Hemingway was once asked "How did you go bankrupt?" He said "First gradually, then suddenly."
Well, we're a long way down this road now, and we've just about run out of gradually. See that cliff ahead? That's the beginning of suddenly.
Suddenly is like one September morning in NYC on the 103rd floor. At 8:40 a.m., the skies were clear and the office coming to life. Six minutes later, suddenly happened. No one can say precisely how much money was erased from America that day - estimates range from hundreds of billions to two trillion dollars - but it's etched with precision that 2,996 died. As the proverb goes, the afternoon knows what the morning never dreamed.
Suddenly made another appearance in NYC seven years later, again the second week of September. Lehman Brothers announced bankruptcy with $768 billion in debt but only $639 billion in assets. The U.S. economy suddenly "fell off a cliff" that week and was "hours away from collapse." Fed Chairman Ben Bernanke proposed a $700 billion emergency bailout. "If we don't do this, we may not have an economy on Monday." Treasury Secretary Hank Paulson got down on one knee and begged Nancy Pelosi's support.
"Alex, let's stay with Suddenly in NYC, for $800 billion." On May 6, 2010, Wall Street expected a day just like any other. Then, suddenly, the floor disappeared from under the market. The Dow precipitously dropped 1,000 points, most of it in 30 minutes. $800 billion was lost. Traders stood shell shocked, helpless, mouths open, hands on their heads, as if my Cubs had just swept their Yankees in the World Series. Then just as suddenly, in the next 20 minutes, $600 billion came back. No one had the slightest idea what was happening, or why. It took six months to explain the Flash Crash, and then only partially.
It's not as if we haven't been warned about suddenly. "This is the most predictable financial crisis in the history of our country," says Wisconsin Congressman (R) Paul Ryan.
Hint: Forty-three cents of every dollar Washington spends is borrowed.
Hint: The Federal debt is increasing $4 billion every day.
Hint: The US government pays over 80 million bills per month.
Hint: In the three years 2009-11, federal spending was $2.2 trillion more than in the three years ending 2008.
Hint: Since 1965, the gross domestic product has increased 2.7 times, but entitlement expenses have increased 11.1 times.
Hint: "American universities have raised their fees five times as fast as inflation over the past 30 years," said Derek Bok, former president of Harvard. "Universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires."
Hint: Social Security, Medicare, and Medicaid make up 42% of the federal budget.
Hint: Over the next ten years, aging boomers will result in a 50% rise in the number of people 65-74 years old, a growth rate not seen in 50 years.
Hint: 10,000 baby-boomers will become eligible for Medicare every day for the next 19 years.
Hint: The federal budget deficit for 2011 is shaping up to be $1.4 trillion. For 2010, it was $1.3 trillion, and for 2009 $1.4 trillion. But notice now the difference: for 2008 $0.45 trillion, and for 2007 $0.16 trillion.
Hint: When you total it up, our federal debt now stands at $14.32 trillion.
Hint: At $14.32 trillion, we're officially maxed-out, and thus waist-deep in a debt-ceiling crisis.
In 2010, Congress capped our level of federal debt at $14.3 trillion. We reached that a few months ago, in May. With zero political consensus at the time, the Treasury shuffled around piles of money to make ends meet. This shuffling ends August 2.
What to do? Congress is at war with itself... and with the White House...and each political party is at war within its own members. The trust and goodwill among these politicians can be measured in milligrams.
If the US reaches a technical default, there is a spectrum of possible consequences ranging from "not much" to "catastrophe." Clearly the process is alarming the world, and amusing no small number of our detractors. Well, I'm glad at least someone is happy.
The GAO (Government Accountability Office) said it best a few years back. "By definition, what is unsustainable will not be sustained."
Signs and Symptoms
When trying to diagnosis an illness in medicine, we look for signs and symptoms. Concerning our current economic fever, the signs and symptoms are written in blinking neon lights visible from the space station.
- "If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels," wrote an International Monetary Fund director in June, "you find four countries: Greece, Ireland, Japan and the United States." This is interesting company. Greek and Irish bonds are junk rated, while Japan has been in economic doldrums for two decades.
- The three major ratings agencies - Standard & Poor's, Moody's, and Fitch - each have issued official warnings that failure to meet debt obligations could trigger rating downgrades. This, in turn, would begin a cascade of negative economic consequences, all expensive and dangerous.
- China is our largest creditor, holding $1.16 trillion of US Treasury securities officially, and, likely, as much as $2 trillion (with Japan second at $912 b). "We hate you guys," said one Chinese Treasury official, "but we can't stop doing this." It's not wise to be up-to-your-eyeballs in hock to someone who despises you, whether Al Capone or Chairman Mao. China can't pull the rug out, however, because it would destroy them as well. But if they do manage to find a way, well...
- Should we receive a ratings downgrade, then insurance companies, pension funds, mutual funds, and institutions might be forced to dump their Treasury holdings. Some investors have rules that they cannot hold assets rated below AAA. The proverbial snowball downhill.
- The Bipartisan National Commission on Fiscal Responsibility and Reform was commissioned by President Obama in February, 2010. Their findings were reported ten months later, then summarily ignored. Their warning: "If the U.S. does not put its house in order, the reckoning will be sure and the devastation severe."
- Erskine Bowles, the lead Democrat on the Debt Commission, wrote in the WSJ: "We just cannot afford to stay on autopilot, and I guarantee if they don't do it now, when we look back and the crisis is upon us...people will think, 'How could we have been so foolish?' "
- According to economist Mary Meeker, "I took a deep dive into these questions a little more than a year ago, and I'm finally up for air....By our rough estimate, USA Inc. has a net worth of negative $44 trillion."
