Bill Marsh presents an interesting picture of interconnectedness in Sunday morning's New York Times. It's a great visual of the myriad connections through borrowing and lending across borders, but a few nuances to consider:
- Some folks who follow these numbers will be surprised to see US debt to GDP list as 100%. This is gross debt, including about 30% of GDP that the government owes to itself (more on that below).
The relevant metric for this picture should not be gross debt. It should be debt held by the pubic -- that's the number that markets care most about because that is a measure of our government's debt obligations to external creditors. According to CBO, debt held by the public as a share of GDP is expected to be 71% in 2012.
If you want to learn more about this important distinction, see this from the CBPP. As that analysis points out:
Such a focus on gross debt is seriously misguided and could inhibit the effort to address the nation's long-term fiscal challenges.
Debt held by the public consists of promises to repay individuals and institutions -- in the United States and abroad -- who have loaned the federal government money to finance deficits. Gross debt includes, in addition to the debt held by the public, so-called intragovernmental debt --money that one part of the federal government owes another part. More precisely, intragovernmental debt consists of promises to repay certain federal government accounts, such as the Social Security Trust Funds, for amounts they lent to the Treasury in years when their earmarked revenues exceeded their outgo for benefits and other costs.
Here's how CBO sees it:
Long-term projections of federal debt held by the public, measured relative to the size of the economy, provide useful yardsticks for assessing the sustainability of fiscal policies." In contrast, "gross debt . . . is not useful for assessing how the Treasury's operations affect the economy.
- The article states that American banks are heavily exposed to some of the countries with serious sovereign debt problems, including Spain, Ireland, and Italy. Not according to the figure below from Moody's. Which doesn't mean we're out of the European debt woods at all, however. Many US investors and funds are exposed, and we export a lot to the Eurozone. So contagion is a real worry, no question. But I don't think it comes mostly through our banks' exposure to the shaky debt.
- The most important question about all this in the near term is what happens next. From where I sit, European negotiators are slowly and haltingly moving the in right direction, but the process is really quite disconcerting. You hear about progress toward the only solution that I think will work -- rip the band-aid off Greece, creditors take big haircuts, a robust fund to backstop exposed institutions -- only to read the next day that it's hit a wall.
- The second more important question is a medium-term one: what measures must be taken to avoid being back here again soon. From where I'm still sitting, that's a question about debt, and I mean at every level: households, corps, banks, governments. I'm convinced there's a global misunderstanding of the concept -- as Minsky discovered decades ago: "stability is unstable." With booms, come destabilizing debt bubbles that have us stuck in the economic equivalent of the shampoo cycle: bubble, bust, repeat.
More on this in a forthcoming piece I wrote for the journal Democracy.
This post originally appeared at Jared Bernstein's On The Economy blog.
Danielle Crittenden: Sunday Roundup: Berlusconi a Loss for Comedians Everywhere
Inflation, you say? Fed Hawks were saying that all through QE1 and QE2. Three Fed members voted against QE. Yet we still have deflation, not inflation. The 10-year bond pays 2%, investors don't think we have or will have inflation. The inflation hawks are wrong: debt and asset inflation inflate the money supply, not Fed input.
The US money supply shrank $4T due to housing collapse. We can safely print that much.
Now, we Boomers are a population bulge so back under Reagan they raised our SS taxes, diverted the extra money into a new trust fund to help cover our extra cost. The first Boomers are 65, the fund is now being tapped. It will run out early, before all us Boomers are "gone". But it's not anybody's future retirement money. And it's not much money, about 3 years worth of total SS payments. It's just a buffer, not a trust fund.
Time to take a hard look at higher tariffs and shorter work weeks with the same pay if we are to escape from this ever-shrinking economic net. The alternative is global economic collapse followed by the rise of a new generation of ruling demagogues.
Jobs are lost to productivity gains. Take the Internet: 100,000 postal workers will lose jobs, this site eliminates newspaper printer and delivery jobs, retail jobs are lost to Amazon, I buy everything online. Computers and the Internet eliminate jobs, or they wouldn't be used. Labor is the most expensive part of any business, tech is only used when it reduces jobs.
150 years ago half the population grew and distributed our food, now 3% does. That eliminated almost half of jobs. Jobs just disappear, they don't go anywhere. The 5% we lost were created by the housing boom: construction, real estate, finance. They disappeared when the boom did.
