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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
August 4, 2010
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I – along with others – believed our fiscal position back in the early-nineties was a disaster in the making.  Were we wrong?  Our federal debt expanded 134% during the seventies to $779bn.  The eighties saw federal borrowings increase another 247% to $2.701 TN.  “Fortunately,” GDP inflated massively as well, ending the eighties up 457% in 20 years to $5.482 TN.

As a percentage of GDP, federal debt ended the sixties at 33.8% and the seventies at 30.4%.  Enormous deficits, however, saw this ratio deteriorate markedly during the eighties, ending 1989 at 49.3%.  A few years of record deficits resulted in this ratio jumping to 58.9% by 1993.  Miraculously, the economy set course on a protracted boom, and governmental receipts skyrocketed.  By 2001, federal debt had dropped to 41.8% of GDP.  Many were contemplating the ramifications of Washington paying back all its borrowings.    

My thesis holds that the rapid deterioration of our fiscal standing was only interrupted by an extraordinary (and unrepeatable) 15-year boom in private-sector Credit creation.  In particular, this historic debt expansion was dominated by a profound change – including a massive expansion - in financial sector risk intermediation.  Between 1993 and 2008, GSE assets ballooned from $631bn to $3.4 TN.  Over this period, the agency MBS market expanded from about $1.4 TN to end 2009 at $4.96 TN.  The asset-backed securities market surpassed $4.5 Trillion in 2007, up from about $400bn to begin 1993.  Broker/Dealer assets began 1993 at less than $400bn and grew to about $3.1 TN.  After ending 1993 at $3.3 TN, total U.S. financial sector borrowings closed 2008 above $17.0 TN.  In the ten years 1998 through 2007, total mortgage debt jumped from $5.13 TN to $14.5 TN, a historic gain of 183%.  These were “once-in-a-lifetime” financial and economic developments.

This enormous increase in debt inflated asset prices, inflated incomes, inflated spending, and inflated government receipts and expenditures.  In particular, the huge expansion of household and financial sector debt was chiefly responsible for filling government coffers from Washington to Sacramento.  Politicians extrapolated this bonanza and spent unwisely.  But the 2008 bursting of the mortgage/Wall Street finance Bubble abruptly ended this cycle of Credit inflation.  Much of the debt intermediated through the U.S. Credit system was discredited.  The housing mania was terminated, resulting in a collapse in demand for mortgage Credit. 

In the post-Bubble backdrop, private-sector (household and financial sector) Credit has contracted, and there is little prospect for meaningful expansion for some years to come.  Unlike the early nineties, there will be no miraculous new type of finance to fuel booms in the economy, asset prices, and government receipts.  Financial innovation and the reckless expansion of Wall Street finance will not bail out Washington.  We're basically left with a massive expansion of government debt until the markets decide to impose discipline.

Our recovery has been completely dependent upon government spending and ultra-loose monetary policy.  This has entailed an incredible increase in Treasury borrowings.  The markets assume our rapidly deteriorating fiscal situation will improve as the economy recovers.  On the spending side, the economy is now dependent on massive federal stimulus.  I don’t expect any self-imposed restraint on government expenditures.  And, importantly, it would take renewed expansion of private-sector debt to meaningfully boost the ratio of governmental receipts to expenditures.  Washington – or the states – can’t spend its way to fiscal recovery.  Instead, we’re witnessing a fiscal train wreck.