American politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion-dollar annual deficit.

Policy stimulus is focused on maintaining current consumption as opposed to making the United States more competitive in the global marketplace.

Dollar depreciation will sap the purchasing power of U.S. consumers, as well as the global valuation of dollar denominated assets.....

Legal Tender | January 21 12:51pm | Permalink
Isn't it ironic that Orszag chose to join an administration that campaigned on and still maintains "the big lie" that entitlements (healthcare) and subsidies ("green" energy) can be massively increased while at the same time 95% of Americans (those making under $250k) would get a laundry list of new handouts (refundable tax credits).

Talk about a free lunch! The most amazing thing is that, despite making the free lunch the centerpiece of their policies, the Democrats have become less popular. They can't even buy votes effectively- pathetic.

Nice to see Orszag now finding a conscience, but where were these sentiments when he was part of the team selling the big lie? Hence, why should we respect his views now?

Europeans well know that social democracy is fiscally unsustainable and is always paid for by the middle and working classes. Would Americans have voted for Obama if Orszag had told the truth and said that European-style benefits would require European-style taxes? $9/gallon petrol, 20% VAT and 40% income tax brackets starting at income levels closer to $50k than $250k is the reality everywhere Europe.

Maybe Obama's 2012 campaign slogan should be "change you will pay dearly for".

Jan. 26 (Bloomberg) -- The U.S. will suffer a “train wreck” at the hands of bond investors if it fails to solve its budget problems, said Nouriel Roubini, the economist who predicted the financial crisis.

“The fiscal problem is very serious,” he said in a Bloomberg Television interview today with Tom Keene at the World Economic Forum in Davos, Switzerland. “The bond vigilantes have not yet woken up in the U.S. in the way they have in the euro zone. Unless the U.S. addresses this fiscal problem, we’re going to see a train wreck.”

President Barack Obama yesterday pledged a freeze on non-defense discretionary government spending to rein in a deficit he described at “not sustainable.” U.S. Treasuries fell today before an auction of $35 billion of five-year bonds. Roubini suggested that the U.S.’s commitment on the deficit may still not be enough to placate investors......

Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.

The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said yesterday.

“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains “stable,” according to the report.....

The net notional amount of derivatives used to hedge or speculate against a default on U.S. government debt rose 12% in late January, according to Depository Trust & Clearing Corp. figures.

The increase suggests investors are becoming more nervous about the quality of U.S. debt. It also threatens to cast a pall over the notion that Treasurys are risk-free assets investors should run to for haven from other instruments......

....It might have been thought that their President would try to alert them to the damage being done daily to their future, and to the serious shift in world power and influence away from a country so hobbling itself with debt.

Barack Obama has obviously calculated that the political risks are too great for candour, so he, too, operates within the dream by proposing some restraint on discretionary spending without touching the entitlement programs, the military or taxes. In this, he is complicit with Republicans in deforming the nature of the debate and ill-informing Americans.

He has obviously reckoned that, with the Republicans believing the problem can be solved by discretionary spending cuts alone, he isn’t going to do anything credible before the next election.....

The Congressional Budget Office projects that America's 2011 deficit will be $1.5 trillion, or 9.8% of GDP, and debt held by the public in the 2011 fiscal year will approach 70% of GDP. How close is America to facing a bond market crisis? Should drastic cuts to the budget be made now? Over what horizon should they extend? And what balance between tax increases and spending cuts should be struck?

Or is the entire underlying premise of the question mistaken? Can America count on a return to growth to solve most of its near-term budget problems? And how should other economies approach America's fiscal morass?

Dear Shareholder,

You probably don't think of yourself that way. Citizenship isn't an investment, it's a state of being. But by birth or naturalization, every American has more than just an emotional stake in the United States. We have a financial one, too. And by any measure, that stake is at risk.

Two months ago the federal government issued a 268-page Financial Report of the United States Government. It doesn't have a glossy cover with photos of smiling employees, and a lot of the numbers are in trillions. Except for that, it looks a lot like the corporate annual reports of the companies I have followed. You can see how the various lines of business are doing—Social Security, Medicare, etc. There's even a mission statement: "to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare and secure the blessings of liberty to ourselves and our posterity."

The United States isn't a corporation, of course. It can't exit from underperforming territories (pick your state) or auction off lines of business (the Army, Medicare). And its "customers" can reward themselves with unaffordable services because they're also the shareholders.