Does the exposure to foreign debt by US banks include CDOs or just direct financing of the debt? I find it interesting that Goldman was heavily involved in the structuring of Greek debt so that it passed muster when Greece was entering the Euro zone. I'm thinking there were some "innovative" financial products that may be on US balance sheets.
Those with the most to lose are the 1% who have hoarded all the wealth. What happens when those billions disappear from the paper (databases) where they exist? One thing is FOR SURE --We'd all suddenly live in a much more EQUITABLE society.
The world would move forward but the political and societal implications would be enormous... so who would lose power and who would gain power and would that scenario really be bad for the average citizen? Short term... LONG TERM?
There was an article on Bloomberg on Oct 18 2011, That states Bank of America has already taken their debt exposure (derivatives from its Merrill Lynch unit) to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
Second BAILOUT - Federal Reserve Now Backstopping $75 Trillion Of Bank Of America's Derivatives Trades
Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.
This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.
This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.
"Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depository "
http://tinyurl.com/6hc5txa
The comments will give you a grasp of the magnitude of what this means and how it is different from the JPM position which ALREADY has THEIR derivatives books on the side of their FDIC insured depository business!
The odor is that BOFA is moving their WORST DERIVATIVES from the ML shotgun marriage buyout to now be insured by the FDIC! This now sets a nuclear weapon on the bank accounts of everyone in an FDIC insured bank in the United States of America if any of those derivatives are tied to Greece defaulting or any European bank going under if Greece defaults.
More on that deepening picture here:
http://seekingalpha.com/article/301317-europe-s-large-banks-are-the-titans-crumbling?ifp=0&source=email_the_daily_dispatch
http://blogs.reuters.com/felix-salmon/2011/10/20/bofa-puts-taxpayers-on-the-hook-for-merrills-derivatives/
http://www.stratfor.com/content/greece-decision-tree?utm_source=twitter&utm_medium=official&utm_campaign=link
http://www.ritholtz.com/blog/2011/10/not-with-a-bang-but-a-whimper-bofa%e2%80%99s-death-rattle/
Is ANYONE here on HP getting the magnitude of what is brewing?
http://www.nuwireinvestor.com/articles/derivatives-market-doomsday-scenario-57925.aspx
U.S. banks have loaned only $60.5 billion to banks in the PIIGS nations. But they've lent $275.8 billion to French and German banks.
Anyone aware is watching the financial "troop movements" like some battle brewing on the Western Front in 1916.
1. Warren Buffett's suddenly engineered $5 billion investment in BOFA.
http://dealbook.nytimes.com/2011/08/25/buffett-to-invest-5-billion-in-bank-of-america/
2. Timmy's SNL "The Perfect Cheer" trip to Europe like Neville Chamberlain visiting Hitler in 1938 expecting not to be eaten by lions..
3. BOFA trying to QUICKLY get their derivatives exposure exempt from Section 23A and tied to their FDIC consumer deposit insurance.
http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html
Something BIG is up! Greece is GOING TO DEFAULT in December.. The fear is that it will start a contagion event like the collapse of the Vienna Credit-Anstalt Bank on May 11, 1931 that was the TRUE START of the Great Depression. History is now repeating itself.
If derivatives are the nuclear fission accelerent in this global arson event too, we are all going up in the Mushroom Cloud. No one on Earth yet knows what the notational imbalance is until it starts.
Robert Rubin, Alan Greenspan and Larry Summer should not have stopped Brooksley Born of the CFTC, for wanting laws put on the derivatives market. If they had listened to her, there would not have been the 2008 crash.
As head of the Commodity Futures Trading Commission [CFTC], Brooksley Born became alarmed by the lack of oversight of the secretive, multitrillion-dollar over-the-counter derivatives market. Her attempts to regulate derivatives ran into fierce resistance from then-Fed Chairman Alan Greenspan, then-Treasury Secretary Robert Rubin and then-Deputy Treasury Secretary Larry Summers, who prevailed upon Congress to stop Born and limit future regulation
Read more: http://www.pbs.org/wgbh/pages/frontline/warning/interviews/born.html#ixzz1boOoQcDb
We have a monetary system that increases the money supply by ALLOWING PRIVATE BANKS TO LEND MONEY INTO EXISTENCE - EVERY DOLLAR OF THE $15+ TRILLION CREATED SINCE 1970 WAS CREATED AS DEBT.
