The US has been in Debt for a long time with interest payments and budget deficits!

The interest on the United States debt is an unstoppable time bomb.  Currently the United States is the largest debtor nation!  To see some of the other debtor countries go to the CIA World Fact Book website.  The US federal government has always been in debt, except during the presidency of Andrew Jackson.  In 1835 he reduced the federal debt to $33,733.05, and is said to be the only US President to have paid off the national debt.  Things changed in 1837 when a depression caused a tenfold increase in debt that lasted until 1844.

The current fiscal year ends Sept. 30, 2011 with a deficit of more than $1.26 trillion, and is reported as being the largest shortfall since the end of World War II.  The Obama administration has just released its 2012 budget projections.

I wonder how many Americans realize that the US Constitution does not require congress to have a balanced budget.   We have a Fiscal Commission that is charged with balancing the budget excluding interest payments by the year 2015 (you need to rotate the summary tables, I think these are the same tables that Paul Ryan is currently using to question Tim Geithner).  While our states have a constitutional requirement to balance their budgets,  we keep the federal government open with continuing resolutions, that have the likely potential to increase our debt position.  An amendment is needed for the federal government to balance the budget.  See if your state was in the 2010 top debt position.

In 1936, Congress was first presented with a Balanced Budget Amendment (BBA) by Republican representative Harold Knutson of Minnesota, but it died in the Judiciary Committee.

Over 70 years later we still don't have one. Some members of Congress are trying to get a Balanced Budget Amendment passed. Lets hope they have the political stamina to make change happen. In the U.S. House of Representatives Robert Goodlatte, along with a group of his colleagues have sponsored a bill  to adopt a Balanced Budget Amendment  to the U.S. Constitution.  Goodlatte also sponsored the amendment in 2007 and 2009. 

Long time politician U.S. Sen. Orrin Hatch, R-Utah, has sponsored the Balanced Budget Amendment  4 times and co-sponsored it 13 times in his 34 year career.  U.S. Sen. Mark Udall, D-Eldorado Springs, is also a co-sponsor of the current Balanced Budget Amendment.

The amendment would prohibit federal spending from exceeding revenues except in those circumstances of a war declared by Congress.  Approval of the amendment would require two-thirds majorities of both houses of Congress, and ratification by at least three-fourths of the states.

The reality is that the government debt comes from years of spending more money than it has received.  The last time the US had a balanced budget was in 1957. 

The debt level is expressed as a percent of the country's total production, or gross domestic product (GDP), which was $14.7 trillion in the third quarter of 2010.

The current debt of $14.7 trillion is 95% of gross domestic product, that's up 51% since 1988.  The GDP is defined as the total value of all of a country's goods and services that were produced in a year.  It's the number used to put a size on the economy.

Even before the economic crisis, the U.S. debt grew 50% between 2000-2007, ballooning from $6-$9 trillion. The $700 billion dollar bailout helped the debt grow to $10.5 trillion by December 2008.

Two-thirds of the public debt is owned by the people, businesses, and foreign governments who bought treasury bills, notes, and bonds.  Purchasers of Treasury bills expect the U.S. economy to recover enough to pay them back. The U.S. is such a large customer for foreign investors like China and Japan, it is allowed to run a huge tab so it will keep buying exports.

Debt is a form of bondage, and we should use extreme caution when borrowing money.  It's time to balance the federal budget as well as reduce the interest payments on our debt!

Developing countries take their ideas right into the future

According to a 2009 report by the Boston Consulting Group (BCG), the BRICI countries,  Brazil, Russia, India, China, and Indonesia had some 610 million internet users, and that number was expected to double by 2015.  The Vancouverite  cited the BCG report as saying, with PC penetration still quite low, mobile phones are cheaper and more convenient tools for both communicating and seeking out entertainment.

The BRICI countries have around 1.8 billion mobile-phone SIM card subscriptions, more than four times the combined total of those in the United States and Japan. In fact, as sophisticated handsets become available in the BRICI markets, millions of BRICI digital consumers are leapfrogging over PC usage and going online via their mobile phones, a trend that has significant implications for their internet usage habits. 

Samuel Palmisano recently made this comment, "This is what I don't think people get in the United States, is the emergence of the middle class."  He stressed, that we lose site of the statistic that 500 hundred million people are going to enter the middle class in the next few years. 

"Those 500 hundred million people want cars, houses, cells phones, bank accounts, air conditioners. They expect transportation to work, they expect secure safe cities, and quality health care." 

