Originally Posted By ActionJack

 

What lack of regulation of derivatives is the problem?  Why do government future liabilities have anything to do with this particular lack of regulation of derivatives?  I see a lot of undefined jargon like casino capitalism, trade deficits, voodoo economics designed to strike an emotional chord but no specific examples of deficiencies.  It seems more spouting of marxist propaganda with no real understanding of what any of it means.  I think a New Year's resolution is in order here.

 

The 2008 crash was caused by a lack of regulation, not just the presence of Freddie and Fannie. The same toxic assets were packaged with other investments, leading to CDOs and--coupled with CDOs--eventually caused the fallout to spread to Europe, and now to China. We're looking at something like a trillion dollars of subprime mortage that eventually led to fallout in the tens of trillions worldwide. And those toxic assets are connected to only a fraction of over $370 trillion in unregulated derivatives that U.S. banks are exposed to, and part of a global market which the BIS estimates at over $600 trillion, but which some sources indicate may be as high as $1 quadrillion. Some details here:

http://moneymorning.com/2011/10/12/derivatives-the-600-trillion-time-bomb-thats-set-to-explode/

Government liabilities, which involve future obligations for health care, social security, etc., make up another bulk of total money supply, and is most prominent in the U.S., where the government had been engaged in offering various tax cuts (which, together with war costs, are the main drivers of the deficit) while borrowing more to provide what are probably some of the best government services for citizens worldwide. Hence,

http://www.forbes.com/2010/03/18/tea-party-ignorant-taxes-opinions-columnists-bruce-bartlett.html

And an explanation of those future obligations here:

http://www.truthinaccounting.org/

Casino capitalism essentially involves financial speculation, which is what Wall Street happily engages in, and is now being rescued from thanks to bailouts from Washington, which it owns. See

http://www.cnbc.com/id/28892719

and similar reports for details.

"Trade deficits" is "undefined jargon"?!

http://www.census.gov/indicator/www/ustrade.html

"Voodoo economics" is a term Bush, Sr., used to describe Reaganomics, which has been followed since by each administration. That is, deregulate and let U.S. corporations profit, offer tax cuts, borrow more to power up the military which is needed to prop up the dollar, and let the sheeple enjoy by maxing out their credit cards, using their homes to buy more stuff, and buying and selling homes to bolster consumer spending.

Voodoo economics defined briefly here:

http://en.wikipedia.org/wiki/Reaganomics

Originally Posted By medck

It's not a non-sequitor.  One of two scenarios is possible.  We can call them the one-account vs multiple accounts scenarios.  I want to stress here that either one is an intellectually sound interpretation, but combining them is not.  And AJ and AB want to combine them.

 

The one account version says the US govt is one entity and pays for all its programs (education, defense, social security, pornographic art, etc) out of one huge pot of money.  It gets revenue from lots of sources (income tax, Social Security tax, fuel tax, corporate tax, etc) and dumps that money into its account.  If it spends more than it brings in, it borrows the difference.  That is the deficit.  There are no individual accounts, just programs to be funded.  Social Security costs a certain amount ($713 billion in 2010) and that is paid out of general revenue which includes social security taxes and everything else.  There is no "trust fund", that is just a propaganda exercise to explain the shifting of funds based on one system of taxes to another.  The last 25+ years, the so-called "social security surplus" has just that a lot of revenues came from SS taxes and the program didn't pay out as much.  Since all that money went into one pot, it just decreased what the deficit would have looked like.  The money, in AJ's terms was spent.  But note, it was real money that was spent, not borrowed money.  The "borrowed" debt that is in the SS trust fund in this scenario to represent that transfer is just a fictional device.  Now social security is spending a bit more than social security tax revenue.  Big deal.  It all comes from one pot of money; however, this fiction that there is a trust fund means that these "interest" payments are fictional.  The only real transfer from the rest of the budget is the amount between SS revenue ($664 billion) and expenditure (713 billion) -- that is $49 billion.  That the government claims it is sending $117 billion to the $2.6 trillion social security trust fund is just fiction since there is no social security trust fund, it just drops back into the big government pot.  But there is no additional debt, even if the government is telling people there is $2.6 trillion in debt to the social security fund.  Note that if this is your argument, you can't call the debt in the trust funds "debt" since your whole argument is that it doesn't exist.  The (tax) money was spent, yes, but it was spent so the govt did not have to borrow in the past.

