There is a concept in economics known as the “snow-ball effect” on debt. It involves the self-reinforcing effect of debt accumulation arising when the growth of the national economy is less than the interest paid on public debt.

  In math it looks like this:

 I’m not going to focus on the mathematics here when the way the financial markets are reacting to Greece is all you really need to know.

 Insurance costs against a Greek government default leapt to a record after leading debt analysts warned the country’s economy could face a ‘slow death’ because of its deteriorating finances.

 The concern is that Greece’s economy is fundamentally uncompetitive in the world market, that it must borrow just to maintain its basic needs, and that interest payments on the debt accumulation is now reaching levels that has forced Greece to drastic action. Raising taxes and cutting social services to pay the interest will smother the economy further, making more borrowing necessary.

  The one thing you can count on every year for Christmas season is hype. Every single year, no matter what the economy is actually doing, you will hear reports about a tremendous surge in shoppers on Black Friday.

  Why anyone in their right mind would go to a shopping mall on Black Friday is beyond my imagination. I would rather poke sharp objects in my eyes, but that’s just me.

 The hype that follows Christmas is generally less intense, but it’s still there.

 U.S. retailers ended up having a decent Christmas, with holiday sales at the high end of modest expectations as consumers let loose some pent up demand and retailers carefully managed inventories and promotions.

  Retail sales rose 3.4% in December from the year before, the Commerce Department said Thursday. Combined with a 0.9% gain in November, retail sales rose 2.3% to $509.3 billion year-over-year for the two-month holiday period, to $446.8 billion, the Commerce Department said.

 Really? Solid Christmas sales despite high unemployment, huh? Let’s examine those claims more closely.

  You’ve heard the term Ponzi Scheme. Well now I want to introduce you to the term Ponzi Economy.

 Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds. The conclusion of this fairytale is that the government got to run up a 1.5 trillion dollar deficit, didn’t have to sell much of it to private investors, and lived happily ever – ever – well, not ever after, but certainly in 2009.  Now, however, the Fed tells us that they’re “fed up,” or that they think the economy is strong enough for them to gracefully “exit,” or that they’re confident that private investors are capable of absorbing the balance. Not likely.

“The 401(k) system has to be fixed, and I don’t know anybody who can fix it but the federal government.”

– John Bogle

 Late last week the federal government began floating proposals for reforming America’s broken retirement system. The proposed reform centers around the idea of getting people to invest more conservatively and withdraw the money more slowly so that they don’t outlive their savings.

 The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are leading the effort.

 Secretary Iwry developed this idea when he was working at the Brooking Institute in 2008 in conjunction with the Heritage Foundation. The concept involves rolling people’s 401(k) savings into directed distribution plans unless they specifically elect not to participate.

 This probably sounds like a reasonable idea until you dig beneath the surface.

  The deeper and longer the recession goes on, the more questionable the numbers get.

Today the headline number was a loss of 85,000 jobs in December and a steady unemployment rate of 10%.

  The market only expected to lose 3,000 jobs, so this was a negative report. However, like most unemployment reports, the Devil is in the details.

  It’s easy to take a couple months of charts and declare that the future will continue the present trend. That’s what the Green Shooters/Recovery crowd is doing.

 But when you step back and put things into historical perspective, when you analyze the fundamentals of the economy, then it changes everything. It smooths out all the temporary stimulus created by the federal government that is destined to run out soon.

   When you know you are about to do something unpopular you try to hide it. For instance, the public would never know that over 140 banks (not counting credit unions) have gone under this year because their announced failures only happen on Friday evenings.

  Another extremely unpopular event would be another round of bailouts for Wall Street banks. That’s why the provisions are hidden deep within the financial reform bill.

 For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system.

  Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

 Believe it or not, this is not the most outrageous thing Washington has done in the last week.

“Clio, the muse of history, is as thoroughly infected with lies as a street whore with syphilis.”

– Schopenhauer

 I don’t blame the Tea Party Protesters for getting it wrong. They probably learned the same myths in school that you and I did. It most likely never occurred to them that they were being lied to at such a young age.

  Normally the lies we are told are lies of omission. For instance, schools no longer teach the long history of labor struggles in America, or the dozens of times we invaded Latin American countries to defend the profits of American banks.

 However, on occasion, the lies we are told are overt and intentional.

 The tea party protesters are victims of both flavors of lies. It wasn’t by accident. As Saul Bellow once said, “A great deal of intelligence can be invested in ignorance when the need for illusion is deep.”

  The underlying assumption that the current world monetary system is built upon is that America will always over-consume and the world will always accept our debt at face value. It’s a warped and unhealthy relationship, but its worked (sort of) for several decades. That’s why it was notable when a Chinese central banker spoke up last week.

 “The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said, according to an audio recording of his remarks. “Double the holdings? It is definitely impossible.”

Impossible? That’s absurd. For decades foreigners have been more than willing to exchange their excess dollars from trade surpluses for our debt in order to keep their currencies at artificially low levels.

  It turns out that the problem isn’t foreigner’s willingness to lend to us.

“The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,” he added. “The world does not have so much money to buy more US Treasuries.”

 The problem is that the American middle class is broke and unable to continue to over-consume.

  You might have heard about how Washington is going to crack down on Wall Street banks. It was something about regulations and Fat Cats.

  Yet if you look at what is going on today, you would come to the exact opposite conclusion.

 The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.

 I bet you were starting to worry about the TARP banks, and if they could still afford to give out multi-million dollar bonuses to their executives. I know I was. Thanks to an IRS rules change, they still can.