If you want to disagree, please supply information about any other way that $15 trillion was created and put into circulation.
What the hell else should we expect but dominoes falling in an international collapse of this debt Ponzi scheme?
To those who want to blame the "welfare state", please educate yourself about government spending as a percentage of GDP, and be sure to note that the only thing that is really increasing is the interest on the debt governments incur because they have allowed private banks to create money instead of doing it democratically as in Article One of the Constitution.
THE ONLY SOLUTION IS TO END FRACTIONAL RESERVE BANKING DEBT-BASED MONEY, RESTORE CONSTITUTIONAL MONEY, SUPPORT REFORM BILL H.R. 6550.
THE SECRET OF OZ - Bill Still
http://www.youtube.com/watch?v=swkq2E8mswI
LIFE INC. - Douglas Rushkoff
http://www.youtube.com/watch?v=sOBWhVe68os
WEB OF DEBT - Ellen Brown (1 of 5)
http://www.youtube.com/watch?v=QU0XiklHPMc
THE 50 U.S. STATE INFRASTRUCTURE BANKS POSSIBLE SOLUTION (1 of 5)
http://www.youtube.com/watch?v=2atnm1oTjJ8
THE BEST 3,000 YEAR ANALYSIS OF "MONEY" I HAVE EVER FOUND
http://www.monetary.org/
"THE LOST SCIENCE OF MONEY" by Stephen A. Zarlenga
http://old.monetary.org/lostscienceofmoney.html
A SHORT HISTORY OF THE MONEY POWER
http://www.monetary.org/wp-content/uploads/2011/10/32-page-brochure-sept2011.pdf
KUCINICH and CONYER'S HR-2990 PROPOSED CRISIS LEGISLATION
http://www.monetary.org/wp-content/uploads/2011/10/HR-2990.pdf
PRINT READY FLYER MATERIALS FOR OWS CAMPS *EVERYWHERE*
http://www.monetary.org/demonstrations
AN ENLIGHTENING CONCEPTUAL POD CAST DISCUSSION
http://www.old.monetary.org/radio001.mp3
MORE POD CASTS
http://www.monetary.org/podcasts
The massively complexity of the Euro and all of the different cultures and governments in the Euro nations is just a typical sample of the impracticality of "one world government". Heck, if they can't evern get the Euro to work, it certainly is not going to work for the entire world. Actually it is just a way for the ultra wealthy to seize control of the developed world . . . they'll get to the other third world countries later.
Greece is a problem, one that most of Europe has, an economy that is fixed and will not explode in manufacturing and jobs. Because of this, like France, the cut production, days, hours and put more people to work on the same job that should only take one person, then with retirement a draw unless the people have to pay 15% of income into it the government reaches a point of failed income and massive outlays.
But the USA has a small population, massive amounts of power that can be harnesses, natural resources and eduction plus innovation, except both political parties like the stalemate we are in.
There are ways to put this nation to work, but they will upset the status quo!
Average American
VIVA THE REVOLUTION!
This is why the attempt to distinguish our own profligate welfare state with our economic problems is futile. At the present rate, we will join Greece in five years. We need to stop the borrowing and spending immediately, not tomorrow and not years from now. The progressive party is over.
This does not count the the added borrowing to finance Obamacare when it comes on line in 2014 and the lowered tax revenues as Obamacare and EPA GHG regs cripple the economy.
THE PARTY IS OVER.
Our choice is between cutting the government back to where it was in 2000 in short order or going through the economic hell of Peronist Argentina with riots in the streets.
Progressives, Liberals and Democrats, are not the cause, then, of what is going on. A part of it, but maybe not so much a Conservatives and backward thinking often based upon out-and-out mis-information.
The deficit was at zero when Clinton left office, and escalted in Bush, Jr's Presidency and collapsed.
Connect the dots to your theory.
Balance the budget!
US debt is becoming unsustainable. I think Italy and Spain must also default. Europe must go back into recession and the US will too. Obama is desperately trying to be the mover and shaker behind the scenes to get Europe to borrow enough money to stay afloat until AFTER Obama gets re-elected. Then they can drop into recession.