- "Even with the massive 2008-2009 policy effort that successfully prevented financial collapse and Depression, the United States is now half way to a lost economic decade," wrote Larry Summers last week (former Clinton Treasury Secretary and former Obama Director, National Economic Council). "Over the last 5 years, from the first quarter of 2006 to the first quarter of 2011, the U.S. economy's growth rate averaged less than 1% a year, about like Japan during the period when its bubble burst. At the same time the fraction of the population working has fallen from 63.1% to 58.4%, reducing the number of those with jobs by more than 10 million."
- State and local budgets have reached breaking points, causing the elimination of 450,000 jobs since September 2008. The quiet states of the Upper Midwest are exploding with protest. Minnesota's legislature and governor brawled over the budget, then turned off the lights for three weeks - the nation's longest state shutdown in a decade. Wisconsin likewise is fighting a civil war with recalls of senators, attacks on the governor, and 100,000 protestors in Madison.
- Bill Gross, CEO of PIMCO, the world's largest bond firm, explains what happens when countries assume liabilities that future growth cannot comfortably pay. "90% debt to gross domestic product is the line beyond which leverage dynamics begin to work in reverse, slowing growth instead of enabling it. The developed world as a whole is now approaching that key percentage....As it does, economic growth slows by approximately 1%. Almost on cue, developed economies are experiencing 2% instead of 3% annual growth." This has been called the new normal. The 2% real rate of growth is known as stall speed. "This connotes an inability to behave like the historical capitalistic model should. Corporations lose incentives to invest because profit growth stagnates, unemployed workers are not rehired, and the standard cyclical model of seasonal rebirth is jeopardized."
- Construction payrolls of 5.5 million in 2007 are now down to 2.2 million. Ironically, today's construction jobless rate of 16.3% is also down from 22% a year ago, because many discouraged workers stopped looking or switched to trucking or manufacturing.
- The housing market remains mired in its deepest downturn since the Great Depression. Home builders sat on the sideline for the fifth straight spring. "In every cycle we have come out of, construction has always been a major factor in the recovery, going back to the end of World War II," said Alan Greenspan. "This is the first time when construction has not come out of this."
- The US Post Office projects an $8.3 billion loss in the year ending September 30. "On September 30, I won't be able to pay my bills," says the postmaster. "A payment of $5.5 billion is due for the federal government to pre-fund retiree health benefits. I can't make that payment." One of his proposals is to suspend Saturday delivery, and his prediction is that in fifteen years we will have delivery only three times a week.
- American will consume 140 billion gallons of gasoline in 2011. Since pump prices are a dollar higher than last year, this means an additional $140 billion dollars are flowing away from families, farms, and small businesses that desperately need to stop such revenue loss.
- According to The Heritage Foundation's James Sherk, job creation has basically flat-lined. Before the health overhaul law passed, the number of new jobs was soaring. Private-sector job creation [as opposed to combined private and public sector job creation] had improved by an average of nearly 68,000 a month in the 15 months before April 2010. But in the 15 months since then, it has slowed to an average of 6,500 a month. Correlation cannot prove causation, he said, but the evidence does lend weight to the voices of business who say that the law is preventing hiring.
- "We're still looking at payrolls today that show 7 million fewer jobs compared to the peak of January 2008," said economist John Lonski in June. "Until we make more progress on the jobs front, until we start to generate jobs at a rate of at least 300,000 to 350,000 per month, we're going to be disappointed with the pace of activity."
- Of the rich Group of Seven economies, America has the lowest share of "prime age" males in work: 80% of those between 25-54. In the 1960s this number was 95%.
- For a lot of people "it's going to feel very hard," said Treasury Secretary Timothy Geithner last week, "harder than anything they've experienced in their lifetime, for a long time to come."
In earlier newsletters (see archive), I've explained that these days are not normal. History has lurched, the math is dysfunctional, volatility is widespread, everything's being shaken, and soft-anarchy is the new normal. The above examination of our persistent economic torment makes the case strongly. To summarize: The economy is growing about one-third as fast as in other post-recession recoveries, consumer confidence is low, the dollar is weak, foreclosures are high, housing prices remain depressed, the real estate market flirts with a double-dip recession, the middle class is shrinking, unemployment is stubbornly and painfully unimproved, and politicians don't know what to do. Gold, the ultimate flight to safety, is now priced above $1,600, a record. Last November, it was $1,300 - that, too, was a record.
At the same time, there are significant positives as well. At $14.6 trillion, our GDP is still by far the highest in the world, equal to the next three nations combined (China 5.9; Japan 5.4; Germany 3.3). The stock market has recouped much of it losses. Interest and mortgage rates have been stunningly low for years, making housing more affordable for those with good credit. Many US corporations are earning record profits, with as much as $2 trillion sitting on the sidelines waiting to invest. Yet corporate America does not know what will happen next, and until they do, they will not invest, build, or hire. They need clarity and confidence before venturing forward in such stormy seas.
What might be our response? Build your house on the rock, and not on the sand. Hold all things lightly. Have high hopes and low expectations. Guard your heart. Never be greedy. Be grateful for all things, large and small. Help your neighbor in need. Trust in transcendence. "Keep your life free from the love of money, and be content with what you have, because God has said, 'I will never leave you, I will never forsake you.' " (Hebrews 13:5)