 

The multiple account version says the govt has lots of independent accounts (social security, medicare, highway, Indians, military retirement, civil service retirement, etc) that usually bring in more money than they spend in a year.  When they do that, they loan the money to the rest of the government in exchange for real public debt that is repaid with interest at a later date.  Sometimes they spend more and draw down their trust funds; sometimes their trust funds are exhausted and they need transfers from the general revenue (highway trust fund in 200

to make up the difference.  But the asset is real.  It belongs to the specific program and is a claim on future govt revenue through the interest and principal payments on govt debt.  Now in this case, the programs are generally supposed to support themselves through their dedicated income streams (social security, medicare, fuel tax, Indian royalty fees, etc) and trust funds.  If all these trust funds are drawing down their assets, the rest of the govt will have to borrow more from the public and eventually the trust funds will be exhausted if the interest revenue is insufficient to cover the shortfall over the long-term.  At that point, these programs would have to make a claim on the general budget to make up the shortfall.  You might consider this being "bankrupt", although their dedicated income stream will support some level of the program (80% in the case of Social Security).  Note, if the program is spending more than it brings in and interest is not enough to cover this, you can't argue that the program can meet all its obligations forever without changes.  But its trust fund is "real" and the rest of the government is paying interest on it; the debt however, is rather larger.

 

Now, AJ and AB want to claim there is one account for purposes of arguing "there is no trust fund" but they want to claim there are multiple accounts to argue "social security is bust/operating at a loss and US debt is 100% of GDP".  You can't have it both ways.  If there is one account and no trust fund, social security is as viable as the US Government and the public debt is 30% lower than AB is reporting.  If there are multiple accounts, then there is a trust fund, social security is viable through the late 2030s without changes, but the public debt is at the higher level AB is reporting, although 30% of that debt is paid to government itself.

 

I am sypathetic with either version, just not the inconsistent hybrid one that AB and AJ are putting together.

The US incurred about $2.5 trillion in additional debt in 2011.  This  is a simple fact.  The government borrows about $0.43 for every dollar spent in 2011.  This cannot continue.

I agree that the government takes in funds and spends funds.  The government has also made a lot of health care and retirement promises.  These promises cannot be met without ruinous levels of taxation.  Most of what state above I agree with.  But I don't count an "asset" as something that does not have anything of value behind it. 

US outstanding debt is now at the level at the end of WWII. 

This cannot continue.

Originally Posted By airboy
 

The US incurred about $2.5 trillion in additional debt in 2011.  This  is a simple fact.  The government borrows about $0.43 for every dollar spent in 2011.  This cannot continue.

I have no idea where you get your "fact".  The US added about $1.1 trillion in debt in 2011.  You're not clear on whether you mean calendar year (Jan 1 - Dec 31, 2011) or fiscal year (Oct 1, 2010 - Sept 30, 2011), but either way it is not $2.5 trillion.  If fiscal year, the debt on Sept 30, 2011 was  $14,790,340,328,557.15 and on Sept 30, 2010 it was $13,561,623,030,891.79.  We'll call that $14.8 trillion and $13.6 trillion or about $1.2 trillion, less than half what you say.  The numbers for calendar year 2011 are $13,997,932,781,828.89 for Jan 3, 2011 and $15,125,898,976,397.19 for Dec 29, 2011.  That's $14.0 trilion and $15.1 trillion for a total of $1.1 trillion added.  Again, well under half your claim.

This tallies, with the CBO claims on government revenue and spending which also tally to a but over a one trillion dollar gap in FY2011 (NOT $2.5 trillionas you attest), that compared with a debt growth of $1.65 trillion in FY 2010, $1.89 trillion in FY2009 and $1.01 trillion in FY2008.  It will probably be under $1 trillion in FY12 and (if the temporary tax cuts expire) down to 3% of GDP by 2013-14.  The problems come after 2020.

You can look it up yourself here:

http://www.treasurydirect.gov/NP/BPDLogin?application=np

it also breaks out intergovernmental holdings (I did not break them out, since you prefer not to).

Originally Posted By airboy

Originally Posted By medck

It's not a non-sequitor.  One of two scenarios is possible.  We can call them the one-account vs multiple accounts scenarios.  I want to stress here that either one is an intellectually sound interpretation, but combining them is not.  And AJ and AB want to combine them.

