Beyond the Debt Ceiling: the Death Spiral

But if investors lose confidence in the federal government (which they should have by now) and the interest on the debt rose to an average of 10% (admittedly higher than it has been yet), the scenario of the death spiral would occur at $14.5 trillion dollars.

That is right. A death spiral is possible, if enough investors lose confidence, at below the current $16.7 trillion debt limit.

So where the real debt limit lies depends on where real investors, as a group, draw the line.

It would be interesting to ask a few people like Janet Yellen, Ben Bernanke, Lawrence Summers, Barack Obama, Jacob Lew and John Boehner exactly what they think the real debt limit is.

Even the GAO thinks "Debt held by the public at these high levels could limit the federal government's flexibility to address emerging issues and unforeseen challenges such as another economic downturn or large-scale natural disaster. Furthermore, in both the Baseline Extended and Alternative simulations, debt held by the public continues to grow as a share of GDP in the coming decades, indicating that the federal government remains on an unsustainable long-term fiscal path." [GAO Long Term Outlook]

I predict we are in for stormy fiscal weather. Today the government pays interest at a rate from practically zero on short term notes to 3.75% on 30 year bonds. I believe the Federal Reserve has gone to great lengths to keep interest rates low not just because that encourages an economic recovery, but because it puts off the day of reckoning on the real cost of the national debt.

The Republicans are right, we need to cut spending. But we have to cut spending in a way that minimized the hurt to both people and the economy. That means cutting subsidies to the rich, the upper middle class, and in particular military spending and foreign aid. But the Republicans want to cut payments for seniors and the poor.

The Democrats are right, we need more revenue, which means more taxes. We need a higher tax rate on people earning more than $50 million per year and on large inheritances. We need to close every loophole. We need to legalize and tax "street" drugs. But tax increases do result in less spending and less capital deployment, so they should be reasonable. And the Democrats, too, have been reluctant to cut military spending.

The American economy has been badly hurt by both parties and both branches of Congress and by the President these past few years. By protecting their turfs, including the Pentagon budget, they are weakening the long-term viability of the United States.

Both parties should agree to balance the budget in fiscal 2015 and start paying down the national debt in fiscal 2016. The pain will be shared by everyone, but to the extent it can be targeted by law, it should be dished out to those who have benefited most from the American economy.

A Trillion Here, A Trillion There

I read the other day that President Barack Obama added a billion dollars to the commodities program for school lunches. The Agriculture department has started including healthy foods like fresh vegetables and meat in their program, which I consider a good thing. Kids do better when they eat healthy food. For many kids on the free and reduced lunch program, and even for kids with from families with incomes above the cutoff points for the programs, a healthy school lunch may be the only healthy meal they get in the day. Otherwise they may be living on white flour, fat, and cheese.

But then I thought about the military budget. And the bank bailout. And the automobile bailout. And the regular tax loopholes for selected corporations and for billionaires. And the bailout for irresponsible home owners. I realized a billion dollars may or may not be a lot of money when you are talking about a national or global scale.

A thousand dollars is about the take home pay of a minimum-wage American worker. A million dollars is a thousand bundles of a thousand dollars. A billion dollars is a thousand bundles of a million dollars.

Then you have the trillion dollar bundles. It takes a thousand billions to make a trillion. And suddenly these numbers are relevant. It used to be the only economic items numbered in trillions were the national debt and the annual gross domestic product (GDP). But this year the government's budget deficit is over a trillion dollars, and next year's is expected to be over a trillion as well.

Trillion dollars. $1,000,000,000,000.00.

And suddenly the sham nature of American governance and the Obama administration has a greenish light cast upon it. A nightmarish, Herman Munster sort of light.

We are told we cannot afford a decent medical system in the United States. We can't increase the national education budget in a meaningful way [instead, the Obama administration has now tied federal education aid to evaluating teachers according to their classes' standardized test scores.] We can't afford to stop global warming.

Will you look at that budget deficit? No, poor education for poor and working class kids won't cause immediate economic collapse; we need the trillions to bail out banks that strangely resemble gambling casinos tied to loan sharks.

We can't give good dental care to everyone (ask dentists about the sorry state of dental care in the United States of America, and how much of it is from delayed treatment due to lack of money or insurance) because we are spending trillions to stop terrorists whose most spectacular military success to date was accomplished with a few thousand dollars worth of airline tickets and a few dollars worth of box cutters.

As to global warming, the only serious money spent is to subsidize corporate production of new cars (cash for clunkers).

If interest rates rise eventually, and they might even if the economy remains anemic if investors start shying away from national debt, the interest itself on the debt could soon hit a trillion a year.

Some would say this matters not. Going back to Alexander Hamilton, who himself was modeling the U.S. Treasury on the Bank of England, some believe that debt is not a problem because for every debt there is a creditor. We mostly owe our debt to ourselves (and the Chinese) the theory goes.

