Crushing Debt = The End of American Empire
 

Nice bit of Orwellian double-speak from our Dear Treasury Secretary:

[b][i]"Senator, I can tell you what you can believe. You can believe I believe everything I say."[/i][/b] -- U.S. Treasury Secretary Henry Paulson, Senate Testimony, July 15, 2008

[b]Famous Last Words:[/b]

[quote][18 Aug 2008] Freddie [Mac] spokeswoman Sharon McHale denied that the company is in trouble.

"It [the Barron's article] significantly overstates our financial situation," McHale said. "We continue to be adequately capitalized and we are committed to raising additional capital. We're financially sound and have strong liquidity."[/quote]

Let`s see how those capital-raising efforts [which are of course completely not needed, that`s why they`re committed to them, or something] are going, shall we?

[url=http://online.wsj.com/article/SB121919008026355015.html?mod=hpp_us_whats_news]Rising Cost of Debt Stokes Fears On Freddie`s Prospects[/url]
[quote]Freddie Mac was forced to offer unusually rich terms to investors in a $3 billion auction of its debt, raising anew concerns about the health of the mortgage giant, a vital prop for the U.S. housing market.[/quote]
The optionarmageddon blog [which is generally a lot more level-headed than the site name might connote - the name is a pun on "Pay-Option ARM", a recently-quite-popular way for people to consign themselves to debt slavery while feeling that they were "living richly"] comments with a nice [url=http://optionarmageddon.ml-implode.com/2008/08/20/foreigners-push-back/]geopolitical perspective[/url]:
[quote]As the latest Freddie auction shows, foreigners (as well as American buyers of Freddie paper) are demanding higher interest rates. This is the inevitable endgame of financing one’s lifestyle with too much debt.

After a borrower has borrowed too much, his lenders realize his credit isn’t as good as it once was. If the borrower wants to keep borrowing, lenders will demand higher interest rates to offset the increased risk that the borrower won’t pay them back.

As has been noted on this blog, time and again, America is going bankrupt, which means we are increasingly dependent on those who would lend us money. This gives enormous power to those who do lend money, primarily autocratic governments. The always erudite Brad Setser noted this in a blog post earlier this week, that the foreign reserves of autocratic governments are growing at a much faster pace than those of liberal democracies. Here are some scary charts for you.

This fact, that autocracies are saving dollars at a high rate, is well known. But its implications are rarely considered. Conventional wisdom still considers ours a “unipolar” world, with one major superpower. And yet, autocratic governments like Russia have gained significant financial strength, which they are using to exercise power. Russia has no intention of leaving Georgia, and Western energy supplies are more vulnerable as a result.

Political and military power is just a derivative of economic power. As long as Americans spend more than they earn, ours will decrease.[/quote]
So much for the delusional fantasy [which appears to have gained traction during the Reagan-era deficit-spending spree] that "[National Account-Balance] Deficits Don't Matter." As Nouriel Roubini [see article linked and quoted in my next post below] puts it:
[quote]For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars.

... In turn, [the ensuing government] bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”

The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. [b]“Once you run current-account deficits, you depend on the kindness of strangers,”[/b] he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.” [/quote]


[b]Famous Next Words:[/b]

[url=http://www.bloomberg.com/news/index.html]Fannie, Freddie Shares Slump on Speculation Treasury Bailout Is Inevitable[/url]: [i]Fannie Mae and Freddie Mac tumbled in New York trading to the lowest levels since at least 1990 as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders.[/i]
[quote] Aug. 20 (Bloomberg) -- Fannie Mae and Freddie Mac tumbled in New York trading to the lowest valuations since at least 1990 as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders.

Fannie, based in Washington, slumped as much as 20 percent and McLean, Virginia-based Freddie dropped as much as 32 percent, extending its losses to 90 percent for the year.

``Using taxpayer money to bail them out looks like it's becoming reality now,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. ``That's going to leave the shareholders holding worthless paper.''[/quote]
...and taxpayers holding nearly-worthless paper, just of the crapMortgage variety, as opposed to the crapStock line.
[quote]Investors in Asia, the biggest foreign owner of Fannie's $3 trillion of bonds, are reducing their share of purchases, potentially increasing the need for Paulson to make good on his pledge to backstop the companies.

