The economic news just keeps on getting worse

[unixronin]

Both in the US:

As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.

[...]

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

And in Europe:

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities.  It must repay – or roll over – $400bn this year, equal to a third of the region's GDP.  Good luck.  The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel.  The budget is based on Urals crude at $95.  Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60% of mortgages are in Swiss francs.  The zloty has just halved against the franc.  Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story.  As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle.  There is a crucial difference, however.  European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks.  En plus, Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50% more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51% in January, and Brazil lost 650,000 jobs in one month).  Britain and Switzerland are up to their necks in Asia.

According to the first article, the US has little choice but to monetize its debt — which is a euphemism for "start printing money with nothing to back it" — and according to the second, the IMF is in the same boat.

So this got me thinking (again).  What do we all do, if the entire global economy implodes?  If all the banks fail or stop doing anything but collect money, and the world's governments all start printing money trying to inflate themselves back to paper solvency, and their currencies start chasing the Zimbabwe dollar?

Comments

[ithildae.livejournal.com]

That line of thought is what led me to the Thomas Jefferson quotes in my last post (http://ithildae.livejournal.com/144120.html). We have all driven ourselves into debt with inflated dollars. If we run through a deflationary cycle, most of the world will be indebted under terms that can never be repaid. Revolution will be the only option to retain any kind of freedom. I sincerely pray that we do not reach that point, or pass it on to our children.

[lebo-superman.livejournal.com]

Revolution. This is, seriously, the most viable suggestion I've seen. Fire the entire government, form a new government under a new name, and you're no longer liable for the old government's debt. It's the ultimate "hard re-boot" of the system. If we (the US citizens) do it first, we'll virtually force the rest of the world to do it, because those we owe such huge amounts to currently would implode under the weight of the unpaid bills.

But, be ready. If we were to undertake such an action - major foreign powers (like China, who I think holds around 40% of our debt paper) may try to invade to foreclose on the debt.

[ilcylic.livejournal.com]

The other disadvantage of this option is, once you do it, you're on your own. A country that reboots in this fashion may not be "legally" liable for the debt (though, the notions of legality break down pretty badly at the national level, see also your point about invasion and foreclosure on an entire nation) but the creditors aren't likely to forget the default.

Just as an individual who defaults may not be eligible for further loans, so may also a nation who defaults not be extended any sort of credit in the international marketplace.

Now, it's certainly tempting to look at that as a very good thing, given that it's spending money we don't have that got us where we are in the first place. But it may also impact our ability to trade with other nations, which will hamper any attempt to get things moving again.

[lebo-superman.livejournal.com]

True. But, at this point, no path forward will be painless. What Washington is doing currently prolongs the pain for several generations, and by the time my granddaughter is entering the workforce that pain will most likely be felt to the tune of federal income taxes around 55-60%, with no refunds at the end of the year.

[ithildae.livejournal.com]

Won't that really depend on the value of what we are trying to trade? We may not get credit terms, but if we have excess, say, food, we should be able to get something for it.

I really don't want the kind of reboot that revolution requires. I do hope the specter of it keeps our current batch of politicians mindful of the consequences of their actions. Sometimes, the possibility of losing everything keeps enough people honest in their dealings. The banks should be paying attention.

Revolution would be a pretty bad thing. I would only seriously advocate for it if my essential liberties are compromised beyond redemption. If the banks/government manipulate the value of my debt so that it is greater than my potential earnings of a lifetime, or more, that would be an essential liberty. Even the consequences of extranational trade loss would not be as important. That is just my attitude. Not binding on others.

[ilcylic.livejournal.com]

f the banks/government manipulate the value of my debt so that it is greater than my potential earnings of a lifetime

i.e.: revaluing the currency, but not revaluing the mortgage on your house? "Your mortgage was for $100,000 OldBucks, and we've printed NewBucks that are each worth $1,000 OldBucks, but your mortgage is now in NewBucks."

Is that the sort of scenario you're envisioning?

[ithildae.livejournal.com]

Something along those lines, yes.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." -- Thomas Jefferson, 1802

I don't think I am the first to think of it.

[jhetley.livejournal.com]

"Just as an individual who defaults may not be eligible for further loans, so may also a nation who defaults not be extended any sort of credit in the international marketplace."

Argentina?

[ilcylic.livejournal.com]

May have gotten off as lightly as it has due to going first.

We might well do similarly well, simply by being large. But it would really hurt. Especially since we've been selling all our capital infrastructure to China. And we'd probably have to scale back on all the Green Movement stuff in order to be able to re-grow our own economy.

I think it would behoove creditors to consider holding interest at zero, while refusing to make any more loans, in order to have some hope of retrieving their principal. But I dunno if that'd really work, or if the whole system is inflated on the predication of interest payments holding things up.

[unixronin.livejournal.com]

But, be ready. If we were to undertake such an action - major foreign powers (like China, who I think holds around 40% of our debt paper) may try to invade to foreclose on the debt.

One other possibility that may come down the pike is it wouldn't be the first time the US Government has simply repudiated debt. (Which would probably collapse China's economy.)

