U. S. Treasury Secretary Timothy Geithner wrote a letter to Colorado Senator Michael Bennet dated May 13, 2011, explaining why the national debt ceiling should be raised from the current limit of $14.3 trillion. Here are few insights into the mind of a oblivious Keynesian economist.
Geithner, “I hope that congress will act in a timely manner to increase the debt limit and protect the full faith and credit of the U.S. government, but I appreciate the opportunity to respond to you about this matter.”
U. S. Treasury Secretary Timothy Geithner
Currently the federal government owes about $9.2 trillion in “hard” debt to the public and foreigners, an additional internal debt owed to various federal agencies, such as Social Security, brings the total debt to$14.4 trillion. This constitutes about 96% of our GDP. If you add state and local debt the number climbs to 115% of the GDP. Add in personal debt and the figure climbs to 223% of GDP. Add in all current U.S. debt owed and the figure jumps to 365.6%. And Mr. Geithner’s solution is to raise the debt ceiling and add more debt?
“As you know, the debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congress and presidents of both parties have made in the past.
Failure to raise the debt limit would force the United States to default on these obligations, such as payments to our service members, citizens, investors, and businesses. This would be an unprecedented event in American history. A default would inflict catastrophic, far reaching damage on our Nation’s economy, significantly reducing growth, and increasing unemployment.”
Geithner continues “A default would call into question, for the first time, the full faith and credit of the U.S. government. As a result, investors in the United States and around the world would be less likely to lend us money in the future.”
First the federal budget is $3.75 trillion. In that $3.75 trillion we would automatically cut off payments to “service members, citizens, investors, and businesses?” What say we concentrate on eliminating waste, fraud, and a few thousand bureaucrats who produce nothing for our economy and cost thousands of jobs? I know Florida District 24 Representative Sandy Adams is up to the task.
President Richard Nixon defaulted on the Bretton Woods agreement in 1971 reneging on our agreement to redeem dollars for gold payments.
Second we have defaulted in the past. It is a myth to we never have defaulted. In 1971 the U.S. federal government under the direction of President Richard Nixon went off the gold standard and told various world bankers the Federal Reserve would renege on the Bretton Woods agreement signed in 1944 that promise to back U.S. dollars with gold.
“And those investors who still choose to purchase Treasury securities would demand much higher interest rates, reflecting the increase risk that we might default on our obligations again.”
Did this actually happen in 1971?
In August 1971 when it was announced by President Nixon that the U. S. would default on its obligation to redeem the dollar for gold under the Bretton Woods system the Federal Funds rate increased from 5.63% to 5.75% from August to September and dropped down to a low of 3.29 in February 1972 and raising back to 5% by the end of 1972.
If the U. S. reorganizes does Geithner think the increase in interest rates would be permanent?
Apparently in 1971 the raise in interest rates lasted all of one month. Investors are not dim-witted idiots as Geithner would have Congress believe.
“Default would not only increase borrowing cost for the Federal government, but also for families, businesses, and local governments – reducing investment and job creation throughout the economy.”
The Federal Funds rate since 2007
Ah one slight problem there Mr. Geithner, the facts. When the “Great Recession” began in Fall 2007 government “investment,” that would be spending to the rest of us, has increased 27.8%. Government “investment” has increased from 2.942 trillion to $3.761 trillion. During that time of “investment” real investment, or to us regular folk, the productive private sector investment has declined 16.7%, from $2.26 trillion to $1.88 trillion.
Is there an inverse relationship?
Almost like the government was “crowding out” private investment. Maybe if the federal government borrowed less there would be more funds for private sector investment?
Commercial Real Estate Loans since 2007. There does not seem to be a correlation between a low Federal Funds rate and actual loans.
Of course there would be. You do not have to be an economist to figure it out.
“Treasury securities set the benchmark interest rate for a wide range of credit products, including mortgages, car loans, student loans, credit cards, business loans, and municipal bonds. Accordingly, an increase in Treasury rates would make it more costly for a family to buy a home, purchase a car, or send a child to college. It would be more expensive for an entrepreneur to borrow money to start a new business or invest in new products and equipment.”
