But Obama's spending plans are extraordinarily ambitious. His projected deficits for the rest of his possibly presidency are higher than the "runaway" deficits that plagued most of the Bush administration--and after the first few years, that's not stimulus, that's ordinary spending outstripping revenue. For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is? That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.
The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future. Probably, there will be a Republican in charge. Markets hate Republicans.
But last Thursday, the Treasury auction was . . . well, descriptions vary from "weak" to "horrible". This raises the unpleasant possibility that markets are, as my business school professors insisted, "forward looking". Voters may believe that getting a bunch of special interests to agree in principal that costs should be cut is the same thing as actually cutting costs. Bond markets don't. That's why James Carville famously wanted to be reincarnated as the bond markets so he could "intimidate everyone".
But the problems faced by Clinton were modest--moderately higher interest rates, possibly, for ordinary borrowers. The Obama administration is trying to borrow 13% of GDP this year. If bond markets think future deficits are a problem, they can rapidly push up rates to the point where that borrowing becomes unaffordable. And if they do, it will be clear that they are pricing in that ugly, ugly CBO graph:
Obama can assure voters that he inherited these deficits. But bond markets pay closer attention to the fact that Obama has already increased the projected deficit he inherited by 50%:
The White House raised the 2009 budget deficit projection to a staggering $1.8 trillion today. For context, it took President Bush more than seven years to accumulate $1.8 trillion in debt. It also means that 45 cents of every dollar Washington spends this year will be borrowed.
President Obama continues to distance himself from this "inherited" budget deficit. But the day he was inaugurated, the 2009 deficit was forecast at $1.2 trillion -- meaning $600 billion has already been added during his four-month presidency (an amount that, by itself, would exceed all 2001-07 annual budget deficits). And should the president really be allowed to distance himself from the $1.2 trillion "inherited" portion of the deficit, given that as a senator he supported nearly all policies and bailouts that created it?
The president also talks of cutting the deficit in half from this bloated level. But even after the recession ends and the troops return home, he'd still run $1 trillion deficits -- compared to President Bush's $162 billion pre-recession deficit. In other words, the structural budget deficit (which excludes the impacts of booms/recessions) would more than quintuple.
Obama's spending is not the only reason the deficits are so big--not by a long shot. But he is using the sticker shock to slide in big spending plans without paying for them. And while the US can certainly afford one $1.4 trillion year, it probably cannot afford 10 $600+ billion years. As private credit markets recover, government credit markets will start to reflect that reality.
That's not to say that disaster is at hand. Obviously, I am not fond of all the new spending plans, so I (and you) should be mindful of a possible tendency towards wishful thinking. And this is early days--sometimes a bad bond auction is just a bad bond auction. But I imagine that Larry Summers had at least one sleepless night.
The USA stays credit worthy if you pencil in carbon tax/cap and trade. The political window for introducing that seems to close in summer 2011, or maybe a bit earlier?
I don't see a political window for cutting spending on an adequate scale without major revenue increases.
Cap and trade has a potential reverse Laffer effect -- assuming that it's a gigantic energy tax with no consequent rebate, how much do we lower economic growth, and what is the impact of that slowdown on the futures market?
Like the actual Laffer curve, the second order effect usually doesn't swamp the primary, but I think you can expect lower income and capital gains taxes to partially offset any revenue increases from the energy tax.
Of course, all of that assumes that you can pass a giant tax increase. I've seen estimates that cap and trade would result in an average $3,000 tax increase per family. I don't know how that tax increase would be distributed, and it will be indirect as to voters, but it's still going to be a hard sell.
You are initially correct, but then you take your eye off the ball and dilute the message, if I may mix my metaphors.
Don't get caught up in the money game. Money isn't real wealth, it is merely the method we use to apportion goods and services. The available pool of goods and services is the true wealth of society.
If we produce less in goods and services, we will be worse off. It does not matter what games you play projecting interest rates and taxes and revenues. If the goods and services are not there, no amount of money will buy them.
I agree, Bart - cap and trade objectively sucks unless it's revenue neutral. (In which case, whether it sucks depends on whether you are a Mankiw-style believer that carbon usage has more negative externalities than whatever activity we are going to lower the tax rate on as a result of the energy tax, and yes, a real tax is better than an cap and trade auction).
In this case, though, the OP was arguing that cap and trade's expected increase in US tax revenue should make the US more credit worthy in the out years, so I stuck to that.
Cap and trade is a dead letter already. There's no support for it in Congress or the public at large. This is going to get very ugly, with voters demanding both increased services and, well, if not lower taxes at least no substantial tax increases. The government will deal with it the way democratic governments the world over always deal with such conflicting demands from the voters: Say hello to my little frind inflation.
I don't think cap and trade is a dead letter. The public overwhelmingly has no idea what it is, not in the sense of not know the specifics but in the sense of overwhelmingly having no clue what it is even supposed to address. People generally believe global warming is a serious issue and people believe that we should do something. As far as its support from the public at large I think it is a function of a lack of debate. I think it might take a few years but I expect cap and trade will become increasingly appealing once America has a little less on its plate.
The public is smarter than you think, sir. AGW arguments are deflating, as global temperatures continue a decline that is now ongoing for at least seven years. The trends in US polling in the first quarter of 2009 (Pew and Gallup) clearly show that the public is getting wise to the scam. Australia is a bit ahead of the US in the carbon tax debate. The Oz public rejected cap/trade when they became aware that it was a massive tax on energy. By all means, let's have debate. But don't be so sure of the outcome.
