This rare footage has fortunately been preserved. It is the credits scene that appears in the original version of Being There which, unfortunately, does not any longer appear in the DVDs being sold.
Enjoy.
http://www.youtube.com/watch?v=vsQ_ClWBeRI
Sunday, November 16, 2008
Default and Other Cheerful Tidings
Satyaj Das is a genius and a man whose words require minute attention. In his latest of November 11, 2008, he proposes that there is a reasonable possibility of a default on the part of our government on its debt, an apocalyptic event.
He also points out that the dollar has undergone a stealth devaluation which has had more or less the same effect as a formal default. For example, Europeans who bought US government bonds recently would have probably suffered substantial losses. He notes that "[b]ased on the highest $/ Euro exchange rate (Euro1 = $ 0.85) and recent trading levels (Euro1 = $ 1.56), the investor would have lost (up to) 46%."
Das also notes that typical cases of sovereign defaults lead to losses of 50% to 80% of the value of the investment. Thus, the losses suffered by Europeans and others are not far short of those sustained during defaults. A case can therefore be made for the proposition that this stealth devaluation of the dollar has been the equivalent of a default.
The implications for future loans are obvious.
What are the implications for countries, such as China and Japan, whose export-driven economies depend on the financing of our consumption-driven deficit? Obviously, they will be forced to charge more for their goods and thus continue to accumulate increasingly devalued dollars. But this is ultimately a mug's game, one which their self-interest cannot tolerate in the long run. There are only two options for them: Hope for a strong dollar, or at least one which does not fall more than they can afford or, more ominously, do what they can to re-cycle dollars out of their system as they accumulate in exchange for stronger currencies or other things. This would put the dollar's status as the global reserve currency in jeopardy. But this jeopardy already exists given the stealth devaluation Das notes.
The world's first option, hoping for a strong dollar, is not realistic given the internal debt and enormous unfunded liabilities the federal government faces. As Das notes, "[t]he US national debt as of March 2008 stands at $9.4 trillion.....The US national debt has grown by $3 trillion (50%) since 2000, when it was $6 trillion.......Prior to the current crisis, the Office of Management and Budget projects that total debt will rise to $12.3 trillion in 2013."
We don't know how many trillions the current crisis will add to the debt because the crisis is not over and expensive new bailouts are popping up like mushrooms after tropical rains.
But it is not simply bailouts and trade deficits that jeopardize the dollar, it is internal debt which also adds another punch to the barrage of punishment. Das quotes Peter Orszag, Congressional Budget Office Director, as a gentleman who does not mince words in this regard: He told the Senate Finance Committee that “…the US economy faces the long-term threat of ‘collapse’ unless major reforms on health care spending are instituted in the coming years.” The federal budget, according to Orszag, is on an “unsustainable path” with health care costs growing much faster than the overall economy. Unless health care spending is brought under control, Orszag noted that the American economy faces crippling problems that “would make our current economic difficulties look tiny”.
Das also quotes Richard Fisher, head of the Dallas Federal Reserve Bank who, while speaking in a private rather than official capacity, said that “the unfunded liabilities from Medicare and Social Security...comes to $99.2 trillion over the infinite horizon”. This equates to $1.3 million per family of four - over 25 times the average household's income. Finally, Das notes “off-balance sheet” liabilities. They total about $6 trillion plus in debt and guarantees primarily involving Fannie Mae and Freddie Mac.
Because the US government pays the bulk of its debts in dollars it prints, it can simply print more dollars to fund its obligations. But this game obviously has limits as creditors will rebel at getting paid with pennies on the dollar. At a bare minimum, interest rates on Treasury obligations will go up.
Signs of stress are already easy to see. Das notes that prices to 'insure' Treasury obligations in the CDS market have increased spectacularly, implying a higher risk of Treasury default. He writes that the market is charging a fee of "about 0.40% pa for 10 years (equivalent to $40,000 annually) in October 2008. This is an increase from 0.01% pa ($1,000) in 2007" on $10 million, 10 year Treasury obligations.
What is to be done for the risk of default is significant even if it is not with us today? In my view, we need a return to neo-Victorian financial values: thrift, industry, rejection of unlimited credit, living within our means, searching for value, investing wisely and prudently, etc.