[jhetley.livejournal.com]

I'm too old for a revolution. Hold it without me, okay?

[ithildae.livejournal.com]

I don't want to hold it, at all. There are some things that are worth fighting for. Freedom from economic slavery is one of them.

[ilcylic.livejournal.com]

It's just so ridiculous.

Even if all these people with all this debt are in default, all this money is just fake anyway.

People still need to eat. People will still want cars. Auto plants still exist. People still know how to run them. Oil wells still work.

So, two big options. People stop using fiat dollars and demand either direct barter, which is ohmyfuckinggod inefficient, really, or minted, commodity backed currency. As you knew I was going to, I recommend gold. Sadly, there really isn't enough gold in the world to account for the volume of trade. If gold balanced out to it's actual value, vis-a-vis the $USD / $EUR / $GBP, it'd be worth about $7500 an ounce. Which is slightly impractical for coins that let you buy a loaf of bread.

(The problem of needing to mint "coins" in ten-thousandth ounce increments can be solved with cryptographic mathematics, and a lot of computers, but does tie the economy to computer networks rather unpleasantly.)

The other big solution is, the UN steps in, kicks out a new currency, and enslaves rescues us from our folly.

[hugh-mannity.livejournal.com]

Gold, silver and platinum. Three tier currency, all 3 tiers solid.

Getting rid of compound interest would be a huge help in the future. But getting rid of about 90% of government would be a lot more useful in the long run.

[ilcylic.livejournal.com]

Sadly, multiple commodity currencies are a terrible idea, because you get drift between "official" rates and "commodity" rates, and then you get people gaming the system to exploit the differences. Which basically ends up generating inflationary leaks in the currency system.

[hugh-mannity.livejournal.com]

Then use silver. IIRC, the dollar does actually have a specified weight in silver.

[ilcylic.livejournal.com]

Same basic problem, though I suppose there's likely a higher volume of silver than gold. I guess then you only need coins that are a hundredth ounce in weight.

But no, the dollar is worth precisely nothing. It used to be worth gold and silver. No longer. Thank Roosevelt and Nixon for that.

[ithildae.livejournal.com]

I have heard consistent rumors that the "Amero" is printed and ready to go, we just need a crisis to implement it. That doesn't fix the problem of it being commodity backed. Who has actual cash anyway?

[luxobscura.livejournal.com]

What do we all do, if the entire global economy implodes?

Establish 360 degree, 300 meter kill zones.

Oh, did I just say that out loud?

[pernishus.livejournal.com]

Pernicious the Musquodobot Harbour Farm Cat hands Alaric monsieur Wile E. Coyote's little umbrella, and suggests delicately the inadvisability of looking down...

[skellington.livejournal.com]

The short version is that a 75 year projection of the US deficit isn't that useful.

Social Security is funded out through about 2039, assuming the "middle" of the three forecasts they're using. On the optimistic forecast, it never runs out of money. If we get to 2039, current taxes will cover about 75% of current benefits. So, give or take, a 25% increase in the 12.6% social security tax (including employer half) can get fixed with about a 4% tax increase. Not beautiful, but it isn't something to get worked up over.

(The law requires the social security administration to start planning on what to do when the trust fund shows a deficit within the next 10 years. So in theory, we start worrying about it in 2029 or so.)

As for medicare/medicaid (which is the vast majority of the rest of that number), the answer is that it is based on medical spending costs that increase dramatically faster than GDP+inflation. Extrapolated far enough, in the 2030's or 2040's, the entire salary of an average person will go just to pay for their medical care. (And that assumes that we have any clue what medical care will be like in 30 years. Think we'll finally have some decent products based on mapping the genome?)

This trend obviously can't continue. At some point, insurance providers, including the federal government, will stop paying for certain procedures. Either the medical industry will get more efficient (including patents on drugs expiring, etc.) or cancer drugs that cost hundreds of thousands of dollars, and have a 1% cure rate won't be covered. Either way, medical costs will get capped at some fraction of the GDP.

The rest of that mess; well, lots of countries are about to go bankrupt. The US is actually in better shape than most of them. (And if you think our entitlement issues and demographics are bad, look at Italy's!)

[ithildae.livejournal.com]

Not just Italy, most of Europe is a demographic mess. When it comes to important resources (like food) we are a very rich nation. We have the fundamentals to do ok through this mess, we just need to keep the shortsighted and the power hungry from damaging our prospects. Not easy, but certainly within reach.

[unixronin.livejournal.com]

Yeah, I was looking at Italy. Deficit of 112% of GDP projected next year....

[skellington.livejournal.com]

Yeah, but their long term demographics are even worse.

They have a negative population growth, and they're going to be very elderly heavy in their population before too long.

I've seen some of it attributed to social pressure on women not working (and women who have kids not being able to easily go back to work.) That eliminates both the women working before and after kids, and also discourages women who do want to work from ever having them.

[jhetley.livejournal.com]

Yes, as through this world I've wandered
I've seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.