'Crossing the Rubicon'

In "The Problem with Markets," I argued that the strong performance of one high profile market is less than it seems:

People may...believe, as a great many apparently do nowadays, that those currencies and foreign assets that are risky in their own right are nevertheless a better bet than any of the alternatives --- that is, they are the best of the worst.

That's one reason why the U.S. Treasury market has remained buoyant even though Washington is spending and borrowing money like a drunken sailor and wrecking the nation's long-term creditworthiness in the process. From the perspective, say, of a European who is worried about the burgeoning debt crisis in his own backyard, our market might appear to be a safe haven.

In "The Debt-Bomb Rubicon," Dow Jones Market Talk blog offers up some further thoughts on the threat posed by Washington's spendthrift ways, as well as a far more sobering explanation than mine for investors' seeming denial about the risks [italics mine]:

Real Times Economics picks up on the debt theme, noting that the $13 trillion in U.S. national debt equals 88% of projected 2010 GDP (in a post earlier this week, I compared it to 2009’s GDP and arrived at 90%, but little difference; at current growth rates for both it will soon be 100% of GDP.) That puts the U.S. in a dangerous situation. From the Journal’s Mark Whitehouse:

We’re borrowing to bail out consumers who took on too much credit and couldn’t pay, and to support social-security and Medicare systems we can’t really afford. We’re able to do this because financial markets have maintained a surprising faith that we will eventually get our spending under control, and because the dollar’s role as a global reserve currency has kept our borrowing rates unusually low.

The travails of Greece demonstrate the hazard such easy borrowing terms can create. After Greece adopted the euro, markets began to treat it more like any other European economy, allowing it to borrow at interest rates nearly the same as Germany or France. That, in turn, helped Greece get into much deeper debt trouble than it would have otherwise. As a result, it now has to implement austerity measures that will likely yield much deeper economic pain.

I’ll tell you, folks, we are crossing the Rubicon. We are going to be forced into some very hard choices, choices we have been putting off for years, no matter how the economy’s doing. That’s the real takeaway here, that soon no matter how fast the economy is growing, it won’t be able to keep up with our debts.

I disagree with Mark on one point, though. I don’t think our creditors and the markets are giving the U.S. a pass because they believe the government will eventually get spending under control. There simply is zero evidence that that’s going to happen. No, the markets are giving the U.S. a pass because the thought of a sovereign debt crisis in the world’s largest economy, which prints the world’s reserve currency, and which is in times of trouble the ultimate safe haven, is simply too terrifying to even contemplate.

But you’d be wise to do so.

Comments

[angryfutureexpat]

"We’re borrowing to bail out consumers who took on too much credit and couldn’t pay..."

Does he just not know that this is bullshit, or is he being deliberately disingenuous?

[D Rumsfeld]

Your comment '........is simply too terrifying to even contemplate.'

You could not have expressed it better. This view will change and then hell will literaly come.

[George Fleming]

Social Security is in the black for many years. We are borrowing from it to pay for tax cuts for the rich, for offshoring of jobs the purpose of which is to profit only the rich, and for criminal foreign wars and a grotesquely inflated military the purpose of which is to enrich only the rich. ("War is a Racket" said Smedley.)

The USA is now owned and governed by the corporations. It is a kleptocracy and the most dangerous rogue nation in the world, the result of 30 years of right-wing neocon stupidity, greed and savagery. It is time for our nation to dissolve, and this appears inevitable as Mr. Panzer suggests. Then perhaps there will be some justice, and a chance for a better world.

a veteran

[Don]

There's very little that can be done to avoid a class war, and since most Americans are armed to the teeth, you have to wonder how safety could ever be guaranteed. As it stands now, the wealth is still being redistributed, albeit artificially through borrowing, but that can't last for very long. The world is tapped out, and the wealthy ... have no where to hide.

I think we'll see a cultural revolution of some kind, with unbelievable anger against the ruling class, on a scale that might rival any war in history. That is how the story goes, after all. First the guy on the white horse, and then the red one. We've already seen the white horse, and most swallowed it hook, line, and sinker. The red one, won't be any different.

[dearieme]

It would seem that Americans still feel that the world owes them a living. None of us are owed a living.

[Mackay]

Except State of California public employees. and a $100,000. a year pension.

[dearieme]

Good point Mackay: if that pension is contractual, I suppose it does mean that they are owed a living. Until Californian pension plans go broke. The lesson for California is presumably to stop signing such extravagant contracts - though I dare say that it's already too late.

[Blurtman]

Krugman would appear to disagree with the unsustainable US debt argument.

[xqqme]

Does George Fleming explain the collapse of the Soviet Union with "30 years of right-wing neocon stupidity, greed and savagery"?
You can never solve a problem without admitting the truth first. Just sayin'....

[we're all expendable]

Escape From America: The Strange & Scary Billionaires Behind The
Libertarian-Inspired Sea Castles
By Mark Ames

What happens when Americans plunder America and leave it broken,
destitute and seething mad? Where do these fabulously wealthy
Americans go with their loot, if America isn’t a safe, secure, or even
desirable place to spend their riches? What if they lose faith in
their gated communities, because those plush gated communities are
surrounded by millions of pissed-off Americans stripped of their
entitlements, and who now want in?

We finally have the answer, and you’re not going to like it: a new
fleet of castles that float in the oceans. The super-wealthy are
already building their first floating castle, a billion-dollar-plus
luxury liner that offers permanent multimillion-dollar housing with
the best protection of all: moats made of oceans, keeping the
land-based Americans they’ve plundered at a safe distance.

The first such floating castle has been christened the “Utopia“–the
South Korean firm Samsung has been contracted to build the $1.1
billion ship, due to be launched in 2013. Already orders are coming in
to buy one of the Utopia’s 200 or so mansions for sale--which range in
price from about $4 million for the smallest condos to over $26
million for 6,600 square-foot “estates.” The largest mansion is a
whopping 40,000 square feet, and sells for $160 million.

http://exiledonline.com/escape-from-america-the-strange-scary-billionaires-behind-the-libertarian-inspired-sea-castles/#more-23218

[NOTaREALmerican]

The USA is truly a safe haven. When push-comes-to-shove the US has the most loyal peasantry in the world, and best of all they'll believe anything. Our peasants will happily die defending the nobility's loot from trrrrrrrisss.

[ECS]

Hmm, Utopia is a castle with a moat? Not unless it is unsinkable.