Here is the future of Federal government borrow-and-spend "solutions:"

1. The government borrows trillions of dollars over the next year or two, sating the entire world's appetite for Treasuries. Everyone who is willing to buy essentially zero-interest bonds on a gamble the dollar will strengthen against gold, oil and all other currencies already owns a couple trillion dollars' worth of U.S. bonds and has no appetite or cash for more.

2. As the export-our-way-to-wealth model (Japan, China, Germany, et al.) breaks down (because nobody's buying anything anymore from anywhere--nobody needs more machine tools, steel, autos, etc.) then the exporters' surplus which they once plowed into dollars and Treasuries vanishes.

As a corollary, the oil exporters' great wealth also dries up as the "head-fake" in oil prices causes their revenues to plummet just as their sovereign wealth funds take huge losses and their vast welfare expenses continue rising--along with their rampant inflation.

Simply put: nobody has surpluses to dump into U.S. Treasuries. They're using the money they have to stave off social disorder in their own countries.

3. U.S. buyers of Treasuries--panicked souls seeking safety--realize they're losing ground owning zero-interest bonds. Once the dust settles, money managers realize that just maintaining the value of their funds isn't going to cut it. Recall that pension funds are all based on making 8% per year forever. Losing money is not preferable, of course, but now that the markets have already lost 40%-50% then the losses have already been taken. Now the managers have to start recouping their losses or they'll lose their jobs.

It's really that simple. In times of panicky 40% declines, T-Bills are just fine. But after the dust settles, nobody's going to stay employed in the money-managing business who sits on zero-interest T-Bills. Get out there and make us some money, boys and girls; and T-Bills--which have shot to the moon in a spike that looks just like tech stocks in 1999 and oil in 2008--are no longer money-makers.

Simply put: the domestic market for Treasuries is also set to drop.

The blogosphere is alive with the news that the German central bank was unable to sell their latest batch of low-interest bonds; so guess what happens next? The interest rate has to rise to a point which entices jittery investors.

I know this sounds insane in a "low interest rates will last forever" climate, but I predict interest rates in the U.S. will climb to the 9%-12% range much faster than the "experts" imagine is possible. Yes, even with asset deflation and rising savings rates, two factors which are supposed to keep interest rates low forever.

I believe volatility in all markets is here to stay, and volatility is not a friend of bonds. The face value of bonds can fluctuate as wildly as the value of stocks, and so the notion that bonds are "safe investments" for widows and orphans is misplaced. It is assumed by many that low/no inflation means bonds will rise in value, and perhaps this is the case in normal times. But this is not a normal time, nor is the U.S. government borrowing $1.2 trillion a year indefinitely normal.

OK, let's take out our calculators. How about we tax the super-wealthy top 1% of wealth-holders in the U.S. another $500 billion a year. (After all, they own some 2/3 of all productive wealth, so they can afford to pay a bit more.) That's almost half of all corporate profits, and a pretty good chunk of change.

(Note: I believe it is fair and just that the AMT--alternative minimum tax--should be abolished for everyone below $1 million a year in gross income, for all sources. Above that, then every citizen of the U.S. should pay a hefty minimum tax regardless of tax loopholes and the source of the income. If you're raking in $1 million+, you can afford to pay some tax. Currently, it's "cheaper" to hire shrewd tax attorneys than it is to actually pay taxes-- at least at that level of income.)

OK, so we're pulling in $500 billion more--wow. Now the deficit is only $700 billion a year--roughly equal to the rightly loathed TARP program.

OK, then let's just abolish the U.S. Military--the entire thing, the Armed Forces and the civilian Pentagon, the multitude of bases, the 10 aircraft carriers, all of it. That saves $500 billion a year.

Hmm, we still have a deficit of $200 billion a year-- and we also have a couple more million unemployed citizens.

Does this little exercise bring home just how insane $1.2 trillion deficits are? There isn't enough money in the entire world to fund this scale--and recall that every other government in the world will also be running huge deficits as they borrow and spend to stave off social disorder and political turmoil.

4. As interest rates triple for Treasuries, the interest we pay on past and new debt also triples from $260 billion a year to $780 billion a year-- outstripping the largest programs including the Pentagon, Social Security and Medicare.

The need to service all this debt will stripmine the entire Federal budget. It will be so stupendous that we as a nation will be borrowing $750 billion a year just to pay the interest on past debts--thereby increasing next year's debtload.

The end-game to borrow-and-spend madness is insolvency and repudiation of debt. There is no other destination.

So here is a short, semi-random list of solutions which don't depend on Federal borrowing and largesse:

1. Every small business owner who vacates a tiny $3,000/month storefront and hastens the bankruptcy of the commercial landlord who "needs $3K" from the space to pay an inflated mortgage is part of the solution. When the building is sold later for a modest sum, spaces can be rented for what a struggling business might actually afford, i.e. $300/month.

Please note:

Nobody needs to start or operate a small business. You cannot coerce anyone to take the risks of entrepreneurship, hire workers, rent space and pay taxes. Every entrepreneur can opt out at any time when the risk-return ratio turns negative. High rents, high taxes and lower revenues have turned the ratio extremely negative.

