'We no longer live in a world of nations and ideologies, Mr. Beale' - Macleans.ca
 

‘We no longer live in a world of nations and ideologies, Mr. Beale’


 

Bloomberg’s sphincter-tightening-news division reports that two-year U.S. Treasury Bonds now have a higher yield than notes of similar maturity issued by Berkshire Hathaway Inc., Procter & Gamble, Johnson & Johnson, and the Royal Bank of Canada.


 

‘We no longer live in a world of nations and ideologies, Mr. Beale’

  1. "Who has better credit than Uncle Sam? If you ask the bond market, that elite list includes Berkshire Hathaway, Procter & Gamble, Lowe's, Johnson & Johnson, and a host of other blue-chip corporate borrowers. The U.S. government has the ability to levy taxes on the largest national economy in the world, a vast and fearsome revenue-collection apparatus, and more than two centuries of constitutional government under its belt. P&G has Tampax ……….. So here's a prediction for you: Obamacare is not going to happen, regardless of the fact that the president is going to sign it into law today, regardless of what happens in the 2010 and 2012 elections, and regardless of any speech given anywhere in Washington. The government's ability to simply say “Make it so!” and ignore economic reality is coming up against its limit. If Nancy Pelosi thinks the Republicans are obstructionists, wait until she wants to borrow money from people who don't want to lend it to her and don't have to run for reelection." National Review, March 23, 2010

    Read column this morning. I, too, think this is a sign of the coming apocalypse.

  2. Spending credit like water is buckets of fun for a while. It loses its lustre when the lender limns the line and all that is left is a long list of interest charges.

    At that point (now a matter of decades) the US will have one of three options:
    (1) Print money to pay off the debt. See the Weimar Republic for reference.
    (2) Default on the debt. To oil suppliers. And China. Imagine a foreclosure, except with tanks, bombs, and missiles on the one hand and an oil crisis on the other.
    (3) Drastically raise taxes and cut spending to cover interest payments and forego the borrowing on which the US is now dependent. The rich will leave, of course. Everyone else will have the joy of working 12 months to keep 2 months worth of pay.

    • I broadly agree, but you are confusing the debt and the current account deficit. The two are related – when governments spend more than they collect in revenues, it tends to increase the current account deficit. Nonetheless, when Clinton balanced the budget, the US still had a sizable current account deficit.

      Why does the US have a large current account deficit? While some blame China for undervaluing the yuan (the US has deficits with more than just China), the core reason is because they can. Though the US has a floating exchange rate, it has largely avoided the devaluation you would expect from such a large current account deficit. This is because the US dollar is the international reserve currency. In a sense, it allows the country with the reserve currency to take on interest-free loans.

      The death knell will come at such a point when countries abandon the dollar standard. The result will be a massive devaluation of the US dollar. All of a sudden, consumers who have become reliant on importing cheap goods from abroad will no longer find those goods to be so cheap. It also means that US foreign debt will be held in terms of non-US dollars, which will make it all the more difficult to pay off debt.

  3. If, for the sake of argument, you take Pelosi, Obama and, to a lesser, extent Reid as "the government," the current US "government" is actually more to the left than the NDP. I think explaining it that way makes the coming fiscal armageddon easier — esp. for those uninitiated in US politics — to comprehend how it went so bad, so fast. Or, "Putting champagne socialists in positions of power will do that, DUH".

    • to the left of the NDP

      Really?

      Hyperbole is an effective rhetorical tool, so maybe you didn't mean that literally. You can't really think that Obama, Pelosi and Reid are to the left of the NDP can you?

      • I agree with your point (Obama opposes gay marriage, and is currently managing two major overseas wars), but I'll play devil's advocate. If you think solely in terms of expansion of the size of government, Obama/Pelosi may exceed anything the NDP could dream of.

        Government spending as a % of GDP was 20.7% in 2008. In 2009 it was 24.7%, and it will probably only continue to rise. By contrast, the NDP, at least in theory, claims to support balanced budgets. They mounted an anti-tax campaign against the HST when it was being implemented in Ontario. Their scary left wing agenda involves not cutting corporate taxes, rather than raising them.

