Free Markets, Free People

You can pay me now or you can pay me later …

This speech by Dave Cote, CEO of Honeywell (to the Chamber of Commerce) was forwarded to me by a friend.  It is one of the best summaries of our fiscal/financial problems I’ve seen in a while.  Usually, when I see a 34 minute video I’m loath to give the time necessary to watch it, but this one is both fascinating and deeply disturbing. Take the time.

Cote lays out in words and charts our coming fiscal train wreck if we don’t do something “proactively”.  As he says in the speech, we can do what is necessary to solve the problem or at some point, the bond market (as it did in the case of Greece) will do it for us.  One will be painful, the other is catastrophic. 

You can read the speech here if you prefer.   And if you’d like a copy of the charts and visuals, they’re here.

Dale’s post below about “Following the House of Bourbon” is essentially given facts and figures by this presentation.  For instance, the discussion about China’s defense expenditures being paid for by our interest payments.  Cotes points out that if spending remains unchanged through 2020, we’ll be paying almost a trillion dollars in interest a year.   At this point, foreign governments own 45% of our 9 trillion in debt.  China owns at least a trillion of it.  And there’s no end in sight of the sale of government debt here.

The last point Cote makes that echoes Dales warning is about how quickly this will happen if we don’t do something.

While the problem builds slowly and inexorably, financial markets respond abruptly. When that decline does happen, it won’t be a case of minor monthly changes that give us 15 months to adjust. The hurt will come overnight as the herd moves against us. And then it’s too late.

That could happen at any time without warning triggered, as Dale points out, by some seemingly insignificant occurrence that normally would receive only passing attention. I don’t think, for the most part, people understand that very important point or they’d be beating down the doors of Congress. 

Cotes also addresses “political will”  and whether we have the will to do what is necessary (and endure the political consequences) to get this nation’s fiscal policy on the road to sanity.  He notes that the public is more engaged now that in quite some time (and that’s a good thing) but are really focused on the wrong things (although they do recognize the gravity of the situation, he thinks they’re focused on fairly irrelevant portions of it).

The distilled point of course is politicians only have the spine the public gives them and unless they’re assured the public is behind doing what has to be done to solve the crisis, their risk-averse nature will have them continue to kick the can down the road. 

Anyway, highly recommended.  It will give you a great idea of what our situation is, where we’re headed and what the results of continuing to ignore it promise.



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23 Responses to You can pay me now or you can pay me later …

  • The situation in Greece showed us that even when things go completely to hell, a large part of the populace will not want to pay the price necessary to get the countries’ finances in order.  And there is no shortage of political opportunists who will keep pushing the idea that we’re on the right track if we just dig ourselves a deeper hole, cheered on by hacks (sorry, Nobel Laureates) like Krugman.  It’s frustrating and frightening to see us heading for a cliff, and realizing that the driver refuses to hit the brakes, preferring only to debate whether or not he’s pressing hard enough on the accelerator.

    • Oh, we’ll just get rid of all the spending we don’t need – you know, like a military, maybe we can leave some of the Navy intact to make sure boaters are being safe, and if we just did away with the borders we wouldn’t need ICE, and if we sent all earnings in to the IRS, and let them dole out what we’re entitled to every couple of weeks, we could eliminate a significant portion of the tax collection agency that’s caught up with reviewing incomes and catching tax cheats like Tim Geithner or Charlie Rangle.
      We could assign people to jobs according to where they live, or where they’re needed,  and do away with a good portion of the transportation infrastructure that currently allows greedy selfish suburbanites to commute every day,  then we won’t have to waste billions on maintaining roads and bridges.   Maybe introduce a ‘residential sharing’ plan so we can provide housing for people who currently can’t afford it by assigning families to people who have more room in their houses than the really need.  Reduce air travel so that it’s only used for important reasons, airports will become smaller, and the FAA will have less work to do to track it all.  Gee,  that will save petroleum too!, and cut our carbon foot print which will be wonderful.  In fact, we can probably do away with a lot of the industries and businesses that compete with each other right now, like farms and oil companies and airlines and computer manufacturers and car companies and consolidate them under one government department each to achieve better resource use and lower costs.
      Yep, there’s a lot of things the government can do to raise revenue and reduce spending so we won’t have to worry about ever being in the shape Greece is in right now.  In fact the Democrats have already moved us along my suggested path, we just need to keep spending and trust government to fix it and we’ll be in paradise before you know it, the envy of the world!

