April 1, 2011
John R. Talbott, author of The 86 Biggest Lies on Wall Street and Obamanomics, has an excerpt from his upcoming book, How I Predicted the Global Economic Crisis*: The Most Amazing Book You’ll Never Read, in the Huffington Post:
If we don’t come to understand the underlying reasons for the current crisis and enact real reform of Wall Street and the banks and get big corporate money out of our elections we face a future that is truly frightening. (Yes, corporate money — total revenues of the 500 largest American corporations are 1,000 times larger than all our unions’ resources combined). There is still time to act, but we must realize that our congress on its own is not going to enact meaningful regulation of Wall Street and the banks, their biggest campaign contributor and lobbying force. Pressure for reform must come from our citizens working together outside of our traditional political parties and governmental representatives.
There is no question that big banks working closely with and paying off our elected representatives to remove regulations on the books caused the current crisis and much of the current government operating deficit. It is unfair to ask American workers to stay on the job past 70 years of age to solve this financial problem as they didn’t cause it. Similarly, it makes no sense to ask average American taxpayers to step up and bail out bank creditors at 100 cents on the dollar as it was these creditors who agreed to take this repayment risk and received the rewards over time in increased interest payments from financing these corrupt banks. Americans cannot just ignore this problem and hope it goes away. Luckily, there are things we can do like cutting the defense budget (over a trillion dollars annually once you add in the costs of our intelligence services and the Department of Homeland Security) back to its level of just fifteen years ago which will save close to $700 billion a year. But first we must limit the lobbying power of the defense industry.
It will not be easy, but very little is riding on it other than the very survival of liberal democratic society on this planet. I believe the key to real reform lies in the realization that all corporate power and profit comes from the people’s initial consumption decision to buy these companies’ products and services. If the people get organized and decide to stop buying the products and services of those banks and corporations that are the worst abusers of our democratic process we can effect real change.
The explosion of government debt in the world will trigger the next crisis. Like the debt in the mortgage crisis, most sovereign country debt is rated AAA so no investor will expect major defaults, especially among the more advanced countries of the world. The amount of sovereign debt in the world, approximately $35 trillion and on its way very quickly to becoming $50 trillion will make the $3 trillion subprime mortgage crisis seem like a minor tremor compared to the major devastating economic earthquake to come.
It is not just governments that are in trouble. Citizens around the world have not saved enough for their retirements. One, most corporations terminated the defined benefit pension plans for their employees over the last 20 years in an attempt to increase corporate profits and shift investment risk from their balance sheets to their employees. Two, Americans have done a poor job of adding to their 401(k) retirement plans as the median balance of a 401(k) today is about $12,000, hardly enough to retire on. Three, many people around the world presumed they could retire on the equity they had built up in their homes. This, thanks to the housing crash is no longer true. Many homeowners have seen their home equity evaporate as now one in four Americans have homes that are underwater, that is the house is worth less than the mortgage. Four, many Americans over 55 years of age are being laid off in this recession and cannot find other work, further straining their retirement plans.
I don’t think people realize how widespread the government sovereign debt crisis is going to be. We have all heard about Greece, Iceland, Ireland, Portugal and Spain, but it is the biggest, richest and most advanced countries of the world that will be tested the most. It is the advanced countries’ banks that have lent these troubled sovereign credits money and it will be their governments who will go into further debt to bail out both the countries that get into trouble as well as the banks in the advanced countries that lent to them.
So this current financial crisis could not have come at a worse time for those countries struggling to deal with their excessive debts. One, it has put the world’s largest banks in jeopardy at a time when their governments are already running significant operating deficits due to the recession. This means that any attempt by the governments to rescue the troubled banks will have to be done by issuing additional new debt thus contributing to even higher debt to GDP percentages for these countries.
Two, the very notion of a global recession/depression is that high unemployment and lower business activity results in less government tax revenue. This lower tax revenue creates deficits that add to the levels of sovereign debt. If we are slow to emerge from the current financial crisis, as I expect, then these ongoing deficits will dramatically increase sovereign debt worldwide by trillions of dollars.
Three, the current crisis has impacted the ability of countries to repay their debts which means their cost of borrowing will increase in real terms to reflect this greater risk. The cost of borrowing will increase as well in nominal terms if these countries decide to print money to fund their deficits as inflation returns. This means that we can expect governments to carry increased interest expense on their debt loads going forward. If the average cost of borrowing for the U.S. Treasury goes from 3% to 10% because of an increased fear of future inflation combined with paying a higher default premium, this will add an additional $1 trillion to the annual deficit making it impossible for Congress to balance the budget and thus reduce or stabilize debt loads in the future.
A rough cut rule of thumb is that countries typically get into trouble when their total debt exceeds their entire GDP. The US, France, Germany and the UK, as well as most of the other European countries will very quickly exceed this dangerous threshold in the very near future. Japan is already there. The great recession and its associated government deficits will last much longer than people expect, banks will continue to write off bad loans that will require their government’s support and the retirement of the baby boom will dramatically decrease government tax revenues while at the same time putting enormous demands on governments to provide for the retirement and health care costs of their elderly citizens.