Matt Taibbi: The Mad Science of the National Debt

[marmar]

from Rolling Stone:


The Mad Science of the National Debt
With Congress gridlocked by the debt-ceiling debate, the Federal Reserve is conducting a radical experiment with the American economy

By Matt Taibbi
May 22, 2013 2:55 PM ET


Welcome back to the dumb season. It's debt-ceiling time again.

We've been at this two years now. It was back in 2011 when the Republican Party, seized by anti-government furor, first locked on the lifting of the federal debt ceiling – an utterly routine governmental mechanism that allows the Treasury to borrow to pay for spending already approved by the entire Congress, Republicans included – as a place to hold a showdown over?.?.?.?government spending. That first battle resulted in a "Mutually Assured Destruction"-type stalemate, in which both parties agreed that if they couldn't reach a deal by New Year's Day 2013, a series of brutal, automatic, across-the-board spending cuts would take effect. At the time, it seemed unthinkable Congress would let that happen. By the time we passed that date, the thing that seemed unthinkable was the idea that Congress would ever make a deal. The cuts took effect in March and we were headed for a full-on fiscal crash on May 19th, when fate intervened to stop this stupidest-in-history blue-red catfight in its tracks, if only temporarily.

In early May, Treasury Secretary Jacob Lew announced that the federal government suddenly had enough cash on hand to stay afloat until "at least Labor Day." We were saved by, of all things, a record quarterly profit from the notorious state-seized mortgage-finance company Fannie Mae, which is paying the state $59 billion, enough to keep us in the black through the summer.

But this reprieve is only for four months, and if anything, the latest stay of execution only underscores the utter randomness and imbecility of our political situation. If the one thing preventing Washington from seizing up in fatal gridlock for even a brief spell is a surprise burst of good fortune from a bailed-out financial zombie like Fannie Mae, we're screwed. The only thing that will rescue us from having to go through this over and over again from now until the end of time is for our increasingly polarized Congress to come to some broad agreement on tax hikes and spending cuts – the kind of routine deal that now seems politically impossible. .........................(more)

Read more: http://www.rollingstone.com/politics/news/the-mad-science-of-the-national-debt-20130522#ixzz2ULzuhTWL

[mbperrin]

1. Taibbi is doing some of the only good writing on this topic.

I have and recommend that my students do hold little cash and instead hold real physical assets, using those assets themselves, so that their intrinsic value cannot be affected by nominal values.

The only reason we haven't had massive inflation is because the bubble money is put into the shadow economy, mortgage derivatives, stocks and such. This has led to a crowding out of money for the real world, and has extended the stagnation we see now.

[golfguru]

2. The real reason there is mild inflation is...

the Fed QE's have not been able to improve velocity of money.
The banks have plenty of liquidity, but there is a dearth of borrowers
able and willing to borrow.

[mbperrin]

3. You and I are saying the same thing.

Rather than lend to businesses or individuals, they'd rather stick it in derivatives and other non-physical "assets." Time proves that they might lose on real loans, but Uncle Sugar will make them whole on their shadow stuff.

So yes, no demand increase for physical items - the money went elsewhere.