Still, the idea of the U.S. as a corporation is more than a thought-experiment. It's a way to reposition our approach to long-term problems. What would USA Inc. be worth? Who would want to buy its shares? And what would a turnaround expert recommend for a company that lost more than $2 trillion ("net operating cost") in 2010?

I took a deep dive into these questions a little more than a year ago, and I'm finally up for air. I reached three conclusions. First, USA Inc. has serious financial challenges. Second, its problems are fixable. Third, clear communication with citizen-shareholders is essential. If the American people embrace the need for bold action, their political leaders should find the courage to do what's right.....

Niall Ferguson, a prolific purveyor of financial history, is nothing if not counterintuitive.

As markets swooned in 2008, the Harvard professor published “The Ascent of Money,” a paean to bankers and credit. As Greece struggled to elude debt default in 2010, he brought us “High Financier,” a biography of Siegmund Warburg, promoter of European economic integration.

Now we get “Civilization,” a brawny study of how the West came to dominate the globe over 500 years. This might sound like an odd theme to trumpet amid China’s relentless rise and America’s descent into financial purgatory. In truth, the timing makes it a must read.

Ferguson is aware that the West risks going the way of Rome. Civilizations, he argues, are complex and asymmetrically organized systems: Operating between order and disorder, they can look stable then suddenly collapse, like a sand castle.....

By Laurence Kotlikoff
April 6 (Bloomberg) -- The two parties are having a heated debate over the Republican plan to slice $61 billion off Uncle Sam’s projected $3.6 trillion budget. If the Republicans get their way, the deficit will fall from 9.5 percent of gross domestic product to 9.1 percent. If they don’t, they’ll probably shut the government for a couple of days. Then they’ll compromise on, say, a $40 billion budget cut, having proved they gave it their best shot.

Arguing over lowering our deficit by just 0.4 percent of GDP when we need to run massive surpluses to deal with the baby boomers’ impending retirement is, pick your metaphor -- rearranging the Titanic’s furniture, Nero’s fiddling, Custer’s Last Stand.....

.....Mr. Geithner offered the following words of comfort: “Look at the price at which we borrow.” In other words, don’t worry, because interest rates are still joyously low.

But run this observation by economic historians, and you will find that it also provides little assurance.

In other research Professor Reinhart has found that that interest rates are surprisingly bad at predicting debt crises in the near future. The painful rise in the cost of borrowing that is typical in a sovereign debt crisis often comes on extremely suddenly, Professor Reinhart says. (After all, the assumption that just because things have been trending a certain way for a long while means they will stay that way forever is exactly the kind of logic that led to the housing bubble.)

In other words, there are a lot of things to pay attention to when you are trying to predict whether the United States is likely to default. Unfortunately, despite what you may have read lately and seen in the markets, sovereign credit ratings and current interest rates may not actually lend you that much insight.

Fox Business reporter Peter Barnes began his televised interview with Treasury Secretary Tim Geithner two days ago with this question: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.”

“No risk?” Barnes asked.

“No risk,” Geithner said.

It’s enough to make you wonder: How could Geithner know this to be true? The short answer is he couldn’t.....

...Muddle Through, or Crisis?

Betting against the power of the free-market economy in the US is generally a bad idea. Yet when I suggested back in 2003 that we would see a slow-growth Muddle Through Economy for the remainder of the decade, it turns out I was right. We only grew at 1.9% last decade, which was the worst performance since the Depression. Ugh.

So where are we for the next five years?

I think we have two choices as a country. We can elect to deal with the deficit proactively, or wait until there is a crisis and react. And make no mistake, there is a an approaching Endgame, with regard to how much debt the market will let us have. We don’t know that point now, but if it happens it will be quite a “surprise!”

What happens if we make the choice to get the deficit under control? What that really means is that we have to decide how much health care we want and how we want to pay for it. Let’s forget for the moment how that happens. Let’s just be optimistic and say we do make those decisions.

For me, that is the best-case scenario. But it means a slow-growth, Muddle Through Economy for quite some time, perhaps as long as 5-6 years, though getting better as time goes on. It also means it is highly likely we will have at least one recession during that period, as growth will be close to “stall speed” and any exogenous shock could tip us into recession. Recessions mean higher unemployment, lower tax revenues, and an even deeper hole that will require more fiscal discipline and work. It will make maintaining corporate earnings growth at today’s expected levels more difficult, which puts a headwind to the US-based equity markets. Of course, a recession will mean (on average) a 40% retrenchment of US equities. It will also mean another deflation scare and a likely QE3. Bernanke can bring back and polish his “helicopter” speech, but this time he will be able to tell us what happened.

