Obama's Ides-of-March Moment is Near

American Thinker ^ | February 24, 2010 | Monty Pelerin

[neverdem]

By the end of March, Barack Obama's administration will face its destiny, its Brutus a pawn of the fates.

In Jimmy Carter's presidency, the Wall Street Journal editorialized about "Ratcheting to Ruin." The title derived from the fact that each cycle high in unemployment was higher than previous ones, and each cycle high in inflation was also. "Stagflation" was the neologism coined to describe what up until then was believed to be impossible in the Keynesian world. This period ushered in a new era in both politics and economics. Carter was replaced by Reagan, and Keynes was replaced by Friedman.

Thirty years later, Keynes is back in vogue, Obama has ascended to the White House, and times are reminiscent of the Carter era. The economy is awful. Fear and dissatisfaction prevail. Politicians are held in contempt. There is one major difference -- Carter did not face an "ides of March" event.

In Shakespeare's Julius Caesar, a soothsayer warns Caesar to "beware the Ides of March." The prescient warning did not help Caesar. As Obama approaches his March moment, no warning can change his fate.

Ben Bernanke promised to end Quantitative Easing (the printing of money to stimulate the economy and fund the deficits) by the end of March. Some believe his commitment was a "campaign promise" to ensure his Senate reconfirmation. Others believe it was a real commitment, necessary to maintain a stable dollar. Shortly, the world will find out.

Mr. Bernanke, quite unintentionally and through no fault of his own, will be Obama's Brutus, regardless of his decision. To understand why, some numbers are necessary. Government needs funding this year of $2.0 trillion (that includes the federal budget deficit, off-budget spending, and state and local needs). Private industry needs about $0.5 trillion. Part of the funding will come from the country's savings. Total gross savings (new savings) is estimated to be $1.5 trillion. Assuming all savings is available, a shortfall of $1.0 trillion exists.

This shortfall can be met from two sources:

• Foreign lending
• Quantitative Easing (QE)

Another possible source could result from a reallocation of existing savings, as would happen in a major stock market decline. That outcome cannot be quantified. Furthermore, a stock market rise would produce a drain of funds from debt markets. Either effect is one-time, therefore not a continuing source of funding.

As the need for foreign investment increases, foreign willingness to lend is declining. Two reasons are apparent: worries about the sustainability of our deficits/dollar and large foreign needs for capital at home. Martin Crutsinger reports:

The government said Tuesday [last week] that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion. The reductions in holdings, if they continue, could force the government to *make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5-billion drop in April 2009.

Accuracy in fund flows is difficult to obtain. Foreign investment of all types appears to have increased about $500 billion last calendar year. If all of that were for government debt, then our Fed would have bought, directly or indirectly, another $500 billion. That amount of QE is significant, representing about 25% of government tax receipts. It represents a rise of over 60% in Fed assets using a pre-crisis base. In a normal economy, a monetarist would likely claim that continuation of that expansion rate would result in annual inflation of at least 60% per year. Another 140% increase resulted primarily from Fed purchases of distressed assets from the banking industry.

Foreign funding was insufficient last year and will be even more so this year. The deficit will be larger, and foreign funding will be smaller. QE must be larger. There is no way to fund these deficits without QE.

The problem is bigger than the numbers above might suggest. Budget forecasts show that the problem increases over time. In addition, 40% of existing debt matures in the next year. That means $2.8 trillion of debt has to be refinanced. The Treasury must sell on average $90 billion of debt a week! In five weeks, we need to sell $450 billion. That is equal to the largest full-year deficit in history, at least until Obama's first year.

There are no plans to curb spending or cut deficits. President Obama just increased the debt ceiling by $1.9 trillion. To outsiders, we appear like a banana republic with ICBMs. Does anyone seriously believe that funding based on "the kindness of strangers" is workable much longer?

Bernanke has two options, neither of them good. He can do what he promised and stop QE. Or he can renege on his promise. Either alternative has radically negative consequences for the country, Bernanke's role in history, and Obama's presidency. If Bernanke stops QE, he fulfills his role as an independent central banker. Presumably, that action stops the decline in the dollar and reduces the risk of future inflation. It was the course that Paul Volcker chose in the late 1970s.

