So Long US, Hello Amazon.comia

07/27/2011 11:22 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Maybe the markets don’t care about the debt ceiling because the United States has already been written off, writes senior editor Igor Greenwald.

With every press conference, interview, and parliamentary maneuver, the functional bankruptcy of the US government becomes clearer.

With Republicans unwilling to rebuild lost revenue and Democrats loath to cut social spending, the leaders charged with raising the US debt ceiling to avoid default have embarked on an increasingly embarrassing search for stopgap measures.

In yesterday’s episode, Speaker of the US House of Representatives John Boehner presented legislation that guaranteed a sequel to the farce next spring, in exchange for a supposed $1.2 trillion in spending cuts over the next decade.

This wasn’t exactly proof of political radicalism, considering that, on the most likely glide path, US budget deficits will total something like $13 trillion over the next ten years—nearly doubling the national debt.

And even the odd trillion that Boehner offered up shrank to $850 billion upon review by the non-partisan Congressional Budget Office. The punch line, though, was that Boehner’s plan would save just $1 billion over the current year, or 0.08% of the expected annual shortfall.

Naturally, the government-hating Tea Party caucus of the Republican House delegation lined up to vote against, joining most of the Democrats and dooming Boehner’s baby.

Senate Democrats have their own plan, which would save $2.2 trillion over the next decade without boosting federal revenue as a percentage of the GDP from a 60-year low.

Majority Leader Harry Reid’s bill would also postpone the next fiscal reckoning until after the elections in 2012. This galls Tea Partiers, who want to campaign on the $14 trillion national debt almost as badly as Democrats want to run against the Republican threats to cut Medicare.

And in the meantime, until today, financial markets have been coasting—defying all the tut-tuts about an imminent apocalypse should the US lose its AAA credit rating, as now seems almost a foregone conclusion, or actually default, risking a global credit crisis.

Another quarter of booming corporate earnings has given investors every reason in the world to gravitate toward the healthy apex of the private economy, the one that builds factories overseas to sell to whichever nations happen to be buying at the moment.

But bonds have also done well, in part because there are so few good alternatives to Treasuries at the moment. It can’t be because investors expect an economic collapse—or else they wouldn’t be also eagerly chasing commodities.

Commercial banks have strong regulatory incentives to look past the current crisis, and toward new global capital requirements that reward leveraged investments in government bonds at the expense of lending to customers.

Asian central banks still have the proceeds of huge trade surpluses to deploy. These are bond buyers for whom gold is not a realistic substitute.

So everything’s good, except for all the news out of Washington. Which is a capital of a somewhat mythical country known as the United States of America, which used to have policies and common goals.

But these have now been written off as evil “income redistribution” schemes in disguise. Proponents of that view have successfully thrown sand into the gears of government that were well worn and breaking down long before the saboteurs took office.

So perhaps the markets don’t care because, from a financial point of view, the United States has already seized to exist as a coherent entity.

There is the vast government bond market of course, but it’s a ward of a Federal Reserve that has tipped its willingness to rescue Treasury buyers as many times as it takes to avert collapse of the current financial system.

And then there is the corporate ecosystem—based nowhere in particular and paying taxes accordingly—which is doing so well that at least 55 high-grade corporate bond issuers are already seen as a lower default risk than Uncle Sam in the credit-default swaps market.

We have the Mid-American Farmville growing corn for ethanol and for export to China and Japan and wheat for the Arab countries. We have the Duchy of Hollywood and the Silicon Valley Republic, with its satellites in coastal Guangdong.

The economic values and needs of the Energy Extraction League are vastly different from those of Non-Profit Land, or those of Detroit, or Boeing’s new South Carolina base, or Amazon.comia.

If they’re lucky, the economic refugees from a million strip-mall and Main Street storefronts sporting vacancy signs will find a refuge in one of these successor states. And if they’re not, they could still try to reconstitute the United States as a coherent economic entity by political means.

It’s a long shot, but who’s to say it can’t happen?

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