      • I think there are some major disconnects in the populace in regards to where wealth, growth, and jobs come from. I suspect this comes from the school system,  academia, and the media.
        You have high-tech folks working hard to defeat Prop. 23 in California. Of course, they don’t care about carbon taxes! Their production is in China. Or they are making the solar cells that get the subsidies.
        But its the evil oil companies who just want to keep the workin’ man down (if by working man, you are referring to a B-12 visa holder from India who is working in Silicon Valley.)

    • We are not Greece. We have the Tea Party movement, and strong opposition to Obamacare, etc. We have our own entitlement types, but there is hope for us yet.

  • There’s something about the entire debt meets China meets trouble later problem I don’t get.

    Today China lends our government money. This is money they’ve gotten from our massive trade surplus, right?

    So say tomorrow the stop lending us money. What are they going to do with the dollars from the trade surplus?

    Sure, they could decide they want to be paid in Euros, and that would likely drive the price of their goods through the roof. How much of their economy and people’s relative prosperity is dependent on having the US to sell goods to?  How to do they shut us off and not shoot themselves in the foot?

    • You are correct. I have been thinking more and more about this issue, and its not good for either country.
      From a recent LSE podcast on China’s financial markets, supposedly 40% of their GDP derives  from export business. They have taken those dollars and purchased US bonds instead of US products. They own 800 billion in Fannie and Freddie bonds…do you think the average Chinese if allowed the free choice would have invested 800 dollars per capita roughly into our mortgage market?  Another LSE podcast said that Asian government  lending to the USA accounted for 25% of household credit and lowered interest rates by fully 1%.
      Just imagine the malinvestment that causes, not only in the US, but in China.
      They hold 2.6 trillion dollars in reserves. Assume those are all dollars (they aren’t but close enough) and what are they going to buy from the USA when they eventually want to convert those paper promises into product? I guess real estate, maybe.  Oh, and China should be considering that they cannot just keep doing everything to help themselves and not the USA. If we get in a worse state and then they cut us off, it would be politically simple then to simply not pay them. You see, once the bank says your credit card is maxed, that’s the time to declare bankruptcy and not before.
      BTW, there is an econtalk podcast on France’s role in creating the Great Depression. Essentially they went back on the gold standard after WW I with a slight devaluation to their currency. They then sucked in gold, but did not print additional currency to be backed by their gold. Thus deflation started in other countries and France had inflation at first. France’s share of global gold reserves went from 7% to 27% in just a few years. Sound familiar? I am not sure if the situation is the same with China, but the parallels are a bit scary.

      • This is not to say the US does not have about a million things it could do by itself to help the economic situation.

    • It is rather interesting.  In a lender/borrower relationship who is the slave and who is the master?  If a lender wants his money back he must take an active interest in the economic well being of his borrower.

      Ultimatley our problem is not that our debt is owned by whatever nation, it is a problem that it exists in the first place and that it is taking a larger and larger portion of our budget just for debt service.

    • That depends.
      Has our deficit spending been offsetting the drain of our trade imbalances?  Something that is often underrepresented because their lending is counted against their imports.  If it has, then when we end the deficit spending (and eventually we must) our economy will implode and there won’t be mass purchases of any goods, Chinese or Otherwise.

  • I find it impossible to trust any politican with more revenue. They will not lower the debt with it but spend more.
    This speech was long on facts short on solutions, not that I have the solution either.

