Other U of C professors have also been taking that same “free market” stance: those banks who bet wrong should pay the price and reorganize under bankruptcy protection.

I like his idea of leveling the playing field between debt and equity because he’s right that heavily indebted economies and consumers have less margin of error due to debt service costs. I also, unfortunately, have to agree with him that the cash flows to service the debt are simply not going to materialize. Wile E. Coyote is off the cliff, he just hasn’t fallen to the ground yet.

venividivici on February 14, 2010 at 6:49 PM

kelley in virginia on February 14, 2010 at 6:42 PM

You’re a racist for posting that. At least one black Congressman voted in favor, so that makes you a racist because you’re against that vote.

Patriotism (as not defined by the Dem Party)=racism!

Liam on February 14, 2010 at 6:52 PM

CSK on February 14, 2010 at 6:25 PM

Response to self: Do ALL your research before shooting from the lip.

Wiki says there are about 72M boomers born in the 19 year period considered the baby boom. Rounding off, at about 4M per year retiring, at about $.5M each for a payout, this comes to $2T per year.

Perhaps this isn’t really doable.
But I love the idea.

CSK on February 14, 2010 at 7:06 PM

venividivici on February 14, 2010 at 6:49 PM

Thanks for reading the piece and for your feedback.

So you also agree that the Big Write Down will have to occur sooner or later – as much a power-political as an economic process? If so, it seems like the last ones standing – on current trends that would be us, with potentially China and a handful of smaller countries that are less exposed, but aren’t in a position to have much clout – may be in a position to sort out winners and losers during the inevitable write down.

The next question would be whether and how broadly the sorting out determines winner and losers within nations as well as between them. Assessing current trends on that score is trickier, since there’s a policy trend as well as complex countervailing political trends.

And the last question for us, I think, is whether the result will be experienced by everyday citizens as a massive, extended disruption alongside a severe downward revision in standard of living, or whether something closer to a transition can be accomplished, among other things preserving the dollar and something resembling current entitlement expectations, political structures, ineternational alliances and resource/supply chains, etc.

CK MacLeod on February 14, 2010 at 7:09 PM

I have surveyed. Worked long and hard. I and my family have decided, after reading the Founding Fathers, that these a-holes work for us.

I’m not feeding the beast Pelosi.

Key West Reader on February 14, 2010 at 7:12 PM

Liam on February 14, 2010 at 6:52 PM

LOL that you are calling her ‘racist’.

Key West Reader on February 14, 2010 at 7:13 PM

LOL that you are calling her ‘racist’.

Key West Reader on February 14, 2010 at 7:13 PM

Just having some fun at expense of liberals. LOL I’m doing it directly in a roundabout way (my personal way of an Obamateurism, getting my politicalspeak honed a little better)

Liam on February 14, 2010 at 7:26 PM

Class warfare begins, only a sequel nobody anticipated: Civil servants versus the private sector.

Starlink on February 14, 2010 at 6:59 PM

That’s going on right now in Socialist Europe.

“Within every socialist beats the heart of a thief”

PackerBronco on February 14, 2010 at 7:44 PM

These asshats have ruined this country. What part of not paying people that dont get off their ass and go to work dont they understand. I had to work for what I have and with whats going on now it will evaporate due to forces beyond my control other than my one measly vote. Barry f’n Obama is an asshole.

UncleZeb on February 14, 2010 at 7:48 PM

We have to greatly reduce our future commitments and our present spending…Otherwise, the only way we will keep from destroying the Western financial system is to become a command economy with property rights and individual choice becoming relics of a golden age long since passed.

That’s the whole idea, you silly. Wake the hell up.

Meremortal on February 14, 2010 at 7:49 PM

Sorry about previous post but after reading this I was really mad.

UncleZeb on February 14, 2010 at 7:49 PM

Americans need to learn that we can’t maintain the Ponzi schemes of entitlement programs we’ve built. We have to greatly reduce our future commitments and our present spending, and start to dismantle the Leviathan of federal bureaucracy that has exploded over the last several decades. Otherwise, the only way we will keep from destroying the Western financial system is to become a command economy with property rights and individual choice becoming relics of a golden age long since passed.

