Thursday, December 19, 2013

Economic madness in the public and private sectors

The insanity continues.  In government, the Secretary of the Treasury, Jack Lew, is at it again.

The Obama administration warned Congress on Thursday the government could run out of borrowing room to help pay its bills as soon as February if lawmakers do not move swiftly to raise the nation's debt ceiling.

"I respectfully urge Congress to take action to raise the debt limit at the earliest possible moment," Treasury Secretary Jack Lew said in a letter to congressional leaders.

. . .

In October, Congress and the administration suspended a $16.7 trillion cap on borrowing until Feb. 7. A new, higher limit will then be set, incorporating borrowing done through that date.

If lawmakers do not raise the limit further, Treasury will be able to juggle money between government accounts to keep just under the new limit for a few weeks.

There's more at the link.

Right now the Treasury can borrow without restriction.  By the time February rolls around, it's widely predicted that it will have added at least $1 trillion, perhaps double that, to the already formidable public debt of this country.  That debt is already almost out of control, as we saw a few days ago:

Yet, even with that reality staring them in the face, the Treasury (and Congress, and President Obama) are about to raise the debt limit again.  Are they blind, deaf and dumb?  What will it take to get through to them that you simply can't go on incurring more and more and more debt?  It's already greater than we can possibly repay, unless we debase our currency through rampant inflation and repay high-value debt in eroded-value dollars.  Doing that will destroy the US dollar as a reserve currency . . . unless the same thing happens to all other major currencies at the same time.  I halfway suspect our financial authorities may be banking on that (you should pardon the expression).

There's only one real, meaningful, permanent solution to the problem.  Government has got to live within its means, with a balanced budget, spending no more than it takes in.  That means cutting expenditure (drastically), and raising more tax income (where possible), and reducing duplication, waste, fraud and other excesses in government spending.  Unless we do that, the end of our current economic road is as sure and as certain as the sunset.

I've spoken in the past about the need for individual financial discipline, to prepare ourselves for the economic tsunami that's on the way.  This latest insanity merely confirms my worst fears.

However, much of the private sector isn't facing reality either.  It's partying like there's no tomorrow, ignoring the facts and living for today.  "Eat, drink and be merry, for tomorrow we die" just about sums it up . . . but they fail to understand that tomorrow's almost here.  Just look at these reports on the same day from the same news source:

Read both articles, and despair.  There are far too few buyers in the market for all those housing starts . . . but that hasn't stopped the developers, flush with QE cash from the Fed, from building them.  What will happen when the bottom falls out of the property market altogether?  For the answer, see 2007-08 - only it'll be much worse next time.

"These are the times that try men's souls" . . . and their wallets, and their bank accounts, and their sanity.



Divemedic said...

The debt (that the government will admit to) is $17.25 trillion. They have borrowed a trillion since October.
But that is only a part of the picture. Remember that the Fed has been monetizing the debt by creating virtual dollars and using them to purchase government bonds. In fact, they have purchased over three trillion dollars worth of government bonds and mortgage backed securities since 2008.

We are seeing the US economy come apart. When the wheels will come off is anyone's guess, but I do not see things getting much better, and even when they do improve, the improvement will be small and short lived.

We are in interesting times. We are seeing the end of the American experiment. What scares me is knowing what is coming next: We have a large, militarized police force, a broke, desperate government, people who are soft and needy, and an impending economic collapse. That is a pattern that has repeatedly been seen in history, and it never turns out well for the people.

Sunnybrook Farm said...

The TV news stories over the last few days have included ones on:
-how the housing market is picking up the best in years
-hiring is up, companies have been creating new jobs now that the economy is so much better.
-new businesses are opening all over our area

There is not any mention that things are close to a collapse, our media has failed as well.

Shrimp said...

It is by design. There can be no other logical explanation.

Anonymous said...

As always, a good analysis, but I wanted to point out a piece of the puzzle on the housing market that you seem not take into consideration:
Purchasing of existing housing is mostly being done by investors (about 55-60% of closings in the last month or so in the two markets I follow), therefore you have strong purchasing with no mortgage applications. While there is a dramatic drop in mortgage applications, there is a continued run-up in housing demand and a corresponding increase in new construction to take advantage of it. I'm not sure the fundamentals are sound for those investments and construction, mind you, but over the last 3 years there WAS real value in the secondary market in many areas, with purchase prices of about 50-70% of new construction costs and a shortage of available rentals.

When the market collapsed, construction stopped and under-utilized housing sat empty. It has taken 5 years of organic growth in the need for housing clear out enough of the over-production backlog for new housing to start to be viable again. There is still too much dead inventory in many markets (houses in foreclosure or default with nobody living in them, in some markets over 10% of existing housing is empty).

Personally, I've been buying single family housing in select markets since the drop. Owning single family housing as rental property is kind of the family business, but I thought I’d never be able to participate because of the bubble. I'd been holding off investing in real estate because of the bubble and putting savings elsewhere, so was able to make a few choice acquisitions. Mortgages are hard to get for investors, so most of the time you have to buy in cash. Mine were purchased for income potential, and have strong fundamentals and no debt, which will insulate me from fluctuations in the rental markets. Much of the current acquisition volume is being done by brokers who want to turn thousands of units into investor grade bond assets of some kind and then package them out to the market. I think that may prove to be an unwise strategy, but I'm not in that market.

Just my two cents worth. YMMV. Void where prohibited, taxed, licensed or stupid.


Anonymous said...

I forgot to point out, it is the stupidity of the rest of the market that is making income producing real estate so attractive to investors. With no other safe harbor for money, a lot of small and medium investors are putting their money in this segment.

Real Estate is slow to liquidate and has uneven growth, and it is a BUSINESS that has to be managed and not just an asset that can monitored passively. However, it tends to produce good steady income and, like gold or silver, it seldom drops to zero value (except when governments mess with it, which is frankly too often.)