“I think this is a problem that is going to go live really soon. In that sense, I mean within the next two years. Because the whole thing, fiscally and other ways, is very near the edge of chaos. And we’ve seen already in Greece what happens when the bond market loses faith in your fiscal policy.

…By combating our crisis of private debt with an extraordinary expansion of public debt, we inevitably are going to reduce the resources available for national security in the years ahead. Because as a debt grows, so the interest payments you have to make on it grow, even if interest rates stay low. And on current projections, the federal debt is going to be absorbing around 20 percent — a fifth of all the taxes you pay — within just a few years.

…I’ve just come back from China — a two-week trip there — and the thing I heard most often was, ‘You can’t lecture us about the superiority of your system anymore. We don’t need to learn anything from you about financial institutions and forget about democracy. We see where it has got you.’”

Niall Ferguson: Economic Badass

If the United States goes the way of Greece, there’s no one big enough to bail us out. Ferguson did at least say he thinks the situation isn’t inevitable and I would hesitate to predict a Soviet Union-style collapse. What I do see on the horizon is a long Japanese-like malaise, or very possibly a prolonged 70’s style stagflation and a slow downward spiral of a Britain-esque imperial decline. Unfortunately, I almost hope for that since an all out Rome-like implosion is within the realm of possibility.

And as the West fades and the East ascends, it is worth noting what they are saying about us and our long term outlook. Guan Jianzhong, the chairman of Dagong Global Credit Rating, the largest credit rating agency in China, had the following to say:

“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards. China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged… The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings. Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.”

Indeed Professor Ferguson, the former lecturer is getting a nice talking to. Still, we shouldn’t get carried away, even Dagong Global Credit Rating concluded the United States’ debt was the 13^th safest investment in the world. But U.S. debt had been considered far and away the safest investment for my entire life and probably everyone else out there reading this blog. And even Moody’s has warned of downgrading the U.S. from a triple-A rating.

The long term outlook is even more problematic. While the $1.5 trillion dollar deficit in 2010 is clearly unsustainable, the $107 trillion in unfunded liabilities puts the United States on even shakier ground. While that number sounds huge, it doesn’t mean anything until you actually break down what kind of growth and tax revenue we’d need to pay for it. Former comptroller general of the GAO, David Walker, estimates it will require over 10% growth from now until the end of time; something that has never happened, will never happen and is little more than a pipe dream.

This all means that the United States will have to raise taxes and cut entitlements (while we’re in the midst of increasing them) during a drawn out recession that very well could linger in a decade-long malaise or disco itself into a decade-long stagflation. Whatever we do (and we have to do something) it will simply compound our economic problems.

Even before the financial crisis shrank tax receipts and national productivity, close analysis showed the United States was on an unsustainable fiscal path. In August of 2006, Laurence Kotlikoff, writing in the Federal Reserve Bank of St. Louis Review came to the conclusion that the United States was, for all intents and purposes, broke.  He did so with a lot of fancy math, using equations such as the following:

Yay for math. Anyways, the conclusion is certainly nothing to laugh at, especially since it preceded the meltdown:

“Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.”

He goes on to recommend privatizing social security while simultaneously installing universal healthcare; a very interesting recommendation likely to garner support from absolutely no one. But the paper is sound and quite disturbing. Take this paragraph, updated and elaborated upon by yours truly:

“The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion [now around $107 trillion]! This figure is more than five times [seven times] U.S. GDP and almost twice [thrice] the size of national wealth. One way to wrap one’s head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes [that kind of economy-wrecking increase would actually lower tax receipts, see the Laffer curve]. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits [I'd bet the AARP opposes this option]. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent [a guy can dream can’t he?].”

So are we nearing the end of Pax Americana? Is the sun setting on the American Empire? Have we crossed the Rubicon? While I would like to see our quasi-imperial presence come to an end, I hope we can do so in a peaceful, non-collapsing fashion. Nonetheless, it is unmistakable that the long term fundamentals of our economy look awful.

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Yet right now, the world is focused on Greece, which is requiring a massive bailout from the IMF (partially paid for by United States taxpayers). As a stipulation of the bailout, the IMF is demanding Greece raise taxes and cut social benefits, which has predictably lead to rioting in the street.

I’ve had enough of the bailouts, but what’s more concerning to me is where Greece stands on a list of countries regarding their debt situation:

This information, from the CIA Worldfactbook, is actually a little old. A less complete, but more updated list (although still mostly from mid-2009) puts the United States at 96.5% instead of 94%, the United Kingdom at 425.9% instead of 365.4% and Ireland at 1312% instead of 998.9%! Wow, the United States actually looks pretty good, relatively speaking of course.

