I'm not a Trekkie, but I am Scottish, so borrowing that line seems apropos. Let's start today's post with a little game I call "Attribute the Quote."
"There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term. You either crowd out other borrowers or you print money. This is a crisis of excessive debt, which reached 355 percent of American gross domestic product. It cannot be solved with more debt."
Stumped? I'd have been, too. The quote came January 29 in Davos from Niall Ferguson, an economic historian. (Economic historian - now there's a fun date.) Next up:
"Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism."
The last word is something of a give-away, but it's still a bit shocking that the man was sufficiently prescient to have gotten this 142 years ago - especially since the "technology" he was referring to didn't include Wiis, iPods, HDTVs, or GPS units.
It was Karl Marx, writing his epic "Das Kapital."
Last, but not least:
"Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth ... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit ... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."
A couple of my guys at work got this one, though they first guessed Hyman Minsky. The "confiscation through inflation" was too reminiscent of gems like "irrational exuberance" not to detect the intellectual double-speak of Alan "Mr. Bubble" Greenspan, who spoke those words in 1966.
Hey DJ, queue up "Losing My Religion" by REM, because Alan abandoned that kind of ordered thinking once he got his hands on the purse strings.
The bottom line is that I don't like this stimulus spending. Maybe I'd feel differently if the US actually had any money. But we don't. We're in hock up to our eyeballs, and we want to fix our economic problems by going deeper in debt.
Households and business are going through the painful process of de-leveraging. It's like a colon cleansing - painful, yes; messy, most assuredly; but necessary when you've been guilty of gluttony for too long.
But the government doesn't like it. Washington is a collective of crack-heads who've been puffing the pipe so long that all they can think of is the next fix: "We've gotta increase consumption! We've gotta get credit flowing! Banks need to lend, people need to borrow!" So, just at the time when the rest of us are cleaning the pipes, the pols are sitting down at the buffet table for another debt orgy. And like Fletch, they're going to put it on the Underhills' tab - and you and I, the US taxpayers, are the Underhills.
Fortunately, some Congresspersons get it - though I'm jaded enough at this point to believe that they're just hearing the outrage of their constituents and putting on a good game face, but when push comes to shove they'll vote this porky pig right in, just like the TARP. But I have naive hope that the groundswell of those opposed to this sucker will rise like a savior to US economic - and perhaps total - sovereignty, and we won't go the way of Marx' grave prediction.
I also know that John Q. Public hates this idea, for the most part (except those who still can't wipe off the kool-aid mustache - more on them later). And listening to those in Davos, the rest of the world hates it, too. There are increasing demands around the globe that the US demonstrate how we're going to fund all this spending, if we expect to be able to crowd out the rest of the world's funding needs, courtesy of our triple-A rating.
And to use another old Scottish line, "Aye, there's the rub, laddie."
See, even with all the spending, and with the federal debt ceiling now exceeding GDP, the ratings agencies are unlikely to downgrade US debt, as they did Greece's and Spain's. Why? Are we too big to fail?
Ominously, we are not. But Moody's and S&P are a spineless lot, and they know where their bread's buttered. They are US companies, and they will not bite the hand that kennels them. Fitch is a UK concern, though, so they might have the bollocks, as our friends across the pond say. But I'm guessing they'd shy from it too, because if they turned out to be in error, they might never see a dime of business from a US firm again. And Lord knows there's ample probability that the ratings agencies might be in error. Their collective (a word we need to get used to, comrades) performance rates them a solid "F."
No matter. China et al will do what the ratings agencies are too cowardly to do. Seeing our massive debt load, they will bid yields to appropriately price risk - believe it or not, there's more of that happening these days - and Treasuries will trade at A-ratings levels, at best, if not in the Bbb- range. And I will be happy, being short the long bond and all.
One of my compadres on the D2 football message board I frequent asked me this question:
"Hey Brian, in simple terms (if that is possible), how do you think the Obama admin is going to try to keep rates low in the face of all this debt? My guess is, they think they are going to get through the next 18-24 months 'unscathed', and hope for some miracle - maybe a huge market rally - to come to the rescue at that point. But, as you know, a spike in rates will cripple their plans for a recovery, so they must have some sort of scheme cooked up?"
I referred him to my latest blog post, where I talk about the Fed's little Ponzi scheme, then I added this:
"I don't see that Barney Fife - er, Bernanke, has more than the one bullet left in his pocket. So they'll try buying Treasuries to keep rates low, but since they'll have to print money to do it, they won't be able to stop rates from rising unless they play the scheme in such massive proportions that they totally destroy the dollar and plunge us into Weimar-esque hyperinflation. I think Bernanke understands that, which is why they're just jaw-boning at this point. Of course, it's not working.
Beyond that, the only thing they could try to do is legislate lending and savings rates, like we did before DIDMCA in 1980. But that would require us to return to the gold standard or some other representative money system - it won't work w/fiat money."
Hence the Greenspan quote - made before he lost his religion.
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