Boomstick! Nice work Ed. Teach the people, dismantle the beast, and rebuild our economy.

Next up–how we do that. we’ve gotta go there.

ted c on February 14, 2010 at 8:01 PM

It’s time for the People to just take control and get it right. For men and women who run businesss and households to take these a-hole politicians by the shoulders and shake them awake.

Bottom line. We’ve had enough. You serve us, we don’t serve you. The Federal and State Governments should be audited by third party firms. Results should be posted.

I know many of us own small businesses; we always do internal audits to get a pulse on our fiscal stability.

We have a duty to audit state and federal accounts from the top down and the bottom up.

Let’s roll.

Key West Reader on February 14, 2010 at 6:06 PM

That’s my homey. +5 ;)

ted c on February 14, 2010 at 8:03 PM

So you also agree that the Big Write Down will have to occur sooner or later – as much a power-political as an economic process? If so, it seems like the last ones standing – on current trends that would be us, with potentially China and a handful of smaller countries that are less exposed, but aren’t in a position to have much clout – may be in a position to sort out winners and losers during the inevitable write down.

The next question would be whether and how broadly the sorting out determines winner and losers within nations as well as between them. Assessing current trends on that score is trickier, since there’s a policy trend as well as complex countervailing political trends.

And the last question for us, I think, is whether the result will be experienced by everyday citizens as a massive, extended disruption alongside a severe downward revision in standard of living, or whether something closer to a transition can be accomplished, among other things preserving the dollar and something resembling current entitlement expectations, political structures, ineternational alliances and resource/supply chains, etc.

CK MacLeod on February 14, 2010 at 7:09 PM

I think as a practical matter, a “write down” is inevitable. The cash flows simply don’t exist to pay off the debts. The powers that be are obviously trying to reflate, but the deflationary forces are too strong and will overwhelm them. Where it gets supremely tricky is that so much of the debts were jammed into securitization structures in the “shadow banking system” that who knows who owns what, so getting parties to agree to what the write-downs will entail is a huge mess. What’s becoming clear is that “extend and pretend” is running out of time. Frankly, I’m glad as the levels of unreality are starting to reach the hallucinatory stage. Once the SEC and FASB suspended “mark to market”, you knew the jig was up and that they were just buying time. That people took that as the “all clear” sign and jumped back into the equity markets was truly the triumph of hope over experience. I can’t believe the banks were able to sell all that equity during the run up.

As far as winners and losers within countries, it will depend on how much control the governments retain over the ability to determine that. Normally, in a crash of this type, the winners are those who stood by during the bubble, accumulated cash and then deployed it at the right time. The saying I’ve heard is “During bear markets, assets return to their rightful owners”, i.e. people who have an eye for value and who don’t buy during the bubble run-up. The recent trial balloons being floated over banning short-selling in stocks and basically outlawing CDS trading are hints that the ability to profit from any prolonged slump might be severely curtailed, partially as a way of removing any incentive to even try. The perverse thing is that banning short-selling has never worked, yet it keeps coming up as a solution to market crashes. Right now, the major winners appear to be government employees and those who overleveraged themselves, which is pretty much ass-backwards, if you ask me.

I definitely think there’s going to be a reduction in the standard of living in the West. I don’t quite understand the mechanism by which it happens, but when debt-to-GDP (public and private) reaches these levels, it leads to slower growth going forward. When I say I don’t understand why it happens, I mean because debt service is ultimately someone’s income, so as long as there wasn’t mass default, I don’t see how it would matter for economic growth. The only thing I can think of is that debt service income typically ends up in the hands of those with a lower marginal propensity to consume. I don’t know. Sometimes those macro-equations in macroeconomics become so all-encompassing it’s hard to say that anything is ever out of equilibrium. The people who’ve looked at entitlements whom I respect say they will eventually be means-tested and I think that’s right. Over time, though, that means they’ll turn into welfare programs and probably, in the end, get phased out. It will be good if that happens.