All that money has to come from somewhere. Ultimately cap and trade is a consumption tax, and the people doing the consuming aren't going to appreciate it. I've seen estimates of an additional $4000 cost to the "average" family. Seems a bit high to me, but even 25% of that will cause a political revolution. Now, the people in Congress are overwhelmingly good at one thing, and that is staying in Congress. If I could find a way to bet against cap and trade ever happening in the US I would put my net worth into that bet.
Megan, I think you've forgotten to add the link for your block quote citation.
What are the chances that the loss of Treasuries' riskless status leads to a really, really ugly dollar sell off and not just merely bothersome inflation?
Sick Joke and Obama's Not Laughing
http://www.aratunes.us/home.cfm?feature=702420&postid=42108
Yes, I see, so Obama shouldn't have pushed for a stimulus bill.
Oh, wait -- without the stimulus bill, consumer spending would still be plummeting and the jobs report would even more nightmarish than it is. And revenue would be lower because the economy would be in even worse shape, and so on.
So...Obama should have pushed for more taxes.
Oh, wait -- Obama is barely able to manage a 3% tax hike on the top marginal bracket, even when throwing in tax cuts for everyone else; no other tax hike would have been conceivable. Not to mention the fact that it would have been a dumb idea in the midst of a severe recession, as I'm sure the right would not be shy of telling us if it had been suggested.
So...what is it Obama is supposed to do exactly?
"Oh, wait -- without the stimulus bill, consumer spending would still be plummeting and the jobs report would even more nightmarish than it is. And revenue would be lower because the economy would be in even worse shape, and so on."
You have to show that the stimulus bill did anything to reduce job loss for this argument to hold water.
http://michaelscomments.wordpress.com/2009/05/08/the-april-numbers-are-in-its-official/
So, I'll go with "Obama shouldn't have pushed for a stimulus bill"
Oh, wait -- without the stimulus bill, consumer spending would still be plummeting and the jobs report would even more nightmarish than it is. And revenue would be lower because the economy would be in even worse shape, and so on.
And you know this because what exactly? Why is it such a given that this spending is necessary to promote recovery?
Back in 1982 Reagan faced an economy in a deep recession that featured problems in the financial sector (http://en.wikipedia.org/wiki/Early_1980s_recession#Financial_institutions_crises) and an unemployment rate that went to almost 11%. His deficits, however, never exceeded 6% GDP. At 1.85 trillion Obama is looking at more than double that, around 13% GDP.
Even without a stimulus bill the economy recovered and Reagan was overwhelmingly re-elected.
The notion that a stimulus bill was an absolute necessity is completely bogus.
If Obama wanted to do the economy a sector he could have looked for ways to get government out of the way and let the private sector make the necessary adjustments to kickstart the economy. Instead he seems hell-bent on preserving zombie companies like Chrysler, firing CEOs, raising corporate taxes, reducing consumer credit through the credit card bill and in general promoting an uncertain environment that make businesses less likely to invest.
Hope and change!
Dear Mr. Steinglass:
Let's be charitable and assume that Pres. Obama had no choice but to pass the stimulus. In other words, he inherited a bad situation that required he spend a lot of money (mostly on things he could pick!).
However, when my family has an unexpected need to spend a lot of money (say, replacing a failed transmission), I scale back other spending I might have wanted to do (goodbye trip to Disney World). This might cost me popularity (in my case, with the wife and kids), but I have to face reality.
I see no evidence that Obama is changing his spending plans to account for the stimulus (and the drop in revenue from the recession). Instead, he's going full-speed-ahead. I suspect that he will try to address this on the revenue side (tax increases), hoping he can dump most of it on "the rich".
We'll see.
--Colin Fraizer
I think this is pretty damning:
http://michaelscomments.wordpress.com/2009/05/08/the-april-numbers-are-in-its-official/
Haha. Didn't realize Ken beat me to it.
There seems to be some myth that government borrowing vast sums of money improve the economy. It's not like no one has tried it before.
Just look north of you. A country in many ways the same. Any, and I mean any provincial or federal that has tried to spend it's way out of a slowdown has failed. Failed in that the situation got worse. They invariably turned around when they stopped borrowing, got rid of some regulation or dead weight.
What Obama is doing, an extension of what Bush did late last year, is going to become the problem, if it already hasn't.
There seems to be some strange ideas that the economy is some discrete thing that can be studied, understood, manipulated, depended upon or whatever. It is simply a series of transactions that individuals enter into either willingly or by necessity. A purely human process, with all the extreme, stupid, offensive, enlightened and wonderful characteristics of humans. That some man, or group of people in some city of some country could direct or run such a thing is sheer hubris. The only saving grace is that consequences are inevitable. Correction always comes. Unfortunately.
And just wait for the bloodbath when the Fed has to react to inflationary pressures. Seems to me we have seen that before.
Derek
The window for getting this tide of red ink under control is closing rapidly. The first large wave of Baby Boomer retirements starts hitting in the next five years.
Here is a prediction you can probably take to the bank. The government is going to find it more and more difficult to actually borrow on the open market at rates that don't explode the interest costs to the government, so they will turn to two sources- monetization of debt by the Fed, and forced lending from 401Ks and IRAs.
