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America’s trillion dollar question

The US economy has suffered a sharp nosedive. Plunging exports and the biggest fall in consumer spending in 28 years has meant that the decline was much worse than analysts had expected. Kevin Connolly in the US looks at why we are now talking trillions as well as billions.

In the world of American government, the trillion is the new billion.

There was a time when only astro-physicists and accountants practising in Zimbabwe had any use for a word which – in the US at least – means a million millions.

Barack Obama is not the only extraordinary phenomenon to rise to prominence in this country in the last year or so – the trillion is right up with him. Suddenly it is popping up in newspaper headlines with extraordinary frequency, even though it is surely a number so far beyond our everyday conceptual grasp that it conveys practically nothing.

America’s budget deficit for example – the amount by which what the government spends exceeds what it earns – is now $1.75tn, and its national debt – the total of those deficits accumulating from year to year – is nudging $11tn.

Incomprehensible

If it helps to view it as a figure then here is America’s annual budget deficit as it stands now: $1,750,000,000,000. And the national debt: $11,000,000,000,000.

Does that help? No, I rather thought it would not.

President Obama has unveiled his $3.6tn (£2.5tn) budget for 2010

You get more of a feel for the scale when you consider that the digital national debt counter near Times Square in New York ran out of space when the number crossed the $10tn mark. They were only able to keep spelling out figures electronically by replacing the dollar sign at the front with an extra number.

And yet the trillion is only one of a number of startling, incomprehensible numbers to make their way into the headlines since the start of this recession.

Take Mr Obama’s stimulus package for example, which ended up at $787bn (or just over three-quarters of a trillion if you prefer). You have probably heard by now the calculation that that is the equivalent of spending $1m a day every day starting from the birth of Christ and going on through the present day.

Verbal inflation

Slightly more accessibly, it is also regarded, in real terms, as one of the most expensive projects ever undertaken by the American government.

Only fighting and paying for World War II cost more. Vietnam came close but putting a man on the moon was a bargain in relative terms at about a third of the price of the stimulus programme.

 

It is hardly surprising that politicians and pundits on American discussion programmes often jumble up the millions, billions and trillions – we are still in the process of adjusting to a frightening order of magnitude

That is even more startling when you consider that the bailout for troubled banks (that is troubled in its modern sense of “greedy and incompetent”) is only going to come in very slightly cheaper, at perhaps $750bn.

The creation of the new reserve fund to pay for health care reform in Mr Obama’s first budget will cost a further $634bn.

The US is struggling with rising unemployment

And yet it is not very long ago that the word billion began creeping into the lexicon of everyday politics.

In the past it was mostly regarded as a loose, non-specific way of conveying a sense of scale bordering on the fantastical – as in “a billion stars in the heavens”.

The speed of that verbal inflation is staggering. Most of us still use the word millionaire to describe someone of enormous wealth, but it has actually been around since the mid-19th century in its current form and once conjured an image of someone with limitless spending power.

Today it is a little less special. There are thought to be around 10 million millionaires in the world and we use the word billionaire to convey the idea of limitless plenty instead – there are only just over a thousand of them, and maybe even fewer than that after the global collapse of values of the last year or so.

But hardly have we grown used to the idea of the billionaire when the word billion, relatively speaking, has begun to lose some of its power to convey a cosmic sense of financial scale, displaced by the t-word.

It is hardly surprising that politicians and pundits on American discussion programmes often jumble up the millions, billions and trillions – we are still in the process of adjusting to a frightening order of magnitude.

Quadrillion

If you are not sure of the difference by the way, think of it like this.

A million seconds is 11 days.

Since we have only just started on the trillion scale a bit of a breathing space should now follow

A billion seconds is around 32 years.

And a trillion therefore is 32,000 years.

It seems to me this matters because the language of political arithmetic is now completely removed from the language of everyday life – and that has happened with frightening speed.

In the early years of his presidency, for example, Bill Clinton tried to get a $16.3bn stimulus package through on Capitol Hill and failed, partly perhaps because that sounded like a hell of a lot of money back then.

