Worthy Opinions » Downtime: The Great Snow Job

by David Haggith

The Congressional Budget Office recently announced that the United States will be running its first trillion-dollar deficit this year — $1.2 Trillion if we count the pocket change. That’s about three times more than it’s been in any other year. Most Americans seem ready to agree with congress that this is necessary in order to save the economy from becoming totally frozen. After all, George Bush recently explained that he had to give up on free-market principles in order to save the free market because he had been warned by his experts (who never saw any of this coming) that we were facing an economic peril “greater than the Great Depression.”

Everyone Wanted Good Times, No One Wanted to Pay.

America has enjoyed a long ride on the bull with few interruptions since the Reagan days. But those glory days of high living were mostly because we didn’t pay for most of it as we went. The government learned special charm where it became unnecessary to pay for economic expansion with real money if you endlessly strip those burdensome regulations off of the credit market and free it up to create money. But magic, it turns out, always has a dark side.

The reason Reaganomics, once called voodoo economics by a wiser Bush, worked like a rocket is quite simple: it’s easy to make the good times roll when no one is paying for them. The federal government rolled back taxes and started pushing mountains of debt forward. There is no question that you can put an economy on high throttle by buying much of what you want on credit. Just as households can live high and mighty for awhile that way, so can governments. You can only clear the road ahead so long by pushing a snow drift forward becomes too high and too packed to push, and then you’ve really blocked the road for good. That’s what we did.

The government piled up record drifts of national debt in order to enjoy a time of prosperity at the expense of future generations, while individual households did the same thing. Nearly everyone accepted the mass delusion that housing could go up steeply in price every year forever. Thus, no matter how much debt one took out, one could always sell his home for more than he bought it for and cash out in a personal crisis.  The government fostered this denial of economic reality by constantly cutting back more of the restraints on the credit market so people could keep increasing the drift of debt ahead of their own little plows. Eventually, there was no additional unrestraining that could be done. The little plows all reached their limit, and there was no way to lighten the load, so the prices of homes could not go up any further.

Because people will mortgage their lives to buy a home, the price of houses rose as fast as the government and the banks found ways to raise individual debt ceilings by stripping away the regulations that imposed ceilings. It was a national pyramid scheme where everyone had to know there would be a limit to how much debt each individual could manage and, therefore, how high the price of a house could go. In 2008 we learned where that limit was for individuals. We pushed our little plows ahead until they could push the drift no more. Now we’re in for a loooong, cold winter.

That’s when George Bush made his penetrating observation that “the thaw needed unthawing.” As the credit markets froze up, he did the only thing his gurus knew to do and urged congress to pass the biggest snow-job ever brought upon a nation. The snow job was this: we needed to “unthaw” the frozen credit markets so that people could get more debt by Christmas time in order to keep pushing the snowdrift a little further forward. There’s still a load of denial in there that wants to believe the snowdrift can keep moving forward. People were automatically doing the thing they naturally do when they hit their debt ceiling, they stopped buying and started to hunker down by saving. George Bush wanted to make sure they kept buying so the delusional economy could continue.

The British government came up with its own solution. Since people who were saving were clearly no longer participating in the bubble economy, the government proposed a tax on savings “to force people to spend or invest, rather than just sit on their money.” God forbid that people should stop buying things they really don’t need and often don’t even enjoy all that much.

It also turned out that none of the possessions people had amassed, such as granite countertops, represented an accumulation of wealth because they were all matched by an equal or greater accumulation of debt. Now, if the problem was created by loose credit, how is loosening up credit going to solve the problem? Most of the populace, apparently already in winter hibernation, did not even ask that question.

To unthaw the frozen credit markets in the U.S., the Bush Administration got out the big government plows so we could start really moving some debt. He decided to push all the bad debt of businesses and bankrupt individuals out of the way by nationalizing it. But where does all that debt drift to when you just push it ahead? Obviously, it becomes a greater burden piled into the future. While individuals have found the top of the drift (which you can also translate “bubble” or “pyramid”), government believes that it has not. It maintains the delusion that the laws of economics that the masses have already run up against do not apply to governments.

How long can the government drift?

As if it were an omen, the National Debt Clock in Times Square reached its numeric limit in September of 2008. In order to make room for more debt, the keepers of the clock did what government is doing with the debt. They removed the dollar sign in order to clear room to add another digit to the capacity of the debt clock. When the National Debt Clock was conceived twenty years ago, it was unimagineable that we’d ever get buried this deep in debt. By October the national debt (the amount of money the government owes from all of its combined years of deficit spending) reached $10.2 Trillion. This year’s projected deficit will add another 10% to that. The mountain is piling faster all the time.

Let’s put those numbers in perspective. The interest in the national debt right now is about $412 Billion a year. That’s more than the first phase of the bailout program every year spent just on interest. We have reached the avalanche point where we must borrow the full amount of the interest every year to keep rolling the debt along. There is a heavy cornice of snow right over us, however, that is ready to crash on us: Thanks to the failure of the stock market, U.S. bonds are selling cheap right now than they aver have — at yields of 1-2% interest. People are practically giving their money to the federal government as a place to park it outside of the stock market. If the stock market recovers, however, those rates will have to double or triple to get back to the price the U.S. historically has had to pay to get private investors, corporations and nations to finance the annual overspending. As soon as the interest the government pays returns to its normal levels, the interest on the debt alone will be $1 Trillion a year.

Yet, the situation is even more grim than that. Right now we’re financing a deficit of $438 Billion a year. As we look at tripling that this year, we know we will have to pay higher interest just to sell a much larger supply of bonds. You cannot increase the sales of bonds without creating a matching increase in demand. At the same time, major bond buyers, like China, are talking about running away from U.S. bonds  because the U.S. looks like a stinking bad credit risk.

Snowed Under?

We’re now in a catch-22 situation: if the stock market recovers, the nation will be unable to even finance the interest on its debt. Recovering stocks always result in having to pay higher interest on bonds. If the stock market doesn’t recover, we’re snowed in there, too. We’re no longer plowing against a snowdrift; we’re plowing against an avalanche in motion. That is why Bush has said he had to give up free market principles because the nation was facing an unprecedented economic disaster. Unfortunately, you cannot solve a debt crisis by adding more debt.

And talk of tax cuts to stimulate the economy? I’m afraid you cannot help the morbidly obese by throwing them candy. Tax cuts, in this case, would just accumulate on the mountain of debt that has to be paid off in the future because they’re not going to stimulate the economy and produce more revenue. The last tax cuts barely even nudged the economy, as it is now too fat to roll over.

The time to pay the piper on debt spending has arrived. Most of the government’s efforts are an attempt to correct the problem by postponing the correction. Some of us have been predicting this day when Reagonomics first came into play … if the game of buying on loose credit continued. It was from that time forward that the national debt began to grow out of control. Did Reaganomics create a huge boom? Of course. It is amazing what roaring times a nation can enjoy when not a soul is paying for them. But eventually the play day in the snow is over, and someone’s got to start lifting a shovel and taking down that mountain one shovel at a time so that we can all get back home. The prices on houses need to fall significantly to where people can afford them without taking on absurd debt loads. Consumer spending needs to slow down to where it is not happening all on stacked-up credit cards. All the things government is trying so hard right now to avoid.