Is a Bond Crisis Inevitable?
With Christmas shoppers out in force and the stock market surging to a two-year high, talk is spreading that the long-awaited recovery is at hand.
Perhaps.
But gleaning the news from Europe and Asia as U.S. cities, states and the federal government sink into debt, it is difficult to believe a worldwide financial crisis that hammers governments, banks and bondholders alike can be long averted. Consider.
Fitch and Moody's have just downgraded the debt of Ireland, Greece, Portugal and Hungary. In Budapest, the politicians talk of default. Spain has been warned its debt and banks could be downgraded.
The European Central Bank is buying up this paper to prevent panic selling by investors. There is talk of forcing bondholders to take a haircut. They would trade their suspect bonds for new euro bonds whose face value would be appreciably less.
In the Latin American debt crisis, the United States bailed out its banks holding the bad paper by giving them U.S.-backed bonds, while forcing them to take a loss on their Latin bonds. Courtesy of Uncle Sam, Latin America walked away from a huge slice of its debt.
The Japanese national debt is slated to pass 200 percent of gross domestic product this year, highest of any major economy on earth. Half of Japan's spending is now financed by bonds. Tax revenues do not even cover 50 percent.
Nor is America out of the woods.
Financial analyst Meredith Whitney told "60 minutes" we can expect 50 to 100 cities and counties to default on their municipal bonds. Though derided as an alarmist, Whitney was among the few who warned that U.S. banks were in treacherous waters before 2008.
If anyone is an alarmist, it is The New York Times. In an editorial the day after Christmas, "The Looming Crisis in the States," the Times writes, "Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s."
California and Illinois are to America what Germany and Spain are to the European Union—the first and fifth largest states.
Illinois, writes the Times, "is faced with $4 billion in overdue payments." The state "has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments." Illinois is also still borrowing to finance half of its budget.
By Sept. 30, the U.S. government will have run three straight deficits of close to 10 percent of GDP. And Barack Obama and the GOP just passed $858 billion in new and extended tax cuts and fresh spending.
Yet many dismiss the threat of a series of defaults by European nations and U.S. states and cities leading to a financial crisis that could eclipse the one we have just passed through.
What is the basis of this confidence?
Germany dominates the European Central Bank and will not allow defaults by Ireland, Portugal, Greece or Spain. For that would imperil the One Europe project to which Germany has been dedicated since World War II. Berlin will do what is necessary to save the euro and prevent Europe's monetary union from collapse.
What is wrong with this thesis is that it is not Germany alone that decides on defaults. The weaker countries in the euro zone, like Greece, may decide they will not endure the agonies of austerity any longer. Street politics may force regimes to abandon the regimens imposed upon them as a condition of their bailouts.
In America, it is the Fed that is the last line of defense and has shown a disposition to act in a financial crisis.
Since 2008, it has doubled the money supply and taken a trillion dollars in bad debt off the books of U.S. banks. Secretly, it has lent trillions to banks and businesses all over the world and is now buying U.S. bonds to inject more dollars into the economy.
But how does the Fed prevent a state like Illinois from failing to meet its debt obligations and defaulting? How does the Fed prevent a series of municipal bond defaults by cities and counties that lack the tax revenue to pay their bills and whose credit rating has reached a junk-bond status where they can no longer borrow?
Congress would have to vote the bailout money. But will a House that owns its majority to the Tea Party approve half a trillion dollars to bail out Democratic-run cities or Obama's home state or Jerry Brown's California?
This June, the stimulus money runs out, and as housing prices continue to fall across America, property tax revenue will fall.
The Feds are about to stop bailing out the states, and the states, on shortening rations, will stop bailing out counties, cities and towns.
We may be closer to the falls than we imagine.
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Entries(RSS)
I don't understand why a crisis gets such a negative mood from columnists.
Crises are useful and important events. The crisis is not the mistake itself, but the correction of the mistake. Had large scale defaults and debt collapses not happened in Russia, there would not have been a cleanup of bad investments. It was a regular prevention of crisis by IMF in giving Russians more money that was causing more malinvestment, corruption, and dishonesty in Russia.
Argentina's crises have seen the country emerge in better conditions after the crisis, because when foreigners liquidate all domestic assets and withdraw funds, when banks get a run from the public, when local and national governments run out of funds, they all prevent the spiral of perpetual poverty that their country was going into before the crisis. Wasteful use of capital results in deaccumulation of capital and fall in everybody's living standards. A little crisis prevents that gradual decline, and starts the process of more conservative use of capital.
When Ireland, Japan, Spain, Greece, Hungary, and Poland default, when towns in Illinois and California default, it will stop the problems happening NOW. There is a big difference between what is good for the ordinary people, and what is good for governments. Where government is allowed to invest people's money poorly with outsider's guarantee, have people actually benefitted?
You're absolutely right, Mr Sanjay, but of course when the crisis affects the average working man's livelihood, it hurts. That's what causes the negativity, and we haven't even mentioned what happens when the government cant support unemployment and welfare benefits anymore.