I strongly suspect that this will happen sooner, rather than later.
That's when the Democrats will lose the Middle Class-when they have to go to Home Depot to get the wheelbarrow they need to haul several hundred thousand worthless greenbacks down to the Dandee Bread Outlet to purchase a loaf of Mite-E-White. Right now, they're in their triumphalist "Thousand Year Administration" mode.
Yeesh, when this comes back to bite them on the ass, it's going to be Ugly Stick time.
Funny thing is, they're going to actually try to blame it on Bush.
BTW, get ready for your own private Weimar. Under Obama, rich Republicans will have two wheelbarrows instead of one.
Bastards!
Yancy,
There's a third source of revenue that you missed. All you have to do is look across the pond at our relatives over in Europe. The VAT. Whether it will be a national sales tax or a true VAT, I'm confident we'll see a VAT proposed in the very near future.
Americans are used to paying sales taxes at the state level. A VAT of even 5% could be sold as a minor impact to Americans and it would be an absolutely huge revenue generator.
Oh, I'm sure we'll monetize some debt first, but once real inflation kicks in, that process will have to stop, or at least be significantly curtailed.
If Washington tries to confiscate part of the 401Ks and IRAs of working Americans (especially after the beating those investments have already taken in the markets), I think the folks in Washington will find out what really is the third rail of American politics......
From a political standpoint, I think a VAT will be, at least politically, the lesser of all evils. That's worrisome, since I always assumed we'd use a VAT to meet our Social Security and Medicare obligations down the road. If we're shooting that bolt now, it could get really ugly in another 20 years.......
One of the big problems with the stimulus bill is that it's mostly tail and very little dog. Alice Rivlin, John McCain and others pushed to divide the early spending into two bills - "stimulus", which would be money spent in the 18 months after passage and designed to start the economy, and "investment", which would be longer term spending.
Instead, Obama pushed the dem wish list, so we got a lot of out-year spending, which contributes to the risk of a US treasury collapse, and very little actual money spent to date.
The best case you can make for the stimulus is that it has (hopefully) had a psychological impact - that because people know that the money eventually will be spent by the government, they are spending their money now. But (1) that's difficult or impossible to test, (2) it's probably not true, and (3) if the point of the stimulus was to create a publicity stunt to encourage people to feel better about the economy, there were better and cheaper ways to accomplish that.
It is worth noting that when the Democratic Party produced real men, it produced politicians like Roosevelt and Truman.
I sometimes take issue with my friends on the right who heap praise on Amity Shlaes counterhistory of the Depression, "The Forgotten Man", for one reason. The working people standing in breadlines, who were the object of Roosevelt's exercise, couldn't be fooled.
After the first year of the New Deal, Roosevelt had 4.5 million men working on some sort of project somewhere. There was a reason Alf Landon is beloved, but didn't have a chance in 1936. Roosevelt got material results: government make-work jobs, for people who were previously getting Relief.
Compare this to the Administration today, one that is skippered by a man who's "stimulus" bill is producing nowhere near as many jobs (I would be surprised if the jobs produced by Porkulus approach 200,000) and whose recovery act is aimlessness personified. The TARP banking program has put the Democratic Party in bed with the Banksters. This is something Roosevelt NEVER would have done.
Call Barack Obama what you will, just don't call him another Roosevelt.
Obama's numbers look bad, but he is adding in the cost of Iraq and Afghanistan, which Bush did not. There would always be a "supplemental" defense bill of 2-300 billion added in later in the year. The debt increased around $5 trillion under bush, and if you add the deficit numbers up from 01-08 from the chart, it wouldn't even be close to that number.
Given the shift away from realestate investment and productive capital investment toward simply holding commodities, the only thing the goverment has any hope of inflating away are retirement savings. Plus, the t-bills they sell pull captial away from productive investment. We might end up avoiding net deflation, but we're getting the worst of both worlds.
Neil,
The numbers for Bush are the actual deficits. This means that it includes the war funding, whose funding did not disappear into a black hole that is not counted against the balance sheet. The difference you are talking about in the last sentence is the difference between borrowing from the public and borrowing from governmental entities like Social Security.
Let's also recall that much (most?) of the supposed cost savings Obama has touted comes from measuring against a baseline that assumes the "Surge" continues indefinitely.
So that would knock off what, 100-250 billion? Even with the surge the deficit still declined until the economy tanked at the end of 07.
Did we see a large increase in interest expense in recent years?
No, but if McArdle is right, you are going to.
What I'm wondering is if the deficit spending before 09 signifcantly increased the total amount of interest expense relative to GDP or did interest rates fall, justifying some borrowing?
Recent news: Looks as if Obama and the CBO's estimates are off a bit, and the $1.8T 2009 number is sliding closer to $2.0T.
His error, alone, is equivalent to the 2007 deficit - in toto.
Therein lies the issue. These numbers are staggering no matter how you slice them, and there is no way to predict how the world will respond since this is terra incognita. There is one thing that's pretty certain however: the response won't be rosy. Careless spending is rarely rewarded.
Obama and the Congress that he leads clearly have no idea what they are doing to the economy. This is being driven by social engineering, not economics. Nobody is even reading the bills that were passed (it's physically impossible, given the short time windows).
So before the liberals ask "well... what was he SUPPOSED to do?" perhaps they can agree that ramrodding $2T in un-reviewed deficit spending wasn't it.
