I have studied this subject very deeply. Even Macro economic Professors are confused. The general gist of the situation is that at this point and for quite a while it doesn’t matter what party is in power. The financial state of the US is in the hands of private individuals that control the federal reserve. The plan is to continue to inflate the economy until the system is at the brink of collapse. Then then the UN in the form of European banking will step in and offer us a solution that we cant refuse. That is to join the one world economy. They will issue Ameros, American currency at equal value as the Euro. Everyone with think Oh what a saving grace! But it will be a knife in the back because then we will be controlled economically by a power that is not our own. It will bleed it’s way into the social structures and the laws and before you know it we have world wide pseudo-socialism. Unfortunately this is not conspiracy theory. I wish it was.

About the only economic alternative would be for us “the US” to:

1) Take ownership and control of the Federal Reserve
2) Cancel all debt owed to the federal reserve ( a reduction of 45% of deficits)
3) Hunt down the corporations that have profited from this exploitation and take ownership of them.
4) Pay down the remaining debt with the proceeds obtained.

Nor does it appear that Prof. Verret is attempting to identify those so-called “too big to fail” institutions that enjoy an implicit guarantee by the federal government. That list extends far, far beyond those companies enumerated here. Further, if potential liabilities for such companies are properly considered part of the national debt, without discounting for the probability that the government will in fact have to pay such liabilities, or for the amount of assets offsetting such liabilities, then the proposed rule is really that the debt must include all such prospective liabilities. Well, those prospective liabilities are not new, to put it lightly; they’ve existed from the time the first company became too big to fail. To argue that the national debt must account for all accountable payments—not all possible payments, as noted, because it’s quite impossible that the full figure could ever be realized—of debt necessary to prop up such companies is the same to argue that the debt is several times bigger than it’s always been thought to be, and has been for the better part of a century. Yet following that reasoning is at odds with Prof. Verret’s insinuation that “the Obama Administration’s deceptive accounting practices” are responsible for this condition, and so we must infer he didn’t mean that (unless we’re to take him as having been careless in the pursuit of a political shot).

If Prof. Verret had drawn the line where Thales suggests, to include all debt implicitly or explicitly guaranteed by the government, then the distinction would have at least a certain sort of internal logic. (It would have its own problems, for reasons I assume are quite obvious and which rhyme with “schmunschmanageably schmeculative.”) But the distinction as-drawn lacks even that spare virtue.

I’m not the first to note this, but Prof. Verret’s article seems nothing more than half an hour of talk radio masquerading behind footnotes. Or to translate for the Internet: Epic financial-sector policy critique fail.

Concerned Citizen: The only thing that matters is the perception in the marketplace of the ability of the USA to make good on its debt. This is influenced by actions that take place daily and many of these participants have superior information to the commenters on this blog. If this perception becomes negative, as it has decidedly, people will vote with their wallets and take their marbles and play elsewhere.

Those people with superior information believe the following:

1. That a yield of 4.15% is perfectly acceptable for a 30-year Treasury.
2. That the inflation-indexed equivalent ought to trade in such a way to imply* an annual expected inflation rate of approximately 2.21% over the next 30 years.
3. That it is perfectly reasonable for the USD to trade against GBP at around the same rate it was trading back in 2002 and at a much stronger exchange rate than only 18 months ago.

Government bond yields
Exchange rates

* It’s a bit more complicated than this, naturally. As a rough approximation of what the market thinks about inflation though, it is a pretty good guide. If all those people with superior information thought hyperinflation was at all a real possibility, the yield spread would be much, much wider.

You seem to be saying you fear these companies will continue to lose money indefinitely, and be unable to pay down their debts. Then the government will ultimately be stuck with the debt, because the assets won’t be worth much. Is that correct?

I think the actions cited by anonymoose, among other things, make that scenario improbable.

The only thing that matters is the perception in the marketplace of the ability of the USA to make good on its debt. This is influenced by actions that take place daily and many of these participants have superior information to the commenters on this blog. If this perception becomes negative, as it has decidedly, people will vote with their wallets and take their marbles and play elsewhere. They will move their money to other countries, exchange dollars for other currencies and gold (itself the ultimate hard currency) or exchange it for assets. You will know what information is available and what people think about that information if the dollar goes down another 50%.

The markets are intelligent and they will decide the value of the USA’s balance sheet, including “The Shadow National Debt”. One thing is certain. If we keep doing what we’re doing, it will not end well.

once again. VOTE THE BUMS OUT!

Not sure who invited this person to post. But it was a mistake. Big mistake. If I want diatribes against Obama, I can tune into the Fox New’s round table.

This post was mentioned on Twitter by Cerno: The government is is hiding $7.8 trillion of national debt: http://bit.ly/3qcd15...

Anonymoose: Uh, are you arguing that the assets wouldn’t be used to pay off the debts and would be held while the government paid off the debt incurred by a “too big to fail” company in full while leaving the assets of a company untouched?

I don’t know. But typically we don’t treat govt sources of revenue (National Parks where folks pay fees, the taxation power, etc) as assets precicely because the govt isn’t expected to use them in a way that maximizes revenue. And the fact that the govt has an equity stake in these companies is due to the fact that they have other goals that revenue maximization.

ShelbyC:
If you’re an investor investing in a business that you expect to make money that’s certainly what you expect.But if you’re the government bailing out a business that is too big to fail I’m not sure the expectation is as clear.

Uh, are you arguing that the assets wouldn’t be used to pay off the debts and would be held while the government paid off the debt incurred by a “too big to fail” company in full while leaving the assets of a company untouched?