Then there is the crisis scenario. Let’s assume we do not deal with the deficit in any meaningful way. Eventually the debt will rise to epic, Greek proportions. The bond vigilantes arise from the dead and start to push up interest rates. Interest as a percentage of government spending rises, crowding out other government expenses or increasing the debt still further.

Then we have a crisis. We are FORCED by the bond market to get the deficits under control, but now we are doing so in a crisis. Health care will have to be slashed by far more than it would in a more controlled scenario. Tax increases will be brutal. You think Social Security is untouchable? Not in this crisis world. Means testing and spending freezes will be the rule of the day. Military cuts will seem draconian. Our allies who depend on us for a defense shield will not be happy. Education? On the chopping block. The economy will not be Muddle Through, but Depression 2.0. Unemployment will go north of 15%.

What’s my basis for this? History. This movie has played over and over again in various countries in modern history. While we may be the world’s superpower, we are not immune from the laws of economic reality.....

We hadn't heard much from legendary investor Stanley Druckenmiller since last August when he decided to shut down his Duquesne Capital hedge fund. Until today. In a must read interview, the man who took on the Bank of England in 1992 and won, says that he join the camp of Bill Gross et al, making it all too clear that all the recent fearmongering about the lack of a debt ceiling hike by the likes of Tim Geithner, Ben Bernanke and, of course, all of Wall Street, is misplaced, and that the real threat to the country is the continuation of the current profligate pathway of endless spending. From the WSJ: "Mr. Druckenmiller had already recognized that the government had embarked on a long-term march to financial ruin. So he publicly opposed the hysterical warnings from financial eminences, similar to those we hear today. He recalls that then-Secretary of the Treasury Robert Rubin warned that if the political stand-off forced the government to delay a debt payment, the Treasury bond market would be impaired for 20 years. "Excuse me? Russia had a real default and two or three years later they had all-time low interest rates," says Mr. Druckenmiller. In the future, he says, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order." Which begs the question: if interest rates are so low today, is the market not appreciating the current path of "financial ruin"? And here is where Druckenmiller joins the Grosses and the Granthams of the world. Asked if the future is not so bad judging by today's low bond rates he says, "Complete nonsense. It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week." Of course, there is another name for this type of arrangement and so far only Bill Gross has used it: Ponzi Scheme.

More from the interview:

BOSTON (MarketWatch) — America has been working hard to pay its debts of late.

Not the country, that is, but the people.

The statistics show that Americans are more diligent about eliminating debt and increasing savings, albeit slowly. After the greed decade of the 1980s and the market boom of the 1990s, it took two bear markets in the 2000s to convince most people that it was time to cut back on the excesses and at least try to spend within their means.

Over those same three decades, however, the federal government turned $1 trillion in debt into $14.3 trillion, and is having to decide (again) whether to increase the debt ceiling so that the government can stay open. Governments, of course, have the ability to print money when they need it, but they face tough financial decisions whenever they are looking at having to push debt beyond anticipated levels.

Debt drain

In that way, the average consumer can learn from Uncle Sam’s latest discussions about expanding the debt ceiling. By applying common sense to your own finances — and looking at the folly of government spending — it becomes easy to see why long-running unpaid debts are more than just a temporary drain on resources and assets.....

By Mina Kimes, writer
FORTUNE -- You have to see it from Bob Rodriguez's perspective. Twice he has spotted an approaching storm. Twice he has warned the world. Twice he has been pooh-poohed and seen investors abandon the two mutual funds he managed. Twice he has taken steps to shield his clients from the coming crisis.

And twice -- first with Internet stocks in the 1990s, and then with the financial crisis of 2008 -- Rodriguez has been right.

As the latter cataclysm unfolded, the man once mocked for missing out on the hottest markets of his lifetime was anointed as a seer. The Wall Street Journal pronounced Rodriguez one of the "doomsayers who got it right." Barron's labeled him a "prophet." MarketWatch described him as one of the "four horsemen of the market....."

Treasury Secretary Timothy F. Geithner takes comfort from the government’s ability to borrow at low interest rates as the budget deficit hits a record high. “There’s a lot of confidence” in America’s capacity to meet its commitments, he told Bloomberg Television.