 

The one account version says the US govt is one entity and pays for all its programs (education, defense, social security, pornographic art, etc) out of one huge pot of money.  It gets revenue from lots of sources (income tax, Social Security tax, fuel tax, corporate tax, etc) and dumps that money into its account.  If it spends more than it brings in, it borrows the difference.  That is the deficit.  There are no individual accounts, just programs to be funded.  Social Security costs a certain amount ($713 billion in 2010) and that is paid out of general revenue which includes social security taxes and everything else.  There is no "trust fund", that is just a propaganda exercise to explain the shifting of funds based on one system of taxes to another.  The last 25+ years, the so-called "social security surplus" has just that a lot of revenues came from SS taxes and the program didn't pay out as much.  Since all that money went into one pot, it just decreased what the deficit would have looked like.  The money, in AJ's terms was spent.  But note, it was real money that was spent, not borrowed money.  The "borrowed" debt that is in the SS trust fund in this scenario to represent that transfer is just a fictional device.  Now social security is spending a bit more than social security tax revenue.  Big deal.  It all comes from one pot of money; however, this fiction that there is a trust fund means that these "interest" payments are fictional.  The only real transfer from the rest of the budget is the amount between SS revenue ($664 billion) and expenditure (713 billion) -- that is $49 billion.  That the government claims it is sending $117 billion to the $2.6 trillion social security trust fund is just fiction since there is no social security trust fund, it just drops back into the big government pot.  But there is no additional debt, even if the government is telling people there is $2.6 trillion in debt to the social security fund.  Note that if this is your argument, you can't call the debt in the trust funds "debt" since your whole argument is that it doesn't exist.  The (tax) money was spent, yes, but it was spent so the govt did not have to borrow in the past.

 

The multiple account version says the govt has lots of independent accounts (social security, medicare, highway, Indians, military retirement, civil service retirement, etc) that usually bring in more money than they spend in a year.  When they do that, they loan the money to the rest of the government in exchange for real public debt that is repaid with interest at a later date.  Sometimes they spend more and draw down their trust funds; sometimes their trust funds are exhausted and they need transfers from the general revenue (highway trust fund in 200

to make up the difference.  But the asset is real.  It belongs to the specific program and is a claim on future govt revenue through the interest and principal payments on govt debt.  Now in this case, the programs are generally supposed to support themselves through their dedicated income streams (social security, medicare, fuel tax, Indian royalty fees, etc) and trust funds.  If all these trust funds are drawing down their assets, the rest of the govt will have to borrow more from the public and eventually the trust funds will be exhausted if the interest revenue is insufficient to cover the shortfall over the long-term.  At that point, these programs would have to make a claim on the general budget to make up the shortfall.  You might consider this being "bankrupt", although their dedicated income stream will support some level of the program (80% in the case of Social Security).  Note, if the program is spending more than it brings in and interest is not enough to cover this, you can't argue that the program can meet all its obligations forever without changes.  But its trust fund is "real" and the rest of the government is paying interest on it; the debt however, is rather larger.

 

Now, AJ and AB want to claim there is one account for purposes of arguing "there is no trust fund" but they want to claim there are multiple accounts to argue "social security is bust/operating at a loss and US debt is 100% of GDP".  You can't have it both ways.  If there is one account and no trust fund, social security is as viable as the US Government and the public debt is 30% lower than AB is reporting.  If there are multiple accounts, then there is a trust fund, social security is viable through the late 2030s without changes, but the public debt is at the higher level AB is reporting, although 30% of that debt is paid to government itself.

 

I am sypathetic with either version, just not the inconsistent hybrid one that AB and AJ are putting together.

 

The US incurred about $2.5 trillion in additional debt in 2011.  This  is a simple fact.  The government borrows about $0.43 for every dollar spent in 2011.  This cannot continue.

 

I agree that the government takes in funds and spends funds.  The government has also made a lot of health care and retirement promises.  These promises cannot be met without ruinous levels of taxation.  Most of what state above I agree with.  But I don't count an "asset" as something that does not have anything of value behind it. 

 

US outstanding debt is now at the level at the end of WWII. 

 

This cannot continue.

Essentially this argument is saying that it over-taxed in the past with social security and spent in on other government programs and today the fact that social security payments exceed contributions, instead of using what should have been the previously collected surplus they will just increase taxes today too to make up the ongoing shortfall in social security contributions.  So why pay interests too which means even more taxes?  This has to be on the same level of thinking that has the Euro in trouble.  In the end, this approach leads to both higher taxes and shrinking value in the dollar which means another tax through decreased spending power.  As said before, it has to end.

Originally Posted By medck

 

I have no idea where you get your "fact".  The US added about $1.1 trillion in debt in 2011.  You're not clear on whether you mean calendar year (Jan 1 - Dec 31, 2011) or fiscal year (Oct 1, 2010 - Sept 30, 2011), but either way it is not $2.5 trillion.  If fiscal year, the debt on Sept 30, 2011 was  $14,790,340,328,557.15 and on Sept 30, 2010 it was $13,561,623,030,891.79.  We'll call that $14.8 trillion and $13.6 trillion or about $1.2 trillion, less than half what you say.  The numbers for calendar year 2011 are $13,997,932,781,828.89 for Jan 3, 2011 and $15,125,898,976,397.19 for Dec 29, 2011.  That's $14.0 trilion and $15.1 trillion for a total of $1.1 trillion added.  Again, well under half your claim.

