Nothing will change with Barak Obama in power in Washington, in fact it may get even worst. The team Obama has put together is just as scary as Bush's team, which is natural since there really wasn't an election to begin with. Like I have said in the past: the political/financial elite here decide what you the people will wear, the people get to decide the color...



Our $100 Trillion National Debt

December, 2008

The "official" debt of the United States is only around $10 trillion dollars as of August 6, 2008. This is a manageable number; we could pay it off in a few decades if we quit buying luxuries like food and clothing, and take a few other minor economy measures. Unfortunately, the "$10 trillion" number was produced by government accounting, which among other things allows one to ignore Social Security, Medicare, and the new prescription drug benefit. This is like ignoring rent, food, and utilities in your household budget… it will lead to a few bounced checks. Our real debt is about ten times higher. Who says so? The President of the Dallas Federal Reserve, Richard W. Fisher. In a May speech at the Commonwealth Club of California, he states that the US national debt is close to $100 trillion. You can read his whole speech at the Federal Reserve web site.

The Real Debt

Here is what he said regarding the actual US debt: "Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent." Interested readers will notice that the new prescription drug benefit is projected to be more fiscally crushing than all of Social Security. Mr. Fisher points out that this $99.2 trillion will be a bit of a burden to pay off: "Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income." You do have $1.3 million in your pocket, right? What, are you some kind of deadbeat? Speaking of deadbeats, the "$99.2 trillion" estimate does not include the subprime bailout. So for those who like large round numbers, by the end of 2008 the real National Debt should be large, round, and about $100 trillion.

Other Unfunded Liabilities

The Fed’s numbers do not include some other liabilities the US has acquired over the years. One massive but unquantifiable liability is the probability of future wars. If it cost the US hundreds of billions of dollars to invade the fifth-rate kleptocracy of Iraq and the foreign-aid regime of Afghanistan, how many trillions would wars against real powers cost? Perhaps I should ask "how many US cities" such wars would cost. Some nations could legitimately plan for peace. Sweden has not fought a foreign war since 1814 (as many Swedes have pointed out in emails regarding my Swiss article). Switzerland, not since 1815. The US record is less hopeful. The US is rarely not in foreign wars, and the current Administration has openly announced that the "Global War On Terror" will never end. Yet our government accounting is predicated on perpetual peace, on an ever-increasing flow of money into the official pyramid schemes. In any case, whether you are pro- or anti- Empire, real accounting demands some reserves for future war contingencies. When even a few US cities are burning radioactive pyres, the flow of funds to Social Security and Medicare will suffer some interruption. Any fiscal plan demands amortization of the accumulated hatred our foreign adventures have accumulated. The US taxpayer has aided every evil dictator since 1945. Stalin, Castro, Pol Pot, Nyerere, Idi Amin, go right down the roster and US money helped pay for the barbed wire and bullets (and the nuclear reactors, in the case of the Kim Dynasty rulers of Korea). So far blowback has been quite mild. But in a world full of easy do-it-yourself WMD technologies, our luck can’t hold forever. If the US were a private company, the "badwill" on our books would reach into the tens of trillions.

Tearing Up The Credit Cards

Most likely, the US will simply continue into bankruptcy. This is the most common pathway for nations with fiat currencies and unchecked ruling classes. But let’s assume that somehow a Clone Army of 435 Ron Pauls gets into Congress, while genetic technology brings back Jefferson and Gallatin to their old offices. Can the US be made solvent again? I think so. Most of the unfunded liability is medical. We know why the medical system does not work. So if we eliminate the FDA, guild restrictions on medical professions, and the ridiculous tax laws that force us into medical-insurance serfdom to employers, we could cut medical costs enough to phase out Medicare and the new "drug benefit." In this way more than half the shadow debt can be wiped out. The answer for the Social-Security pyramid scheme is well known. Chile fixed its Social Security disaster decades ago, by giving large IRA-style allowances and phasing out the government payments to younger recipients. The sooner we do this the easier it will be… the Boomers start retiring soon. Most important, we have to listen to the Founder’s calls for free trade with all nations but entangling alliances with none. The US cannot stop every quarrel in the world even if we wished… and the actual record of our foreign-policy geniuses has been to send a couple of trillion dollars out to the very worst criminals in human history. Aid To Dependent Dictators must stop. None of this will happen while Mordor-On-The-Potomac still possesses its plutonium credit card, the Fed. Just as we would for any other bankrupt relative, we must help Uncle Sam cut up his credit cards.