``This whole backstop mechanism was set up so the actual need for it could be avoided,'' said Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York. ``The market is testing the Treasury's resolve.'' [/quote]
"...Set up so the actual need for it could be avoided" - a phrase which could have been lifted right out of Orwell`s [i]1984[/i]. And in fact the bond markets have simply called Paulson`s bluff and said, effectively, "You want the toxic mortgage-backed paper so badly? Then you buy it." But fear not, ever-optimistic Freddie spokeswoman Sharon McHale has soothing lies to tell you:
[quote]Freddie ``continues to have strong access to the debt markets at attractive spreads,'' spokeswoman Sharon McHale said.[/quote]
Let`s just see what those "attractive spreads" might look like these days, shall we? Ooh, look, we didn`t have to go far - just a few paragraphs further down in the same Bloomberg article:
[quote]In market trading, investors this week demanded an extra 104 basis points in yield to own Freddie's five-year debt rather than Treasuries of similar maturity, the most since reaching a 10-year high of 114 basis points in March. The gap narrowed to 74 basis points after Paulson's announcement.

Fannie spreads approached a 10-year high of 104 basis points on Aug. 18, from 74 basis points on July 28. In the decade before 2008, the spread averaged 43 basis points.[/quote]
So the "Paulson Put" allows Hammerin` Hank, in his unofficial role as [url=http://itulip.com/forums/showthread.php?p=44283#post44283]chief bond salesman for Fannie and Freddie[/url] to jawbone a temporary 30-point reduction in yield spreads on FNM and FRE notes - expect those spreads to blow out again very quickly. But apparently, Ms. McHale never met a "record spread" she didn`t like. To borrow a theme from the ongoing Beijing Olympics, setting records is good, right?

One of the few truly lucid posts I've seen on the vast wasteland that is the [i]Yahoo! Finance[/i] message boards of late - this one came in response to the italicized "bottom is in!" post by someone who probably owns way more shares of Freddie Mac (FRE) than they wish they did:
[quote]18-Aug-08 03:35 pm
[b]tradetk11 Subject: 2 reasons to be buyinG AT THESE LEVEL[/b]
[i]1. FED says they dont need to step in because FRE IS capitalized.
2. Fed said that if they ever do need to bailout FRE then they would do so in a manner NOT to reward shareholders. THAT DOES NOT MEAN 0. That means that if they spend their money buying stock which would probably be the way they bail them out that the stock wouldnt be bought at a premium. There is NO WAY this stock goes to 0 because it would mean end of US BANKING SYSTEM. NO bank or institution outside this country would ever lend or buy equity in a financial again.[/i]

Reply by [b]sbike[/b]
1. FED says FRE IS capitalized...
Do you believe them? The fed also said that the sub-prime losses were manageable and that the problems were 'contained', i.e. not contagious. Then why are so many banks and insurance companies crashing? Didn't Greenspan extol the virtues of ARM's? Didn't Bush & Co. change the bankruptcy laws in '06 so that your debt follows you for the rest of your life at the behest of the banking lobby well in advance of the housing crash? Do you really want to make investment decisions based on the word of the FED? Think for yourself.

GS said in spring that the total 'subprime problem' will amount to $300-400 billion. Oh really? And weren't we told by the media that Bush's rebate checks of some $160 B make it all better? Then why has more than $1 trillion been slashed of the market cap of the financial institutions. Add the crash in bonds. Wiped out market caps in most every home builder. And we are only in the third inning. After sub-prime there are Alt-A mortgages which have yet to peak or crest. Look what is happening to foreclosure rates for 'prime' mortgages - they have doubled in the last year and are accelerating. There are close to 10 million 'home owners' who owe more on their house than they are worth. This will take another two years or so to play out. Adding salt onto the wounds are car loans. GM & Chrysler have stopped offering car leases because they are upside down on the value of the lease returned cars.

We are likely looking at a total housing drop of 40% from last years' high - so about another 20% drop in market evaluations. What will this do FRE's balance sheet? Bankrupt it.

Debts are always paid. In normal times they are paid by the borrower. After this reckless debt binge financially engineered by wall street bankers, a generous slice of the debts be paid by the lenders. Trouble is - they don't have enough money.

The fed maintains a watch list of some 90 banks likely to fail. IndyMac was not even on the list!

Oh but we have the FDIC to step in to protect us. Well all the money FDIC has is $68 B and Indymac took about $10 B so that means about $58 B left.

I believe that we are likely to witness 3-5,000 banks go belly up, 20 million homes foreclosed, insolvent car companies thrown a lifeline by 'the government' which means you get to pay from your wallet.

Each year America's debt grows more than the whole world saves. How can this continue. Oh well, then the treasury will just sell more bonds to foreigners, right? You mean foreigners like Russia who presently hold hundreds of billions of US T bills? Or foreigners like Saudi Arabia and China. China will continue to buy US T-bills until it suits them. If they stop buying who will finance the debt?

