Friday, July 24, 2009

Taipan Daily: The Return of Exploding Debt Dynamics, Part I

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Wednesday, July 22, 2009
Taipan Daily: The Return of Exploding Debt Dynamics, Part I
by Justice Litle, Editorial Director, Taipan Publishing Group

Way back in October 2008 – remember those dark days, when it seemed stocks could only go down instead of up? – I wrote to you on the topic of "Exploding Debt Dynamics." (You can find the original piece here and part II here.)

Rather than summarize, I'll just quote the original if you don't mind:

Cartoonish as it sounds, [Exploding Debt Dynamics is] a real term that IMF economists use.

If, like me, the phrase gives you visions of Wile E. Coyote blowing himself up with a box of ACME brand dynamite, you aren't too far off.

The technical meaning refers to the fallout from an ever expanding debt-to-GDP ratio. Beyond a certain tipping point, a country's debt burden becomes "explosive" as interest rates shoot higher, hope of payment recedes, and investors stampede for the exits.

To further clarify, just imagine a man with a $50,000 a year income and a $70,000 a year lifestyle. Now imagine the man's "income-lifestyle gap" is financed by credit cards.

This can work for a while, but not forever. As more and more credit card debt piles up, the possibility of paying off the cards becomes ever more remote. Eventually the guy's credit rating goes into the toilet, his interest rates skyrocket, and the whole mess turns "explosive."

This kind of thing can happen to whole countries, just like it does to people...

Now here we are some nine months later, in July of 2009, and the picture has changed in a few notable ways. The dollar, much as expected, fell hard from its lofty crisis peak. Gold stocks managed to pick themselves up off the floor. And U.S. investment capital flowed aggressively back out into the world as markets breathed a sigh of relief.

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But, while a few things have changed, other things have stayed remarkably the same. We are still very much on the path to "endgame" as far as long-term realities are concerned. How this whole mess will be resolved is far from clear. And Exploding Debt Dynamics are still very much with us...

A Truly Impressive Number

Let's start by talking zeroes... as in, the zeroes that go to the right of a dollar sign.

A long time ago, in a galaxy far far away, it used to be that a billion dollars (a.k.a. $1,000,000,000) was a big enough figure to impress most anyone. The James Bond villains of the world could feel respectable demanding such a sum. "One billlionnn dollars..."

But now, thanks to an unceasing litany of stimulus and bailout, a billion bucks feels like chump change... a trifling sum... a waiter's tip.

And so, to impress the jaded soul in these inflationary times, we've got to go REALLY big. How does $24 trillion grab you?

Let me repeat that – $24 trillion. That's a cool 12 zeroes, like so: $24,000,000,000,000. You could spend $22,000 a minute for 2,000 years straight and still not plow through such a pile.

So where does such a boss hoss number come from? It's the rounded-up estimate of the total U.S bailout cost so far. The guys over at Clusterstock came up with a handy little chart...

View Reported Cost Of Total Bailout Chart

How about that. Back in August 2008, the bailout was naught but a mustard seed – a mere glimmer in a bureaucrat's eye. "Our baby's all grown up," as Trent from Swingers might say.

The latest figure – a towering $23.7 trillion – comes from no less an authority than Neil Barofsky, the "special inspector general for the Treasury's Troubled Asset Relief Program." (I put the title in quotes because that's exactly how Bloombergreports it. You can't make this stuff up.)

"TARP has evolved into a program of unprecedented scope, scale and complexity," special inspector general Barofsky said in prepared testimony for Congress. In other news, the Pope remains Catholic and bears still defecate in the woods...

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Andrew Williams, a spokesman for the U.S. Treasury, took issue with Barofsky's over-the-top tally (which includes backstops and guarantees on top of actual funds committed or spent).

"These estimates of potential exposures do not provide a useful framework for evaluating the potential cost of these programs," Treasury flack Williams whined. "This estimate includes programs at their hypothetical maximum size, and it was never likely that the programs would be maxed out at the same time."

In other words, Treasury seems to be telling us, those of us concerned by this gut-busting estimate should just mellow out and take a chill pill because, hey – the odds of the worst-case scenario are extremely low.

Gee, where have we heard that before? Did this guy used to work for AIG? Citigroup maybe? Bank of America perhaps...

And That Ain't the Half of It

The late Senator Dirksen would agree... $23.7 trillion is real money.

You could cut that sum in half and you're still talking close to the entire annual economic output for the richest nation on Earth (the United States). You could knock it down three quarters and the total would still eclipse all major foreign holdings of U.S. Treasuries ($3.3 trillion). You could trim it by 90% and the cost would still outweigh China's total foreign reserves (the single largest cash horde ever amassed).

Balanced against all that, we are supposed to be comforted by the news that Treasury has spent "less than" $2 trillion so far (per Mr. Williams). But how much more is yet to be plunked down? And how, exactly, does Uncle Sam plan to pull a few more trillion out of his hat?

And again, it is not just the United States caught in a serious fiscal bind here. One could argue the entire Western world is up to its neck in multitrillion-dollar rescue obligations now... even as the fundamentals for various Western economies continue to get worse (despite the giddy outburst of investor optimism witnessed of late).

In part II we'll look at just how bad things have really gotten, for countries and banks alike...

Warm Regards,


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