Tuesday, January 25, 2011

Global Insiders Warned: U.S. Debt Crisis Could Explode at Anytime

Global insiders are starting to gather in Davos, Switzerland for this week's World Economic Forum. JPMorgan Chase's Jamie "Obama's Favorite Banker" Dimon will be there, as will be Treasury Secretary Geithner.

When attendees arrive and check in, they will be given their badges and a copy of a special Davos magazine, prepared especially for the event. In the magazine will be an article by Robert Rubin. He is an insider's insider. Participants will read the article. Rubin is so wired in that when insiders think of the people who are operating behind a president, it is names like Rubin's that come to mind. Jacob Lew the new director of the Office of Management and Budget is connected to Rubin. The old director of OMB, Peter Orszag, was connected to Rubin. The new head of the National Economic Council, Gene Sperling, is connected to Rubin, as was the previous NEC head, Larry Summers. It goes on. Rubin served as Treasury Secretary under Bill Clinton. He was former co-CEO of Goldman Sachs. He is co-Chairman of the Council on Foreign Relations. Got the idea? Insiders will read what he has written.

The first part of the article is about what the United States needs to do to get the economy going. It is a desperate shot taken at the buzzer from beyond half court. Rubin knows this. He is also a Keynesian, so his recommendations call for more spending that he hopes can be reversed in two or three years, once the economy "gets going". It won't work. The shot will fall short of the rim.

The second part of the article is much more significant. It is the breakdown of what is going wrong in the United States. An abbreviated version of the "Davos Warning" has been printed in FT.
Rubin wrote (my emphasis):
The risks of our fiscal position are serious and multiple. And while these risks become more severe over time as our debt position worsens, all of these either have begun to materialise or could do so in the near term, so we should act now.
What multiple shapes could the crisis take? Rubin writes to the Davos insiders (My emphasis):
To be specific about the risks, deficits could crowd out private investment, which could choke off a private investment recovery. Moreover, the capacity for public investment is already diminishing, and could be exacerbated by growing entitlement costs and mounting interest payments...

Most dangerously, there is a risk of disruption to our bond and currency markets from the fear of much higher interest rates due to future imbalances or from fear of inflation because of efforts to monetise our debt. The result could be significant deficit premiums on bond market interest rates, seriously impeding private investment and growth or, worse, acute bond market declines that cause an economic crisis. This could also start in the currency markets.

While the likelihood of major market disruptions is greater in the intermediate and longer term, the shorter-term risks are also real. Market psychology can change unexpectedly and dramatically – either on its own or because of some catalyst – when underlying conditions are unsound. Possible catalysts are a debt ceiling confrontation, currency market problems, and state deficits...
For emphasis, I remind you this is a former Treasury Secretary of the United States writing. One of President Obama's top outside advisers. So does Rubin think there is an easy solution to the debt problem? He writes:
Growing out of our fiscal morass over time without policy action would require inconceivable rates of growth. Muddling through with unexpectedly favourable developments is extremely unlikely. The strong probability is that either we make the hard decisions so vital to our future, or we will be forced at some point to act more harshly and with less time to thoughtfully set priorities. Our long history of political and economic resilience should augur well. But these decisions are extremely difficult, and the question is whether we have the political will to face up to what we must do.
There you have it, from a man as inside as you can get:
...our structural fiscal trajectory is unsustainable with multiple, serious risks (while at the same time, our large cyclical deficits are exacerbating debt levels and interest costs)...
Bottom line: The United States is in serious financial and economic trouble. It is only a matter of time before the crisis explodes. Don't take my word for it, just re-read what the former Treasury Secretary has to say. It's all there.


  1. The money line:

    "Growing out of our fiscal morass over time without policy action would require inconceivable rates of growth."

    Ergo - he advises "policy action."

    What sort, I wonder.

  2. These violent little Hitler-wannabes know exactly what is wrong...Goverment Terrorism that enacted laws and taxes that enslave and slowly murder everyone. The infantile and retarded electorate - made possible via their Public Schools and TV broadcasts - Don't have the slightest clue.