You realize that 1) “assets” are more often things like outstanding loans than real estate and 2) in the real world firms like AIG and Citi have been spinning off non-core (and I believe possibly some core) assets at a furious pace to pay off obligations and to reserve against future losses, right? I mean, AIG is basically expected to not exist in a few years and the government to take a loss on the whole deal, but AIG is seeking to spin off the profitable parts of itself, and use the proceeds to repay the government investment that saved their ass. Likewise, Chrysler and GM are making pretty big workforce cuts, shutting factories, and spinning off whatever they can to help make good on their debts, while at Citigroup there are billion dollar deals being done to spin off subsidiaries like Banco Popular and their Japanese brokerage agency to raise a cash backstop for expected future losses from their loan portfolio. Mr. Verret’s hypothetical simply doesn’t exist in the real world.

byomtov: If I borrow to buy a business I expect the business to pay it back out of cash flow. I may be on the hook if the business fails, and the remaining assets are inadequate to cover the debt, but that’s hardly the same thing.

If you’re an investor investing in a business that you expect to make money that’s certainly what you expect. But if you’re the government bailing out a business that is too big to fail I’m not sure the expectation is as clear.

jimbo: The usual hysterical rantings by someone who has no understanding whatsoever of the modern monetary system or the Federal Government’s relationship to it. The Federal Government is a currency issuer in floating exchange rate regime. As such, it neither “has” nor “doesn’t have” money at any given point in time. It creates money by spending it into circulation, and destroys it by taxing it out of existence. The act of issuing bonds for such an entity is not, in fact “borrowing” in any normal sense of the word (Does the NY subway need to “borrow” Metrocard credits in order to add them to your card?), but instead a way to support nonzero interest rates.For a good overview of this, go here:http://www.moslereconomics.comStart with the “mandatory readings” and go from there.

You’re kidding, right?

Mosler thinks that the subprime loans were the result of fraud?

Um…no…

Sorry.

Well, that may be an interesting exercise, but it tell us much here. These particular debts are nothing like more commonly incurred federal debt, and certainly don’t justify Verret’s hysteria.

In particular, normal federal debt is repaid out of tax revenue. That is not the expectation here. If I borrow money to buy a car I expect to pay it back out of my regular income. If I borrow to buy a business I expect the business to pay it back out of cash flow. I may be on the hook if the business fails, and the remaining assets are inadequate to cover the debt, but that’s hardly the same thing.

ShelbyC:
Yankee, I’m pretty sure the all caps thing is a joke.It sure seems to have failed though.

That was my thought, but then I read the actual post. I guess it could just be satire and going over my head.

byomtov: Nothing like higher interest rates to help an economy along.

It’ll save us from the hyperinflations! Not as well as the almighty gold standard, but better than what we’re doing!1!

yankee: I would just like to observe that using ALL CAPS AS MUCH AS POSSIBLE makes your argument much more PERSUASIVE because you seem SO MUCH MORE REASONABLE and NOT AT ALL HISTRIONIC.

Yankee, I’m pretty sure the all caps thing is a joke. It sure seems to have failed though.

geokstr:
Yeah, sure.
If you believe there is actually real “money” or anything else of value in this “social security trust fund”, I have a full sized airport up in Pennsylvania with 3 passengers a week I can sell you – cheap.In truth, this “trust fund” is just an accounting gimmick to fool the taxpayers that the gov has been saving this money just for them, when in fact it’s just filled with IOU’s from ourselves that will have to be funded with real cash from taxpayers eventually – starting like in a few years.

Even if the trust fund is totally bare and filled with IOUs, using it to calculate the total national debt still makes far more sense than the proposal above. I was more trying to point out how foolish the original post was than saying “don’t worry, Captain Hammer the Social Security Trust Fund will save us!” When even counting the various govn’t trust funds notional value against the general fund debt makes more sense than your accounting of the debt, it’s time to go back to the drawing board. Mr. Verret, I suggest you do so.

Steve: The point is that, even assuming the federal government ultimately stands behind the debt of these companies, we would certainly expect them to liquidate their own assets before the government steps in and makes up any shortfall.

But didn’t we just balk at doing exactly that? Doesn’t being too big to fail mean that we can’t just liquidate their assets?

2010 is just around the corner. Vote the bums out. Let anyone’s second term be their last.

Any chance of finding out where these comments were coming from? Sounds a little too efficient to be random readers, don’t it?

The point is that, even assuming the federal government ultimately stands behind the debt of these companies, we would certainly expect them to liquidate their own assets before the government steps in and makes up any shortfall.

If the government buys an office building that is worth $10 million and carries a $3 million mortgage, would we just add $3 million to the national debt and ignore the fact that the building has value?

byomtov: As others have said, including the debts without also including the assets is ridiculous.

Well, we’re just totaling debt. The government doesn’t have a “balance sheet” so I’m not sure where you put the assets. We’re not trying to determine a “book value” for the fed govt, a la “A = L+E”. And since the reason we have such strong equity positions in these companies is that they’re TBTF, we should expect to have to pay their debt.

Money is neither sentimental nor patriotic. Those with real money will start to shift the funds outside the US if the perception that the government is cooking it’s books. That will result in severe harm to the US economy. And any attempts to control capital flight will result in a panic move to get the capital out while one can.

The demand for entitlements or positive rights is infinite but the ability to fund them is not. And without a true accounting we as a society cannot make an honest determination of what we can afford to pay for versus what we want.