But that's not how liberals think. They view this as some sort of "we won, you lost" situation, without having the common sense to realize that the inflation that is coming will affect us all - and the poor and unemployed doubly so. They have just cut off their own nose to spite their face, but they aren't even smart enough to realize it.
THAT'S what's so amazing about this. The sheer magnitude of the stupidity and ignorance is breathtaking.
Bah! 200 billion? These days that's just clutter.
No, when a political party is in Triumphalist "We Won, You Lost, Get the **** In Line" mode, it starts digging its own grave.
Forget comparing today's Democrats to the 2002 Republicans. That's too easy.
Think the Democratic Party right after Lyndon got elected outright in 1964. He absolutely humiliated Goldwater. That election makes Obama's achievement of last November look tame in comparison.
What did the Democrats do? They fell in behind a Protracted Land War in Asia and inflationary social policies at home.
I would cite Marx here, but everyone does that.
The problem is that the Base Democrats spent so many years hating Bush and what he "did to the country" that they now only care that they have the levers of power and that the levers need to be used to affect change. They can't see how this stuff turns on them in the most vicious of fashions. So there doesn't seem to be anyone around to stand up and say, "wait a minute, there are limits to what we can do!"
Besides, when you're being cheerled on by the likes of Andrew Sullivan, everything must seem possible. When everyone adores the Leader, including the Press, that should be when the warning signs start going off in Democrats' heads.
But it won't, because they have the power, and they don't want to lose it.
So before the liberals ask "well... what was he SUPPOSED to do?" perhaps they can agree that ramrodding $2T in un-reviewed deficit spending wasn't it.
I'm by no means a liberal so I can tell you that your neo-hooverite/neo-mellonite thinking is just plain wrong. The government is taking the right actions (within the confines of political reality) and I feel we will have prevented a major economic calamity by these actions.
"The government is taking the right actions."
What do you base that statement on?
Rob,
Just look what happened in Japan - they followed your neo-mellonite policies at the begining of their crisisn and they ended up with a lost decade with a debt load 5 times as high as ours. If they had spent more money at the outset of the crisis, it would have been a much cheaper and a much faster recovery.
"If they had spent more money at the outset of the crisis, it would have been a much cheaper and a much faster recovery."
And you know this - how?
You keep saying neo-mellonite, but I don't think you understand that Mellon’s proposals were ignored and Hoover removed him. Nothing was liquidated under his watch. Hoover intervened all over the place, only the uber intervention of his successor makes Hoover look action-free.
Bush initiated TARP, approved Federal funds for Car manufacturers, passed the first stimulus bill, etc. but it looks like his administration did nothing in comparison to Obama’s stated plans.
You know, that "neo-hooverite" thing is pretty funny. Hoover was the one who opened the spigot. Roosevelt actually ran, in part, against Hoovers deficits in the same way Obama ran against Bush's.
"neo-hooverite"
This is a false analogy. Hoover didn't "do nothing". He ram-rodded spending almost as much as Franklin did. Hoover, though, felt that this spending must be paid for with new taxes. That's what hastened the Great Depression. "Doing nothing" would have been a better move on his part as well.
The biggest problem with the stimulus bill was that it was never going to get spent in the period of time when we needed stimulus (i.e. right now). As of today the government by their own estimate (which I assume is high as they have simply given money to the state, who knows if it has translated into economic activity) has distributed about $28.5 billion.
http://www.recovery.gov/?q=content/investments-agency
This of course is a lot of money, but it doesn't really move the needle in terms of a $13 trillion dollar US economy. Given the current rate of spending it is hard to see how you could get the majority of this money out to the economy before a normal business recovery starts.
This is one of Friedman's classic arguments: lags. Friedman reminded us time and again that the inertia of government prevents them from being timely.
It's not *that* hard, if your goal is just to shovel money out the front door. You can mail cheques to everyone inside probably a couple months, place orders with usual suppliers(military, roadbuilding, doctors, etc.) farther out and pay in advance, and of course there's the whole realm of monetary policy which can, relatively speaking, turn on a dime if the Fed plays along.
The problem comes in when you want to spend the money on things you want, rather than just on things. That takes planning, effort, startup time, and other such things. Oddly, a stimulus is one field where government efficiency and due diligence is actually counterproductive in some ways - half the point of a stimulus is to get money spent, no matter what on, and making sure you spend it well just means you spend it slowly. Of course, that has plenty of problems of its own, but it's an odd interaction.
I'm not sure mailing checks out does much. Everyone I know who actually got a check used it to pay down debt (i.e., destroying money), which is not what you want them to do when you're in a deflationary cycle.
But the whole point of a stimulus is to increase consumer confidence - it's fundamentally psychological in approach. Taking the helicopter money and paying off the credit card can help do that.
It should be noted that I'm not actually much of a fan of stimulus theory. There may be some narrow situations where it works, but on the whole it's got way too many negative effects for what few positive ones it has. But for those who are, I'm pretty sure that they should be less concerned about how well the money gets spent than about how quickly. Of course, if their actual goal is to use the word "stimulus" to get money spent on their preferred fields, well, that's a totally different story.
Getting money out fast isn't hard, if done through existing channels. It simply depends upon having the mechanisms in place to to the RFP's, RFQ's, award the contracts and issue the task orders. The difficulty comes into establishing a funding and oversight mechanism for a new class of programs.