  3. kudos to epj for bringing this to the fore. the us has mortgaged its future for the next few decades (unless there is a disruptive event). wonderful to see that lila rajiva is still part of the global dialogue. keep engaged and keep posting lj (here and at the db).

  4. You mean by 'policy action' keeping their buddies sweet while flaying the skin off the backs of everyone else?

  5. The economic medicine has a expiration date (and it's about to expire) that makes it less and less effective as time goes by. It will probably come to helping thy neighbor on a very local level when it is finally admitted to all "there isn't any entitlement money or for that matter any money".

  6. It will never be "admitted to all" that there is no money. They will continue printing it until no one wants it any more, then they will print something else. Then they will issue electronic "credits" which will be enforced by legal tender laws. We're all hosed.

  7. The "policy action" that this bankster terrorist speaks of is really gaining total ownership of the Amerikan Tax Cattle(TM).

  8. Following this global economic theme, the US deficit dilemma, is one of my favorite past times. I'm glad the "HC bill repeal" effort is over because I don't think there is anything else that can be used to avoid the debt ceiling issue which should be very revealing and entertaining. I seriously doubt that "(we) have the political will to face up to what we must do." Importantly, so far it's all be approached in the usual ass-backward way, because no one has dared to do the math. Instead, one politician or another comes up with some bold way to cut $60 (or maybe only $50) billion dollars in spending this year. Morons! Look, the deficit last year was over $1.2 trillion and it will always be over at least $1 trillion every year hence, assuming the economy grows at 4% (no way) and 10,000 Boomers PER DAY go on the dole. That means spending has to be cut by approximately $1 trillion per year just to maintain our $14 trillion debt level. It really does seem to be an impossible situation, and I don't use that word lightly. Another tangible fact that everyone has avoided so far is what the actual new debt ceiling amount will be for 2011. Think about it, it will have to be about $15.5 trillion. (That's the current debt of $14.3 T plus this year's deficit of $1.2 T.) I predict that even the average US pin head will think that's a lot.

  9. Invest in America? When they're 1.2 trillion in the hole. You need to pay off those credit cards before you buy anything new O-Bubba.

    Oh yes. Invest in education. When last years grads can't find commensurate jobs? Why train for engineering when the global pay scale is $27k/yr. in Russia, Poland, India, China, etc. Can you raise a family in America on $27k?

  10. The TV show Jericho is starting to look more and more like the most likely scenario with every passing day. When things start heading off a cliff the Ruling Class will need something big to reroute the crazy train, and it's going to come in the form of nuclear "terrorism", followed by a corporatist dictatorship Mussolini-style. A private Blackwater army will provide the muscle with Halliburton/KBR/Goldman/JPMorgan as the business front.

    The only question is whether or not the rest of the world will put up with the existence of such a monstrosity. World War III, anyone?

  11. Isn't it ironic, looking for solutions from those who are responsible for getting us here in the first place.

    We need to stop allowing the mental/ideological inbred the ability to frame the issue within which we must respond.

  12. Only seriously stupid people work for a living. These criminals steal 50% in taxes and the other half in inflation.

  13. This process has gone on for decades, especially with detaching dollars from gold. I'm no gold bug, but 'In Xerox We Trust' hasn't worked too good anywhere its ever been tried.

    Since 1974 the logarithmic alpha has been about 2x-per-decade for debt growing and money losing value. Its like runway chain reaction in atom bomb though. Eighty neutron generations thereabouts is what it takes for detonation. Yet the first sixty generations of that activity would do little more than make the bomb too hot to touch. Its the last twenty generations, especially the last ten, where all the entropy and Michael Bay special-effects happen.

    I'd say we're about generation 64 or so economically. We're starting to notice its kinda warm around the bomb core now. All the Davos schmucks have been telling us for years now its now big deal because the bomb core is 'only' a little warmer year-to-year. Now one of the Davos schmucks has done the math and realized what generation of neutrons this bomb is on.

    Assume each quarter is a neutron generation, and I give about sixteen-seventeen quarters left before the heat's too much and the core 'disassembles.' Then KABOOM!