Things are not as they are made out to appear. Things are not as bad as they seem...they are worse.[/quote]


[b]Fleckenstein vs The Green Goblin[/b]

[url=http://articles.moneycentral.msn.com/Commentary/ByAuthor/BillFleckenstein.aspx]Bill Fleckenstein[/url]`s latest article:

[url=http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NowGreenspanDoesntLikeBailouts.aspx]Now Greenspan doesn't like bailouts?[/url]: [i]The former Fed chief's criticism of the rescues of Bear Stearns, Freddie and Fannie is infuriating because he created the mess that led to them.[/i]

Ernst and everyone else,

[I]Warning: Tom Clancy novel spoiler[/I] -- [spoiler]As I've been pointing out since 9/11/2001, Tom Clancy's novel [I]Debt of Honor[/I] (published in 1994) includes a scene in which a foreign pilot deliberately crashes a jumbo jet into an important building (the U.S. Capitol, during a State of the Union speech, so that maximal numbers of high U.S. officials are killed) because he has a grudge against the United States.[/spoiler]

I distinctly recall that, while reading that part, I wondered what defenses the U.S. actually had against such an attack, other than the wholly inadequate item Clancy mentions in the story. (After all, Clancy is patriotic enough not to reveal stuff that can't be found in public sources, as he points out in an afterword to [I]The Sum of All Fears[/I] concerning details of a nuclear weapon.)

[spoiler]Well, it turned out that in real life, the U.S. actually had no adequate defense against such an attack as Clancy described.[/spoiler]

So?

The same book has another subplot in which several foreign governments deliberately and in coordination dump their massive U.S. Treasury bond holdings onto world markets for the specific purpose of causing financial chaos in the U.S. That is, they use their holdings of U.S. debt as a weapon.

[quote=ewmayer;139570]a nice [URL="http://optionarmageddon.ml-implode.com/2008/08/20/foreigners-push-back/"]geopolitical perspective[/URL]:[/quote]Note this portion near the end of the linked article:

[quote]... we are increasingly dependent on those who would lend us money. This gives enormous power to those who do lend money, primarily autocratic governments. The always erudite Brad Setser noted this in a blog post earlier this week, that the foreign reserves of autocratic governments are growing at a much faster pace than those of liberal democracies. Here are some [URL="http://blogs.cfr.org/setser/2008/08/14/the-changing-balance-of-global-financial-power/"]scary charts[/URL] for you.

This fact, that autocracies are saving dollars at a high rate, is well known. But its implications are rarely considered. Conventional wisdom still considers ours a “unipolar” world, with one major superpower. And yet, autocratic governments like Russia have gained significant financial strength, which they are using to exercise power. Russia has [URL="http://online.wsj.com/article/SB121923076375956371.html?mod=hps_us_whats_news"]no intention[/URL] of leaving Georgia, and Western energy supplies are [URL="http://en.wikipedia.org/wiki/Baku-Tbilisi-Ceyhan_pipeline"]more vulnerable[/URL] as a result.

Political and military power is just a derivative of economic power. As long as Americans spend more than they earn, ours will decrease.[/quote]What defense does America have against [I]that[/I] kind of financial weapon?

(In Clancy's book, the dept holdings of the unfriendly countries are far less than current real-world foreign holdings of U.S. debt by potentially unfriendly countries.)

I've seen it argued that China, for instance, would never dump a trillion USD to disrupt the bond market because that would hurt itself as well as us.

Well ... what if a government viewed that as just another necessary cost of war that it was prepared to undergo?

- - -

Part of my contempt for the Republican Party's revised strategy since 1980 is that their deliberate running-up of the U.S. national debt (in order to tie the hands of later Presidents and Congress who might want to increase spending on "liberal" things) has handed our potential enemies an enormous and unprecedented financial weapon, all while they talk about their supposed superior concern about national security. They used to talk about being more fiscally responsible than Democrats; nowadays they avoid mentioning that they don't practice the sort of governmental fiscal responsibility (balanced budgets) they used to espouse when I was young.

Note the current administration's tactic of separating all bills for financing the Iraq war from other budget bills, and calling them "supplemental" or something, in order to pretend that such spending dollars don't count as much, or don't add as much to our deficit and debt, as other budget dollars.

Credit-where-credit-is-due: Another feature of the new Republican strategy is deliberate long-term weakening of the U.S. dollar, which to some extent acts to devalue our national debt. They don't have to worry about the CPI-inflation[sup]*[/sup]-boosting effect of dollar-weakening because they inherited the Fed's revised method of fighting CPI-inflation from President Carter (though they try to avoid admitting that).

[sup]*[/sup] See other postings about the correct way (not the CPI) to measure inflation, though.

[QUOTE=ewmayer;139559]Query to our chief resident chemist: Paul, the above article also notes that Lipmann graduated from Oxford University in 1978 with a degree in English literature. Perhaps you crossed paths?[/QUOTE]Not as far as I recall, though we went up to Oxford in the same year, 1975.