In related news:

Walker's World: Could U.S. go bankrupt?

Is the Fed running out of firepower? Or, to rephrase the question, is it possible that the central bank of the world's biggest economy is becoming overstretched and overwhelmed by the costs of the crisis? If so, does that mean the United States could go bankrupt? The question is becoming urgent, because Tuesday the Fed cut the federal funds rate from an extraordinarily low 1 percent to an unprecedented 0.25 percent, with a prospect of going down to zero. But even such unheard-of steps might not, on recent experience, revive the animal spirits of entrepreneurs and get bankers lending again. Fear still rules the markets. Ben Bernanke, the chairman of the Federal Reserve Board, is trying desperately to keep the good ship capitalism afloat and is deploying heroic, innovative and risky measures to do so.

The costs are becoming astronomic. Over the course of the last year the Fed's balance sheet has tripled to $2.2 trillion. Like Atlas of the Greek myths, who bore the world pressed down on his shoulders, the Fed is currently holding up the U.S. financial system. It has launched new credit facilities, accepted dubious collateral for loans to banks, arranged currency swaps and generally done things it has never done before in its 95-year history. Under the Term Auction Facility, it has issued $448 billion in liquidity to banks against various securities including Treasury bonds, municipal bonds, AAA securities and so on. Under the Term Securities Lending Facility it has issued $185 billion in Treasury securities to guarantee inter-bank loans, backed by vaguely defined collateral that includes the now-notorious "mortgage-backed securities." Since Oct. 29, when it decided to intervene to unblock the commercial paper market, on which many U.S. corporations depend for operating funds, it has issued $349 billion in net liquidity.

Under the Commercial Paper Funding Facility it has issued $309 billion and a further $41 billion under the Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility. The Fed's balance sheet also shows another $628 billion in assets, much of it in the form of currency swaps, like the special agreement on Oct. 29 to extend $120 billion to Mexico, Singapore, Brazil and South Korea. This followed the $180 billion swap agreement the previous month with the Bank of England and the Japanese, the European, the Canadian and the Swiss central banks. And all this is being done under a veil of secrecy. Citing banking confidentiality, it has rejected a Freedom of Information act request from Bloomberg Television to detail precisely the kinds of collateral it is now accepting and the credit it is issuing. It is also allowing banks to turn a neat arbitraging profit on the funds it lends out to commercial banks at an interest rate of 0.49 percent. The banks then deposit these funds back with the Fed as reserves, on which they receive 1 percent interest. In theory, the Fed's ability to issue credit and supply funds is limitless; they can simply continue to print money or extend guarantees, and they will be backed up by the full faith and credit of the United States.

In practice, there will come a limit when the markets, foreign or domestic, start questioning the value of that credit and demand much higher interest rates to hold dollars that are visibly declining in value. That has not happened yet, and given the need of the rest of the world's central banks for the U.S. economy to remain afloat, it may never do so. But we are getting into risky and uncharted territory. This expansion of the Fed's balance sheet is but a fraction of the overall exposure. The Fed has said it is prepared to put as much as $2.4 trillion into the commercial paper market (the $349 billion listed above on the balance sheet is the current net position). And at the end of the day, the Fed also stands behind the $1.55 trillion issued by the Federal Deposit Insurance Corporation, and the $950 billion by the Treasury and the $300 billion by the Federal Housing Administration and the $200 billion that has been pledged to Fannie Mae and Freddie Mac. Altogether, more than $7 trillion (or about the wealth that the entire U.S. economy produces in six months) has been committed to the financial crisis by the U.S. government and its agencies. And so far, it has probably stopped a banking collapse, but it can hardly be said to have saved the system.

Currently shrinking at an annual rate of more than 4 percent, the economy is sliding down the slope from recession toward depression. Consumers are on strike. The housing market continues to sink, with new housing starts falling another 19 percent in November. And the world is following the United States down this grim slope, with China reporting drops in exports last week. And now this week China reports that its output of electricity, a reliable indicator of economic activity, fell 9.6 percent in November. The measures currently being taken by the Fed are historic. It never did anything like this during the Great Depression, and the only comparison is with the emergency measures it took to finance World War II. But we are only in the initial stages of this recession, and already the federal debt is heading toward 80 percent of GDP. Back in 1980, it was just over 30 percent of GDP. The last time it was as high as this was the aftermath of World War II, when the debt peaked at 120 percent of GDP. Forget about the war on terror; for the Fed, this is now the war to save the economy.


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