Snap! And crackle...

On Thursday, I noted that, in the last 12 months, America has paid over $400 billion in interest payments on "the debt", AND increased the debt outstanding by around $1 trillion, making a total of $1.45 trillion. (I know I'm adding apples and oranges, but both elements are burdensome obligations.)

Now, noting the drop on the Dow and the cost of rider-bribes to the bailout bill, Karl Denninger is at the fruit-summing game:

Bailout Bill $700 billion
Additional Pork $150 billion
Dow (-484) in 3 hours $600 billion
Total carnage to you, The Taxpayer $1.45 trillion

The government is feeding the woodworms. Mish is convinced that deflation is inevitable ("There has never been hyperinflation in history with falling home prices.")

So you'd be forgiven for thinking, "What's the point in destroying even more money on this bonfire? Cut out and burn the rotten wood first, then rebuild the house."

Not so easy. The situation is especially bad because it's spilling over into international relations. Some American official (I forget who) flew over to China last year to get the Chinese to buy into mortgage-backed securities. Did the US really think a powerful partner would allow itself to be cheated when the package turned out to be rotten? (And didn't the Chinese know that, anyway? Isn't it possible they bought the rubbish because they were confident they could force the US Government to make good on it?)

I would almost say, buy into the packages the Chinese bought; but I expect there are ways to make the Chinese the preferred creditors and stiff everybody else.

Remember that Denninger has been saying recently, buy a good home safe and get your cash out of the bank? Let's see how unreasonable his doomster position turns out to be.

Well, you got what they wanted

The Saviour Bill is passed, and with a sigh of relief, the Dow... DROPS 157 points, as the dealers begin to realize that 200m American taxpayers have shelled-out $3,500 each for nothing at all. Look at the "panic" on Monday when the Bill was thrown out, and the "joy" now.

Financial white-water dead ahead

Jesse reports on an FT article from Wednesday, which suggests that the "hurry-up-and-give-us-$700bn" is to do with the need to renew credit default insurances on Fannie, Freddie and Lehman this month - the first two immediately after this weekend.

Maybe I was right, then, when I thought I saw panic in Hank Paulson's demeanour the other night, as he responded to Congress' rejection of the bailout proposals.

Oh, and London Banker reflects bleakly: "The crash in equities will still happen."

US debt-to-GDP, 1940 - onwards

Belatedly, it occurred to me that it could be more useful to see the progress of the debt burden in terms of national earnings. This is from Steve McGourty and is updated as of 21st September.

I'm not sure how much comfort we can take from the fact that the blue line was slightly higher in the mid-1990s, and far higher in the '40s. I suppose it depends on what you think may happen to the GDP part.

US debt outstanding, Fiscal Years 1950 - 2008

Figures are in billions of US dollars.

US debts vs. other expenditure - 2006

Here's the importance of debt, compared to other Federal and local State expenditure.

I've taken the interest on the debt for the fiscal year 2006, plus the amount by which total debt increased in the 12 months ending Dec 29, 2006. That's because the outstanding debt is increasing even faster than the amount of interest being paid.

(Figures are in billions of US dollars.)

By way of comparison, I also give below two figures - the increase in debt plus interest paid for 2006, and then for 2008. In the latter case, the increase in debt is that from 30 Sep 2007 to 12 months later, and the interest is the latest available as per here.

In other words, if America had no such debts, she would have $1.45 trillion more per year to spend on other things.

Interest, plus rolling-up more debt, now equates to some 30% of all non-debt-servicing costs of the States and Federal Government.

Existing debts and the Bailout Bill

Treasury debt information

$431,270,863,309.37

That's America's "Interest on the debt outstanding" for the fiscal year 2008 - not ended.

20 years ago, it was $214,145,028,847.73.

Zgirl's "Better than nothing" blog explains why deflation would cripple the American government, so money has to keep pouring in and we have to hope that foreign creditors (including the equally busted Brits, it seems) continue to buy-in US Treasury securities.

How to come down from this perilous height?

If this is the pitch, the answer is "No".

I've just watched Democrat Senator Harry Reid try to sell the revised bailout bill, live on BBC News 24. He may have unfortunate body language, and until this minute I knew nothing about him; but I wouldn't buy a certified gold bar from him for an obviously forged red cent.

He refers to a major insurance company allegedly under threat, and a hypothetical example of a local Nevada bank safeguarded by increased deposit insurance. And as I've been typing this, I've been hearing Senator Hillary Clinton enunciating, in her hectoring, braying, bored voice, all the good reasons why "I" want this, that and the other and so should you.

Maybe they're just the world's worst salespeople, but I don't buy. Sorry.

Your prediction?

Experts and interested amateurs: please give us your best guess at the value by end 2008 - see sidebar.

So you think the USA has problems?

"European banks are generally more levered than their U.S. counterparts."

Paul Kedrosky (htp: Jesse)

UPDATE: the Daily Telegraph concurs.

The $700 billion is to appease foreign investors?

I said in August that I thought powerful foreign creditors would refuse to be cheated, and now Karl Denninger tells us that the $700 billion bailout is to compensate these parties.

And that probably doesn't mean us Brits, either.