That is a vast simplification of a complex system. If a trillion is collected in taxes, who paid it, billionaires or minimum wage workers? If it is spent, what for, artillery or medicines? If it is owed, exactly whom do we owe it to? Who has enough money to loan that much to the U.S. government, an increasingly bad credit risk, if you ask me?

Of course, the economy could recover, military spending could be reduced, the Bush (+ lots of Democratic Congressmen like Mike Thompson) tax cuts for the rich could be repealed, and we might get a balanced budget in, say 2011.

Don't bet on it. And if history is a guide, the trillions of debt already accumulated will never be paid off.

And divide that billion dollars of new money for healthy lunches to school children by the number of children in schools in the United States. Per child, it comes to less that $20. That's not much of an increase in fresh vegetables.

Corruption in the U.S.A.

Every once in a while there is a newspaper headline about an elected official in the U.S. being indicted for corruption. In contrast if you read articles about life in third-world countries you are told corruption is rife there. Cops and bureaucrats ask for bribes every time you encounter them.

One of today's headlines, Doctors Reap Millions for Anemia Drugs [New York Times, registration required], tells of a different type of corruption. Legal corruption. Amgen and Johnson and Johnson developed and now sell drugs for anemia that are used mainly for cancer patients undergoing chemotherapy, which tends to reduce their red blood cell counts. These are good drugs: Aranesp and Epogen from Amgen; and Procrit from J&J. But being good is not, apparently, good enough. Doctors are being paid to prescribe the drugs, and we are talking small fortunes here. In one example 6 doctors split $2.7 million in 2006 for prescribing $9 million in drugs. And here is the kicker: it is totally legal.

Totally legal is the defining nature of corruption in the United States of America. And it is no accident. Alexander Hamilton, the Secretary of the Treasury under President George Washington, had observed that men where, by and large, corrupt. Positions of power, he had noticed, attracted the most corrupt men. Rather than trying to change human nature Hamilton advocated institutionalizing the corruption. Three branches of federal government meant that corruption would have to be shared, a sort of consensus effort. Corruption would lift all ruling class yachts if structured properly. Otherwise it would be ruinous to business.

He was right, but the price American's pay is high. We began paying that price right away. Slavery, which steals people's dignity and labor, was written into the Constitution; it is the systematic essence of corruption. Hamilton did not invent it, but it is why slaveholders fought the American Revolution. He did corrupt the first Congress of the United States under the new Constitution by getting them to pay off revolutionary war debts on par, but only after they and their friends had bought up all those paper debts at heavy discounts. The members of the first Congress made themselves richer, in many cases far richer, overnight by a simple vote. They also simultaneously created the national debt, which was part of Hamilton's plan.

So today, and over the past two-hundred plus years, corruption is done systematically and effectively in the U.S.A. You generally don't have to bribe policemen. Instead the police lobby has assured that police are paid a good ordinary salary. The government takes their salary out of your taxes and fines.

The rich are different. Their money comes from capital gains, dividends, and inheritance. They have made sure the Democrats and Republicans tax these sources of money minimally, if at all. For the most part the reporting of capital gains by individuals and income by businesses is semi-voluntary. If you are an employee both Social Security and income tax are deducted from your wages. You have to apply to the Feds to get your money back if you overpay. Businesses and rich individuals write checks to pay their taxes, such as they are. True, they fear auditing, but a lot of taxes can be avoided between audits. Special tax breaks keep their taxes minimal.

If you are rich enough and want something in the U.S., you don't bribe a beaurocrat or elected official. You make a campaign donation; you bundle campaign donations from your associates and make sure you are noticed handing them in. When laws are written your donations are remembered. You have shown an interest in the law. Your lobbyist may be invited to draft the law or amend the draft proposal.

Mostly we don't think about it. It is the water we swim in, with currents swiftly stripping the working people of assets and heading them for the sewers, while warm gentle currents caress the rich. Think about it too much and the African pay-as-you-go systems begins to look attractive.

Once a lawyer who made his money off fees on probating estates boasted to me how he and a group of other probate lawyers recommended that the State of California set maximum probate fees lawyers could charge. They always charge the maximum. It was passed without opposition; it was sold as a reform; but in fact the level of probate fees they set was higher than was previously customary for lawyers to charge.

I'll be writing quite a bit about institutionalized corruption in this blog, over time. Tales from history, tales from the recent past, and analysis of the rare news article on the subject.

If I ever get enough people coming to this site to support myself and a few crack reporters, I'd like to do a section that specializes in reporting on corruption of the legal kind. It takes a lot of research to do that kind of story and you have to be prepared to withstand legal threats and even criminal threats. That is why you see so little of it in America's "free press."

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