America the Bankrupt: Economics 210 in the Land of the Freeway and the Home of the Wave (January 17, 2005)

In The Bankruptcy Court For The World

In re the United States of America, )

Debtor.                                                   )  W-06 – _______

Comes now the United States of America (hereinafter “U.S.A.”) and hereby declares that it is insolvent.  The U.S.A. is unable to meet its obligations and pay its bills and regrettably must . . . . . . . .

When the Euro (E) commands two green backs (GBs) and the U.S. national Debt (D) (not the deficit (the little “d”)) reaches ten Trillion, there will be an uncontrollable economic meltdown in American financial markets.

Imagine if you spent $10 K (10 thousand) a month for 6 months, then your deficit is $10 K a month; your Debt (the total bill; the entire enchilada; the whole shooting match) is $60 K plus interest and growing.  The little “d” deficit is bad; the Big “D” Debt is very Bad.  Never forget the Big D.  In addition, today the total personal debt (including mortgages) of the citizens of America (P) already exceeds ten trillion and continues to grow.  It is only a matter of time.

The numbers are too big, so the government lies.  About both the number and its effects on the economy.  The government unilaterally decides to divide the big “D” figure in the example above (60 K) into two numbers (20 K) and report another acceptable number (40 K) to the public.  The government simply considers some expenses “Off Budget” (20 K) and then reports a smaller “On Budget” number (40 K) as the Big D.  The same accounting gymnastics are applied when the government misrepresents the little “d” deficit and simply states that it is $6 or $7 K a month.  Unemployed accountants from Enron and WorldCom assist in the effort.  However, the foreign investors know the real scores, namely that the deficit is really 10 K and the Debt is really 60 K.

Everyone has forgotten the quadratic equation, but how many citizens realize that a trillion is one thousand (1000) billion or 1 with 12 zeros (1,000,000,000,000.00).  A billion is one thousand (1000) million or 1 with 9 zeros (1,000,000,000.00).  A million is one thousand (1000) thousand or 1 with 6 zeros (1,000,000.00).  These -illions and -illions and -illions of dollars must come from someone’s pocket.  Yours.

Look around.  The Chinese are selling goods to Americans and selling money to Americans to buy the goods from the Chinese.  Okay, it is a little more complex and involves other players and plays.  At core, however, Americans do little more than take money from other countries and give it back to the countries in exchange for their goods and services.

David Ricardo is still right on the money.  He rightfully assumed that everyone has something to bring to the table known as the marketplace.  Comparative international trade theory is premised on every player doing something more efficiently than another player.  The fundamental and growing problem is that America is increasingly not able competitively to produce goods and provide services sought by other countries.  The U.S. will not have a comparative advantage in the production or provision of much in the coming decades.

There is no sound doctrinal economic theory that relates or correlates total personal or national debt with gross domestic product or the trade deficit or other economic factors and measures of performance.  The relationships over time are available for scrutiny.  The lack of any generally accepted theory leaves individual players to determine their own psychological anxiety level and to predict the comfort level and behavior of other players.  At some time, enough will be enough or more than enough.  Most individual foreign businessmen have no quarrel with the current scheme except if their products become far less desirable against comparable American products because of the continuing decline of the dollar.  Collectively the game will collapse when the larger players realize that the return on the investment will never materialize for the players who don’t know when to fold them.  The growing personal debt (P) of the citizenry and the rising national Debt (D) of the country will accelerate the collapse of the dollar.  The declining dollar will retard the decline for a time because foreigners will buy more of the cheaper products and services from the U.S. and ride the closeout sale for a time.  It is only a matter of time.

At some point, few players will be foolish enough to provide or accept devalued dollars in exchange for interest payments also made in devalued dimes or even quarters.  A lender who provides $100 at an expected 5 % interest rate will discover that he will receive devalued dollars and nickels in the future.  At a 20 % devaluation, the lender will receive $80 ($100 x .8) in principle and $4 ($5 x .8) for a total return of $84.  To make something on the deal, the lender will demand a nominal rate of 30 % interest at a minimum.  At a 20 % devaluation, the lender will receive $80 ($100 x .8) in principle and $24 ($30 x .8) for a total return of $104.  He is now a day late and still a dollar short.  To obtain a 5 % rate of return, he must demand 31.2 % interest.  Add in a few more points for uncertainty and even more points to accommodate unchecked inflation.  At some point, the Hyperdive economy will be characterized by what engineers describe as “positive dynamic instability.”  Everything will deteriorate quickly with no effective countervailing prescription.