2. Every parent/guardian who teaches a child (by their own example) to unplug electronics which are not in use and all those energy-hogging inverters/rechargers is part of the solution.

Q.: What percentage of household electricity in the U.S. is lost to appliances that are turned off?

Saturday Quiz: Energy Lost on Electronics Standby (May 24, 2008)

According to The U.S. Department of Energy, there are 2,776 electrical generation plants in the U.S. That means 140 power plants do nothing but generate the electricity wasted by DVD players, TVs, answering machines, stereo systems, xBoxes and computers plugged into wall sockets while not in use. One easy solution: put as many of these devices as is practical on power strips which can be turned off with one switch.

3. Everyone who focuses not on losing weight but on becoming fit and feeling better via refusing to consume junk food and garbage fast food is part of the solution. Changing the goal from weight loss to well-being is a solution for the individual and for our society as a whole.

4. Everyone who consciously chooses to prepare a home-cooked meal rather than buy a toxic-waste fast food meal is part of the solution--and a revolutionary to boot: "A healthy homecooked family meal and a home garden are revolutionary acts."

Please don't email me that "real food" is unaffordable; beans and rice and vegetables from the Asian or Hispanic or Halal markets are much cheaper than fast food. Please click on the "What's for Dinner?" tab at the top of the page for an analysis which proves this. When it comes to fast food, what we have can be boiled down to one word: excuses.

5. Everyone who forms or helps sustain a community garden is part of the solution: "Food is wealth, health is wealth, energy is wealth; all else is illusion." (For more aphorisms, please scroll down this page.)

6. Everyone who starts bicycling, insulates their water heater, or installs solar panels, etc. is part of the solution. The cheapest energy "source" is conservation. Installing solar panels isn't just a metric of which energy source costs "less"--as measured by what? What if the energy is priced in gold, or oil, or air quality?

There are dozens of other solutions which we control and which don't require unsustainable Federal borrowing and largesse.

Here are several thought-provoking readers' comments:

Adam C.

I just thought I'd write in to correct a fallacy in the argument contributed by Harun I. today.

"The problem with maintaining inflation at 3% is that it compounds until the curve approaches vertical. This exponential growth will eventually outpace real productivity and therefore, at some point, fake prosperity has to be created through expansion of fiduciary media (credit). What this implies is that what is happening today could have been and probably was predicted well before 1913. But once again politics trumped reason.

The effects being experienced today had to materialize. Mathematically there is and can be no other outcome. Ceteris paribus, as real productive activity decreased, credit (fiduciary media) had to be expanded at exponentially increasing rates until exhaustion. Exhaustion occurs at the point where the curve approaches vertical where infinite credit or money has to be injected infinitely. This is impossible and is why all efforts thus far have failed."

This is actually not true. If we accept, for a moment, Milton Friedman's work as correct:

MV = PQ.

M = money supply
V = velocity of money (a placeholder)
P = price
Q = quantity of goods produced

A correlary is given as

%change in M + %change in V = %change in P + %change in Q

or, in plain terms

%change money supply + %change in velocity = inflation + productivity increase So, in a situation where V is constant or increasing, it is in fact not true that we need to inject an infinite supply of money into the system to obtain a constant 3% rate of inflation. The number is actually very finite, and is roughly 5% (2% productivity + 3% inflation). The degree to which inflation outpaces productivity is in fact entirely irrelevant to the discussion.

If we take this a step further, and assume that "real productive activity decreased", constant inflation is even easier to maintain. If we produce less, than we don't have to inject any money at all into the system to create inflation.

Todays problems stem from the fact that for a variety of reasons, "V" has plummeted. It has nothing to do with real productivity. The government is feverishly trying to increase M through deficit spending to counteract this, which will certainly cause painful inflation down the road if/when V picks up. However, to say that this policy is "ceteris paribus" unsustainable is entirely false. It is only unsustainable if we assume a long-term drop in Velocity, which is quite clearly not a ceteris paribus situation.

The real issue with the US economy, monetarism aside, is that the "Y" we produce is not necessarily _useful_ in an objective sense. Legal advice is considered a productive good. Advertising is considered a productive good. Because we primarily sell services to one another, the "Velocity" of our economy is very high. $50,000 for a day in a hospital, as you like to point out, is a great way to create $50,000 of GDP. But we haven't really created anything at the end of the day. A second issue is that the prices of these goods -- let's call them "white collar goods" -- have been increasing at a much higher rate than 3% per year. Inflation in this country is actually quite high, as you have also pointed out many times, if we include items which are excluded from the basket such as health care and legal counsel. I worry about the day when our our considerable supply of money becomes more interested in buying turnips than paying consultation fees. That will be the day when our current economic situation finally hits home for most Americans.

I'd like to reply to Noah C., who wrote:
"With fossil fuel depletion and 78 million Americans becoming retired and useless to the functioning of society in less than 10 years. I don't know what the results will be."

