Barack Hussein Madoff???

Pork Cheops???

This headline is not as silly as it seems. A look at Bernie Madoff’s recent interview reveals many similarities between the situations encountered by both Madoff and Obama. First, let’s look at Madoff’s recent interview.

This is when the criminal activity began:

And his stalwart old trading strategy, built on arbitrage, no longer worked as effectively as it had—for one thing, spreads were narrowing, in part as a result of the technology he’d helped introduce. He’d come up with a new trading strategy based on index options. But the new strategy needed volatility to work, and in the early nineties, the recession had settled in. “The market went to sleep,” said Madoff. He had too much of other people’s money and not enough to invest in.

Madoff started borrowing from his investors’ capital to pay out those solid returns. The returns, false though they were, were their own advertisement. New money started pouring in, saving him in the near term. And this was a different sort of money, the kind that came from bankers who wouldn’t have given Madoff the time of day earlier in his career. “The chairman of Banco Santander came down to see me, the chairman of Credit Suisse came down, chairman of UBS came down; I had all of these major banks. You know, Safra coming down and entertaining me and trying [to invest with Madoff]. It is a head trip. [Those people] sitting there, telling you, ‘You can do this.’ It feeds your ego. All of a sudden, these banks which wouldn’t give you the time of day, they’re willing to give you a billion dollars,” he explained. “It wasn’t like I needed the money. It was just that I thought it was a temporary thing, and all of a sudden, everybody is throwing billions of dollars at you. Saying, ‘Listen, if you can do this stuff for us, we’ll be your clients forever.’ ”

So Madoff took the money. While he waited for the market to wake up, he parked their billions in treasuries earning 2 percent a year, while generating statements that maintained they were earning about 15 percent—fantastic money in a slow market. He couldn’t bring himself to tell them that he had failed. “I was too afraid,” he said.

I think Obama (and frankly, Congress, too) are in the same shape.  The country has written checks that it can never cash unless green dollar bills are simply printed off by the railroad car full.  And Obama knows this. But, their egos have been fed as the dollars flew, and now they are afraid to tell us what we really face. Plus, there’s that pesky 2012 election coming up.

These numbers are not exact, but roughly we have a $14 Trillion deficit, a $7 trillion unfunded Social Security liability, and about $60 Trillion in unfunded Medicare and Medicaid.  About $80 Trillion, give or take a few trillion.  This doesn’t count State or Individual debt.

As Mr. Karl Denninger at Market Ticker frequently points out:

The Federal Government has never in the history of the nation managed to collect more than 20% of GDP in taxes. This has been true in times of peace, war, Democrats, Republicans, deficit hawks and doves.  It has been the case with a top marginal tax rate from 90% all the way down to today’s rates.  The reasons for this are complex, but the primary one is that people don’t have to work, and there is a pain threshold beyond which they simply work and get paid less, or at least “paid less” in terms that can be taxed.

Assuming a $15 Trillion GNP,  and the 20% tax rate, tax receipts would be in the  $3 Trillion per year range, the largest part of which is non-discretionary (Defense and Entitlements). This leaves, on a good day, about $900 Billion (30%) for discretionary spending AND interest payments.  Currently, at 1% Interest Rate, we pay about $200 Billion interest per year. Any Interest Rate increase either cuts into current spending or increases the deficit.A  4% Interest Rate increases that to $800 Billion and wipes out discretionary spending.  At present, $3 Trillion ISN’T coming in,  safety net expenditures are up, and thus we have an even bigger deficit.

So, the Fed can’t raise interest rates or the government is adversely affected and either spending goes down or deficits go up.  The Fed can’t let the monetization continue at this rate or inflation and prices go up, and poor and middle class people will starve and go homeless.  Which increases the need for safety net expenditures.

And at some point, lenders will key into the $80 Trillion in unfunded liabilities and either refuse to lend or demand a higher interest rate. Obama is where Madoff was when it became obvious that his pyramid scheme had gotten out of hand:

Through the nineties, Madoff dreamed of climbing out of the hole he’d dug. “I kept telling myself that some miracle was going to happen or that I was going to be able to work my way out of it. I just didn’t know when that was.” By around 2002, he realized this was a fantasy. “By then, the number was so astronomical I didn’t know what I was hoping for, quite frankly.”

It was a nightmare. Imagine going home every night not being able to tell your wife, living with this ax over your head, not telling your sons, my brother, seeing them every day.

Astronomical numbers. No solution in sight. A nightmare.  Afraid to tell the truth. Madoff and Obama surely have much in common. Maybe a good movie would help. Might I suggest Disney’s Jungle Book. I am sure they will both empathize with Baloo the Bear, when he had hold of the tail of Shere Khan, the tiger,  and said, ” I can’t let go! There’s teeth in the other end!!!”

Squeeky Fromm
Girl Reporter

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