Paul

Fannie And Freddie's Capital-Raising Scam
 

[QUOTE=cheesehead;139582]What defense does America have against [I]that[/I] kind of financial weapon?

(In Clancy's book, the dept holdings of the unfriendly countries are far less than current real-world foreign holdings of U.S. debt by potentially unfriendly countries.)

I've seen it argued that China, for instance, would never dump a trillion USD to disrupt the bond market because that would hurt itself as well as us.

Well ... what if a government viewed that as just another necessary cost of war that it was prepared to undergo?[/QUOTE]
Given the level of our exposure [over $50 trillion in national debt, and a good fraction of that held by foreign governments], anyone with a couple $100 billion of this stuff could cause a major disruption, and a trillion-dollar-or-more dump would probably cause a full-blown financial panic.

Now as you say, most of the governments that hold this paper - whether it be Treasury bonds or GSE mortgage-backed security [MBS] paper - know it's not it in their financial self-interest to dump it on the markets, but far more insidious is the possibility that they would use the leverage such a "nuclear option" gives them to influence U.S. domestic-economic as well as foreign policy. There is no small amount of circumstantial evidence that China is influencing the U.S. Treasury's position vis-a-vis the likely-soon-to-be-required bailout of the 2 "private" mortgage GSEs Fannie and Freddie, and you can bet that China would have far fewer qualms about a "solution" that puts the U.S. taxpayer on the hook than the Treasury would, if they didn't feel the need to placate the foreign owners of the GSE paper and U.S. Treasury bonds.

On the foreign-policy front, imagine if Russia in the past few weeks had told Washington "Stay out Georgia or we take down your bond markets." If they were willing to endure the resulting hit to their own finances - and given the relative state of U.S. and Russian finances these days I'd say it would hurt us much more than it would them - what recourse would we have? Are we going to threaten a nuclear strike because the Russians don't want to buy our IOUs anymore? Not very likely. In fact it would not at all surprise me if Russia had done just that - look at the huge contrast between the U.S. govt's "tough talk" on Georgia and the utter lack of any actions to back up the talk - even economic sanctions have yet to be broached in any serious fashion. Note also the big asymmetry here - Russia was also deep in hock in the late 1990s and subsequently [url=http://en.wikipedia.org/wiki/Russian_financial_crisis]defaulted on its debt[/url], which caused massive disruptions in its economy. However, some unique aspects of the Russian domestic economy, as well as rising energy prices in the decade that followed and which hugely boosted its exports, allowed them to recover surprisingly quickly:
[quote]Russia bounced back from the August 1998 financial crash with surprising speed. Much of the reason for the recovery is that world oil prices rapidly rose during 1999–2000 (just as falling energy prices on the world market helped to deepen Russia's financial troubles), so that Russia ran a large trade surplus in 1999 and 2000. Another reason is that domestic industries, such as food processing, had benefited from the devaluation, which caused a steep increase in the prices of imported goods. Also, since Russia's economy was operating to such a large extent on barter and other non-monetary instruments of exchange, the financial collapse had far less of an impact on many producers than it would had the economy been dependent on a banking system. Finally, the economy has been helped by an infusion of cash; as enterprises were able to pay off arrears in back wages and taxes, it in turn allowed consumer demand for the goods and services of Russian industry to rise.[/quote]

Contrast that with the U.S., which is a net energy importer [and how], relies very much on its banking system, and where the recent government attempt to revive the flagging economy by way of a $160 billion cash infusion had a negligible effect due to consumers being so deeply in debt - and thus only served to increase the national indebtedness and "reliance on the kindness of stangers." Thus, I fear a bond market collapse here in the U.S. would have much longer-lasting consequences.

=========================

[url=http://www.economist.com/finance/displayStory.cfm?story_id=11958334&source=features_box_main]The Economist | American Finance Still Bleeding[/url]: [i]Fannie, Freddie and Lehman ensure August is anything but quiet[/i]
[quote]Loss of faith in the [GSEs'] equity is one thing, ebbing confidence in their vast pile of debt altogether scarier. Spreads on the $1.5 trillion of paper issued on their own behalf have widened significantly. A five-year issue by Freddie on Tuesday sold for 1.13 percentage points over treasury bonds, the highest spread for at least a decade. As recently as May, Freddie had found takers at 0.69 points over treasuries.

A sudden pullback by overseas investors is largely to blame. Foreigners, mostly Asian central banks and funds, hold 35-40% of the mortgage agencies’ total debt. They continued to be avid buyers this year, but their appetite waned dramatically in the first half of August. American money managers have taken up the slack, but they too are becoming twitchy, according to a market participant.

