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Subject:  Credit Bubble Date:  2/5/2013  6:09 AM
Author:  MrPlunger Number:  415090 of 545985

A back-to-the-future piece for METAR. Here's Doug Noland's latest

In April 2009, I began warning of the risks of fueling a “global government finance Bubble.” I didn’t fully appreciate what was unfolding back in ’09. But it was clear that the Federal Reserve, Treasury and global policymakers were prepared to do just about anything. Similar to mortgage finance in 2002, government finance was already demonstrating powerful Bubble characteristics by 2008. The mortgage finance Bubble had collapsed, yet a potentially even greater Credit Bubble was gathering momentum. After all, government finance enjoyed greater “moneyness” than ever – and over-issuance began in earnest. Massive federal deficits coupled with Federal Reserve monetization held the possibility for the biggest Bubble of them all. It’s already historic.

In somewhat of a replay of the nineties, our Credit system has again experienced an historic transformation. The nineties version was about unfettered market-based Credit. Today, it’s unfettered government-based finance. Both are about risk obfuscations, misperceptions and mispricing. Few appreciated how this finance distorted asset markets and the structure of the real economy from the mid-nineties through 2008. Few appreciate the nature of today’s Credit Bubble. Seemingly no one recognizes how profoundly the government finance Bubble is inflating system incomes.

For perspective, let’s start with some expenditure data from the U.S. budget. We know that the federal government ran unprecedented Trillion dollar plus deficits for four straight years, though I’d argue that the aggregate deficit doesn’t do justice to the impact of surging federal spending levels. For enlightenment, I’ll highlight spending growth by major federal agency. In just four years (2007-2011), Social Security expenditures jumped 24% to $731bn. National Defense was up 28% to $706bn. Income Security surged 63% to $597bn. Medicare inflated 29% to $486bn. Health Services was up 40% to $373bn. Veterans Benefits & Services surged 75% to $127bn. Transportation was up 28% to $93bn.

The original is a lot longer.

But it is clear that the next big issue is going to be "who pays for all the communal debts we've run up?".

It's almost like the whole world is full of banana republics where a dictator runs up debts in the name of the state, takes the money, then the next guy very reasonably says maybe the community shouldn't be on the hook for paying it back. (Before carrying on and doing the same again.)

Substitute cities, states, countries. And whilst some city mangers paid themselves fat-cat rates, mostly the problem is promises made to friends and electorates. All over the place unfunded contracts are being given out, promises made to give in the future but no admission of the need for the public entity to receive in the future. In the case of municipalities, simple black holes, for more sophisticated entities just mush about balancing budgets eventually when the crisis blows over.

Most depressing is that some of the smartest minds like Krugman and Stiglitz endorse this spend spend spend now and the future will sort itself out. Isn't this short termism exactly what got us into trouble in the first place?

Non-asset backed communal commitments and debt are going to be "interesting".
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