My working hypothesis for almost two decades has been that the world would gradually converge at the median standard of living of “today”, whatever “today” is. I’ve always said that when all is said and done, the global standard of living will probably be something around what Poland is. Not super-poor, but not rich, either, and around a 2% real growth rate (yes, I know this is not Poland’s current growth rate). For some countries, this will be a good thing and for others it will be a bad thing. Obviously, the US would be among the latter.

venividivici on February 14, 2010 at 8:16 PM

We’re buying our own debt these days just to keep interest low.

An act of desperation?

Sadly, we haven’t learned our lesson. We have borrowed in bad times and in good; it’s now a habit that will not be broken just because alarm bells are sounding.

Shockingly, we have a nobel laureate saying that we are not borrowing enough!

We are now, as a whole, insensitive to the stupefying quantities of money that we have borrowed.

To change this mindset will require what? More pain? Or, can we possibly learn the lesson in the abstract?

oakland on February 14, 2010 at 9:04 PM

Otherwise, the only way we will keep from destroying the Western financial system is to become a command economy with property rights and individual choice becoming relics of a golden age long since passed.

Isn’t that the intended endgame?

Insomniac on February 14, 2010 at 11:26 PM

Isn’t that the intended endgame?

Insomniac on February 14, 2010 at 11:26 PM

Yes. Cloward-Piven strategy. Screw everything up so bad, the govt has to take over. I think it will be the food riots that the one will use to instill martial law.

I didn’t get before why Congress was going along with it, but someone explained it to me in terms that I can understand: it’s like felony-murder. Congress THINKS they are just going along with dear leader to rob the taxpayers blind while they buy islands in St. Croix and keep people dependent enought o keep voting them in until they can retire and get big fat pensions for life. They don’t understand it’s not a ROBBERY they are going along with, it’s a BOMBING of the entire economy. And just like the felony murder rule, they should be held accountable, but they won’t be, we’ll be under martial law.

I am starting to get now why gun shows are running out of weapons and ammo. I guess I’ve been too busy going to school and trying to make a living I haven’t been paying close enough attention. But now, I see. Thanks to the commenters for explaining it to me.

JustTruth101 on February 15, 2010 at 1:38 AM

Hope & change you can believe in America

bluegrass on February 15, 2010 at 10:25 AM

the US will hurtle towards a debt crisis resembling that of Greece under the proposed spending initiatives and commitments to entitlement plans made by the White House.

Anyone else besides me thinking of Cloward-Piven strategy?
And by virtue of Obama’s closeness to this strategy…how far would we be from the beginning of impeachment proceedings? Seriously…

LadinPlaid on February 15, 2010 at 11:00 AM

oakland on February 14, 2010 at 9:04 PM

We also apparently didn’t learn our lesson about printing money with nothing to back it during the 1800′s.

Not many people seem to know about that; it’s a fascinating study of how fast unbacked money can inflate, and the economic craziness that unfolds along with it.

Only difference now is that we have a single entity (the government) instead of many private setups, some literally nothing more than a printing press in a cheap storefront. But the Fed is doing the same thing and we’re heading for the same trainwreck.

Dark-Star on February 15, 2010 at 11:02 AM

oakland on February 14, 2010 at 9:04 PM

“Tune into Mystery oakalnd Theater next Sunday night to find out”

CK MacLeod on February 14, 2010 at 2:40 PM

Followed Hudson’s article until the last graf, where he says this:

Libertarians have warned that our economy is going down the Road to Serfdom. What they do not realize is that by fighting against government power to check financial hubris, they are paving the road for centralized financial planning by Wall Street. They have been tricked into leading the parade on behalf of the financial, insurance and real estate sector – down the road to debt peonage in a monopolized and polarized economy.

This is the point where he loses me, and where the rebuttal goes that argues government regulation and favoritism is what created the moral hazards leading to the messes in the first place. No libertarians I’m aware of are being tricked into supporting centralized financial planning by Wall Street.

Great comments venividivici. Bishop, sounds like a plan. :)

RD on February 15, 2010 at 3:34 PM

Comment pages: 1 2