The situation in agency-backed MBS is even worse, with foreign buyers all but on strike. China’s central bank, which alone had been lapping up more than $5 billion-worth a month, has barely touched the stuff in recent weeks. The spread on the securities has risen to around 2.2 percentage points over government bonds, even wider than it was during March’s turmoil (after adjusting for today’s lower volatility). This has helped to push up interest rates on the “conforming” mortgages that Fannie and Freddie buy or guarantee, at a time when private finance has slowed to a trickle.
[b]
The banks that manage the agencies’ debt issues are pulling out all the stops to ensure their success—even to the point of artificially boosting demand through deals known as “switches”. In such an arrangement, an investor agrees to buy into a new issue in return for being able to sell back to the banks an equal amount of an old one, thus ensuring its net exposure does not rise. If enough of these deals are struck, large amounts of debt can be shifted even when demand is thin. A recent $3.5 billion issue by Fannie was helped along by “very significant” amounts of switching, says one banker involved in it. With a quarter of the agencies’ debt due to mature in less than a year, those charged with peddling it [url=http://www.bloomberg.com/apps/news?pid=20601103&sid=a7vgrj2UCyxE&refer=news]will have their work cut out[/url]—especially if the Asian investors continue to be put off by unkind headlines.[/b]

This is not what Hank Paulson, America’s treasury secretary, envisaged last month when he announced an emergency plan to rescue the twins. By pledging to invest in them if needed, he had hoped to calm markets and thus reduce the likelihood of a bail-out. That gamble looks ever less likely to pay off, however.[/quote]
Is that a [url=http://www.financialpost.com/analysis/columnists/story.html?id=cece0d3f-5927-40fa-a067-8924df2dc473]bazooka in your pocket[/url], Hank, or are you just a market-jawboning eunuch with a Zucchini stuffed into his trousers who struts around wearing a baseball-style cap emblazoned with a [url=http://hats.cafepress.com/item/pornstar-black-cap/14351617]PORN STAR[/url] logo, in hopes of convincing the ladies [i.e. the would-be buyers of the GSEs` debt] that you`re the real deal?


[url=http://money.cnn.com/2008/08/21/markets/thebuzz/index.htm]CNN/Money | Job boom could be coming soon[/url]: [i]Economists at the University of Michigan predict that 3.5 million jobs will be created in the next two years.[/i]
[quote]NEW YORK (CNNMoney.com) -- There is no denying that the job market is weak.

The Department of Labor reported this morning that 432,000 people filed for unemployment benefits in the past week - making this the fifth straight week that jobless claims topped the 400,000 mark.

And so far this year, there has been a loss of 463,000 jobs.

Yet, some are starting to see light at the end of the tunnel on the job front. Economists at the University of Michigan said in a report released yesterday that 900,000 jobs will be added next year and that 2.6 million more will be created in 2010.

Joan Crary, an economist with the University of Michigan, said that [b]this forecast is based on a belief that the economy will finally begin to rebound in the second half of 2009.[/b][/quote]
Yeah - and choirs of singing monkeys might fly out of my butt. That "belief" sounds very much like the "belief" we heard over and over last Fall and early this year, that the economy would "rebound in the second half of 2008." Increment the year by 1, lather, rinse and repeat. The same cabal of ivory-tower economists who so completely misjudged the severity of the housing bubble and the ensuing credit crisis are now using the same kinds of fact-free "beliefs" and bogus GIGO computer models based on "previous downturns" [blissfully ignoring the question of whether their root causes were remotely like those of the current recession] are back at it. This flies in the face of a few uncomfortable *facts*:

1. The U.S. housing and credit bubble represents the by-far-largest speculative asset bubble and debt explosion in U.S. history - the only precedent which comes remotely close is 1929 and the long hard years that followed.

2. The massive glut of unsold home inventory will take far longer than one year to clear out, even at prices close to sustainable historical means [i.e. another 20% haircut for housing, taken nationally]. While there are signs that there is no shortage of buyers in markets where prices have dropped the most, that is far from saying homes are selling at a robust pace, especially relative to the huge overbuilding which occurred in the past 5 years. and for every fiscally prudent potential homebuyer who was or is waiting for housing prices in their local market to drop back into the "non-egregious" range, there are probably multiple folks who bought into the peak of the bubble from 2004-2007 who are now deeply underwater on their mortgage [i.e. the amount to could get for their home is now far less than the price of the mortgage debt are they servicing], probably leveraged up even further using a HELOC, have not seen their incomes rise in real terms for the past decade, and who are now busily maxing out their credit-of-last-resort by way of a ballooning high-interest credit card balance. Given that the U.S. economy is 70% consumer spending, as long as consumer aren't cranking up their spending there will be no significant recovery. One year is not *nearly* enough for Joe Sixpack to pay down his debt anyway near enough to start livin` large again, especially given that J6P *still* hasn`t really cut back his spending to sustainable levels - if he had, we wouldn`t be seeing credit-card debt exploding.

