ctrl.altered.mind

A few days ago, around the time that the Fed announced a surprisingly generous 0.5% interest rate cut on lending (and the time that the average person had started to realize the true impact of the current lending crisis), I heard a talk on public radio analyzing the crisis that banks have been finding themselves in. The Citi group had just disappointed Wall Street by posting a loss of nearly $10B billion.

One line in particular, stood out through the report - that Citi would not be looking to expand its operations in the US. Instead, they would be more interested in seeking out greener pastures in countries that are known to be better savers. While anyone can guess that the consumerist United States is not quite in the habit of saving, I was intrigued to find out which countries are best known for squirreling away a major portion of their paychecks for a rainy day. Get this - average personal savings amounts to only 2% of the US economy, while it is 40% in the case of China.

Robert Rubin, Citigroup’s director and executive committee chair, has a ready answer. Speaking about Citi’s credit hangover, he chided American consumers for their spendthrift ways - but also acknowledges that over the next few months, the country’s economic fate shall rest with the nature of consumer spending. The upcoming economic stimulus package passed by the government is also banking on that same premise. What is not being addressed (neither in political debates nor in general open discussions), is the direction to be taken so that long term financial habits see much-needed change.

The interest rate cuts and stimulus packages are being met with some cynicism. On one hand, it is hard to believe that such indicators are not signaling an upcoming trend of rates falling further and supply being more abundant (particularly illustrated by the current housing market). On the other, frivolous spending in a time of economic slump seems counterintuitive to a solution for jump-starting the economy. As the article concludes:

… Rubin was stumped when asked where the U.S. fit into a world where China has become the global factory, Brazil the world’s farmer, and India its back office. “We can do all of these things, but we have to invest in what we have to invest in, which is education,” he said.

But his answer was uneasy. After all, globalization has made the U.S. the world’s manager and financier, a job that his bank has just screwed up on a massive scale.

The elephant in the room, of course, was the fact that risky bets at leading financial institutions like Citi, Merrill Lynch (MER, Fortune 500), and Bear Stearns have damaged Wall Street’s reputation as the world’s leading financial hub.

According to the US Treasury Department, from 1776-2000, the first 224 years of U.S. history, 42 U.S. presidents borrowed a combined $1.01 trillion from foreign governments and financial institutions, but in the past four years alone, the Bush administration borrowed $1.05 trillion.

While conservatives may still argue that previous lending has not been adjusted for inflation, the fact that President Bush has borrowed more than all previous 42 Presidents, combined, is difficult to refute. The financial report for the US Government is available online (pdf). Besides the eclipsing effects of the ongoing war, according to the financial report, the federal government’s fiscal exposures from social insurance pledges (which include Social Security and Medicare) alone totaled approximately $50 trillion as of September 30, 2006, an increase of about $4 trillion over September 30, 2005, and up from about $20 trillion as of September 30, 2000. This translates into a current burden of about $170,000 per American or approximately $440,000 per American household.

The US really needs to elect a fiscally conservative President. Related to this piece of information and going back to spending and debts incurred from the current war efforts, the Fox News interview with former President Bill Clinton on September 22, 2006, is an interesting one to assimilate (yes, I know, on Fox News).