The American budget, and the American budget deficit have come a long way since – not in the right direction.

Still, since we have only just started on the trillion scale a bit of a breathing space should now follow. It is the quadrillion next by the way.

Now that really IS a lot of money.

Alternative views of the economic crisis

http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/2/hi/business/7874667.stm?ad=1

Depression 2.0?

36 hours in September changed the world. When investment bank Lehman Brothers collapsed, the credit crunch became a global financial crisis.   

 

But how bad is that crisis? Was it wrong to let Lehman fail? Or was Lehman just a symptom not the cause of the chaos in the global economy?

Tough questions, and the World Economic Forum had lined up five top experts (including two Nobel prize winners) to find answers.

The economists among them were Crunch Cassandras; two or three years ago they had predicted that our financial system was headed for a huge liquidity crisis – Nouriel Roubini, Nassim Taleb and economic historian Niall Ferguson.

A pity then, a participant said, that two years ago nobody had thought of inviting them to speak at the forum.

Little wonder that this session was hugely oversubscribed, with 150 people on the waiting list and probably more than that crowding into one of the cavernous dining rooms that are the hallmark of Davos hotels.

Under Davos rules this was a closed session, to encourage frank debate. So with a few exceptions I am not allowed to attribute quotes to individual speakers.

But I can report what was said, and this session was an intellectually stimulating eye opener – and utterly depressing (at least economically).

Depression 2.0?

The biggest question, of course, is how bad is it going to get, and nobody – neither on the panel nor in the audience – dared to provide any cheer.

There was talk of “Depression Lite” and “Depression 2.0″, although the experts also pointed out that it was unlikely to get as bad as the 1930s.

Back then, the US economy shrank on average 14% a year, prices fell at 8% a year and unemployment peaked at 25%.

The sharp rate cuts and fiscal stimulus packages around the world would prevent a repeat, everybody agreed.

Still, warned one of the experts, the world would have to brace itself for “a best case scenario” of at least a year of recession and a “lost decade” of low growth – and most people were still in denial about this prospect.

Root causes

But what caused the crisis? A popular theory is that Washington is to blame for the “global cardiac arrest”, because it allowed Lehman to fail.

The panellists rejected this suggestion as “tosh” and “a myth”.

 

This crisis, several economists said, started two years earlier and was “bound” to lead to a financial meltdown – whether it was a bank like Washington Mutual or the likes of Lehman and other parts of the lightly regulated shadow banking system of investment banks, hedge funds and broker dealers.

“How could banks be so stupid?,” several panellists asked, and allow things go so wrong so quickly?

The root causes for the economic crisis were too much debt, a culture of short-term rewards for long-term risk-taking and fatally flawed mathematical risk models. And plain old greed.

“Derivatives trading is all about how to make a bonus and how to screw your client,” said Nassim Taleb, a former derivatives trader and author of “The Black Swan,” a book about expecting the unexpected.

The result was a mountain range of “troubled assets” (one of the great euphemisms of the crisis, one expert said) that resulted in billion dollar losses and the need to bail out financial institutions like Fanny Mae, Freddy Mac and AIG even before Lehman collapsed.

Into the hurricane

Morgan Stanley, one expert ventured, was saved only because its share price bounced back when rumours emerged of Washington’s $700bn bail-out package. Two thirds of the world’s hedge funds would collapse, suggested another. Financial institutions took on debt worth 40 times their assets – and failed to understand how risky this was. Bank’s risk models, a prominent participant revealed, were based on one year’s worth of data.

It was, another expert said, as if a pilot was assuming that he would never fly into a hurricane, because he hadn’t come across one during the past year.

Bankers had no memory, another panellist said, they had forgotten about the Asian crisis in the late 1990s, the collapse of the LCTM hedge fund, and much more.

But it is to easy to single out the bankers – a banker said.

Where were the regulators, rating agencies, corporate boards and central bankers?

What about the borrowers, who did not read contracts and had to know they could not afford these mortgages?

And what about the shareholders and investors, who did not question the business models of the companies they owned?