I advocated allocating $50B to science and technology funding through defense contracts as an immediate kick-start. It didn't even have to be though the big weapons system contractors in the form of large programs; plus ups and add-on task orders to existing 6.1, 6.2 6.3a programs could generate tons of R&D jobs overnight through small and medium sized companies.
But the simple fact is that the government wanted to pick the winners, the ideological objectives it favored, rather than the solution which could most effectively get money into the economy quickly.
Megan's other post on this regards "crowding out." One thing to keep in mind: investors are no longer the only people who use the credit market. Here in the USA we have a whole generation who borrow to fund their lifestyles.
This wasn't on anybody's mind when the classic crowding out models were written. It wasn't that long ago that people borrowed only to buy houses and cars - and maybe college tuition.
Remember the last time that interest rates soared, back in the late 70's and early 80's. The main consumer impact was housing. At one point mortgage rates were something like 12% or more. It was devastating, and will be again.
But now there's a lot more. Credit card rates north of 35% would be crushing.
Which is why Obama is moving on Credit Reform.
However, if you try to artificially limit credit rates to creditors, you'll simply drive banks out of that business, effectively rationing credit to only the wealthy. Again, the Middle Class will notice.
"The government is taking the right actions."
What do you base that statement on?
In addition I draw great comfort from the statements of Nouriel Roubini: "Today, after the very aggressive policy actions taken by the U.S. and other countries, the risk of that near-depression L has been reduced from 30 percent to 15 or 20 percent. We are instead in the middle of a U."
What do you base your statements on?
See my post, below. The numbers don't lie.
The really troubling thing about that graph is the divergence between the CBO numbers (which is assumed to be non-partisan) and the Whitehouse deficit numbers. Eyeballing it, it looks like the CBO is estimating around a $1.2 trillion deficit in 2019 and Obama's team is looking more like $780 billion. This difference, $420 billion looks on par with or larger than any of the actual budget deficits that were run under Bush.
Investment creates debt too. The party that receives the investment is indebted for the principal plus interest. It is a growing debt.
For every yin there is a yang.
Bush II's most masterful stroke was to end the robber baron age. We are in the age following that age ...
Only if that investment is in the form of debt, if you invest via equity or equity like instruments their is no obligation to repay the princaipal and interest.
With Bush putting out $5 trillion in stimulus over the 8 years of his presidency, one wonders how it ended in a steep recession.
Isn't that obvious? He just didn't spend enough.
I don't think the situation looks all that scary. Even the (tougher) CBO numbers have the deficit declining to what, around 4% of GDP by 2012? Surely we can survive that. As we move beyond that point the numbers are pretty meaningless anyway, because we don't know how fast the economy will be growing nor do we know by how much taxes will have to be increased. I think it's safe to say taxes will be increased by an amount larger than either CBO or the White House is forecasting. And as we all know, it's possible to have a fast growing GDP and a large public sector funded mostly on a pay-as-you-go basis. One is aware most of y'all think such a state of affairs isn't desirable. But that's a very different animal from "infeasible."
> Surely we can survive that
So who is going to lend the money? And if a very large proportion of the investment money floating around goes to the US treasury, who will or could invest? Who will or could purchase US goods?
What percentage of the world economic output will the US treasury be borrowing, and is there any precedent for that kind of imbalance?
Derek
IF that's the case, I don't think you're looking hard enough. Let's just look at a simple arithmetic. Based of the Census, there are some 300 million people in the US. So, if you look at the debt, as it stands right now around the 13,000,000,000,000 (if I am remembering correctly). If you simply look at this as a frozen number, each individual (not household) in the United States owes some $43,300 to cover the debt.
But it's still not that simple, and it can't be eaten by the top 1% (even the top 50%) of income earners. Take Soros, Bill Gates, Warren Buffet, Steve Jobs, and any other number of billionaires out there. If you take every penny they have, it will hardly make a dent in that. So then what, do you start auctioning off land in the US to foreign nations?
But still, even disregarding THAT, you cannot indefinitely increase the debt by hundreds of billions of dollars each year. Taking the CBO estimates, Obama is PLANNING on adding roughly another 4-5 trillion in debt by 2012. That's another 15k in liability for each citizen of the US, bringing the liability (on top of taxes and everything else) to 58k/person in the US. So you add another 4-5k/person in the US (working or not) each year.
This doesn't even begin to scratch the surface of the actual unfunded liability of the US Government, when you factor in the ticking bomb that is Social Security. I've heard (and granted, these are somewhat doomsday estimates) that the unfunded liability over the long term of Social Security alone is in the ballpark of 40 trillion. Even if you take a pretty conservative estimate of that, and call it 20 trillion (we can agree that that money is not there, correct?), that's ANOTHER $67k each person in the US owes.
None of this is even REMOTELY sustainable. Especially when you begin to factor in that perhaps a good 30% of the population will be either retiring/retired, or not old enough to work. So tack on another 30% or so to each person's portion... You should see where this is going.
The US is no longer the production powerhouse it once was. Many of the jobs that produce non-foodstuffs have left for overseas, where it's cheaper to produce (China, India, Thailand...), and so you can take trying to trade goods out of the equation, in any realistic sense. We simply don't produce enough.