        (I was playing devil's advocate though – I think we too often mix up fiscal conservatism with fiscal prudence. NDP'ers may be more fiscally prudent than Obama/Pelosi, rather than more conservative).

      • I don'y know about Obama and Reid, but I think Pelosi is to the left of the NDP.

  4. ‘We no longer live in a world of nations and ideologies, Mr. Beale'

    Meanwhile… has Google pulled their ambassador back from China yet?

  5. And why shouldn't that be the case? If I had a million dollars (right after buying the Dijon ketchup), would I rather lend it to Warren Buffet or to the US government? It's not even close…

  6. I would never underestimate a currency or financial system backed by the most powerful military the world has ever seen.

    • The problem is that the military, in the long-term, needs to be backed by a financial system and economy able to fund it. Historically speaking, solvent and prudent states have fared much better in wars than profligate spenders.

      For decades in the 16th and early 17th century, for instance, the mighty but spend-thrift Spanish fought the puny Dutch. The Spanish lost and became has-beens.

      In the late 17th century, the debt default-prone French sought to crush the puny Netherlands. They failed in the Dutch Wars, and were roundly beaten in the war of the League of Augsburg. When the French made a bid for hegemony in the war of Spanish Succession, they once again lost to a coalition of states led by William of Orange (King of England and Holland).

      Through the 18th century and into the Napoleonic wars, the French and British fought repeatedly for control of colonial territories, and continental domination (the British didn't seek continental domination but they balanced against the French). Britain never fielded a particularly large land army, and funded its navy through prudence. Because money lending interests were represented in parliament, Britain could be credible about its loans. By contrast, the French had a well-deserved reputation for defaulting on debt, meaning that nobody would lend them money without high rates of interest. Despite the best general in history, and the advantages of unity (its easy being one state against a coalition), economic advantages and the military innovation of the levee on masse, Napoleon was defeated by a British-led coalition.

      Finally, in the Second World War, which country was decisive? The one with the mighty land army that had steam-rolled across Europe? Or the one that entered the war with a standing army of about 200,000 troops?

      A strong military must be built on solid economic foundations, otherwise it will fail in any drawn out conflict.

  7. But I wouldn't necessarily want to invest in it. Just how are you going to protest the inevitable devaluation of your investment?

    DARTH VADER: Perhaps you feel you are being treated unfairly?

    • IntenseDebate Notification <DIV dir=ltr align=left>You are right. It's military financing not spending that's the problem – It was incredibly irresponsible to entirely finance the Iraq war through borrowing while simultaneously lowering taxes. One could argue that a government health care program, given America's challenging fiscal situation, is equally irresponsible. However, if the one arguing the latter voted for/was in favour ofboth of the former, he'd be a hypocrite.</DIV> <DIV>

      • I don't understand why you're fixated on Iraq. The grand total of US military spending could be completely eliminated and there would still be a monstrous deficit. Military spending is just a measly 18% of the budget.

        http://farm3.static.flickr.com/2386/2429217377_c7

        The grand total of Iraq war spending was 900 billion. The annual deficits for the next ten years are expected to be 900 billion per year. This year's deficit was 1.4 trillion.

        It's like your blaming the cost of a new car on the radio.

        • Ok, but if you're deep in debt and buying a new car, you should go for the cheapest model. Don't get the satellite radio with the subwoofer.

  8. Any first year economics student can tell you what happens now. the Fed in the US is going to start cranking up the overnight interest rates in order to create sufficient demand for US debt.

    Canada is going to follow, and both of our economies are going to enter the ACTUAL recession that we should have had a year ago. Stimulus just put more heroin in the arm of the junky. What we really need is to dry out from all of this cheap debt and allow the economy to balance out properly.

    • You are mixing up the monetary and fiscal side of things. Interest rates need to go up because they were cut in order to combat the recession. However, fiscal expansions (the stimulus) actually raise market interest rates. Secondly, I think the question is whether you would rather have an extremely precipitous drop in the economy, or whether you would rather spread out the effects of a downturn over several years. Ask yourself which approach is more likely to lead to bank failures and financial collapse.