One other blogger took his nameplate with him — I’m not sure who; the rest left theirs. But this is what was in front of each one of us as we sat down to discuss matters at the US Treasury. Treasury officials had similar nameplates. It dictated where we would sit as well. From the front of the room on the left, for bloggers it was Financial Armageddon, (Megan McArdle — not there), Accrued Interest, and Across the Curve. On the right, Naked Capitalism, Kid Dynamite, Interfluidity, Me, and Marginal Revolution. Aside from putting the two bloggers with the most traffic at the front, there did not seem to be any rhyme or reason to the seating.
The Treasury officials presenting generally sat in front, a few sat to the side and behind us. It made for an interesting dynamic during the portion of the meeting where some bloggers disagreed over whether derivatives should be exchange traded or not. The folks from the Treasury grinned. See? These aren’t easy questions to answer! For me, with a middle view (bring interest rate swaps to exchanges first and see how they work, then try other instruments that are less liquid), I found the exchange to be a waste of precious time, but it was revealing of the attitudes of those in the Treasury. I knew what the bloggers thought already.
The Biggest Financial Problem
I’ve written a number of pieces on why debt matters. (Or, where is the breaking point?) I am in the process of reviewing This Time is Different: Eight Centuries of Financial Folly — a book that deals with the reality of sovereign defaults over the last 800 years.
Surprise! Over-indebted countries do default on their debt more often than less-indebted countries. During the current crisis, we have two mechanisms running to blunt the troubles. The government is running a large deficit, and the central bank is sucking in longer-dated bonds to lower interest rates. I talked about why lower interest rates are not necessarily a blessing yesterday. Today’s thoughts are on deficits.
After the meeting, I said to one Treasury staffer, “One of the quiet casualties of this crisis is that you lost your last bit of slack from the entitlement systems.”
“What do you mean?”
“Just this, prior to the crisis, Social Security and Medicare would produce cash flow surpluses for the Government until 2018. Now the estimates are 2016, and my guess is more like 2014. The existing higher deficit takes us out to the point where the entitlement systems go into permanent negative cash flow. This means that the US budget is in a structural deficit for as far as the eye can see, fifty years or more, absent changes to entitlements.”
He looked at me and commented that it would be the job of a later administration. No way to handle that now. To me, the answer reminded me of what I say to myself when I go on a scary ride at Six Flags with my kids. There is nothing we can do to change matters. The only thing to adjust is attitude. So, ignore the fact that you are afraid of heights, and enjoy the torture, okay?
Would that I could do that with the present situation. The long term problems are too numerous, and the present crisis saps attention from what is arguably a larger problem. Medicare, Social Security, unfunded Federal pensions and retiree healthcare, underfunded state pensions and unfunded retiree healthcare, and underfunded corporate pensions (flowing to the PBGC) are the crisis of the future. We are talking underfunding and debts equivalent to 4x GDP in total.
The deficits may be helping out areas of our economy for which there is already too much capacity — autos, banks, housing, but isn’t aiding the parts of the economy that don’t have excess capacity. The one advantage to Americans is that a decent amount of the debt is absorbed by the neomercantilists, who will get paid back in cheaper dollars (if at all) than the goods that they provided originally.
This all feels like the Japan scenario. Low interest rates, low growth if any in non-protected sectors, soggy debt-laden protected sectors, excess capacity in areas not salable to the rest of the world, high government debt, and a demographic crisis. Also speculation using cheap leverage for carry trades.
I’ll try to tie this up in another post or two. Sorry if this is verbose.