Captain Crunch

The suffering of Somali children took a back seat this week to the repercussions of a neo-nazi Norwegian nutcase, and to the vagaries of the U.S. debt crisis.

With respect to Andynutter, I think the less said the better. There are way too many people out there who fail to understand that racial purity has at best been a recipe for impotent emperors and mad princesses. At worst, an excuse for genocide and global warfare. Think Bosnian Serbs, Tutsis and Hutus. And normal humans would take no  comfort in watching the current flavor of aryans bleed to death from a shaving nick while attempting to tug at their non-existent earlobes.

The U.S. debt crisis, on the other hand, is certainly worth a thought or two. There’s an old story about a billionaire who is asked how much it costs to run his yacht.

“No idea. If I knew that, I couldn’t afford the yacht.”

It’s a sign of the times when the U.S. is so preoccupied with the question. If an empire is worried about cash, does it still qualify as an empire?

The fall of the Roman Empire is linked to economics, at least as much as it’s linked to a decline in morality and an increasingly debauched lifestyle. In an effort to stretch the treasury, by 300 A.D. the silver dinar contained only 0.02% of silver. But when comparing empires, it is worth noting that the GDP of the entire Roman Empire has been estimated by Maddison as 25 billion (1990) dollars―that’s the GDP of Vermont, the U.S. state with the lowest Gross State Product (GSP) out of all the union.

Oh right, back to the future. Once again, the rating agencies are playing a role in the whole affair. In Europe, these agencies mercilessly attacked the so-called peripherals―actually the cradle of western civilization, which emerged from an axis that went diametrically across the Mediterranean Sea, from Greece to Iberia. In the days of the Roman Empire, the periphery were the Huns, Saxons, and Danes.

At this juncture, politicians and businessmen in America are systematically deprecating the role of the agencies. I’ve been repeating ad nauseam that this is entirely correct. After all, wasn’t it Moody’s that kept its Triple-A rating for the FNMA right up to the day the mortgage association when bust? Fanny Mae, as she was known to her (many) friends, was responsible for ultimately securing the mortgages of U.S. homeowners. The poor lass went belly up in 2007, with analysts’ eyes wide shut.

The European Union foreign debt is 80% of GDP, i.e. around 13 trillion dollars. The U.S. debt currently stands at 14 trillion, which if you consider the size of the two economic blocks, is pretty much par for the course. If you click the link you’ll see how this is changing in the blink of an eye. If you consider that the American defense budget alone is 700 billion, then the U.S. is doing a whole lot better than Europe.

The world debt clock shows a depressing picture of red ink. On the whole, some parts are pretty homogeneous. There isn’t a huge difference between France, Germany, Portugal, or the U.K. There isn’t a huge difference between them and the U.S. One of the pundits on CNBC said it in plain English last Thursday: the dollar’s crap, the euro’s crap, and the pound’s crap. I think that’s pretty clear, if a little shitty. If any one economy, economic block, and currency, distinguished itself on a positive note, the others would know what to imitate. Right now, no one has a clue.

Captain America or Captain Crunch? Leadership crisis looms.

One of the curious aspects about the U.S. soap opera, apart from the fact that John Boehner’s press conferences seem like an exercise in Gregorian chant, with a GOP  four-part harmony group (the Bayonettes), is the issue itself. In the European cases, both bailed and bailing, it’s the markets that have done the hard work.

You’re a simple working Joe, and you have a 100K mortgage. One day, the bank guy spots you having dinner at an expensive restaurant with a beautiful young woman. The next day, your credit rating falls, given you don’t seem to be prudent with your cash. Your mortgage rate goes up.

You struggle to meet your payments, and get an extra night job. It’s 6am, and the bank guy spots you waiting at the bus stop, on your way home. You’ve grown a beard (no time to shave), and you look exhausted.

Out on the town, huh? Blowing your cash. Your rating falls again. Your bank manager is getting increasingly moody. You max out your credit card. Your rating falls. Pretty soon, your house gets repossessed. In a short period, you’ve gone from Mr. Clean to Dr. Evil. Serve you right for taking a beautiful girl out to dinner!

The difference with the U.S. story is that America is discussing how to raise its own debt ceiling. You’re getting perilously close to maxing out your credit card. Ok, you need to spend less. Or, wait… you can raise your credit limit. Yes! You call up the company and inform them of the new value.

“Hi. I’ve agreed (with myself) to raise my limit to cover my debts. Oh, and don’t even think of touching my interest rate!”
“Certainly sir, have a nice day.”

That’s it. Which is, to say the least, a little different from your everyday Joe. Credit card companies love to increase your debt ceiling, as long as they’re confident you can pay. More interest. Once in a while they screw up. Your life situation changes. Boom.

Of course the U.S. will sort this out. It’s a political issue, not economic. Just a handy bit of pre-election mayhem, setting the scene for 2012. One thing’s for sure, Obama is not a lucky president.

There is a slight problem, though. There are four and a half trillion dollars of U.S.  bonds out there. Treasuries. Over one trillion in China. And the Chinese, who once were pretty pleased about “owning” the United States, so much that it even generated a (now banned) U.S. right-wing ad about debt ownership, are getting a leetle antsy.

Those treasuries are guaranteed cash. Except China can’t unload them. Well, it can, but the bond prices will come crashing down. Which will make American debt harder to finance. Which will increase the cost of servicing it. And scythe through the value of the Chinese paper. Hey Joe, where you goin’ with that gun in your hand?

The India Road QR links for smartphones: point your camera and click.

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One Response to “Captain Crunch”

  1. M. Says:

    An interesting analysis with an excellent touch of irony, as usual. It’s always a pleasure to read you.

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