So increasing the federal debt will increase the amount of loans to the private sector?
Not likely to any meaningful degree. It will it keep the federal government in business longer enabling a greater concentration of wealth into the hands of a few powerful men in Washington D.C. addicted to cheap money. “Concentration of wealth” being the key goal.
Federal Reserve Chairman Ben Bernanke
The facts are that with the Federal Funds rate is at 0.08% and the monetary base increased to 18% of the GDP, there is no more room for the Federal Reserve to monetize the debt without severe consequences. The swimming pool is full of water. Any more “liquidity” will spill out over the sides of the pool in the form of inflation or incurring more “hard” debt by selling treasury securities to the public or foreigners further “crowding out” private sector investment with the result being further stagnation and or inflation.
The last quarter of GDP growth in the spring of 2011 was 1.9%. Low interest rates do not seem to be “stimulating” much of anything except the federal government’s appetite for debt.
Artificially low interests rates are having a hugely damaging effect on the economy that will be visible for years. The main beneficiary of low interest rates is the federal government and Federal Reserve. The federal government can march onward financing its big government (currently 25% of the GDP is consumed by the federal government) movement and the privately owned Federal Reserve is bogged down with billions in low interest junk and foreclosed housing paper.
Florida Congressional District 24 Representative Sandy Adams would like a chance to find fraud and waste in the federal budget so our veterans benefits are not jeopardized.
If a local private bank owed billions of 3.5% junk bonds and foreclosed housing assets would that bank want a increase in interest rates making their portfolio worthless? Not likely.
“A default would lead to a sharp decline in household wealth, further harming economic growth. Higher mortgage rates would depress an already fragile housing market, causing home value to fall. Additionally, a default would substantially reduce the value of the investment – including Treasury securities – held in 401(k) accounts and pensions funds, which families depend on for their retirement security. This significant reduction in household wealth would threaten the economic security of all Americans and, together with increased rates, would contribute to a contraction in household spending and investment.”
He certainly has the deflation from cheap money part correct. Will there be pain by doing the right thing?
Yes, there certainly will be the right way and the wrong way.
The facts are from the fall of 2007 the Federal Funds rate has declined from 4.76% to 0.08%. From the peak of May 2009 real estate loans have declined 9.4%. During that time the highest the Federal Funds rate has been is 0.21%. Low interest rates do not seem to be stimulating the housing market.
Bankers have the education and training to know that low interest rates cannot last forever. They see the massive debt incurred. They know it is safer to invest in short-term in T-bills than a 15 or 30-year fixed mortgage at 5% when the possibility of 5% inflation is very possible in the near future. Since February 2011 the CPI is up 3.4%. How good does a 5% loan look to a banker when the inflation rate is 3.4%? A 10% inflation rate would wipe out thousands of banks that made loans at 5%. We would see a repeat of the S&L disaster in the late 1980’s.
The 4.2 million unsold homes on the market have depressed resale housing prices 34% below the new home prices. There are another two million homes in foreclosure not on the market at this time. This creates uncertainty for bankers and frankly scares the hell out of them from making loans. Under these circumstances would you be out there peddling 5% loans for 15 or 30 years?
The combination of inflation fears and the unsold housing stock are the root of the real estate problem not low interest rates. If bankers could raise their interest rates to take into account the additional risk of inflation and the huge inventories of unsold homes they would be more willing to lend money and stimulate the housing market. Housing prices would fall, but because of the housing surplus created by the policies of Greenspan, Bush, Clinton, Carter, Frank, Dodd, and Maxine Waters, and higher interest rates.
Allowing interest rates to rise would create more economic activity as more consumers could obtain loans and purchase housing that fit their budget and needs. Bankers would be more willing to take on additional risk if they were compensated with fair market value interest rates for their risk.
“The unique role of Treasury securities in the global financial system means that the consequences of default would be particularly severe. Treasury securities are a key holding on the balance sheets of virtually every major insurance company, bank, money market fund, and pension fund in the world. They are also widely used as collateral by financial institutions to meet their day-to-day cash flow needs in the short-term financing market.”