But look where Greece is on the list; 19th at 153% (at 170.5% as of 2009). That’s no where near as bad as Ireland, Iceland, the United Kingdom or the Netherlands. It’s also not much different than Sweden, Germany, France and Spain. And the United States is certainly doing what it can to catch up.

Greece was engaged in some deceptive tactics to hide their insolvency, such as hiding billions of dollars worth of currency swaps through Goldman Sachs. However, there’s no reason to necessarily think other governments haven’t been engaging in this kind of Enron-like accounting. And regardless, their debt is still multiples smaller than many fellow European nations.

Also, notice the countries who are saving: China, India, South Korea, Singapore, etc. As many have predicted, including myself, we are witnessing the rise of the East and the fall of the West.

Furthermore, it’s interesting how little debt many of the poorest countries have. Part of this is certainly because there are significant doubts as to these country’s credit-worthiness. But doesn’t it say something that while the richest countries in the world drown in debt, Bolivia—the poorest country in South America—has a debt/GDP ratio of 11.31%?

Regardless of the irony, these debt/GDP ratios are unsustainable. In all likelihood, Greece is just the beginning.

Barack Obama 42% Ron Paul 41%

Ron Paul has made quite the journey; from the outer fringe to just outside the mainstream. He won the Republican straw poll at CPAC and came within one vote of Mitt Romney at the Southern Republican Leadership Conference. And after being repeatedly made fun of on Fox News during the 2008 election, today he’s one of their regular guests.

Now the libertarian Republican has made a big splash in the polls. According to Rasmussen Reports, in a hypothetical matchup for the presidency in 2012 between Ron Paul and Barack Obama, they are polling in a virtual dead heat! Barack Obama is at 42% and Ron Paul is at 41%. While statistics and surveys can be deceptive, I find this shocking, albeit in a good way. Plus the press release had this little gem in it:

“Ask the Political Class, though, and it’s a blowout. While 58% of Mainstream voters favor Paul, 95% of the Political Class vote for Obama.”

Wow.

33 States Out of Money

If you think the federal government has budget problems, just look at the states. California is basically bankrupt and now, according to CNN, 33 states have run out of money to fund their unemployment benefits. This in turn has forced them to borrow from the federal government just to meet the bills. So far they’ve borrowed $38.7 billion and that figure is surely to rise as unemployment appears to have stagnated.

Cow Farts No Longer Cause Global Warming

In some “good” news, cows may no longer cause global warming. Louise Gray of The Telegraph in England reports that “…a new study found that cattle grazed on the grasslands of China actually reduce another greenhouse gas, nitrous oxide.”

She does stress this doesn’t mean grazing cows can help fight global warming in all cases. And, at least in my judgment, this actually doesn’t mean anything at all. But it’s nice to know the money spent studying cow farts has been put to good use.

Study Shows Problems with Foreign Aid

It’s very contentious to oppose foreign aid… Bono would be quite upset indeed. However, experts from The Lancet studying countries receiving foreign aid found that these countries trimmed their health budgets after receiving aid. For every dollar in aid, $1.14 was sent from health to somewhere else. While there are other important areas to be spending money on, given the devastating effects of disease in these third world countries, it seems health would be their primary concern.

What this shows is that while foreign aid sounds nice, often it just props up corrupt governments. John Stossel had a good piece on it back when he worked for 20/20:

What we should be doing instead of sending dictators billions of dollars to “disburse” is circumvent the corrupt bureaucrats and trade with these countries. As economist Johan Norberg puts it:

“External barriers such as rich country protectionism in goods of particular importance to the third world – textiles and agriculture – that (according to UNCTAD) deprives developing countries of nearly $700 billion in export income a year – almost 14 times more than they receive in foreign aid.”

That would help poor people a lot more than subsidizing the kleptocracies they live under.

Smart Women Get Their Drink On

And finally, according to a study by the London School of Economics, smart women get tipsy, buzzed, blitzed, sloshed, sauced, trashed, plastered, wasted and hammered more often than other women… Nice.

Choice quotes:

“There was a time when our cost structure could compete worldwide. Not anymore.”

“Leaner, greener, faster, smarter.”

“This is not about going out of business. This is about getting down to business. Because the only chapter we’re focused on, is chapter one.”

Will GM bond holders get the shaft?