The Death of Paper Money

[katoa]

In any case, regardless of the technical details of financial accounting, we are in one hell of a mess.

The head of China's biggest credit rating agency, after lambasting our corrupt credit rating companies (proven in the mortgage meltdown), recently said (reported in Financial Times):

"The US is insolvent and faces bankruptcy as a pure debtor nation"

Whether you believe him or not, our entire money supply and financial system is based on trust, and when our largest creditor is saying that, I get fricken scared.

[Moliere]

In any case, regardless of the technical details of financial accounting, we are in one hell of a mess.

The head of China's biggest credit rating agency, after lambasting our corrupt credit rating companies (proven in the mortgage meltdown), recently said (reported in Financial Times):

"The US is insolvent and faces bankruptcy as a pure debtor nation"

Whether you believe him or not, our entire money supply and financial system is based on trust, and when our largest creditor is saying that, I get fricken scared.

Although I think we aren't in one hell of a mess, I think we are sliding that way very quickly. And if China is saying what you say they are saying and if they are going to act on what they are saying that doesn't bode well for us. Their lack of desire to purchase our debt will just increase interest rates which will make financing all these programs more expensive (keep in mind that most US debt is in relatively short-term issuances, meaning less than 5 years - correct me if I'm wrong on that) so a higher interest rate in the near term could be really, really bad.

This is why although I'm fiscally conservative and I dislike many radically fiscally conservatives, they do play a good part in our nation in reminding us that staying solvent can be a good thing.

[statman]

... after lambasting our corrupt credit rating companies (proven in the mortgage meltdown)...

They're more incompetent than corrupt.

Imagine a 5-year-tenured rating agency guy with a Business undergrad from Rutgers, pulling down a whopping $75K, trying to better himself by going to school at night to get a Fordham MBA, sitting down at the "negotiating table" with a team of investment bankers from Goldman, all with impeccable Ivy League credentials and the brains and $250K+ salaries to match.

Rating agency guy is going to get ROLLED. Same thing happens with the "Regulators."

[statman]

Although I think we aren't in one hell of a mess, I think we are sliding that way very quickly. And if China is saying what you say they are saying and if they are going to act on what they are saying that doesn't bode well for us. Their lack of desire to purchase our debt will just increase interest rates which will make financing all these programs more expensive (keep in mind that most US debt is in relatively short-term issuances, meaning less than 5 years - correct me if I'm wrong on that) so a higher interest rate in the near term could be really, really bad.

This is why although I'm fiscally conservative and I dislike many radically fiscally conservatives, they do play a good part in our nation in reminding us that staying solvent can be a good thing.

China is about to fall off a financial cliff themselves. They've got a bigger real estate bubble looming on their horizon that's even bigger than the one we had. And the global slowdown means they've got excess capacity in virtually all of the factories they've been building like crazy for the last 20 years. And their one-child per couple policy has created a helluva demographic hole for them, worse than anyone in the West has.

China talks a good game right now, but they're about to watch the Chinese miracle go the way of the Japanese miracle...

[Moliere]

They're more incompetent than corrupt.

Imagine a 5-year-tenured rating agency guy with a Business undergrad from Rutgers, pulling down a whopping $75K, trying to better himself by going to school at night to get a Fordham MBA, sitting down at the "negotiating table" with a team of investment bankers from Goldman, all with impeccable Ivy League credentials and the brains and $250K+ salaries to match.

Rating agency guy is going to get ROLLED. Same thing happens with the "Regulators."

Very true, but don't dismiss the corrupt piece even if it isn't as big as the incompentent piece. Remember who is paying the rating agencies? Oh that's right, it's the company that is selling the securities. Gee, that sounds a lot like a profession that I used to participate in....one that has had a lot of issues over the past decade.....one that is now finally regulated by an independent agency (yes audit firms were self-regulated until SOX).....one that also suffers from incompetence.

[Uncle Ted]

China is about to fall off a financial cliff themselves. They've got a bigger real estate bubble looming on their horizon that's even bigger than the one we had. And the global slowdown means they've got excess capacity in virtually all of the factories they've been building like crazy for the last 20 years. And their one-child per couple policy has created a helluva demographic hole for them, worse than anyone in the West has.

China talks a good game right now, but they're about to watch the Chinese miracle go the way of the Japanese miracle...

Yeah, china is kind of dependent on america to buy their junk. Of course, India doesn't suffer the demographics problem that china is facing and could take its place. We just have to survive the baby boomers going into retirement.

[BlueHair]

China can't stop buying our debt. If they do, the dollar will fall through the floor and make all the debt they hold worthless. This would turn the United States into one of the cheapest labor forces on the planet. All the manufacturing would come back to the US and we would become an exporting nation instead of an importing nation. The Chinese currency would raise immediately and put their whole country out of work at once. They would have a billion people out of work looking to overthrow the government. We are in this thing together. China needs a stable US economy more than we need a stable economy. This is why they are investing billions in the US right now. Helping put American workers back to work will help all of us out.

[katoa]

Scary stuff...

In an article published on Bloomberg.com, Boston University economics professor Laurence Kotlikoff writes, “Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.”

This is not a news flash. Former U.S. Comptroller General David Walker has been barnstorming the country for the past several years: appearing on every television show that will have him, delivering the same message, trying to educate the American people about the seriousness of our plight.

If Walker’s warnings have largely fallen on deaf ears, then Kotlikoff’s are likely to receive an immediate ride on the prevailing winds to places far away. Because his conclusions make Walker’s seem like chump change.

Kotlikoff took a hard look at the Congressional Budget Office’s Long Term Budget Outlook, released in June. “Based on the CBO’s data,” he writes, “I calculate a fiscal gap of $202 trillion.”

202 what????

No, that’s not a misprint. Kotlikoff says that, taking into account all supposedly funded liabilities, we’re in hock to the tune of $202 trillion, or nearly a quarter of a quadrillion dollars. Normal minds cannot deal with a number like that. He can’t possibly be serious.

But he is. He’s a serious economist whose ideas are taken seriously. And he’s no stranger to controversy. For years, he’s been talking and writing about the coming generational storm, i.e., the consequences of a worldwide aging population. At some point, the young will no longer be able to support the old. When that happens, well, who knows what will follow?

He also waded into the current economic crisis, proposing a totally revamped banking system in his 2010 book, Jimmy Stewart Is Dead. The proposal, Limited Purpose Banking, “takes the multifaceted fraud out of our financial system by turning all banks, insurance companies, hedge funds, etc. into fully transparent mutual fund companies. Limited Purpose Banking also abolishes over 115 federal and state regulatory authorities and replaces them with the Federal Financial Authority, which verifies, fully and immediately discloses, and independently rates and appraises all securities held by the mutual funds.”

Interesting. But of course banking reform won’t help with the federal debt, which Kotlikoff describes as “a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.”

All Ponzi schemes collapse. They must. That includes Uncle Sam’s, which Kotlikoff says “will stop in a very nasty manner,” the inevitable endgame when you’ve been living beyond your means for sixty years.” As we all have.

What’s the way out of this unmanageable debt overhang? Kotlikoff doesn’t know, but he suggests three actions the government will probably be forced to take:

“The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.”

In his view, “Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.”

And there’s another possibility Kotlikoff doesn’t mention. Default. It seems likely that at some point we’ll essentially have to declare bankruptcy, and some measure of default on the debt will be necessary. That would trigger a worldwide fiscal crisis, with unforeseeable results.

Not a pretty picture, all around. But one we’re stuck with, once Washington’s con game comes to an end.

Read the complete Kotlikoff article here:
http://www.bloomberg.com/news/2010-0...kotlikoff.html