These statements made by Mr. Palmisano were recently aired on CSPAN-2  at an event held at the Center for Strategic & International Studies in Washington, D.C.  The topic: US Global Competitiveness & The Deficit.  IBM Chairman & CEO Samuel Palmisano, along with Dell Chairman & CEO Michael Dell were the guest speakers.  These international businessmen interact on a global scale, and were discussing the state of the US. 

Palmisano said, "We are in a financial crisis."  Dell commented, "If you stand in the way of collective improvement you do so at your own peril." 

John Hamre, President and CEO of the Center for Strategic & International Studies, and moderator for the February 2011 event asked the two international businessmen to describe the "competitive landscape."  Hamre continued, "That most Americans don't know how far behind we are falling."  "If you leave Bejing airport and fly into LAX it's embarrassing!"  It's like going back 30 years in time and yet we have this vision we are ahead. 

Hamre asked Dell and Palmisano to share their understanding of competitive landscape in real and tangible terms.  The point is how do those countries that are emerging in the world address it?

Palmisano described that the emerging countries skip everything that we have done.  They go right to the future.  Their is not such thing as land lines, they go right to the future.  Everything is wireless.  In the highway systems of Shanghai, they built a loop around Shanghai in a year.  At one time the largest share of crane capacity was in Shanghai, that is 70% of crane capacity was in Shanghai.  One other example Palmisano gave is that China has decided to build the largest high speed rail network in the world. 

Palmisano added,  take the education statistic in science and math,  China is high and we are low. The first thing that needs to be understood is that these are not developing countries.  These countries have a huge class of well educated middle class people that are going to drive massive economic transformation, and they don't have a lot of debt.  They can write checks for everything.  They are the lender.

The question that Palmisano asked, "What are the inherent advantages of the United States?"  We have an incredible University system, we have the ability to innovate, create, and research for intellectual property, we have rule of law, the right to be protected, we have had and we will have a transparent capital market system.

Palmisano added, "What is missing?"  Somebody saying, just like they do in these other places like Brazil, India, and China; we're going to take this country from here to there.  We're going to set up an innovation agenda.  We are going to drive innovation.  Here is our advantage and then we are going to sell the case!

Dell suggested, "That it has to be a national priority."  He described that we have 5 billion people in the world with cell phones.  He used the figure that about 1.5 billion are connected on the internet.  The fastest growth is in the emerging nations.  1.3 billion cell phone users are in China and India together.  Adding 15 million new subscribers a month between the two countries.  Enormous industrialization, modernization, and skipping past problems.  These countries say, what should this look like in 5 or 10 years, and leap ahead to that.

Hamre asked the two leaders, "What is the problem when industry is sitting on the biggest pile of cash in history?"  Palmisano responded by saying the question is, "Why aren't you investing more?"  That gets back to competitiveness because we invest where there is opportunity for growth. If you take more from us, there is less to invest. If you compare the US to the rest of the world we take dramatically more than the rest of the world.  Work flows anywhere in the world and so does capital.  So the question is,"Why would they come here?"  "Why would you come and invest in the United States of America when you can go elsewhere and give 10 percent to their government instead of 30 percent?" 

Why would business come here, and compete for 100,000 graduates in math and science, when you can compete for 600,000 in another country.

Palmisano said, "When people have ultimate choice, money can flow, people will invest, with a good rate of return." If you are a government today you need to have a value proposition that attracts the smartest people in the world, and have the best flow of capital so you can be competitive. If you don't do that, then there's too much choice today, and it moves too fast, and it doesn't have a happy outcome.

Dell described China as in its twelvelfth, fifth year plan.  A plan for each business sector.  America needs to get real serious in the systemic issues of productivity, education, and competitiveness.  America has 4% of the worlds population and half the wealth and the world is changing very quickly.  We have to work in this competitive landscape. 

Palmisano described that the way IBM works is to establish the process, to put the metrics in place, and put somebody in charge, and then reward someone for doing well.  He stressed, establish the metrics, then that becomes hard wired into the business.

Christopher Whalen's views on the US economy

Christopher Whalen is an interesting character who has been on the financial scene for a long time.  He is intelligent, and thought provoking.  These are his words... words of wisdom and advice, "We have to take the truths, the values, the thought processes that people have left us for a legacy, and turn that into a message that is politically relevant. There has got to be a way where we can make our fellow citizens understand just how hurtful the current arrangement is for our people.  How it prevents them from accumulating and passing capital along from one generation to the next."  If we have that conversation we might be a more stable but boring country.

Whalen is Co-founder of Institutional Risk Analytics and author of "Inflated: How Money and Debt Built the American Dream." He was in New York last May speaking to The Mises Circle In Manhattan, on Austrian Economics and the Financial Markets, and he had a lot to say!