"Useless to the functioning of society" is a pretty harsh caricature of senior folks. Let's put aside the idea of retirement being "useless" which I do not agree with and go straight to the fact that many seniors work or want to work. But, first, they have to overcome age discrimination. I, for example, would like to work in my field, but for over five years have had no success being hired by mostly millenials or gen-Xer bosses. So I work as a free-lance consultant, part time usually, with no benefits.

As a result of spending most of my adult life raising children and working as a part-time professional I will receive a very minimal social security payout. In addition many "boomers" would like to continue working, but are laid off when they reach a certain age. Many seniors would like to work but find that the jobs open to them are minimum wage, part-time jobs at Target or Home Depot that require standing on their feet for 4-5 hour shifts. Still,many take those jobs which literally cause them physical pain.

Younger people do not understand that as one ages one's body does not always cooperate with one's desires. In addition, one's energy level and, consequently, one's motivation can lessen dramatically. Seniors, no matter how they would like to be more "useful to the functioning of society," literally cannot be, in so many ways. But, on the other hand, many seniors contribute much volunteer work of value that would otherwise never be done. Also, the presence of senior members in a society adds the irreplaceable long-view wisdom of social history.

Noah C's resentful attitude is also revealed in his statement "And we are going to have to support on our backs 78 million retired baby boomers. 43 million disabled people, 70 million children. And we have 20 million illegal immigrants." I don't understand why he feels that all these people will be "on his back." Disabled people have jobs. Parents support children. Illegal immigrants work hard. But the larger issue is his resentment. Has he never heard of the social contract? We are not islands unto ourselves. We all live and work together.

I've already written that I am in favor of social security and Medicare reforms. These are inevitable. In the future there will be more seniors living in poverty than those swinging a club on the golf course or sailing away on their dreamed- and worked- for vacation. Those lucky seniors with private investments that keep them out of poverty will be taxed heavily. If Noah (as a representative of his generation) is still resentful about that prospect, then there will be no hope for a civil society.

From your Jan 07 entry: "It's relatively carefree to work for low pay 10-20 hours a week and scrounge up some tossed-out food from dumpsters."

Yes, this works in today's still affluent society. However, I disagree that they would be of any use in an actual depression:

"work for low pay 10-20 hours a week": Most corporations spend for an employee much more than the salary -- rule of thumb is total expenses for an employee including salary are 3-4x salary, and most items beyond salary do not scale down with fewer hours. Such expenses include office space, IT support and equipment, software licenses, HR support, taxes, insurance against claims by employee for work related issues, distributed costs of job searches to find the person, and so on...

Also, most unproductive time is at the beginning/end of a work interval, so shorter work intervals result in more unproductive time. Also, being out of the office means lacking the ability to provide input and to find out what happened when an item must be solved immediately... A half-time worker is only in the best case half as productive as a full-time worker, but the costs are always greater than half.

The professionals you mention are working part-time can do so only because of a tight labor market -- companies may not be able to fill their positions for months if they go, so they eat the costs. In a depression the employer has all the power, a nd guess what, work week goes to 60 hours, not to 20, for the few lucky enough to have a job. For who does not like it, there is another hungry candidate waiting at the door. This is backed with personal experience -- that's how the landscape looked in Eastern Europe in the 1990's.

"scrounge up some tossed-out food from dumpsters": After a state visit to France, Ceausescu (Romania's dictator) found out that they had this power plant in Paris that burns garbage and produces electricity. What a wonderful idea, he said, and ordered one built for Bucharest too, which was done. Unfortunately, the garbage in Bucharest did not burn, because guess what, people were so poor that they would reuse everything to an extent someone grown up in the rich West did not imagine. The miserable junk thrown in the garbage was stuff that not even pigs or dogs would eat, and that could not be reconditioned or reused in any way. People would share garbage, i.e. if the neighbor has a dog/pig, you save bones/potato peels, give it to them regularly, maybe they give something else in return. Pet food? Who can pay for that? Again, the above is not gleamed from some theoretical equation, but from my childhood in communist Romania, where nobody counted on dumpster-diving for a significant part of the diet.

That's how a real depression looks like. It looks and it smells like the brasilian favelas and the slums of Lagos, like fear and despair, and like all the nasty things people do to each other in such hellholes in order to make it until the next day. At no point living there without the chance of getting out feels like a spiritual experience and an opportunity for enlightenment, no more than diarrhea or a toothache do. I truly hope the US will never know such times, but if it does, don't count on dumpster diving and part-time work! Social networks and being able to provide what others need are the key to making it.

Operation SERF, Part 6:

“Dad,” said Daniel after he walked into the log home from outside. “The French are uploading the video they shot by satellite link.”

“And?” asked Josiah as he sat on his couch looking at the fire in the woodstove.

“Do you want them doing that,” questioned Daniel, “after what happened? What they have us on video doing.”

Operation SERF, Part 2

Operation SERF, Part 3

Operation SERF, Part 4

Operation SERF, Part 5


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