(no subject)
Frickin' stupid Joe and Judy Sixpack borrowed money.
They both have jobs, but trying to live on just that income wasn't enough for them. So they borrowed money - money to spend on beer, to pay rent, to pay for braces for the kids, dinners at Hometown Buffet, etc.
For quite a long time, they did this. They were able to do it because their home's value increased every year so they were able to tap it with a home equity line of credit (HELOC) or mortgage refinances where they got more money each time while rolling their mortgage payments forward. And they kept getting nice credit card offers in the mail that they took advantage of, by paying off old cards (balance transfer) and racking on more debt.
Well at some point lenders realized that Joe and Judy don't make enough to really be able to pay it all off unless they start cutting spending to the bone. First their credit card interest rates will rise steadily, and later on the only money they will be able to get will be payday loans or through the sale of assets they own.
That right there is where governments - foreign, state, local, and Federal - are. We've been spending more than we've been receiving, even through the "prosperity bubble" years of this past decade! National and local governments all over the world were spending MORE than they took in, even during the years when growth was high!
And then when the recession hit, governments borrowed more to spend more, thinking it would jolt their economies back. But just as Joe and Judy Sixpack can't turn their economic lives around by borrowing more to spend more, hoping their employers will see some profits and in turn give them a raise, governments can't spend more borrowed money on things that won't generate a return.
The government has spent so much money trying to keep things afloat. Most of it to:
1. Banks, which kept the money to stay afloat or bought savings bonds (hundreds of billions)
2. Bailing out Fannie Mae and Freddie Mac (two private corporations with stockholders and bondholders) that own trillions of dollars in mortgages, as well as backing FHA loans (also hundreds of billions)
3. Buying mortgage-backed securities ($1.5 trillion by the Federal Reserve)
4. AIG (a private corporation), to help it pay Goldman Sachs and foreign banks 100 percent on their derivatives bets
5. GM and Chrysler (two private corporations), to back its 10-year warranties, back its unions and factories and allow them to keep running (many billions, including as-yet-untapped billions in a line of credit)
6. States, so they could keep state workers (teachers, police, bureaucrats) on payrolls
7. People, in the form of food stamps (now a debit card so no one's stigmatized anymore), unemployment payments (most states ran out so they borrowed from the Federal government to keep paying it), medical care subsidies (Medicare and COBRA assistance)
That's all great for keeping people alive and fed for two or so years, keeping home prices from total collapse, and keeping states going with services for one or two more years, but does NOTHING to invest in future growth and future prosperity.
It's as if, Joe and Judy Sixpack - knowing they were in trouble, knowing they had huge medical bills coming up and didn't have money saved for retirement - went out and got a huge loan and then used it to continue living as before.
If you had the opportunity to obtain a huge infusion of cash - all of it debt you know you had to pay back - would you have taken it at all in the first place? Or would you have taken it and then invested it? Governments all over the world took it and used it up.
And now some in Europe are seeing the light. They're biting down on austerity measures - weak measures that won't be enough, but still harsh. But here in the U.S., Treasury Secretary Geithner, economic advisor Larry Summers, and President Obama want to spend more.
Obama wants a $50 billion "jobs" bill passed to give states another year of money to keep them from having to lay off workers they were able to keep with the previous stimulus bill. Democrats in the Senate want continued unemployment insurance to pay unemployed people more than the 99 weeks they've gotten.
The Federal Reserve under Bernanke thinks printing more money hundreds of billions ("quantitative easing") is needed on top of:
1. the TARP money,
2. the 0 percent to 0.25 percent interest loans it is giving banks to invest in government debt at 3 to 4 percent (that's hundreds of billions in subsidy here, giving banks free money to loan to the government to earn interest) and
3. the $1.5 trillion in mortgage-backed securities it has already bought.
But hey, at some point (now and continuing) investors and lenders know it'll be useless to lend money to the U.S. at such low interest rates when we can't pay it back and even if we do pay it back by borrowing more, the value of the dollars being paid back will be less due to money-printing.
All this borrowing and massive debt is based on the hope of an economic recovery. But the problem with recovery for our country is:
1. When bubbles burst, they either have to be replaced by another bubble quickly or they collapse down to at least to before they started. This one was arrested part-way (yes, the recession has been tough, but it's only partial) with massive debt. There's still a ways to go.
2. The last recoveries we had (like the massive one after the Great Depression) were due to massive amounts of untapped (cheap) natural resources (like oil) coupled with a wartorn Europe and Asia. But now, natural resources are getting more expensive due to increased global demand and fewer remaining cheap resources (like oil) and Europe and Asia have major competitive advantages (Asia having both technical knowledge and cheap labor).
3. We are no longer an export economy earning foreign exchange, getting more for goods and services than what we sell. Money has been draining out of our economy for at least the last twenty years. Most of our productive working class factory jobs have been outsourced. Our government thinks workers are productive because it doesn't count government worker productivity and it includes the productivity of workers in foreign factories if the final assembly is done in the U.S. (Yes, true!) We have a service-and-retail based economy. When times are tough, people can get by without services.
So keep that in mind, folks. The massive financial earthquake is yet to come. We've only had tremors like we've seen in the past two years, and in Greece, Spain, California, Florida, Illinois, New York, New Jersey, etc.