Tuesday, September 30, 2008

Wall St - not a shiny Norwegian Blue

Someone draws our attention to an article in the NZ Herald, arguing that the US can afford to go a bit more into the red to give Wall St the fix it craves.

If I read (and calculate) it right, if the $700bn BBBailout goes ahead,
US debt will amount to $11.3 tn* or 79% of GDP.
Without the bailout, US debt = $9.5 tn, or 66% of GDP
Taking out what the US Govt "owes to itself" in SS and Medicare**
US Debt = $5.5tn, or 40% of GDP.
This is not so bad, runs the argument, given that in 1946 US debt stood at 109% of GDP*.

So, the article seems to imply, although it does not seem to come straight out with it, that they could go ahead with the $700bn, and maybe save the markets soaring assets.

But the downside to the BBBailout is: Increasing US national debt puts taxes up - but the people's budgets are already constrained by rising food and energy bills, unemployment, and foreclosure, so the taxes will have to come from the rich and the corporations, who will squeal and threaten to cut party political donations and leave the country, especially as they are facing liquidity problems of their own.

The second result of the BBBailout is that interest rates will have to go up in order to pull more money into the banking system, and to attract inward investment. This will create worsening debt (loans are more expensive) and will depress the economy. Businesses are calling for interest rates to go down so that they can borrow more easily in order to stimulate economic growth in order to avoid recession.

So while borrowing the $700bn might or might not cure the disease in Wall Street, the resultant borrowing would bring on the recession in the real world, making it quicker and deeper.

But without the $700bn, runs the counter argument, Wall St dies, and if Wall St dies, the real economy gets sick too, because there is no money.

Unless, of course, the people authorised their agents (Government, BoE and the Bank of England Monetary Policy Committee ) to issue the money for them to use, and that would be unthinkable.

The $700 is going to drive debt up, and debt is the problem. You do not solve a problem by making it worse, not unless you have a dead cert winner, and the BBBailout cannot in any way be said to be a dead cert winner. It might delay the stock market crash, it might even mitigate the coming recession, (I'm leaning over backwards here), but it is more likely to be a case of good money thrown after bad. Where is the $700bn going to come from anyway? Is is borrowed? Who from? Clearly not from American banks (although anything can happen in this Alice in Wonderland world of debt-based finance).

So the $700bn is going to add to the US external debt, which currently stands at $13.7tn, (95% of US GDP).

Debt is not a good basis for an economy - any economy. Debt is a cause of economic divergence between rich and poor. Debt is an asymmetrical power relationship. Debt is an important driver of economic growth, it has a doubling rate, it is unsustainable. World debt amounts to $54 x 10 to the power 12. Even if you give Mr Wall St another fix of $77bn, he is not going to make it. He is not a flourishing beautiful Norwegian Blue Wall St. He is one very sick wall st parrot with feathers coming out. This Wall St is dying. He is about to fall off his perch. There is no point in giving him his last fix, no matter how much he pleads for it, because it will not save him.

Reserve the central financial intervention medicine for the real economy. They're going to need it, but $700bn applied to the Green New Deal is going to carry them through on a very reasonable programme of energy saving and renewables investment for the next 2 or 3 years.

So - in conclusion both scenarios - give the handout to Wall St, or give some or all of it back to the people - both scenarios lead to recession.

The alternative whether the money is applied to the real economy, to help power it out of the coming recession, or as one last fix to a dying system of profit created out of debt.

*How does this relate to the $13.7tn of external debt? What proportion of these two figures is double counted?
**What is this? Why does the Govt owe medicare and social services.
***they did have a bit of an excuse, given the recent five years of unpleasantness with Mr Hitler, not to mention the preceding Great Depression.

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