So borrowing and monetizing the debt will make these holdings “safer.”
What Geithner is discussing is referred to as “seigniorage.” Seigniorage is a convenient source of revenue for dishonest governments. Basically if a financial firm or individual holds dollars and the value of those dollars decreased relative to gold or other world currencies the government wins.
Did you get that?
If the Federal Reserve gives the federal government a bunch of cash, the federal government spends it on goods and services before inflation occurs, inflation occurs, businesses, firms, households owning the “old” money lose out to the federal government. The federal government has tricked these businesses and bond holders out of their rightful return on investment by creating inflation. This is a hidden form of taxation, some like economist Gary North would refer to it as theft.
The federal government has a huge, $14 trillion dollar huge, vested interest in seeing that all the paper owned by these institutions declines in value. Future inflation is a hidden tax on these U. S. financial instrument holders, suckers to Geithner and his circle of friends.
How is inflation created?
By increasing the money supply. More debt almost guarantees that the money supply will increase. Geithner is either a dishonest crook or another clueless Keynesian economist. I think the former.
To ensure the value of these low interest financial instruments an honest central banker would tell the federal government that no additional deficit financing credit will be extended and the money supply will be scheduled to grow within strict limits in the future designed to maintain the value of the dollar in relation to other world currencies and gold.
Currently Ben Bernanke is at the helm of the Federal Reserve acting more like an irresponsible bartender handing out cash like it is dollar beer night at the pub. Under his tenure the monetary base (reserves and cash) have increased 200% in the last three years. I do not foresee a defense of the value of the dollar anytime soon. Bernanke will more than likely increase holdings of reserves using stealth intermediaries to acquire three to five year notes so as to avoid the publicity nightmare that Quantitative Easing II created. This will further cheapen the value of the dollar and create inflation.
“A default on Treasury debt could lead to concerns about the solvency of the investment funds and financial institutions that hold securities in their portfolios, which could cause a run on money market funds and the broader financial system- similar to what occurred in the wake of the collapse of Lehman Brothers. As the recent financial crisis demonstrated, a severe and sudden blow to confidence in the financial markets can spark a panic that threatens the health of our entire global economy and the jobs of millions of Americans.”
The risk for the global economy is a continued decline in the dollar. When we borrow money and monetize our debt it increases, not decreases, the chances for a world panic as businesses and central banks increasingly divest themselves from the devalued dollar.”
Geithner is right that a dollar collapse would be catastrophic but his remedy of devaluing the dollar with more borrowing is not sound.
China has divested itself of $200 billion of our short-term securities. Japan has suffered a tsunami and the resulting loss of GDP production. Greece is in financial turmoil and Geithner’s solution is to raise the debt ceiling?
What banking book did he learn this from?
Stupid question. Keynes 1936 work the General Theory of Employment, Interest and Money. An English fairy tale that somehow got classified as non-fiction and is taken seriously by the politicians and economist in Washington D.C.
“Even a short-term default could cause irrevocable damage to the American economy. Treasury securities enjoy their unique role in the global financial system precisely because they are viewed as a risk-free asset. Investors have absolute confidence that the United States will meet its debt obligations on time, every time, and in full. The confidence increases demand for Treasurer securities, lowering borrowing cost for the federal government, consumers, and business. Indeed, during the recent crisis, investors flocked to Treasury securities as a safe-haven asset in the midst of a damaging financial panic. A default would call into question the status of Treasury securities as a cornerstone of the financial system, potentially squandering this unique role and economic benefits that come with it.”
Geithner is right that the world currently flocks to the dollar as crisis hits world markets. That is more a reflection on the poor economic policies in Europe than it is on our policies. Geithner seems enthusiastic that he can get more suckers to buy United States securities and the benefits of seigniorage. As these suckers wake up and see their assets devalued by our Federal Reserve and federal government inflationary policies they most certainly will re-examine their view of the dollar as a “cornerstone” currency.