He shares a piece of trivia about himself by telling the audience that he's a collector of books from the "gilded age," and from the 30's. He held up a book and called it one of his favorites entitled, "The New Dealers."  It was published by Simon and Schuster in 1934, by an anonymous author.  He said, "in those days people were intimated by Wall Street, and the power of the politicians who were owned by Wall Street.  Nothing has changed my friends."

He opens his talk by reading a few paragraphs from a chapter called, "Mad Money."

After reading the paragraphs, he closed the book and looked out into the audience and said, "Unfortunately we have a monetary system that doesn't have any money!"  Many people believe that this is a financial truth, and it's the foundation for the rest of his simply spoken words.

He tells the audience that you need two conditions to accept the premise of market efficiency. The first condition is to have a centrally planned world.  One that you manage and plan, and that doesn't destroy us periodically! The second condition, is the nature of the FED.  Whalen confidently states, "If your going to have a central bank then you have to have an authoritarian centrally planned society." 

He comments that a central bank is anti-thetical to free market capitalism.  He says, it may be a gradual process of diminishing individual liberties, diminishing the rights of property, diminishing the rights of businesses.......but to look at the end result over time.

Whalen believes that the idea of globalization is going to be challenged more and more.  He says that banks have the illusion of global regulation, the illusion of global accounting, and the illusion of global markets.  He gives the example that we thought we had a global market in residential backed securities!

He said that we also have this perception of an internationally linked and efficient market, but what we really have is national treatment in most markets.  In Europe you have 25 countries that do not agree on the definition of default, or agree on a bank regulatory scheme for the EU.

His face showed a deep sense of pride as he expressed his gratitude for living in America.  He commented, that we are still fortunate to have a "degree of freedom," and "a degree of random chance" in our lives that gives us the ability to do things, to participate in things that shape our future.  In Europe you don't have an entrepreneurial advantage, the Europeans have decided who is running things!

He urged people to think about the what kind of political leaders we need to have, and the role of the dollar.  He thinks that when Europe decides to get into quantitative easing that the US will be there to print money and pass it on to foreign central banks through swap lines.  He smiled after saying that Ben Bernanke had to explain "swap lines" to the Senate.  He even poses the possibility of having to tax trade to get us out of debt.

A peek into the subprime mess

In a "60 Minutes" interview Michael Lewis explained to journalist Steve Kroft that the downfall of AIG was was seen by Michael Burry, MD.  Lewis, an award winning author writes about it in his best selling book, The Big Short.  He says that Burry foresaw hundreds of millions of dollars in loans made to unqualified buyers, and that Burry concluded the subprime market would collapse in 2007.

Lewis said, Burry noticed mortgage bonds were supported by pools of loans that were mostly negative amortizing interest only loans.  This type of loan meant that the borrower didn't have to pay back the principle portion of the loan, and that if the borrower couldn't pay the interest back either, then the interest would be added back into the loan.  Lewis states, that Burry thought the lending business had gone insane! Burry had figured out that a small percentage of the mortgage backed securities would be worthless if those loans  failed, and he wanted to bet against them!

He decided that the best way to bet against them was for Wall Street to sell him inexpensive insurance contracts on the mortgage backed securities that would have a big pay out if they failed.  The contracts were called credit default swaps.  He invested in those and made millions.

Lewis explained that Goldman Sach's persuaded the financial products division of AIG to insure tens of billions of dollars in subprime mortgage loans, and that they never even looked at the piles of loans that they were insuring.  Over a few months in 2005, Goldman Sach's got AIG to insure 20 billion dollars worth of subprime mortgage securities that had a AAA rating.

Lewis called the Goldman Sach's - AIG deal one of the "original sins of the looming financial business."  AIG insured an additional 30 billion dollars of loans in worthless securities from other firms. 

How many years will it take for the negative economic ripple effects from the subprime crisis to really be over? Shouldn't we still be asking questions about the details of the crisis?

Who are all of the irresponsible people that created the subprime mess?  Let's name some names, and put their faces on milk cartons for everyone to see.  To whom are the rating agencies accountable too, and why do Wall Street firms pay them?  Why is it a good practice to allow firms that advise clients on what stocks to buy or sell, make bets against those same transactions?

We should be watching what the players are doing now.  Those people who were highly paid during the dismantling of the subprime crisis.  Lets look and see if the same players are now participating in the clean up of the mess too? 

What is  Michael Burry doing now?  One article says that he has closed his hedge fund, and is bracing himself for the devaluation of the dollar.