 

This tallies, with the CBO claims on government revenue and spending which also tally to a but over a one trillion dollar gap in FY2011 (NOT $2.5 trillionas you attest), that compared with a debt growth of $1.65 trillion in FY 2010, $1.89 trillion in FY2009 and $1.01 trillion in FY2008.  It will probably be under $1 trillion in FY12 and (if the temporary tax cuts expire) down to 3% of GDP by 2013-14.  The problems come after 2020.

 

You can look it up yourself here:

 

http://www.treasurydirect.gov/NP/BPDLogin?application=np

 

it also breaks out intergovernmental holdings (I did not break them out, since you prefer not to).

As I noted on my very first post in the thread, the Federal Reserve also took in an additional $1.5 trillion in loans with its continuing money pumping exercise.  You may not consider this an addition to the debt, but I do.  The balance sheet of the Federal Reserve is also putting the USA in hoc for a ton of additional bad loans.

Originally Posted By airboy

As I noted on my very first post in the thread, the Federal Reserve also took in an additional $1.5 trillion in loans with its continuing money pumping exercise.  You may not consider this an addition to the debt, but I do.  The balance sheet of the Federal Reserve is also putting the USA in hoc for a ton of additional bad loans.

Then you're double counting.  The Fed has purchased pre-existing debt on the open market.  That is debt that is already counted as being issued.  You're counting it as debt when it is issued and then counting it again when the Fed buys it back.  Ron Paul had suggested that a way to cut the debt was for the Fed to simply burn that money.  It would be like a company that bought back stock and then cancelled it.  Either way, it is not additional debt.

$7.6 Trillion in Debt

http://finance.townhall.com/columnists/mikeshedlock/2012/01/04/76_trillion_in_debt

U.S. Should Learn from Europe's Welfare State Mistakes

http://www.cato.org/pub_display.php?pub_id=13829

Originally Posted By airboy

Originally Posted By OJsDad

Originally Posted By airboy

The second big problem was too many bad housing loans. This was caused by multiple factors. First, underwriting standards went to hell and lots of bad loans were written in the private sector. Second, the Federal Government underwrote a lot of the bad debt and also pushed lenders to issue loans to people with bad credit.

 

Airboy,

 

  My wife works in a small local bank.  One problem she pointed out was people that can afford a housing loan, but walking away because they are upside down on their loan.  Is there any data to show how much of an impact this problem is on the housing markent.

 

There are several different categories of borrowers. 

Group 1 = homeowners without a mortgage. 

Group 2 = first time buyers without a mortgage

Group 3 = people with mortgage who are not "upside down"

Group 4 = people with upside down mortgages.

 

For all 4 groups, you need 20% down and almost perfect credit to get a mortgage loan today.  If you don't have that much capital, you simply can't buy.  An example shows how this works.  Suppose you want to buy a relatively inexpensive $100,000 home.  You would need a credit score of 700+, about $25,000 in cash (20% down & closing costs), and an income stream to make mortgage payments.  This standard eliminates large numbers of new home buyers.

 

If you own an upside down mortgage, then you have to get to an 80% loan to value ratio.  This means coming up with even more cash to close.  Here is an example.  Suppose you bought a home for $125,000 and it currently has a value of $100,000.  You want to refinance or sell the home to buy another.  To refinance you would need $45,000 plus closing costs to get the new loan.  To sell the home you would need to take $25,000 to closing to end the mortgage.

 

Right now, short sales & foreclosures are around 50% of purchases.

 

There is a lot of data released on this from the US government including the Federal Reserve.

Sorry Airboy, I wasn't clear.  I'm referring to people that have a mortgage, but because the become upside down in it, they walk away from it, even though they can still make payments.  I didn't mean to refer to people that are trying to get a new loan.

I hear that people with upside down mortgages who can afford their payments are walking away but I find it hard to believe it's very common because it's very stupid.  I talked to people in such a situation and they're not thinking about leaving.  If you have to go or can't make the payments I can understand but otherwise it doesn't make much sense.

Also, I heard on a financial show that there will be another wave of foreclosures because ARMs from 2006 and 2007 are about to reset.  There are probably many 'interest only loans' coming due too.

Definitely:

http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml

Posted before, and ignored.

