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May 9, 2005

Debt

-- by Dave Johnson

The Perfect Storm That Could Drown the Economy

"Personal expenditures in the past 15 months have been largely financed by borrowing," said Wynne Godley, a Cambridge University economist who is affiliated with the Levy Institute at Bard College. "And even a reduction in the pace of debt creation will force people to start spending less, on a big scale."
The government is borrowing massive amounts. The public is borrowing massive amounts. At this point we are so dependent on debt that even a reduction in the rate of new borrowing will smash the economy, but how long can the borrowing go on?


Update - Way more here.

Posted by Dave Johnson at May 9, 2005 11:22 AM

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Comments

The question "how long" is the thing, but there is a pretty huge exchange rate manipulation going on right now that makes it look like it is possible that we will not see a crash until '06.

Do you recall the "employment" act passed late last year? I can't recall the name of it at the moment- sorry. But what this act did was to allow- ostensibly to increase employment- large corporations to bring money into the US that they had parked overseas, and only pay a 5 1/4 or 5 3/4% tax rate on it (my apologies again for the vagueness here). The law also allows the government to coordinate this return with the large corporations and banks. It is widely expected that at least $300 billion will be returned.

This money first has to be converted into dollars, and guess what- as a hueristic, about $20 billion dollars bought on international exchanges equals about a 1% increase in the value of the dollar. So there is enough money in this one manipulation to hold the Dollar price steady (against a broad range of foreign currencies) against a 15% "natural" devaluation.

So, you can think of this money as offsetting an equivalent amount of foreign debt, for one year, thus improving the apparent national debt picture by $300 Billion or better.

My opinion is that this law was intended as a way of warding off a potential sell-off of asets by either Korea, Japan, or China, and it appears to be working. But manipulations of this sort only make the crash worse when it finally happens.

- and there might be another possible manipulation possible tht year, so maybe '07? My best guess is that this is the intent here- cut taxes on the rich, rob the economy of every possible penny

Posted by: JohnDL at May 9, 2005 3:08 PM

(continued)

"rob the economy of every possible penny," manipulate the hell out of the markets, then walk away and let everything fall apart- hard- in '08 or '09. Especially if there is little chance of the Repugs holding the white house in '08. Then, blame the "liberals" and take back over against no significant opposition in 2010 and 2012.

Posted by: JohnDL at May 9, 2005 3:16 PM

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