Nial Ferguson's indignant observation that "a deficit this size has not been seen in the US since the second world war" is an interesting exercise in rhetoric. Conveniently, it's completely accurate! But what's missing here is that the deficit projected for next year is way smaller than WWII deficits:
To say something like "Obama is going to run a deficit slightly bigger than what we saw in the Reagan years" is a lot less terrifying than "a deficit this size has not been seen in the US since the second world war." But we're looking at a debt level that's much more comparable to what was wracked up in the 1980s and early 90s than to what we saw in the late-1940s.
His readers have already pointed out that the chart he puts up confuses debt-to-GDP ratios with deficits. More to the point, however, neither metric makes his case.
- According to the CBO, which is usually preferred for projections because it does not share the White House Office of Management and Budget's fervent desire to please the boss, the debt-to-GDP ratio will end up north of 80% early in the next decade. It peaked around 110% at the end of World War II. It peaked at about 47% under Reagan. In both percentage and absolute terms, the Obama debt-to-GDP ratio will be closer to World War II than to Reagan. More worryingly, unlike the World War II debt-to-GDP ratio, ours is expected to keep growing in the years beyond the graph's end, because the projected deficits are higher than projected inflation.
- The Obama deficits are projected to peak at 13%. This is not "somewhat larger" than Reagan's; it is more than twice as large as Reagan's 6% peak. In absolute terms, it's just about halfway between Reagan and World War II.
First of all, everyone expected that they would be paid off after the war ended by keeping tax revenue high and spending low. This is, in fact, what happened. No one expects this to happen now--not even the administration, which has promised to "cut the deficit in half" from the current unsustainable levels.
Second of all, the era of "total war" brought access to a large pool of essentially forced savings. People plowed their money into war bonds and war stamps because it was their patriotic duty, and because there wasn't really much else to buy--goods either weren't available, or were rationed.
The Obama administration doesn't have this luxury. Our domestic savings rate is much smaller than our budget deficit, and no one's going to rush to buy a "Liberty Bond" to bail out GM. Yields on longer-term debt have been rising over the last month, and credit ratings agencies have stepped up the pace of their warnings about America's AAA credit rating. If interest rates get too high, the current deficits are going to crowd out more and more actual spending.
Democrats have largely been treating debt and spending as if they were largely a political problem. What will the taxpayers tolerate? Quite a lot, it turns out, in time of crisis. And so Democrats seem to have settled on a strategy of passing as much spending as they can now, while the American public is still reeling from debt sticker shock, and figuring out how to actually pay for it later.
Roosevelt could do this because people felt that America faced an actual existential threat. But that urgency rarely, maybe never, exists outside of total war. Obama needs to please the bond market, as well as the taxpayers. And the bond market is more educated and attentive than the average voter. You can't just tell them that you're going to achieve fabulous cost savings through health care IT. You have to prove it. The administration hasn't been super-convincing about specifics. So there's a real worry that the bond-holders won't buy it.
You agree that this is a good time to run the biggest deficits since WWII, and then point out how this is all different than WWII. So then, how do we fix this? What are the answers to these deficits, that you agree are necessary? This isn't snark, I am no economist, I am but a meager simpleton who understands that huge deficits can not be sustained(I think), recognize these are troubling economic times where nothing can be done, so spending seems needed. I also understand inflation is worrisome, than again so is deflation. I guess what I am asking is, are we screwed?
I second this question. You can't have it both ways.
This is an *excellent* article, outlining the structural differences between then and now. That makes it all the more perplexing:
Knowing that there *isn't* a pool of War Bond savings that we can use to pay off this debt, and
There *isn't* a "We're all in this together" spirit in the United States (for the simple fact that we're not fighting Hitler and Tojo for our very survival), and
There *isn't* a populace that takes kindly to things like "go without," as there was during WWII's rationing. Can you imagine what will happen if American's are told "only 10 gallons of gasoline, 3 pounds of flour, and one pound of meat per week..." ???
How do you justify this kind of deficit spending?
Moreover, what about the almost complete lack of oversight?
And what about the fact that China and the few other places that might be able to finance this are saying "no more..."
How do you defend supporting this level of spending, and how do you see us getting out of it without being crushed by inflation and/or crushing interest rates?
Rob - We have Recovery.gov! That's oversight!
I don't think we've ever seen in our history the combination of this quantity of deficit spending combined with this level of opacity behind that spending.
It's almost humorous, in the age of the information superhighway and google, how difficult it is to find out details about the spending.
Might this be the reason for the war on global climate change? How else will Obama be able to justify demanding we "turn in" our old (large, powerful, comfortable cars) to buy his new, green, models?
I think it's partially the reason for the wars on:
Drugs
Poverty
Terror
Global Warming
Climate Change
Obesity
And a host of others. If you can "galvanize" people, you can take them to all kinds of places that they didn't know about or agree to. Obama is showing that now, to a very large degree.
WWII warranted the sacrifice. "National Health Insurance" doesn't even come close.
Yglesias and the rest of Obama's "see no evil, hear no evil" defenders are really no different than conservative commentators who kept insisting on the wisdom of Bush's Iraq war long after the facts made that position untenable. Both blindly support their preferred political leader, spilling gallons of ink to defend him from any criticism despite clear evidence that he's driving the country off of a cliff. I despair for the country.
Spot on.
Worse, there seems to be a perverse joy in this.
I just wonder if the neo-mellonites, who oppose spending in the face of the biggest economic shock since the Great Depression, ever entertain the idea that they may be wrong.