Again, we're looking at borrowing and spending the past three decades, not just recently:

http://blogs.reuters.com/rolfe-winkler/2009/09/30/krugman-and-the-pied-pipers-of-debt/

And it's part of a global phenomenon; hence, increasing debt in Europe, Japan, and even China. The reason is simple: in a global capitalist system, one needs increasing production and consumption of goods, especially given competition. At the same time, more would like to become part of the middle class, and will buy those goods. But wages can't go so high because that would cut into profits. In comes banks, which are in the business of lending money, anyway. So debt goes up, which workers pay for little by little, even as they enjoy middle class conveniences.

It gets worse in some countries. In the U.S., for example, more begin to use their houses, which are already being paid for, as collateral to borrow even more money to buy lots of consumer goods. The result is a country where around 70 pct of economic activity is based on consumer spending, with incredible amounts of debt needed to buy incredible amounts of goods. The country has less than 5 pct of the world's population but has more than a third of the world's passenger vehicles: around 250 million out of 670 million worldwide. The country has to buy up to a quarter of world oil production and use almost half of that to power up those vehicles. I think one docu pointed out that the country has to borrow at least a billion dollars a day just to pay for that oil.

And it's not just in the U.S. In Iceland, for example, more than 80 pct owned houses, and several were buying and selling up to two at a time to profit, the same problem that was taking place in the U.S. before the 2008 crash. Meanwhile, corporations worldwide were gambling happily, creating between $600 trillion to over a quadrillion in unregulated derivatives, of which a fraction led to the 2008 crash, and with U.S. banks alone exposed to over $370 trillion.

Meanwhile, as more citizens scrambled for more lucrative jobs in the service industry (and the same problem is now taking place in China, where more young people want to move from factory work to higher-paying work in service, especially in finance), they also began to blame the government or liberals or "lefties" or the military or banks or anyone else, as long as they were not included. In reality, this is not a "liberal" or a "conservative" issue but an internal flaw in capitalism, esp. free market capitalism, which essentially invovles, as pointed above, increasing production and consumption of goods financed with increasing credit, with even more credit created as more move to financing, where more money can be made.

The result of all that is not surprising: a credit crunch, and in general, instability caused by financial speculation. But that will pale in comparison to the effects of a resource crunch, esp. one made worse by the effects of pollution, including climate change, from which no amount of politcking or funny money creation or false hope in technofixes or market forces will solve.

Finally, related:

"World Bank warns of global recession"

http://www.guardian.co.uk/business/2012/jan/17/world-bank-warns-global-recession

Some economists who were asked about the thread topic in another article argued that, at best, we're looking at a "lost decade" of high unemployment, food, and oil prices.

Wow.  I see nobody's changed much in the 6 months I've been away.  So much more heat than light in most of these discussions that span so many complex and interrelated problems.  I don't know that I disagree with much that's been said here, but that just goes to show how widespread and multi-dimensional the problem is...

Fact:  Public sector debt is huge.  Huger than it's ever been.  And while that's not a big problem until such time as the US $$ is no longer a global reserve currency, it's hard to tell when that'll happen--and when it does, if we haven't done something about it, we'll be in deep doo-doo.

Fact:  Public sector debt is a function of Expenditures - Revenues.  That gives us two levers to realistically attack the debt problem.  Small-government advocates can argue that increasing taxes is a bad solution to the problem, but that's a separate debate.  Most people seem to feel like we need a fix of spending cuts and revenue hikes, but that's still up for debate in political circles and nothing's settled.

Fact:  If/when the economy recovers, revenues will bounce back, but that still won't do a thing about the deficit.  It's been huge for a long time.

Fact:  The current economic malaise is not tied to government debt--it's tied to private sector debt.  As Ralfy points out, the debt-to-income ratios in this country have fallen from 156% in 2006 down to I think 116% last year, but they have a ways to go before reaching the 80%-90% band that they travelled in from 1948-1995.  Government debt is a longer-term problem and needs to be dealt with, but it's not really the current problem with the economy.

Fact:  Blaming the subprime fiasco strictly on any one group to support your own political beliefs is simplistic to the point of ludicrous.  Homeowners, lenders, regulators, Congress, investment banks, and personal investors all got greedy and/or sloppy.  Even within business ranks, there were multiple breakdowns, in terms of both ethics and professional competence--but as I said above, there were breakdowns everywhere and blaming one sector is lame.

Fact:  Between Social Security and Health Care benefits, we have an even bigger problem looming that we haven't even started to address yet.  Which suggests that we need to get the current public deficit problem solved sooner rather than later.