More from iTulip

Eric Janszen gives us his take on the brouhaha:

This iTulip post describes the process whereby the current deflation may suddenly turn into inflation.

This one warns against Bill-bashing for its own sake, which may be cutting off your nose to spite your face - something must be done, he says, because the market does NOT self-correct. I would suggest that it might, if the government and banks hadn't "intervened" long ago to create a fiat currency. Once that's happened, we're playing the game for the benefit of bankers and politicians, and by their rules.

And the solution?

Anyone who saw Brian Cox as Titus Andronicus at the Swan in Stratford in 1987, can never forget it. I remember seeing a girl in the audience with her mouth hanging open, paralysed, as Titus stunned us with his almost gloating description of his suffering. And what a master Shakespeare was, understanding that when emotion is heightened, it is also complex.

TITUS Ha, ha, ha!

MARCUS Why dost thou laugh? It fits not with this hour.

TITUS Why, I have not another tear to shed.

Humour can also unblock the mind to work creatively in a disaster. But there is also the "We're doomed, I tell ye!" John Laurie type who only cheers up when it's as bad as he always said it would be. Watch out for them, because unconsciously, they may steer events to match their temper.

iTulip explains succinctly, below, the problem caused by the house price crash. For me, though, it's a reminder of how wonderful the old cartoons are.

Boing!

Dow and FTSE back up again. Thought so. But unlike 1987, I don't think this will be over by Christmas. Bear market rally, don'tcha know?

Super post by Denninger today, too. He points out, among other things, that the Dow started falling yesterday when everyone (himself included) expected the Bill to pass. And as he says, Bernanke upped the money in the system by vast amounts anyway, and it still hasn't fixed the problem. Just how much petrol do you need to throw onto a fire to put it out?

The BBC perspective

After yesterday's "No!" in Congress, BBC "business editor" Robert Peston refers to a "breakdown in the US political system."

To me, it's the very opposite: it's a prewar Lagonda that has spent years with its axles on bricks, and it's just had a new set of tyres put on; after long disuse, the engine has finally turned over. Maybe it will seize up again, but for now there is a hint of democratic accountability.

For example, is it not interesting that more Democrats voted against the Bill, than Republicans for (both as a percentage and in absolute numbers)?

I watched Peston on TV last night and said to my wife, "I should be in front of that microphone." I heard him on the radio this morning and still want his job.

The MSM: one despairs.

Horton heard a Who

Congress just heard from the voters. Let's hope Horton listens closely.

Now what?

Maybe I'm not that good at body language, though I've spent years with unstable children; and maybe it's having to speak to a semicircular audience of journalists outside the White House, and he hasn't learned the actor's trick of seeming to direct his attention steadily to one indeterminable member of the audience; but Hank Paulson's statement made just now (c. 21.45 British Summer Time), with the left-middle-right upanddown movement of his head, and the earnestness of his mouth and lips, makes him look panicky.

But maybe the worst players in the banking market should be allowed to burn out anyway, as Marc Faber has said for a long time.

How many of the crucial 10 swing votes in the House were down to the polemical fax-fomenting of Mish, Denninger at al?

And will the Establishment force them to vote again and again until they get it right? Nancy Pelosi and her "bipartisan" mantra (3 or 4 times in one statement) seemed to hint at this.

Under New Management

If I understand him, Nouriel Roubini (htp: City Unslicker) is saying don't buy the rotten apples, become the greengrocer's senior partner.

My plan: a $15 trillion dollar bailout.

US nonfinancial debt (second quarter 2008) is $32.4 trillion dollars. This pie chart gives a breakdown of the debt by type. US GDP in 2006 (est.) was $13.13 trillion - let's guess it's $14 trillion now. Thus debt as a proportion of GDP is about 230%.

This graph shows that the 50-year mean ratio of such debt to GDP is 120.1%. So to get back to a long-term average, DEBT MUST HALVE. As I said in a reply to a comment today, it's like a game of musical chairs, but taking away half the chairs in one go.

In fact, an almost perfect fit would be to cancel all the mortgage debt in the USA - just to get back to the level of debt averaged over the last 50 years.

And Marc Faber is saying the bailout will need 5 trillion, not $700 billion.

Hmmm....

Why don't we get really bold: $32.4 tn debt x 46% in the form of mortgages = $14.9 trillion. Give everybody their houses free of debt, make future loans on domestic property illegal. Yes, there'll be inflation, but the liberated houseowners will be able to afford it.

Will the banks be ruined? They're ruined now. Will the government have to nationalise them? They're doing it now.

These are revolutionary times. We may not be able to scourge the moneylenders from the temple, but at least we can chase them out of our houses.

Yes, the result's a house price crash, if you can't pump up the price with phoney-baloney money. But no debt, so so what?

The banker has inflated everything so you have to borrow to have anything. He's made himself indispensable, like a pusher of addictive drugs standing outside the school gates, giving away samples to get you hooked. He's your "friend", your "main man", who'll make you "well".

Bankers and their pet traders have become insanely rich by making you poor. Your assets are big on the outside and hollowed-out by debt on the inside; it's why they call it a bubble.

Do you know your enemy?