So, realistically, there is only 1 way out of this, and it's going to be very nasty. Inflation (as the debt is still measured in $, we at least have that option, not saying it's good). But the kind of inflation you are looking at will be a devaluing of the currency on the level of the Weimar Republic. I fear if we go this route, inflation, when it's said and done, will be in the thousands of %, and at the end, we will need to go the route of Mexico, and finally chop a bunch of zeros off of a new currency.
This is an incredibly simplistic model, but I think it should do the job I intend it to do. The numbers being so casually tossed around are staggering. Sure, on the short, we can sustain a decent spending hit in the realm of 4-10% of GDP by the gov't. The problem is that there's no end in sight, and as more and more people get used to the lifestyle, no one who wants to confront the issue will have a chance of winning elections, because it will have to be built on a platform of REAL sacrifice. Not the casual reference Obama has made to how we all need to sacrifice. People will balk at electing someone campaigning on 40-70% taxes across the board without getting anything in return.
The concept behind Keynesian economics is ludicrous. We must spend money to get more and more money into the economy so that people can spend more money. The whole thing is a trap. Once you're in to the point of spending money that you don't have, you're in for the long haul. The idea that the way to generate income to pay down your credit cards is by taking out another credit card, and buying a car is insane. Sure, the car might get you to work, and the credit card might buy you groceries, but before you know it, you are a slave to that debt. I never understood the idea that on a personal level, it's not good, but on a federal level, it is. There's not really much difference outside of scope. When government does it, it simply affects more people when it fails.
for the usa to lose reserve-currency/risk-free-bond-yield status in global markets, the pentagon (esp the us navy, the very relevant aspect to global policing/trade) budget has to shrink to the point where the usa is no longer the dominant actor - this cannot happen in two weeks, but it can in 5yrs, and it can even though nobody knows who the replacement/usurpers are or will be.........consider how easy it will be to cut back on carrier groups (that do not reside on usa territory) rather than domestically-situated defence bases, when the budget stresses really get the thumbscrews turning - pls review your roman/spanish/french/british empire history and tell me again how this is NOT inevitable?? so it goes
Come on, Obama won't risk America's military dominance. He'll cut social spending instead of carrier groups in order to keep the USN ascendant going forward.
...okay, maybe not.
Even the (tougher) CBO numbers have the deficit declining to what, around 4% of GDP by 2012? Surely we can survive that.
Just for fun, can anyone pull up the 2006 CBO numbers and see how well they did predicting the 2009 deficits?
Why should I take any forecasts seriously? Why should anyone?
The GDP is about $13T. 2T on $14T is 12.5%
Who do you know that borrows 12.5% of their annual income just to pay the bills?
Our debt will broach $13 or $14T, just with this one deficit. The whole globe, including all of the small and poor countries, only produces about $65T in output - combined. In other words, we will soon have *debt* equal to 1/4 of the whole world's annual income.
Why, then, would anyone believe that the USA getting MORE credit might be a bit of a problem? Recall how Megan opens this piece: there seem to be some serious jitters out there.
You might not have known these numbers, but there are a lot of people who do. They work at the various federal banks and treasuries around the world, and they are petrified when they realize that Obama is betting everything on Solar Energy and Road Repair.
What could possibly go wrong?
Our debt will broach $13 or $14T, just with this one deficit. The whole globe, including all of the small and poor countries, only produces about $65T in output - combined. In other words, we will soon have *debt* equal to 1/4 of the whole world's annual income.
You're using national debt figures, which includes a lot of money we owe to ourselves in the form of Social Security checks. While you're at at why don't you include the next fifty years' spending on Medicare, Medicaid, national parks, Amtrak subsidies and school lunches. Then the numbers will look real scary! Anyway, US public debt is considerably lower than that. You're also (shockingly) seriously low-balling the country's GDP.
Who do you know that borrows 12.5% of their annual income just to pay the bills?
A government trying to repair the depressed economy bequeathed by its predecessor.
You're also (shockingly) seriously low-balling the country's GDP.
Huh? Google tells me US GDP is 13.84T. He said 13T or 14T -- this is lowballing?
You're using national debt figures, which includes a lot of money we owe to ourselves in the form of Social Security checks.
No... He's not... Social Security, Medicaire, Medicaid... These are not officially on the debt books. He's using the correct figures. When you factor in the money "we owe ourselves", the figure is much closer to 30-60 trillion (depending on how conservative your source is. And I mean conservative in a non-political sense).
http://www.usatoday.com/news/washington/2007-05-28-federal-budget_N.htm
Forget all the rosy predictions about how we still have the money in some vault somewhere, just waiting to be tapped. We don't. That money has been spent. Talk about a Ponzi scheme, eh? Madoff was nothing, compared to this.
This article goes hand in hand with what I'm talking about... It's from today.
From the AP
and they are petrified when they realize that Obama is betting everything on Solar Energy and Road Repair.
What could possibly go wrong?
A hurricane and an earthquake?
In other words, we will soon have *debt* equal to 1/4 of the whole world's annual income.
Not really, no; the world isn't going to lend us 1/4 of its actual output now or ever. What we'll soon have is bonkers inflation that will keep our debt/GDP ratio reasonable by causing nominal GDP to zoom upward even as real GDP runs level or falls.
That appears to be the only way out: monetize the deficits. Worse: bid up interest rates...