Monetary policy is the only mechanism to fine tune economic behavior.  When the Hyperdive starts, however, the Fed will not be able to stem the spin even if it raises or lowers the Federal Funds Rate (FFR) radically.   The world market will not respond predictably to the Fed.  In the past, the Fed’s increase of the interest rate usually drove down the supply of money; its decrease of the rate usually drove up the supply of money.  In the new economy, a higher interest rate will attract foreign lenders and repel American borrowers; a lower interest rate will repel foreign lenders and attract American borrowers with their voracious consumption habits.  There is no equilibrium interest rate.  In addition, the Fed can exercise some control of the M1 money supply, but it cannot control the “plastic supply” (P1 ?) that is within the control of the public and is now out of control.  The public can print plastic and confound policy, at least for a time.

This perfect storm has been building for years.  During the run up to the tech and .com collapse in late March, 2000, many tidy sums were earned and those with mutual funds were taxed annually.  When the run up ran down, those who had invested and saved as they were intoned to do were impacted twice.  They certainly did not receive a refund of the taxes they paid on the appreciation of their investments; they did not receive the anticipated return on their now depreciated investments.  Their privately financed retirements were deferred from a few months to a decade or more.  Their taxes had, however, enriched the public fisc.  In Jan. 2001, the outgoing President Clinton and the American people bequeathed that hefty budget surplus to the first appointed president in American history.

The structural problem with the American economy has been exacerbated and accelerated by the Bush economic policies.  The Bush policy to “spend today and tax yesterday and tomorrow” is the most fiscally irresponsible economic policy in American history.  A purposeful and balanced “tax and spend” policy became a “spend and spend and spend” policy.  The phrase “trickle down economics” is one of the few candid terms in American politics; only a little trickles down to the villagers.  Bush engaged in systematic baksheesh by bribing every constituency at every opportunity without shame or regret.  Try to recall a spending bill that he vetoed.  His recent proposed No [Securities Industry Association] Lobbyist Left Behind Act of 2005, the bill to repeal Social Security in stages, is another proposed trillion dollar transfer from the public weal to his private contributors.  Without public resolve to defeat it, the bill will join the No Lobbyist Left Behind Act of 2000, the No Lobbyist Left Behind Act of 2001, the No Lobbyist Left . . . .  He is looting the country not leading it.

The past surplus in the exchequer disappeared first; Bush was able effectively to tax the populace in the past.  Now the future is being mortgaged to finance today’s excesses.  Tax cuts for the rich were the required bribe to his friends and supporters.  Tax rates in the near future, perhaps during the second or third year of his second term, will need to be raised substantially whether Bush likes it or not.  Bush’s statement that he will cut the little “d” deficit in half by 2009 is akin to a promise to add two more lifeboats after the Titanic reaches New York.

The world may realize that collectively it must abandon the dollar as the world’s reserve currency and shift to the Euro to provide some stability during the resulting world economic decline.  Petroeuros.  The Chinese may elect to peg their Yuan to the Euro rather than to the declining dollar.  If and once the Yuan and the Euro represent the same unit of account and store of value, a new currency could be issued to serve as the industrial world’s new medium of exchange.  How about the Mondial?  The new medium could emerge as the currency for a United Centro y Sud America, although unity in that region is increasingly less and less promising.  The U.S. could print more paper and mint more coinage, but few would care.  It will slip from its dominant role in the world economy in the next score years.

If the Hyperdive occurs in late October of 2005, it will effectively undermine any Bush social security deforms.  As the bourse goes bust and the Dow dives to 7000 or lower, even Bush will have a hard time conning Americans into investing in a failed and failing market on their own.  Americans are gullible, but collectively they are not likely to give up an admittedly unpredictable future under the current social security program in exchange for a certain immediate failure.  The transition costs alone of the social security deform may trigger the Hyperdive.  If the Hyperdive occurs in late October of 2006, it may doom Republican re-election prospects in the mid-term election and emerge as the surprise opportunity for the Democrats.  The Democrats are clueless.  Despite a lifetime spent successfully ducking responsibility, Bush probably will not be lucky enough to flee the White House in 2008 before the house of cards collapses; he will blame others.

America may be forced to file a petition in bankruptcy and prepare a workout with its creditors.  Foreign creditors will demand a balanced budget as a condition of continued foreign participation in the American economy.  The most likely plan of reorganization is to require the U.S. to follow the fiscal provisions that govern members of the European Union.  Asian creditors are likely to vote for such a plan because it is based on sound universal capitalist principles.

(E => 2 GBs) + (D => 10 T) + (P => 10 T) =  Trouble.  As noted above, P exceeds 10 Trillion.  The Hyperdive could occur sooner.  Stay tuned.  Film at 11.

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