History suggests that such faith may prove to be misplaced in the long run. A study of 116 financial crises in 25 countries found that rates had a poor track record in foreshadowing financial difficulties, said Carmen Reinhart, a co-author of the analysis and the female economist whose work is most frequently cited by other researchers. European debt markets were “complacent” about the growing repayment risks there “even three years ago,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in a May 18 interview.

“People don’t worry about credit risk very much until suddenly they worry about it a lot,” said Jay Mueller, senior portfolio manager in Menomonee Falls, Wisconsin, for Wells Capital Management. “Then you can get a panic.....”

With all the bad news about jobs coming out, most of the focus has rightly been on the plight of working people across the country. The big banks which helped usher in this economic crisis have been largely forgotten. The general assumption is that they're doing just fine. And they are, thanks in large part to you and me, the American taxpayer. But as we try to struggle back to prosperity, have we learned the lessons that led to this crisis? One man in the middle of it all says absolutely not.



In 2008, Neil Barofsky was working as a prosecutor in the U.S. Attorney's Office in the Southern District of New York, taking down drug lords and white-collar criminals, when his boss urged him to take on a new case: overseeing the $700 billion Wall Street bailout, known as TARP. The Bush White House wanted to know if Barofsky, a lifelong Democrat who had recently contributed to the Obama campaign, was interested in moving to Washington, DC to become TARP's Special Inspector General, a watchdog over how the money would be spent.



By December, 2008 Barofsky was nominated, confirmed, and had hit the ground running. Nearly two and a half years later, Barofsky has resigned and is back in New York. He recently sat down with me and shared some alarming news.



"You can't look at what happened in the run-up to 2008 and see how it's not going to repeat itself, given what we've done," Barofksy told me in a lengthy interview that aired Tuesday on HDNet's "Dan Rather Reports."



What we've done, Barofksy says, is use taxpayer money to create an explicit promise to the big banks that they will be bailed out again. The landmark financial reform bill known as Dodd-Frank was supposed to end this problem, and President Obama and Treasury Secretary Tim Geithner have repeatedly stated there will be no more taxpayer-funded bailouts. "You shouldn't believe them," Barofsky says. "Not right now." That's because, at the government's urging, the banks are even bigger than they were in 2008, and much of what Dodd-Frank proposes has not been implemented.



While TARP may have achieved its goal of averting a financial Armageddon, Barofsky says the program had other goals too. The Bush Administration sold the legislation to a skeptical Congress as a way to help homeowners stay in their homes. "The program was supposed to restore home owning. It was supposed to keep up to 4 million people in their homes and not lose them to foreclosure." Instead, he says the TARP program has helped 600,000 homeowners, while one million people a year are having their homes repossessed.



Another promise of TARP was to jump-start lending to small businesses. But Barofsky says, the government failed to require the banks to actually lend out the money they were given.


Barofsky says it's enough to make your blood boil.



"There were no strings attached," Barofsky says. "So what happened was, the banks got this money and they decided it was in their best interest and the best interest of their shareholders not to lend it out, but to use it to accumulate capital." 



"You should be outraged," Barofsky told me. "Because that wasn't the deal. Perhaps you should be a little bit mad at Wall Street. But you really should be mad at your government for not fulfilling the promise that they made to you... when we gave all the money to the banks." 



Barofsky says that only days after he took the job, he suggested that the Treasury Department require banks to publicly report how they were using the bailout money. "Dan, you would have thought I had declared a Communist revolution from their reaction. I was told that this idea was terrible." It took more than a year before the Treasury Department reversed itself and implemented his suggestion. "But by then, the largest banks were well on their way to pay back the funds." And, he says, the ability to force Wall Street, either by carrot or by stick, to lend to Main Street was lost.



Barofsky resigned in March. He's now teaching law at New York University and telling anyone who will listen that there will be a "next time" and it will be much worse. He, for one, remains skeptical that Wall Street and Washington can get it together to fix this mess. 



By: Margo D. Beller
Special to CNBC.com

The U.S. is approaching a financial crisis worse than 2008, Jim Rogers, chief executive, Rogers Holdings, warned CNBC Wednesday.

"The debts that are in this country are skyrocketing," he said. "In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.

"When the problems arise next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around....."