Will we meet the tsunami that's coming at the top of a safe hill or on the beach? Given the policymakers' preference for bailouts and debt, I am very pessimistic. But that does not mean that the individual will be drowned for there is a lot one can do to prepare. Of course, that is the hard part; it involves acceptance of hard medicine and adoption of these neo-Victorian financial values on an individual basis for there is no guarantee that our government has any intention of adopting them as its own.
He also points out that the dollar has undergone a stealth devaluation which has had more or less the same effect as a formal default. For example, Europeans who bought US government bonds recently would have probably suffered substantial losses. He notes that "[b]ased on the highest $/ Euro exchange rate (Euro1 = $ 0.85) and recent trading levels (Euro1 = $ 1.56), the investor would have lost (up to) 46%."
Das also notes that typical cases of sovereign defaults lead to losses of 50% to 80% of the value of the investment. Thus, the losses suffered by Europeans and others are not far short of those sustained during defaults. A case can therefore be made for the proposition that this stealth devaluation of the dollar has been the equivalent of a default.
The implications for future loans are obvious.
What are the implications for countries, such as China and Japan, whose export-driven economies depend on the financing of our consumption-driven deficit? Obviously, they will be forced to charge more for their goods and thus continue to accumulate increasingly devalued dollars. But this is ultimately a mug's game, one which their self-interest cannot tolerate in the long run. There are only two options for them: Hope for a strong dollar, or at least one which does not fall more than they can afford or, more ominously, do what they can to re-cycle dollars out of their system as they accumulate in exchange for stronger currencies or other things. This would put the dollar's status as the global reserve currency in jeopardy. But this jeopardy already exists given the stealth devaluation Das notes.
The world's first option, hoping for a strong dollar, is not realistic given the internal debt and enormous unfunded liabilities the federal government faces. As Das notes, "[t]he US national debt as of March 2008 stands at $9.4 trillion.....The US national debt has grown by $3 trillion (50%) since 2000, when it was $6 trillion.......Prior to the current crisis, the Office of Management and Budget projects that total debt will rise to $12.3 trillion in 2013."
We don't know how many trillions the current crisis will add to the debt because the crisis is not over and expensive new bailouts are popping up like mushrooms after tropical rains.
But it is not simply bailouts and trade deficits that jeopardize the dollar, it is internal debt which also adds another punch to the barrage of punishment. Das quotes Peter Orszag, Congressional Budget Office Director, as a gentleman who does not mince words in this regard: He told the Senate Finance Committee that “…the US economy faces the long-term threat of ‘collapse’ unless major reforms on health care spending are instituted in the coming years.” The federal budget, according to Orszag, is on an “unsustainable path” with health care costs growing much faster than the overall economy. Unless health care spending is brought under control, Orszag noted that the American economy faces crippling problems that “would make our current economic difficulties look tiny”.
Das also quotes Richard Fisher, head of the Dallas Federal Reserve Bank who, while speaking in a private rather than official capacity, said that “the unfunded liabilities from Medicare and Social Security...comes to $99.2 trillion over the infinite horizon”. This equates to $1.3 million per family of four - over 25 times the average household's income. Finally, Das notes “off-balance sheet” liabilities. They total about $6 trillion plus in debt and guarantees primarily involving Fannie Mae and Freddie Mac.
Because the US government pays the bulk of its debts in dollars it prints, it can simply print more dollars to fund its obligations. But this game obviously has limits as creditors will rebel at getting paid with pennies on the dollar. At a bare minimum, interest rates on Treasury obligations will go up.
Signs of stress are already easy to see. Das notes that prices to 'insure' Treasury obligations in the CDS market have increased spectacularly, implying a higher risk of Treasury default. He writes that the market is charging a fee of "about 0.40% pa for 10 years (equivalent to $40,000 annually) in October 2008. This is an increase from 0.01% pa ($1,000) in 2007" on $10 million, 10 year Treasury obligations.
What is to be done for the risk of default is significant even if it is not with us today? In my view, we need a return to neo-Victorian financial values: thrift, industry, rejection of unlimited credit, living within our means, searching for value, investing wisely and prudently, etc.
Will we meet the tsunami that's coming at the top of a safe hill or on the beach? Given the policymakers' preference for bailouts and debt, I am very pessimistic. But that does not mean that the individual will be drowned for there is a lot one can do to prepare. Of course, that is the hard part; it involves acceptance of hard medicine and adoption of these neo-Victorian financial values on an individual basis for there is no guarantee that our government has any intention of adopting them as its own.
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