“Moreover, the fact that the United States would not have enough money to meet all of its obligations would have serious economic consequences. If the United States were forced to stop, limit, or delay payment on obligations to which the Nation has already committed-such as military salaries, Social Security and Medicare, tax refunds, contractual payments to business for goods and services, and payments to our investors – there would be a massive and abrupt reduction in federal outlays and aggregate demand. This abrupt contraction would likely push us into a double dip recession.”
Typical Keynesian nonsense. If you take away government spending there will be a “double dip recession.” Would Mr. Geithner like to make a bet on that? Spot me 12 months.
The Keynesians predicted the same scenario after government spending declined drastically after WWII. They predicted the sky would fall and unemployment would skyrocket. What happened?
GDP from 1944 to 1950. The predicted disaster and financial collapse after WWII spending stopped never happened. When the federal spending stopped the economy boomed.
From the end of the war in 1945 to 1946 GDP fell 0.36%. Yes despite a reduction of government spending from 1945 to 1946 of 36.9% the GDP declined less than 1%!
So what happened after WWII?
From 1946 to 1947 federal government spending declined another 15.5% and the GDP increased 9.9%. That does not seem to match up with the Keynesian script very well, or Geithner doomsday forecast.
By 1950 the GDP had increased a staggering 31.7%. Federal government spending did not return to its WWII level in nominal terms until 1957. Accounting for inflation federal spending did not return to WWII levels until 1966. The GDP grew 253% in that time frame.
Call me crazy but give me a double dip recession and years of prosperity.
“It is critically important that Congress act as soon as possible to raise the debt limit so that the full faith and credit of the United States is not called into question. Congress has never failed to raise the debt limit when necessary. I fully expect that Congress will once again take responsible action, and look forward to working with you and your colleagues on this issue in the weeks ahead.
Sincerely,
Timothy Geithner.”
Looking at this mans grammar it is clear he missed his calling in life. He and his hero John Maynard Keynes should have written fairy tales because it is clear the man is clueless as an economist.
The full faith and credit of the United States is in question?
China has already spoken on this matter. They are selling our financial instruments. Our debt will make China the new financial capital of the world, not America. China has the money, the capital, and we have debt. The financial capital of the world will not be New York it will be Beijing in 10 years, maybe five, and Geithner is playing games with the rest of the world trying to squeeze the last few billions out of the suckers still buying our debt.
I do not know when this façade will fall. Some say 2014, some 2018. I think 2012 will be worse than 2011. This financial mess will unravel. An official inflation rate of 5% to 10% would destroy this pretense Geithner is putting up.
Congressman Barney Frank assured the public that Fannie Mae and Freddie Mac were sound investments. Geithner soon will join Frank in the Hall of Shame
Reading this letter is disturbing on so many levels. It is disturbing that Geithner and his Keynesians in the White House and Federal Reserve would believe this garbage. It is disturbing that rational men with billions would believe this gibberish.
I do not believe Geithner, Bernanke, and Washington politicians believe this crap behind closed doors. Washington will sacrifice anything to increase spending and concentrate economic power in the hands of Obama and the Democratic Party. Any overt or hidden tax by inflation will serve their purpose. If millions of investors the world over are hurt, it is the price paid for progress.
Geithner and the other bastard “economist” and politicians know exactly what they are doing. They are concentrating economic wealth in the hands of a few and ripping off millions. History shows that when the hyperinflation comes, 2014 to 2018, the concentration of wealth in the hands of a few will intensify and the possibilities of a tyrannical fascist government like the one in Germany from 1933 to 1945 will be ensured.
Geithner with this letter firmly places himself next to Barney Frank, who assured the public right before the collapse in 2008 that Fannie Mae and Freddie Mac were good investments.
Geithner’s letter is more of the same con game by a dishonest federal government looking for more suckers to rip off. Geithner is a bastard of the first order and should be jailed for the fraud he is committing. The Washington politicians think they will get away with this scam. They are already busted, soon the consequences will follow.
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