Debt, the Biggest Trick of All

According to former Reagan economic adviser and professor of economics at Laurence Kotlikoff of Boston University, however, the $14.57 trillion is itself a low figure.  According to Kotlikoff, U.S.’s “true indebtedness” alone actually amounts to $211 trillion. That’s more than 14 times the “official” $14 trillion official figure and also represents 14x the GDP.

“We’re focused just on the official debt, so we’re trying to balance the wrong books,” Kotlikoff said, naming Social Security, Medicare, and Medicaid for the skyrocketing unofficial figure. To arrive at that whopping figure, Kotlikoff adds up all the promises that have been made for spending obligations, including defense expenditures then subtracting all the projected taxes. Kotlikoff assumed that annual noninterest spending, as well as taxes, would grow indefinitely by 2 percent a year beyond 2075, the point at which the Congressional Budget Office’s estimates end.The difference is $211 trillion. That’s the fiscal gap…

In a 2011  Bloomberg article, Kotlikoff calculated the expense for just one segment of the population…baby boomers. 78 million baby boomers are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000 =  $3 trillion a year.

In November, 2011, Fitch credit rating agency issued a report entitled European Exposure that disclosed that:

“U.S. banks have manageable direct exposures to the stressed European markets (Greece, Ireland, Italy, Portugal and Spain), but further contagion poses a serious risk.

We believe that unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen. Our current outlook for the industry is stable, reflecting improved fundamentals at most banks combined with ratings lower than at pre-crisis levels. However, risks of a negative shock are rising and could alter this outlook.” – Fitch Rating

According to a Nov 2011  Bloomberg Businessweek article,

“JPMorgan Chase & Co. and Goldman Sachs Group Inc., among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.

Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.

As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether…“

Bank of America, Citigroup Inc. and Morgan Stanley also don’t list gross amounts of CDS on GIIPS debt in their filings. All three banks provide figures within their disclosures that they say include a net of their credit-default swaps bought and sold on the five countries.

Of course, all 5 of the major U.S. banks mentioned above loaded with trillions in European counterparty risk also happen to be on the FSB list for posing the greatest risk to the entire financial system.

European leaders have done nothing but delay the inevitable reckoning, by scrambling every few months to find cash to plug the ever growing holes in Greece, Ireland and Portugal, and praying that bigger and more alarming holes in Spain, Italy and even France do not reveal themselves.

- Michael Lewis

Financial journalist Michael Lewis, in his book “Boomerang” reports that worldwide debt levels, both public and private, climbed from $84 trillion in 2002 to $195 trillion today.  In this book, Lewis takes the reader on a financial tour through a number of countries to see how their national character determined how they responded to the tsunami of cheap credit that rolled across the planet between 2002 and 2008…a response that uniquely brought each into the current financial crisis. The book reveals the global phenomena of the folly of both lenders and borrowers. Lenders, driven by greed, eliminated prudent lending criteria lending to all-too-willing borrowers; reminiscent of the subprime lending crisis. In this book, Lewis provides fascinating insights about the crisis including:

• Icelanders wanted to stop fishing and become investment bankers. Stefan Alfsson, an Icelandic fisherman who in 2005 quit fishing and joined the stream of young people becoming bankers, setting himself up as “an adviser to companies on currency risk hedging” — without a day of training.
• Some canny Greek monks who built a vast real estate empire that set off a scandal that helped bring down the government of Prime Minister Kostas Karamanlis in October 2009.
• When a new government took over, it found so much less money in the government’s coffers than it had expected that it decided there was no choice but to come clean; those revelations panicked investors, and the new higher interest rates the country was forced to pay left the country — which needed to borrow vast sums to fund its operations — more or less bankrupt.
• The Greeks wanted to turn their country into a piñata stuffed with cash and allow as many citizens as possible to take a whack at it.
• In Greece, State jobs paid three times those in the private sector (with no work required) and tax collection was a joke: two thirds of the country’s doctors reported an income of less than €12,000 a year.
• Those who work in jobs classified as “arduous” can retire and start collecting pensions, he adds, “as early as 55 for men and 50 for women”; more than 600 Greek professions have somehow managed “to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”
• The Germans acted responsibly in the domestic markets, but happily wallowed in filth when investing overseas.
• British investors, lured by the prospect of 14 percent annual returns, “forked over $30 billion” to dubious Icelandic banks (“$28 billion from companies and individuals and the rest from pension funds, hospitals, universities and other public institutions” including Oxford University which “alone lost $50 million”).
• And property-related bank losses in Ireland, according to one Irish economist, now come to roughly 106 billion euros
• A handful of Irish politicians and bankers had decided to guarantee all the debts of the biggest Irish banks, losses which alone would absorb every penny of Irish taxes for the next four years
• America’s national debts are now matched (even eclipsed) by those of its states and cities. As one analyst interviewed pointed out, the amounts owed to public-sector workers across the country are larger than it will be able to pay.