Volcker's action was bold, highly controversial, and highly criticized. Volcker's action had the support of President Reagan, who was willing to face short-term unpopularity to fix the economy. Bernanke's task is harder than Volcker's. Volcker stopped the economy dead in its tracks. If Bernanke ends QE, he will stop both the economy and the federal government dead in their tracks.

Without QE, the government will be unable to honor its obligations. Non-payment of Social Security or Medicare or federal payroll or welfare checks or retirement checks, or military payroll, etc., etc., would show up almost immediately. That would jeopardize foreign (and domestic) purchases of additional federal debt, exacerbating the problem.

Bernanke's second option enables the government to continue operating irresponsibly until market forces eventually stop the profligate behavior. Market discipline would likely be imposed in the form of a collapse of the dollar or raging inflation (or both).

Under either scenario, the Obama presidency is destroyed. Obama probably prefers the second option, because it might extend the period before sovereign bankruptcy. However, it might not extend it very much. Foreign bankers have chastised our behavior regularly. If the Fed is perceived as "The Great Enabler" rather than as protector of the currency, a run on the dollar and the dumping of Treasuries could result.

From Bernanke's standpoint, it is not clear which option he might prefer, or if he even has a choice, given Congress' involvement. If he behaves like a central banker and pulls the biggest punch bowl in history away, it would force the government to address its problems before they became more serious.

History will not look kindly on this period regardless of Bernanke's decision. Bernanke never had a chance for a favorable legacy. If he plays his role as a central banker, history may be less unkind, stating, "He did what he had to do." If he chooses to continue QE, it likely will judge him as "The Great Enabler," rating him even less favorably than they did his predecessor.

Obama loses either way. He inherited a difficult situation, but then, via foolish policies, he turned it into a terminal one. At this point, Jimmy Carter may be the happiest person in the country. His lead position in the Pantheon of Shame is in jeopardy thanks to Obama.

For the country, times equivalent to the Great Depression are likely ahead. My guess is that Bernanke chooses (or is forced into) continuing QE. Courage is a rare and dangerous commodity in Washington. Hard decisions occur only in crisis.

When the country is perceived and treated by the world community as the wastrel it has become, then remedial action will take place. Hopefully, something is still salvageable.  

Monty Pelerin blogs at economicnoise.com. He can be reached at montypelerin@gmail.com.

[unkus]

ping

[lmr]

I believe that the current cast of characters believes the world will keep buying our debt because of the ‘symbiotic’ relationship we have with them. They believe our debt holders won’t make a run on our bank. Basically, they are betting that the rest of the world will happily buy all the debt we are willing to issue. How this turns out? I don’t know.

[SERE_DOC]

"How this turns out? I don’t know."

I can tell you....

It ain't going to be pretty, no matter what!

[neverdem]

IMHO, the first two links complement each other.

Walter Russell Mead: Do Soldiers Drink Tea?

An Exceptional Debate: The Obama administration’s assault on American identity

Mark Steyn: Celebrate Diversity Unto Death

White House Accused of Federal Crime in Specter, Bennet Races

Some noteworthy articles about politics, foreign or military affairs, IMHO, FReepmail me if you want on or off my list.

[Post Toasties]

My vote is for stopping the QE and getting the pain over with by, say 2012.

[semantic]

QE was never intended to act as a long-term program to monetize the debt. Rather, it was a short-term mechanism that was utilized to manipulate consumer confidence aka "green shoots".

Its purpose was two-fold: (a) make excess liquidity available to fund short-term gov't expenditures ie 'stimulus'; and (b) provide a hard ceiling on interest rates for treasury & agency debt.

QE could never hope to actually 'inflate away the debt' simply because the $USD is linked to a hard oil peg. That is why all Fed printing conducted to date has been through extremely convoluted channels. If the true extent of the Fed's illegal activities were ever discovered, we'd see a collapse in the value of the $USD.

As a short-term ploy ie a 'hail Mary' it was deemed worth the risk. But as a long-term policy prescription, forget it. So when push comes to shove, Ben is going to have to terminate QE.

Like Norma Desmond, the good ole USA is nearing its close-up known as the "Minsky moment".