I can't help wondering who is buying 30-year treasuries at four percent plus change. Seems like that bill, on maturity, will be worth a tiny fraction fo the purchase price when you adjust for inflation.
tsotham,
"I can't help wondering who is buying 30-year treasuries at four percent plus change. "
Life insurance companies for one - if you're 45 years old and have $500,000 in whole life, all they have to pay is $500,000 when you die in 30 years and they can use the maturing bond to do that. They don't care how much that $500,000 can buy.
That's only a small part of it - but is a part.
What bugs me about this is that so far, I have only seen a plan to spend money. I don't think it is possible to spend this amount of money effectively, without excessive waste. Who is going to implement all of these grand plans?
I would guess some of the 60,000 people government hired last month?
The GDP is about $13T. 2T on $14T is 12.5%
Who do you know that borrows 12.5% of their annual income just to pay the bills? "
How do you think the Japanese ended up with a debt 4x as high as ours as a percentage of GDP?
John
Japan is more like 2X our debt as a % of GDP, but your point is still valid.
To whit: is Japan the economy you are hoping for? Universal Health Care, yes, but also universal malaise? Japan has been sick for something like 15 years.
Worse, they will now be competing with us to borrow money that nobody will (or can) lend. What happens then?
Bondholders aren't insisting on a weak economy - they're insisting on a real rate of return! This means that if short term interest rates are artificially held at zero, nominal deflation had better be 3% or more. That's before pricing in any risk. Think about it this way, if all anyone is offering are zero coupon bonds, the dollar had better be stronger when it matures than it is now - and with all this spending, who can believe that!?
Similarly, the big recent moves in emerging markets aren't because people have suddenly reacquired a taste for risk, it's that if investing in America is no longer seen as the safe bet, they might as well collect a risk premium; besides, some foreign currencies are far less likely to tank than the US Dollar.
Doug,
"some foreign currencies are far less likely to tank than the US Dollar." Such as?
Keeping in mind the demographic hit that Europe and Japan are going to have to deal with that our immigration and high birth rate will help mitigate.
No reason to worry about Obama's borrowing. After the US defaults, Obama's supporters can all move to Argentina. They may find it's a little problematic to stay here, what with all the firing squads and gallows popping up.
With Bush putting out $5 trillion in stimulus over the 8 years of his presidency, one wonders how it ended in a steep recession.
It's not a coincidence that the economy went south a year after the Democrats regained control of Congress.
I don't think the situation looks all that scary. Even the (tougher) CBO numbers have the deficit declining to what, around 4% of GDP by 2012?
CBO uses static measures to project into the future. That is, What we do today has no effect on what happens tomorrow. In fact running up the Debt as Obama has over just the past 4 months greatly increases the risk - actually, makes it almost certain - that recovery from the recession will be stillborn and we'll simply sink BACK into recession before anyone realizes the last one ended. The White House is predicting over 4% growth in 2011 and beyond: they seriously need to test the staff for drugs.
You almost have to wonder if they know something about 2012 and the "doomsday prophecies" that we don't: they're certainly spending like there's no tomorrow.
Megan is focused on the right signals. Bond buyers are the key. If they can exert enough influence to keep inflation under control, we might get though w/o irremediable damage. But it will be one helluva deflationary depression. Better than a runaway inflation. The latter is more likely but not certain. In either case, BO will end up a reviled president. Bush wasn't much better. Both deserve opprobrium. Majority rule democracy destroys freedom which destroys innovation and growth. Ochlocracy, rule of the mob, always destroys. Never been a full-fledged political democracy that lasted more than the blink of an historical eye.
America has become a South Park episode writ large. It if weren't tragic it would be hilarious. Markets, especially global mkts, possess powerful adaptive feedback loops to mitigate economic damage the state inflicts. But only up to a point. At that point Atlas shrugs. Productive people stop pushing so hard. They think, "What's the point? They're going to take most of my extra earnings. Every time I act to increase efficiency, to improve our product, to cut costs, I expose myself to political attack. Doing what's right by customers means I'll be attacked by unions, enviro bureaucrats & politicos. Screw it."
EG to mitigate BO's new regs & tax increases, companies move production offshore. But BO is trying to close that loophole. If they stay at home, they get exposed to higher taxes, more regs, bully-boy tactics and greater threat of anti-trust attacks. So they'll delist and move HQ offshore, then get the tax breaks that US states (and fed gov't) offer foreign companies to locate facilities in US. But all at a cost. The real cost is the sudden increase in uncertainty. No one knows what the rules are or will be tomorrow. BO throws out new regs and taxes on a weekly basis these days. No one can plan. Uncertainty is a biz killer.
Increasing taxes, regs and spending in response to the deflationary bust that resulted from the artificial boom induced by Bush-Greenspan Fed is simply beyond stupid. A 10 year old can see it. It takes an Ivy League degree to believe in the myths of Keynesian econ.
Makes one question the value of a Harvard degree. That school has to be the most overrated institution in the world. Anyone who thinks the econ they teach there has any value is smoking some powerful Humboldt County mary jane. (BTW, know where might I get some? Gonna need it to get thru this horror movie.)
My kid's going to MIT. She's studying molecular bio, solid state chem, Chinese & Spanish. She'll get work anywhere in the world when she gets out. The future will be built by entrepreneurs, scientists, technologists and artists working within a profit-seeking capitalist framework or there won't be any future worth living in. It doesn't look like the US will be where that action is for years.... Not until after the BO collapse has played out. Then, maybe. But it's a big world out there.