3. The "belief" that this recession which be short [OK, maybe not quite as short as originally predicted, but still pretty short] and "V-shaped" like most of the ones of the recent past is just that - a belief. In fact a misguided one, because the fundamentals of the current recession are so different than any of the other recent ones, and are far more dire. Most of small number of economists and financial-markets analysts who actually correctly predicted the severity of the current downturn and the spreading ripple effects of the unwinding of the Great Credit Bubble are in fact predicting a so-called "L-shaped" recession [much like Japan`s economy in the past 2 decades, in the wake of the popping of their RE bubble - and unlike Americans, Japanese actually had net *savings* to draw on], where the main initial downturn is followed by a long period of malaise.

4. Even were the housing market to start showing signs of a robust recovery a year from now, any economist worth his or her salt knows that employment is a lagging indicator, so significant job growth would not occur before 2010 at the earliest. Any economist worth his or her salt knows that there is such a thing as a "jobless recovery", in which the jobs that were lost never come back, or are replaced with lower-paying ones. Wall Street bankers replaced with Wal-Mart greeters, if you will.

[quote=ewmayer;139610]Given the level of our exposure [over $50 trillion in national debt, and a good fraction of that held by foreign governments][/quote]No, I meant, as Wikipedia puts it at [URL]http://en.wikipedia.org/wiki/United_States_public_debt[/URL],
[quote=Wikipedia]The [B]United States total public debt[/B], commonly called the [B]national debt[/B], or [B]U.S. government debt[/B], is the amount of money owed by the [URL="http://en.wikipedia.org/wiki/United_States_federal_government"]United States federal government[/URL] to creditors (bankers) who hold [URL="http://en.wikipedia.org/wiki/Treasury_security"]U.S. debt instruments[/URL].[/quote]

From the U.S. Treasury "Debt to the Penny":
[quote=http://www.treasurydirect.gov/NP/BPDLogin?application=np]08/20/2008 ... 9,608,334,387,261.59[/quote]9.6 terabucks, rather than 50.

[quote=ewmayer]Now as you say, most of the governments that hold this paper - whether it be Treasury bonds or GSE mortgage-backed security [MBS] paper - know it's not it in their financial self-interest to dump it on the markets, but far more insidious is the possibility that they would use the leverage such a "nuclear option" gives them to influence U.S. domestic-economic as well as foreign policy.[/quote]As the chess aphorism goes, "The threat is stronger than the execution."

I think perhaps the meaning was not so much the amount of the U.S. debt, rather was meaning the total amount of money Americans have borrowed on the debt markets. I suspect we would indeed have 50 trilliion of total debt liabilities.

This is very frustrating to me as I am one of the 'don't buy it if you can't pay for it' people.

DarJones

China: It's not a threat or anything... | Dr. Doom
 

[QUOTE=ewmayer;139610]...most of the governments that hold this paper - whether it be Treasury bonds or GSE mortgage-backed security [MBS] paper - know it's not it in their financial self-interest to dump it on the markets, but far more insidious is the possibility that they would use the leverage such a "nuclear option" gives them to influence U.S. domestic-economic as well as foreign policy. There is no small amount of circumstantial evidence that China is influencing the U.S. Treasury's position vis-a-vis the likely-soon-to-be-required bailout of the 2 "private" mortgage GSEs Fannie and Freddie, and you can bet that China would have far fewer qualms about a "solution" that puts the U.S. taxpayer on the hook than the Treasury would, if they didn't feel the need to placate the foreign owners of the GSE paper and U.S. Treasury bonds.[/QUOTE]

But don't take my word for it - take theirs:

[url=http://www.bloomberg.com/apps/news?pid=20601080&sid=aslo2E01QVFI&refer=asia]Former China Central Bank Advisor: Freddie, Fannie Failure Could Be World `Catastrophe'[/url]
[quote] Aug. 22 (Bloomberg) -- A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.

``If the U.S. government allows Fannie and Freddie to fail [b]and international investors are not compensated adequately[/b], the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''[/quote]
And just who would be on the hook for the compensation of the poor international investors, who deserve to never have their stock market bets go sour? Why, U.S. taxpayers, either present or future, of course.


I`ve been ragging on Treasury Secretary Hank Paulson quite regularly of late, but would like to note that I don`t think think he`s a bad person - in fact his pro-environment initiatives are laudable - it`s just that his intimate ties to Wall Street in general and Goldman Sachs in particular create an inherent, huge conflict of interest. He`s of course not the first Treasury or Fed head to have a similar background - former Treasury Secretray Rober Rubin is similarly a GS alumnus - but precedent does not equate to propriety in such matters. I also feel the sweeping powers Congress granted him via the recent housing bailout bill are very dangerous - even if merely used rather than misused, they will inevitably produce market distortion, and government-sponsored market distortion is at the root of the housing bubble.