I agree, in order to let the crisis smooth out, the chips must fall on everybody, and not selectively. In that sense, all panics in the West in the 17th to 19th century are a historic footnote, because even when farmers lost some income for some time, most farming households were never badly ruined. I believe when a crisis happened in 1905, a bailout was done...by JP Morgan, who lifted his own personal wealth into his banks; the losses were borne by one who could bear it.
But my comparison is not entirely apt, since people didn't receive as much public services then and didn't feel as much sting in losing them.
A bond today is a tax hike tomorrow. I've been trying to convince the local GOP bosses, but they never listen to me. They seem to think building schools that don't teach is a splendid "investment."
Anyway, the latter day carpetbaggers have already earned their commissions, and their worthless paper will join confederate war bonds as collectors' curios.
I have wondered about this word "austerity".
Often, in order to stop a fiscal crisis, a government doesn't even have to cut spending, and may just keep spending roughly constant or not increase it TOO MUCH. In fact, that is what was done by Netherlands, Canada, Sweden,.etc in the 1990s without complaints, when they were doing fiscal consolidation. That's not austerity, that's moderation.
But in certain countries, just announce any one-year pay freeze of public sector workers and watch them cry. I thought they were public servants, willing to make a common sacrifice for our good! Nobody cut their pay. It was simply said they won't be paid more.
My uncle works in a state tax office, and he never protests, never takes to the streets, and never refuses to work. He is quite content with what he has. Yet, public workers with higher real incomes in Britain,.etc will take to the streets if they don't get their 10% raise.
If more public officials, here and in Europe, listened to Pat Buchanan, governments in the West wouldn't be facing this situation. One major reason for the debt explosion, of course, is oaring public-sector costs associated with uneducated, unskilled first- and second-generation immigrants.
California's situation bears extra notice. Take a look at what already is the dominant ethnic group in the Los Angeles area. The Mexican immigration explosion shows no sign of an end. They, more than anyone else, are ratcheting up the demand for public services, from Medicaid to free OBGYN care for infants of illegals to bilingual education. Aggravating this are state and local obligations to current and future retirees, very much a result of public-sector union collective bargaining. The filing for Chapter 9 bankruptcy in 2008 by the City of Vallejo (population 115,000) may be just a hint of things to come.
Buchanan's article couldn't have been more timely. More.
You've made another good point, Mr Sanjay. Of course the impact of meltdown will be more destructive today than in the past because so many more people are dependent on government handouts, few people farm, and jobs have went overseas along with the infrastructure to support those jobs. All this make the situation quite different than it was in the past, and it bodes disaster.
On the other hand, Americans are spoilt rotten brats who want it all, they want it right now, and they wont take 'no' for an answer. They are a nation of consumptious children who want all the benefits of first world living with no responsibility and absolutely no lowering of profligate living standards. How will they react? This also bodes disaster.
@6: the political class has their excuses and their reasons for everything, reasons the "unwashed masses" couldn't possibly understand. Or that's what they want to think. But the subsummation of large swarths of the U.S. into the worst subsection of Latin America, with absolutely no logical reasoning, reveals their true colors--read: their low I.Q.s.
Outrageous rent rises, sprawling suburbs, traffic nightmares, unemployment, overloaded public services... HOW MUCH of this would DISAPPEAR with about 25 to 30 million fewer Third Worlders on U.S. soil??
A modest proposal: let's start in New York City. Arrest the mayor for maintaining sanctuary ordinances and declare martial law in the five boroughs for just one week. A few such selective raids on the mists populous counties would do a world of good.
And please, do our diplomatic relations a favor and don't target those thrill-seeking young Irish, French and Poles who come from well-to-do families and just wanted to come work in America but couldn't get a visa because of their race.
I'm dreaming, I know.
All this is unnecessary. Remember to thank Alexander Hamilton and Abe Lincoln for government based on borrowing from bankers.
The trouble is, this crisis is not the correction of a mistake. Instead, it is the perpetuation of a mistake. The international banking elite peddles debt to us, on which they charge us interest, and call that debt "money". They create "money" with an entry on a computer; most of it they don't even have to print.
Since the "money" is debt - a loan - any "money" they create is the principle on the loan; not enough "money" is created to pay the interest on the loan. To do that, they have to "print" more "money" - in other words, give us a new loan, on which we pay interest. Since the loan we need to pay the interest is itself another loan accumulating interest, we need yet another loan to pay that.
We are in perpetual debt to those who control the US money supply and the money supplies of significant parts of the industrialized world. The situation is engineered so that the way out is difficult to find. Control of the money supply by these elites has made our economies the de facto slaves of these elites and, since our ability to own the fruits of our labors has been so fundamentally compromised, the net result is our gradual enslavement at the hands of these banking elites.
These crises are not corrections of mistakes; they are symptoms of an extremely significant underlying problem.