‘NO RISK’: MORE WORDS FOR GEITHNER TO EAT

Christopher MarkowskiArticle, Research & The Economy0 Comments

June, 2012

NEW YORK (TheStreet) — There are two ways to conquer and enslave a country. One is by the sword. The other is by debt. — John Adams

Back in February, Senator Paul Ryan from Wisconsin challenged Treasury Secretary Timothy Geithner, asking why the Obama administration is not making any attempt to solve the long-term debt problem.

Geithner’s response was a “take your breath away” moment of honesty, rarely heard from government officials, “You are right to say we’re not coming before you today to say ‘we have a definitive solution to that long-term problem.’ What we do know is, we don’t like yours.”

Another one of our Treasury Secretary’s greatest hits was in April of this year when he was asked; “If we don’t deal with these debt problems we are going to be Greece in two years?”

Geithner responded, “No risk of that.”

I thought to myself after hearing those comments that I had heard that before, and sure enough in April 2011 Geithner was asked, “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner responded, “No risk of that.”

Watchdog on Wall Street Life Lesson #124. Beware of anyone from the big Wall Street firms or any Washington, D.C. politician/bureaucrat that tells you there is “no risk.” There is a very strong chance that they are full of bull excrement.

Every January on the radio show I read a column on air that I penned back in 1999 titled “Crystal Ball.” Around that time of year, along with corny jewelry commercials and Lexus advertisements, I get really sick and tired of all the silly predictions that are provided to us by the media from their cast of “Wizards of Smart.”

From “Hot Stocks for 2012” to “How to Get Rich This Year in These Sectors,” the ridiculousness never seems to end. The point behind my article is that nobody can tell what is going to happen in the future, but one most certainly can have a good idea of what will happen next by studying the past. So I give you a highly abridged and brief history of debt…

The Romans issued a gold coin called the Aureus. The face value of the original coin equated to the market value of gold in it. The Romans, much like the U.S. and other nations today spent money haphazardly that they didn’t have: public subsidies, military expenditures, public works and a huge government bureaucracy. The rulers of the Roman Empire raised taxes and minted more coins to pay their bills. Coins were issued with less gold and over time the people lost faith in the currency.

Chinese rulers started issuing paper money a little over one thousand years ago. They too realized that they could buy a lot of stuff if they printed a lot of money, which is exactly what they did. Eventually people caught on that the paper money had no value and prices rose. In order to keep up the scam, the rulers ordered death for people who would not accept it.

Even nations with huge gold and silver reserves spent beyond their means. Sixteenth century Spain was able to garner significant quantities of the metals from the New World. King Phillip II managed to spend it all and then some. Sound familiar?

Wars, and shovel ready palaces like the huge El Escorial were quite popular. King Phillip defaulted on his debt four times, even though revenue doubled during his reign. In 1576, when Phillip’s revenue was up by more than 50%, his debt jumped by a third. His last bankruptcy occurred when peak gold shipments were coming to Spain.

Germany was also victimized by runaway inflation. While war reparations played a part in the process, it was only a small part of what led to out of control inflation, which peaked in 1923. Prior to World War One, Germany had already established an enormous welfare state, which expanded during the war. Sound familiar?

Germany provided generous social security, health insurance, bailed out municipalities, and they spent lavishly on the arts with government-run theaters and opera houses. Government businesses from railroads to sausage factories lost money. The inflation destroyed the middle class and led to a man named Adolf Hitler who appealed to the masses as “starving billionaires,” people with billions of paper marks that could ill-afford to buy bread.

The Congressional Budget Office released its long-term budget outlook. Who knew the CBO could cure drunkenness? The federal debt held by the public will surge to 70% of the economy by the end of this year, which is the highest share of GDP in U.S. history except for World War II (that includes the Civil War and World War I).

The 40-year average is 38%. In the latest CBO report, they present a Something Wicked This Way Comesscenario in which our national debt will hit 90% of GDP by 2022, 109% by 2026 and 200% of GDP by 2037. I would like to remind everyone that the CBO often errs on the side of underestimating the problem.

What is currently occurring in places like Greece, Spain, Ireland and Portugal is most definitely something to worry about in our future. The CBO notes, “the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.” Play with a calculator sometime and try to figure what our interest payments would be if rates returned to the mean.

Scary stuff . . . currently we pay an average of 2% on our debt with a yearly interest bill of about $450 billion. What happens when it goes back to 4% or higher? Don’t say it cannot happen — that is precisely what the Greeks, Spaniards and Italians were saying a few years ago. I would like to remind everyone that in the early ’80s the 10-year Treasury was paying 15%.

I would also like to remind everyone that the Federal Reserve’s holdings of U.S. government debt since Barack Obama was inaugurated in January of 2009 has quintupled going from $302 billion to $1.668 trillion. The Federal Reserve has become the single largest owner of U.S. government debt.

The Federal Reserve Flow of Funds report for 2011 shows that the Federal Reserve purchased an incredible 61% of all Treasuries issued. The idea presented by many left-wing economists that everyone and their mother are clamoring to lend the U.S. money is patently absurd. If the Federal Reserve was not buying all of this paper, who would? What then would happen to our interest rates?

John Stossel the libertarian commentator for Fox News cited an interesting comparison on his show.

Federal Budget: $3.8 trillion 
New Debt: $1.65 trillion 
National Debt: $14.2 trillion 
Budget Cuts: $38 billion

Now remove eight zeros from the equation and pretend that these figures represent a household budget. 
Annual Family Income: $22,000 
Money the Family Spent: $38,000 
New Debt: $16,500 
Outstanding Debt: $142,710 
Budget Cuts: $385

The left came out guns a blazing at this comparison calling it an oversimplification, one we austerity Neanderthals that believe in living within our means are stupid enough to believe.

We believe that living within ones means is not only necessary but also moral. Recent charts released by the minority office of the Senate Budget Committee, finds that in the next five years, “U.S. Per Person Debt to Increase 7 Times Faster Than Italian Debt.” It currently stands at $52,900; by 2017 it will be $67,500. To put this into proper perspective, every child born a U.S. citizen today owes $52,900 going up to $67,500 in 2017.

We also spend more per person than Portugal, Italy, Greece or Spain, four out five of the infamous PIIGS countries. We spend $20,000 per citizen whereas Portugal spends $10,200, Greece $12,500, Spain $13,100 and Italy $16,900.

Has Timothy Geithner seen these? Does he still think that there is “no chance” of our situation emulating theirs?

 

 

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