Anyway, Bloomberg has a nice article on Paulson and his background, set aginst the backdrop of the GSE crisis, here:

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=a8w9MI4Btco4&refer=news]Paulson Risks Goldman Standard as Fannie, Freddie Shares Erode[/url]


[url=http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?em]NY Times Magazine | Dr. Doom[/url]
[quote]On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
Skip to next paragraph
Enlarge This Image
Bruce Gilden

The audience seemed skeptical, even dismissive.

...

The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. [b]Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.[/b][/quote]
Does that boldface-highlighted bit remind you of any major world economies?

GM, Ford ask for $50B | Live Richly Now, Pay Later
 

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=aIECoNZ8Zbgo&refer=news]GM, Ford Seek $50 Billion in U.S. Loans, Double Automakers' First Request[/url]: [i]General Motors Corp., Ford Motor Co., Chrysler LLC and U.S. auto-parts makers are seeking $50 billion in government-backed loans, double their initial request, to develop and build more fuel-efficient vehicles.[/i]
[quote] Aug. 22 (Bloomberg) -- General Motors Corp., Ford Motor Co., Chrysler LLC and U.S. auto-parts makers are seeking $50 billion in government-backed loans, double their initial request, to develop and build more fuel-efficient vehicles.

The U.S. automakers and the suppliers want Congress to appropriate $3.75 billion needed to back $25 billion in U.S. loans approved in last year's energy bill and add $25 billion in new loans over subsequent years, according to people familiar with the strategy. The industry is also seeking fewer restrictions on how the funding is used, the people said today.

GM and Ford lost $24.1 billion in the second quarter as consumers, battered by record gasoline prices, abandoned the trucks that provide most of U.S. companies' profit and embraced cars that benefit overseas competitors such as Honda Motor Co. U.S. auto sales may drop to a 15-year low this year and fall even more in 2009, analysts have said.

``Next year is going to be a make-or-break year in terms of survival,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets, including GM and Ford bonds. ``Any help like these government loans would be a huge boost.''[/quote]
Not as if Mr. Mirko has A VESTED INTEREST or anything - it`s the national good, truth, justice and the American way that he`s concerned about.

But, but ... we kept hearing all this chatter about the PARADIGM-SMASHING CHEVY VOLT, all these great "green car" initiatives y`all have working on FOR YEARS, which required only HIGH GAS PRICES to become marketable. What this really says is "we put all our eggs in the gas-guzzler basket, that was hugely profitable for a while, but now that gas prices have skyrocketed and we've been exposed as the greedy short-term-thinking buffoons we are, we need a massive government bailout in order to compete with the Asian carmakers. Of course we`re gonna get it, too, because we`re 'too big to fail', vital to the American economy, crucial to national security, all that stuff." Welcome to bailout nation.


[url=http://www.nytimes.com/2008/08/15/business/15sell.html?em]NY Times: Home Equity Frenzy Was a Bank Ad Come True[/url]
[quote]That catchy slogan, dreamed up by the Fallon Worldwide advertising agency, was pitched in 1999 to executives at Citicorp who were looking for a way to lure Americans to financial products like home equity loans. But some in the room did not like it. They worried the phrase would encourage people to live exorbitantly, says Stephen A. Cone, a top Citi marketer at the time.

Still, “Live Richly” won out. The advertising campaign, which cost some $1 billion from 2001 to 2006, urged people to lighten up about money and helped persuade hundreds of thousands of Citi customers to take out home equity loans — that is, to borrow against their homes. As one of the ads proclaimed: “There’s got to be at least $25,000 hidden in your house. We can help you find it.”

Not long ago, such loans, which used to be known as second mortgages, were considered the borrowing of last resort, to be avoided by all but people in dire financial straits. Today, these loans have become universally accepted, their image transformed by ubiquitous ad campaigns from banks.

Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees.

However, what has been a highly lucrative business for banks has become a disaster for many borrowers, who are falling behind on their payments at near record levels and could lose their homes.

The portion of people who have home equity lines more than 30 days past due stands 55 percent above its average since the American Bankers Association began tracking it around 1990; delinquencies on home equity loans are 45 percent higher. Hundreds of thousands are delinquent, owing banks more than $10 billion on these loans, often on top of their first mortgages.

None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt.

“Calling it a ‘second mortgage,’ that’s like hocking your house,” said Pei-Yuan Chia, a former vice chairman at Citicorp who oversaw the bank’s consumer business in the 1980s and 1990s. “But call it ‘equity access,’ and it sounds more innocent.”

Changing the Language

Many experts say the ads encouraged Americans to go deeper into debt.