  • Oh, but if we just elected more people like Mike Castle and John McCain, we could do something about all this….
    Or so we have been recently told by a commenter who is convinced we are off in the woods about what to do.
    And if I sound a bit peeved, well, I am. I’ve been listening to this “don’t let the perfect be the enemy of the good”, suck it up and take one for the team stuff for decades, and I’m heartily sick of it.
    I realize it’s meant well. I realize we’re all nominally on the same side. But I don’t care any more.
    I heard that stuff in 1994. Then the Republicans’ song was “Wait until we get Congress AND the White House. Then you’ll see some action ,yessir!” That got the usual slew of Specters elected in 2000, 2002, and 2004. And we got diddly. Sorry, we didn’t even get diddly, we got screwed. Federalized education, Medicare Rx, and the biggest offense against free speech in our lives – all passed by those Republicans we were supposed to support just to get to a majority.
    And now, here we are, dealing with a likely string of crises like nothing most everyone alive today can remember. Hoping for the “painful” choice as the least bad alternative to disaster.
    This kind of warning ought to be the clarion call to abandon politics-as-usual, tell the political consultants to stuff it, tell the gentrified GOP establishment to pack their bags and get out of the way, and hope against hope that we can get enough Americans on the side of sanity to prevail against the left.
    I don’t know what the probabilities of success are; probably not good. But against certain failure with politics-as-usual, I’ll take those odds.

    • Take heart. Once the money runs out, whichever party is in power, or just about to get into power will start cutting. Happened in Canada. Happened in Sweden. (Sweden! Canada!)
      Unless California gets a bail-out, then we may even see Jerry Brown have to become the axe man not the tax man.

  • Comparing US to Greece is utter foolishness.  Bond markets are punishing Greece, but they’re actually paying us money to issue bonds (it’s a negative yield!).  You can like it or not, but US debt is the only game in town; we can issue bonds until the cows come home and the debt markets will lap it up.

    • Yep. Until one day, they decide that the USA isn’t safe either.
      I predict that’s the day we consider not paying back China or the other foreigners who lent us money.
      So it will be sort of self-fulfilling.
      I can imagine the lefty ads now….”With the amount of interest we pay to the Chinese, we could pay for 1,000,000 children’s healthcare. (cut to shot of poor cancer kid.)”

      • I have been considering ways to deal with the debt.  All I have come up with is this.  First, we must stop making more debt, that is paramount.  Second we consolidate all obligations in one big instrument, and take advantage of low long term rates.  This instrument would be a bond put out with maturity dates that range from two years to thirty years.  All obligations would be replaced with these bonds on a basis that spread the repayment.

        In other words if a borrower turned in $100,000 in T-bills they would receive the current value in the new bonds at appx. $3570 for each of 28 years worth of maturity.  Those bonds could be held or sold.

        This would of course short change the holders to some extent because it would stretch out repayment, but it is better than an outright default.

        • There will be many creative solutions. But only when its all over or very, very close.
          If we do get results from the coming elections that result in a better situation, I will be pleasantly surprised.
          Then again, Jerry Brown is winning in California.
          And, for all the financial stuff, I really think the key will be in de-regulation to spur economic growth. California is the leader in creating regulations, bureaucracy, and forcing businesses out. Until that is understood by the common man, it won’t change.

    • There is one other factor. Who (other than the US) issues debt in their own currency?

      Greece couldn’t just print more Greek-Thingy’s and issue them as payment. The US?

      • I think some bonds are issued in local currencies besides the USA, but obviously investors consider that.
        Supposedly we can’t inflate our way out of debt because we actually keep creating it at such a fast pace, it won’t work as well. The new borrowings would figure in the inflation.

  • How did Alexander Hamilton do it?  I seem to recall from my high school history classes that (A) the fledgling United States owed huge debts after independence and (B) Hamilton especially among the Founding Fathers was determined to get the country off on the fiscal right foot and pay those debts off.  How did he do it?  Is this a blueprint for what we should do now?

  • I want to point out that my statement regarding Greece was, well… I can just quote it again, because it’s pretty clear: “The situation in Greece showed us that even when things go completely to hell, a large part of the populace will not want to pay the price necessary to get the countries’ finances in order.”  I was not comparing the economic situation of Greece with that of the USA, or trying to equate them.  I was pointing out that the belt-tightening that must be done will be resisted by a large part of the population.  As I’ve pointed out in the past, even when Greece had pretty much gone over the cliff and had to cut spending in order to secure the funds that would stave off disaster, there were protests and riots.  There are a lot of people who do not want to lift their snouts from the trough, even when it’s empty.

    • Much of that was because Greece waited until it was forced to make such cuts and then had to make them all at once. That’s the same choice Cote is talking about – do it incrementally now or let the vagaries of the bond market decide when we’ll have to do it all at once.