[perchprism]

ping

[JoSixChip]

"they are betting that the rest of the world will happily buy all the debt we are willing to issue"

But that is the point, they are not buying all of our debt now. Monetizing the debt (QE as it is called hear) Started last year for the first time in American history. No country has ever successfully monetized their debt, think USSR. This is a path that takes courage to change course, no way the government in this country will do that. So the dollar has to collapse eventually, the sooner the better. Once it does we can start to heal, but it is going to be painful, really painful. Qualifier: JMHO

[TruthHound]

"Obama loses either way. He inherited a difficult situation, but then, via foolish policies, he turned it into a terminal one. At this point, Jimmy Carter may be the happiest person in the country. His lead position in the Pantheon of Shame is in jeopardy thanks to Obama."

That's a tall order, but Øbama surpassed that record right out of the chute.

[shibumi]

The ending of these stories never is pretty -

[DB]

The Federal government and California state government both thought they could just ride out this recession and everything would return to “normal” growth like it nearly always has. They paid no attention to the actual cause of this recession - extreme debt. You can’t stimulate an economy that is broke due servicing extreme debt. When the stimulus is gone, the debt is still there, even more debt because the stimulus was borrowed money as well...

Both the Federal government and our state governments are going to be forced to deal with reality sooner than later and start cutting spending across the board. They have no choice and the longer they wait the more extreme the consequences.

[verklaring]

China is selling treasuries not buying them

Yesterday an indirect buyer bought the entire 6 billion 2yr auction at zero percent interest. Indirect may well = the government buying its own debt. This is an extreme example but the USA has had a significant number of failed and semi-failed bond auctions for the past 6 months. Sometimes the primary dealers buy them (the banks) and they are then sold back to the Fed. There have been other quirky gimmicks.

Buying your own debt is like writing checks to yourself, depositing them, and then claiming you have more money in the bank. It is a hidden form of QE, It is the same as printing money. It will destroy the dollar (think rising gasoline prices).

The real reason for the health care package is not health care (which does not kick in until 2013... 2014 ...2015... never) but is a tax increase which does start 2010. They need to find some real money somewhere. Hence the suggestion is floated of turning 401Ks and IRAs into an annuity (repackaged Social Security which is broke). The idea is to take the money in your 401K and give you a government IOU (promise) of payment when you retire. They set the figure and the amount, with a devalued dollar, they come out ahead. You, of course, get riped off.

They are broke and will not stop spending. FDIC is broke, Social Security is broke, Medicare etc. is broke.

The only thing is Europe, China Japan are in worse shape. AIG may, by the way, have also insured Greek Debt, and others. Guess who will get the bill for that? (Who bailed them out before?) The bad mortgage debt of Freddy and Fanny has also been passed on to the Treasury.

This is going to blow up, globally! The question is not if but when.

[mkjessup]

"...the government will be unable to honor its obligations. Non-payment of Social Security or Medicare or federal payroll or welfare checks or retirement checks, or military payroll..."

If the military needed ANY reason at all to depose the illegal usurper in the White House, there it is. If the government is unable to pay it's bills, the government will collapse. A military government may end up being the only way to preserve order and (hopefully) end this 0bamunistic slide into oblivion for our Nation.

[Rapscallion]

Ping

[dsc]

“the current cast of characters believes the world will keep buying our debt”

Which, of course, is ridiculous.

Look for war.

[NoControllingLegalAuthority]

It is obvious from the article the world has already stopped buying American debt in sufficient amounts to support our federal government's profligate spending.

The whole point of this piece is "the party is already over."

America's choices now are reduced to "do we want to be shot or hanged?"

The fed stops printing money to finance government debt and the economy and federal government pretty much come to a screeching halt. If the Fed keeps printing money to finance the debt, roaring inflation destroys the value of the U.S. Dollar.

[ReleaseTheHounds]

Sobering read this morning... Of course, this will all be “Bush’s fault”. “It was like that when I got here!”

How’s that hope & change working out?

[bert]

Since there is,only one solution to the problem, inflation, massive inflation, the printing of money will continue.

QE is the only way out

[Ronbo1948]

A Global Economic Meltdown, a.k.a., “The Great Depression II”

And the pity of it is that Obama could have avoided it. Yes, granted we were in a Recession, but Obama’s decisions made a Second Great Depression inevitable.

I think it was done with just that goal in mind: Wreck the economy and make everyone dependant on the government.

I wonder if he really thought a civil war wouldn’t break out? A revolutionary movement that would hold him guilty of treason?