Barack Hussein Obubble: the moniker fits, now that the grand Keynesian scheme of refloating the world economy on a tide of government debt has come undone. Global stock markets fell 3 percent to 4 percent overnight because American incompetence and American weakness have combined to make the world a dangerous place in which to risk money.
What ails the market is a simultaneous breakdown of Washington’s economic and strategic policies.
We have drawn repeated attention (“Who Will Bail Out the Bailer-Outers?,” May 10) to the Bernie-Madoff-like Ponzi scheme on which the Obubble was founded. America runs a budget deficit close to 12 percent of GDP, unprecedented in peacetime, with a savings rate of under 3 percent. The trillion and a half dollars of federal debt that must be sold annually to finance this deficit are sold to banks, who buy them with cheap funds provided by the Federal Reserve and a great deal of leverage. Two-thirds of the deficit is financed by the banking system, and half of it is financed by banks overseas. The whole world repeats the exercise.
Chains (and chain-letters) break at the weakest link, and the weakest link was Greece, followed closely by Spain, Portugal, Ireland and Italy. European banks bought these countries’ debt with enormous leverage, which turned into the European equivalent of America’s subprime disaster. America’s subprime disaster, to be sure, is not yet over; all that has happened is that American banks have made excellent money buying Treasury securities with very cheap money. Charles Morris called it a “long con” yesterday at the Daily Beast:
At bottom, the muddling through strategy assumes that we can get the economy back on its old footing—rising house prices, more borrowing, higher mall traffic. Everyone knows that’s not sustainable, but the hope is that once everything is ticking along we can—oh so gradually!—pay off our debts, recover the old industrial mojo, stand up to China in export markets.
It’s what The Grifters called a ‘long con.’ Great if it works but very hard to pull off. At the moment, it looks very shaky. Household net worth is 19 percent lower now than it was at the end of 2007. Consumer debt has dropped only a little. The banks are gobbling up the stimulus dollars, and savings-eating zombies still stalk the land. Few of the real underlying problems, like low savings rates, have been truly addressed. Zero interest just makes them worse.
When financial market participants doubt the viability of the long con, they demand a risk premium for lending to banks that are lending to governments that are bailing out the banks that are lending to governments. The cost of funds to banks is rising, by a relatively small margin, to be sure (from a quarter of a percent to slightly over half a percent). That doesn’t seem like much, but since the banks only get three-quarters of a percent buying 2-year Treasuries, the rise in the bank risk premium threatens to undo the whole Obubble. And the rising cost of funds for heavily indebted southern European countries means that the carrying cost of their debt will be entirely insupportable.
The other proximate cause of the market crash overnight is North Korea’s bellicosity. That is the immediate result of the Obubble administration’s stated policy of withdrawing America’s presence from global affairs. When the cat’s away, the mice kill each other, as I wrote in a “Spengler” essay last October. If the Korean peninsula looks frightening, think of a nuclear-armed Iran rampaging around the oil-producing regions from the Caspian Sea to the Persian Gulf.
What ails the market is a simultaneous breakdown of Washington’s economic and strategic policies. And until there is a decisive change in Washington, things will get worse.