Three views emerge on whether the United States will default on its government debts, as I talk to people on and close to Capitol Hill. The first is, hopefully yes, and this August offers a good opportunity. The second is, possibly yes, but this would be bad, so we need some form of fiscal austerity. The third is, under no circumstances, and any talk of a need for austerity is a hoax.

The first view is mistaken. The second view hides a dangerous contradiction. And the third view borders on complacency. So how can we find our way to fiscal responsibility? We need tax reform.

People in the first camp think that the United States government has become too big and the only way to cut it down to size is to limit its ability to borrow. A constitutional amendment to limit the size of government relative to gross domestic product or to require a balanced budget could work, but experience suggests a future Congress could always find a way to escape any such constraint.....

As you might have noticed, since he first made the observation, the debt has gone on rising, very dramatically. But the truth is unarguable. If you’re careening along a road toward a collapsed bridge, you’ll certainly stop, one way or the other. But it makes a difference, at least to you, whether you skid to a halt four yards before the cliff edge or whether you come to rest at the bottom of the ravine.

In 2010, Douglas Elmendorf, director of the Congressional Budget Office (CBO), described current U.S. deficits as “unsustainable.” On that everyone’s agreed. So let’s make them even more so! On assuming office, President Obama assured us, with a straight face, that his grossly irresponsible wastrel of a predecessor had taken the federal budget on an eight-year joyride. So the only way his sober, fiscally prudent successor could get things under control was to grab the throttle and crank it up to what Mel Brooks in Spaceballs (which seems the appropriate comparison) called “Ludicrous Speed.” Let’s head for the washed-out bridge, but at Obamacrous Speed!

The Spendballs plans of the Obama administration took the average Bush deficit for the years 2001-2008 and doubled it, all the way to 2020. “We’ve got a big hole that we’re digging ourselves out of,” the President declared in 2011. Usually, when you’re in a hole, it’s a good idea to stop digging. But, seemingly, to get out of the Bush hole, we needed to dig a hole twice as deep for one-and-a-half times as long. And that’s according to the official projections of the President’s economics czar, Ms. Rose Coloured-Glasses.

By 2020, the actual hole will be so deep that even if you toss every Obama speech down it on double-spaced paper you still won’t be able to fill it up. In the spendthrift Bush days, federal spending as a proportion of GDP averaged 19.6 per cent. That’s crazy. Obama’s solution was to attempt to crank it up to 25 to 30 per cent as a permanent feature of life. That’s load up the suicide-bomber underpants and pass me the matches.....

A decade and a half ago, both of us served on President Clinton's Bipartisan Commission on Entitlement and Tax Reform, the forerunner to President Obama's recent National Commission on Fiscal Responsibility and Reform. In 1994 we predicted that, unless something was done to control runaway entitlement spending, Medicare and Social Security would eventually go bankrupt or confront severe benefit cuts.

Eighteen years later, nothing has been done. Why? The usual reason is that entitlement reform is the third rail of American politics. That explanation presupposes voter demand for entitlements at any cost, even if it means bankrupting the nation.

A better explanation is that the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. How else could responsible officials claim that Medicare and Social Security have the resources they need to fulfill their commitments for years to come?

As Washington wrestles with the roughly $600 billion "fiscal cliff" and the 2013 budget, the far greater fiscal challenge of the U.S. government's unfunded pension and health-care liabilities remains offstage. The truly important figures would appear on the federal balance sheet—if the government prepared an accurate one.....

The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week." Of course, there is another name for this type of arrangement and so far only Bill Gross has used it: Ponzi Scheme.

Even as U.S. government debt swells to more than $16 trillion, Treasuries and other dollar fixed- income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds....

....The second-biggest Ponzi scheme in recent history—organized by the New York hedge-fund manager Bernard Madoff—led to losses of approximately $20 billion in 2008. The biggest, however, is still ongoing: the Ponzi scheme of the developed economies. It is not simply that the developed world has borrowed significantly from future wealth to fund today’s consumption, leading to huge burdens for the next generation. It has also reduced the potential for future economic growth, making it more difficult for the next generation to deal with this legacy.

It may seem harsh or exaggerated to liken the current troubles of the developed economies to a Ponzi scheme. I do so deliberately to emphasize the scope and seriousness of the problem. Nearly five years after the financial crisis, the leaders of the developed world are far too complacent. Politicians and central bankers have continued to “kick the can down the road,” pursuing policies designed to postpone the day of reckoning and avoid telling the public the truth: that a sizable part of the debt will not be paid back in an orderly way.....