“It’s very difficult for one advertiser to come to you and change your perspective,” said Sendhil Mullainathan, an economist at Harvard who has studied persuasion in financial advertising. “But as it becomes socially acceptable for everyone to accumulate debt, everyone does.” A spokesman for Citigroup said that the bank no longer runs the “Live Richly” campaign and that it no longer works with the advertising agency that created it. [/quote]
Citi may have mended its ways [cough, cough], but I notice one of the major credit card issuers is currently running a huge, loud [url=http://www.buzzle.com/articles/regulations-on-credit-card-ads-help-eliminate-debt.html]ad campaign[/url] featuring lyrics from a [url=http://www.lyricsfreak.com/q/queen/i+want+it+all_20112576.html]Queen[/url] song:
[i][b]
I want it ALL I want it ALL I want it ALL and I want it NOW
[/b][/i]
"I just don`t want to *pay* for it now..."
[quote]Citi was far from alone with its simple but enticing ad slogans. Ads for banks and their home equity loans often portrayed borrowing against the roof over your head as an act of empowerment and entitlement. An ad in 2002 from Fleet, now a part of Bank of America, asked, “Is your mortgage squeezing your wallet? Squeeze back.” Another Fleet ad said: “The smartest place to borrow? Your place.”

One in 2006 from PNC Bank pictured a wheelbarrow and the line, the “easiest way to haul money out of your house.”

In 2003, one from Citigroup said a home could be “the ticket” to whatever “your heart desires.” It continued: “You’ve put a lot of work into your home. Isn’t it time for your home to return the favor?”

In 2004, Banco Popular said in its “Make Dreams Happen” ads: “Need Cash? Use Your Home.”

“Seize your someday,” a Wells Fargo ad advised in 2007.

It might seem hard to believe, but not long ago people borrowed money to buy a home with the expectation that they would eventually pay off the debt. A mortgage had a finish line. You mailed your check to the bank every month for 20 or 30 years, paying interest and principal, and bit by bit, at the end you owned your home free and clear.[/quote]
Paying off one`s mortgage ... How very quaint. I just love Ye olde Tales of Yore, and all the silly hangups our forebears had, including silly notions like "thrift" and "personal responsibility." If they had only had the means to go deeply into hock at the touch of mouse button and then spent more of their time blogging about their latest credit-card purchases and the quality of their orgasms with their latest playmate ["As seen on 'Sex and the City'!"] their lives would have been so much *richer*.

The best part is that the U.S. government was a full, knowing partner in the Great Leveraging of the American homeowner:
[quote]in the early 1980s, Americans were not very familiar with the concept of dipping into home equity. Charles Humm, the senior vice president for marketing and sales at Merrill Lynch Credit Corporation, had to go on a road show explaining the idea to potential customers.

He had to change the notion that only people in financial trouble took out a second mortgage, he recalls. Merrill wanted to sell second mortgages to consumers who did not need to borrow money urgently.

“The second mortgage category, then as probably now, suffered from a pretty bad reputation,” he said. “It generally tended to be a credit facility of last resort, and it was done by people in dire straits. That was not the audience we were after.”

The campaign worked. The amount of home equity loans outstanding grew from $1 billion in 1982 to $100 billion in 1988 — [b]in part because a portion of the loans were tax deductible[/b], as the ads often pointed out.[/quote]

[The full article is a tad longish by internet standards, but well worth a read.]

[quote=Fusion_power;139632]I think perhaps the meaning was not so much the amount of the U.S. debt, rather was meaning the total amount of money Americans have borrowed on the debt markets.[/quote]But I was referring quite specifically to the $9.6 trillion "United States total public debt" AKA national debt, because _that_ is what foreign governments own a part of, that gives them leverage to influence U.S. government policy!

Clancy's examples that I referenced were of countries dumping U.S. treasury bonds specifically.

A country's dumping of all their holdings of repackaged U.S. second-mortgage consumer debts wouldn't have the same political impact (just as most people here have forgotten the Murrah Federal Building -- google it if you're one of them).

I happen to disagree with your position cheesehead. I would tend to believe that ANY discontinuity in the debt market would have a catastrophic effect on the US economy. Let me be specific in stating that the effects we see from the mortgage market crisis would be amplified many times over should the international market suddenly shun US debt vehicles. That would defacto present a huge political crisis. It is kind of like being hooked on drugs, we have to have the debt to live.

It is kind of a 6 of one, half a dozen of the other situation. No matter which way you turn, the result would make your hair stand on end (if you have hair that is).

DarJones

Okay. I retract (disown? disavow? deny all knowledge of? wish I hadn't written? claim it must have been inserted by malicious forces beyond my control?) that last paragraph ("A country's dumping ...").