Wow, you sure know how to cook your numbers. Bush had a $162 bil pre-recession deficit? Maybe with some hopeful White House numbers if you keep the war off the books. Why would you keep the war out of it for Bush and count the one-time stimulus against Obama? These journalistic ethics are putting you and your kin out of a job. Good riddance.
Write something real. Explain to me how the Chinese are going to unwind their dollar assets. Yields on T-bills have been near zero for months even though we've been dumping droves of them. There's no real alternative to the dollar and as long as that's the case, money will keep coming cheap.
Bush had a $162 bil pre-recession deficit? Maybe with some hopeful White House numbers if you keep the war off the books.
If you look at the '07 deficit, that's actually what it is. Not the ACCUMULATED DEBT, the budget deficit. Those are completely different things. The '07 fiscal year was the last year that we were "pre-recession". So the statement is valid. Can you come up with some numbers that actually support?
Just for reference, the cost of the ENTIRE IRAQ WAR has been estimated to be just under $700 billion (As seen here). Not that I'm a huge fan of that, but that's over 7 years. Obama's stimulus package was finalized at $787 billion (as seen here). (And please spare me the "That's from Fox News!" meme... That's what the final cost of the bill was... it's fact, no matter where it comes from)
Explain to me how the Chinese are going to unwind their dollar assets.
I suppose the idea that they, along with anyone else who has purchased our debt (Saudi Arabia, Russia, Kuwait, etc.) might come over here to lay claim to our land in order to pay for it? You think we could stop that? While we're disarming, and they are re-arming?
Money will keep coming cheap... Until it stops coming? Click
here. Oh, wait, it looks like they've already started to slow the purchase of our debt... So the only "cheap money" option left is to fire up the printing press. And I'll tell you what. When the currency has NOTHING BUT OUR WORD backing it, it will be worth EXACTLY the price of the paper it's printed on.
You seem to think I'm happy about Bush's handling of the economy. I'm not. And if I wasn't happy about that, what makes you think I would be anything other than downright ANGRY about Obama's spending and handling so far?
Can someone explain why Japan, which has a higher sovereign credit risk than us (I believe it's only rated double-A), and has far more debt as a percentage of its GDP (180%?) has so much lower borrowing costs than us? According to Bloomberg, the current yield on 10-year U.S. Treasuries is 3.2% while the current yield on the Japanese 10-year note is 1.46%.
Three words: Postal savings system.
According to Wikipedia, the postal savings system held only 20% of Japan's debt before it was privatized a couple of years ago.
You do all realize, of course, that you are insane? That you don't know what you're talking about? That the rules are completely different for a sovereign currency-issuer in a floating exchange rate system? That such an issuer cannot be said to "borrow" in any real sense, and that the only reason for it to issue "debt" at all is to support a non-zero interest rate?
Sometimes I despair. We have real problems to address in this country, and we argue about meaningless things like the amount of "debt" the federal government has. Maybe you guys need a remedial course from the Noble prizewinner William Vickrey:
http://www.columbia.edu/dlc/wp/econ/vickrey.html
I don't know what was so noble about his prize.
Fallacy 16 -
Printing money is good for the economy.
Increase supply, reduce demand. Reduce demand, reduce value. The Weimar Republic found this out the hard way.
For each Keynes or Vickrey, I counter with Mises, or Hayek. Even Milton Friedman came to his senses.
Try applying the Keynes model to any form of business, which, at its heart, is all that government is. I would imagine you can't really sustain it. At least, beyond the short term. Your Keynes/Vickrey model might keep it afloat to suffer a very slow death. You are betting EVERYTHING on the notion that, if we can keep it afloat for another 10 minutes, magic will happen, and everything will right itself.
You cannot disregard our debt so casually. You cannot assume that all that is needed is to keep money in circulation. If no one wants your product, you're going to fail.
That whole article reads like a how-to book for stimulating a large boom-bust cycle.
This Roubini article, though I don't agree with the timeline of his dark--typical for him--assessment fleshes out some of these same points.
http://www.nytimes.com/2009/05/14/opinion/14Roubini.html
The main point is that a fall in the value of the dollar hurts our creditors much more than it hurts us. Though they complain about it loudly, China, the petro-states and Co. are pretty committed at this point to buying more dollar-denominated assets. We're effectively monetizing the debt which will cause some inflation, but as Roubini points out, this inflation will be offset by the fact that commodities are traded in dollars. As a side bonus a decline in the dollar will make our exports more competitive and rein in the current account.
The drop-off in Treasury sales and increase in yields, and keep in mind that yields and volume were both at historic levels for months, can be better explained by the movement of capital back into other "risky" assets like stocks and corporate bonds. This is a good thing, not a sign that everyone is giving up on the U.S. and the dollar.
And it will be way more than a decade before China takes the steps necessary to make the renminbi a viable international currency. The euro? Will Italy stay in the EMU? And if it leaves, why would France and Germany stay when they're fiscally hamstrung and importing inflation from other countries? Are they that excited about welcoming Iceland into the fold? The EMU looks less and less viable the bigger it grows. The yen, euro, and sterling all look bad as reserve currencies.
Does all this mean we can spend forever? No. But if we have to pay a big down payment now to rein in the growth in health care spending and to get our energy and education infrastructure back in shape, fine. The international financial picture has never been better for us and it may not be that way forever. The decline of the dollar will be a slow process, not a sudden crisis in "2-3 years."