CBO Director: A Somber Warning

July 28, 2010

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CBO Director: A Somber Warning

Courtesy of Karl Denninger at The Market Ticker

With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.

So let’s see…. if you buy bonds today there’s a chance you could lose some of your money, or there’s a chance you could lose a whole lot of your money.

That sounds comforting, doesn’t it?

But it’s the next sentence that ought to make you sit up in your chair:

Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States.

Right.

This is what history tells us. It is also what I have been trying to amplify now for the past three years. The reason is this graph:

What I find amusing is that the CBO is flapping its jaws over only the government’s liabilities. It, by the way, is also looking only at the debt held by the public (and not the games played with FICA and Medicare):

Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections through 2020 (with adjustments for the recently enacted health care legislation) and then extending the baseline concept for the rest of the long-term projection period. The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.

It never ceases to amaze me that Congress and others will flap on about this (as CNBS is this morning, as they have many mornings), but none of them want to talk about the real gorilla in the china shop that is blasting everything in sight – that’s this graph:

That’s total systemic debt compared to GDP – both public and private. The breakdown looks like this:

See that nice pink slice at the top? That’s all the federal government is responsible for.

So…. why are we focusing only there again?

Oh, maybe it’s because we don’t want to talk about the rest – especially not on "business pump-monkey" television that is sponsored by all the big businesses that CREATED this crap-pile of trouble, which incidentally is focused in the following areas:

Household credit. That’s "bigger mortgage, bigger house" BS. It’s "A Lexus and a BMW in the driveway, so long as I can barely make the payments, because that makes me speshul", driven, of course, by the advertising revenues on that same pump TV.
Non-financial business credit. This is the "small businesses need to go broke faster with their credit cards" game. It’s the "borrow your money, rather than make it" to expand your business. It’s "growth at any cost, whether you can actually make a profit after all the stripping of your money by the very same big banking and business interests that run that very same pumptastic media.
And, of course, the big daddy, Financial Instruments. That’s all the fun stuff. It’s the banks "creating money" – well, not really money. The illusion of money. The naked short of unbacked credit issuance against nothing at all. And of course these very same pumptastic crap-spewers on our airwaves are all companies that have a very, very vested interest in seeing that bubble continue.

The problem is, it can’t.

Oh sure, government has tried. It has spent and spent and spent, none of which it had, in a puerile and futile attempt to avoid truth-telling – that the above three sectors of the economy must shrink dramatically or our economy is headed straight for a collapse.

Indeed, what history tells us in both Iceland and Greece is that it is precisely when a captured government tries to protect the above three sectors of borrowing from the just desserts of their foibles that a sovereign debt crisis erupts – at least in modern economies.