The same, of course, could be said of the Obama Administration, whose vast spending plans and agenda for reorganizing large swathes of the American economy suggest hubris on a breathtaking scale.
Sure. I have a posting just above that explains why I oppose it (I have a LOT of other reasons).
Why do you support it? What makes you think that this kind of spending is a good idea:
a. Theoretically, and
b. Practically - taking world-events and current demographics into account.
??
If there were $2 trillion sitting around somewhere otherwise doing nothing that the government could spend, there would be some benefit.
The problem is that spending right now implies borrowing. Borrowing not from americans, but foreigners. Already the devastated housing market is feeling the effects of having to compete with the US treasury for borrowing. The US dollar is being depressed with the current 'flight to quality', away from the risk of inflation caused by an insatiable demand for credit from the US government. A low dollar has some benefit. But extremely dangerous and expensive if you want to borrow trillions.
The scale of the borrowing, on top of the tail end of a keynesian stimulus that has spanned almost the last two decades has brought these effects quicker than otherwise.
I think we've passed the point of 'biggest economic shock since the Great Depression'. Everything we see from now on in is effects of the 'solution'.
So no. I'm quite sure I'm not wrong. I've seen this type of stupidity run it's course quite a few times. Never on this scale however.
I'll tell you what comes next. Two scenarios. One is the administration realizes that the basic assumptions they made are wrong and change course. Haven't seen that yet, other than in rhetoric. The second scenario is more likely. It seems that there is one government agency in particular that does not buy into the rhetoric, the CBO. With congress and the administration thinking the same way, expect to see it weakened in some way. Personnel change, no funding, whatever. Make it go away. In other words, don't believe anything, and I mean anything in the way of financial numbers out of government. Statistical measurements will be adjusted. Etc. Of course, the administration still needs a crisis to further their agenda, so this won't happen immediately.
I could go on. As I said, I've seen this many times before. Looks the same so far, just bigger.
Derek
I wish I could bottle the arrogance and smugness of those who use the Yglesian terms "neo-Hooverites" or "neo-Mellonites". It's slick enough, I could probably use it to run my weed-whacker.
You won't get much out of your weed-whacker. Given their image of Hoover and what he actually done are complete opposites.
And so Democrats seem to have settled on a strategy of passing as much spending as they can now, while the American public is still reeling from debt sticker shock, and figuring out how to actually pay for it later.
I wish you were correct here. But paying for healthcare coverage expansion without borrowing seems to be a big political problem. I think it would indeed make sense to universalize health insurance right now, while the economy is still suffering from deflationary pressures, and worry about paying for it later. That doesn't seem to be what's happening, though, at least in this area, as Democrats squabble over taxing private health insurance benefits. Most of the other extraordinary, recession-related items (bailouts + stimulus) won't be repeated, and so we will indeed see a fairly massive cut in the overall budget. What I think Obama and Co. can be fairly accused of is not getting out the cudgel to cut other areas of the budget (mostly entitlements, but also defense) to enact reductions commensurate with the cratering of revenues. I think this is very prudent on their part, lest we see a repeat of 1937. No question, though, that taxes need to be increased or inflation needs to get a lot higher. As unpopular as the former course of action is, I don't think today's financial markets will allow the US to get away with massive inflation, so I expect taxes to go up. My first choice would be to have said increase be accompanied by a shift to consumption taxation. We shall see.
massive inflation
Is 7% a year for 10 years really that bad vs. all the other options?
jmo,
If inflation were going to be 7% a year, what would you do?
If inflation were 7% a year and you owned the amount of treasury bonds that the chinese own, what would you do?
Someone downthread talks about avoiding war. I know, let's piss off the chinese. Really piss them off by knee-capping their economy and potential for growth. That should make for a real peaceful future.
Derek
One year ago crude oil drove the price of gasoline and related products to nearly $5/gallon. As you can recall, people's responses ranged from angry to very angry to "I cannot survive with $5/gallon gasoline."
The CPI at that time showed that the blended effect of this "catstrophe" gave us an inflation of around 3.2%.
3.2%
Five percent inflation is extremely uncomfortable.
Seven percent will rapidly destroy people on fixed incomes, long-term labor contracts, etc. Social unrest will start to be reported. Crime rates will go up noticeably.
Ten percent is devastating. People will panic. Homeless rates will rise dramatically, and you'll see news stories about families living in cars, etc.
Anything beyond 10% and you will see massive social unrest. This is when food riots and other such wonderful things become very real possibilities.
Not to be a smart alec, but when you wrote:
"Seven percent will rapidly destroy people on fixed incomes, long-term labor contracts, etc. Social unrest will start to be reported. Crime rates will go up noticeably."
I had visions of the elderly mugging people with their canes/walkers, burning cars, and otherwise rioting.
The pain will be felt most by the elderly (who are on fixed incomes) and the poor (whose earnings will not keep up with inflation, unlike skilled or unionized workers).
What this will also do is increase exports. Why sell your cows to Americans for American dollars, when you can sell them to the Chinese for solid currency? This will make commodities like beef more scarce, making it more expensive. Our eating habits will change, fast food shops will close, frugality will increase, obesity will drop, mortality will increase (less money for life-saving treatments, less money for maitenance treatments for things like acid reflux), savings will rise (though maybe not in cash savings, unless they are in Chinese yuans), and basically people who live through it will be like my grandparents who lived through the great depression.
Which may not be a bad thing (Americans are a bit soft), but it will be miserable.
And yes, Canadians are soft too.
I have nothing but respect for Smart Alec's.
Battle of the Walkers would be hilarious - on TV.
I was alive and working during Jimmy's Stagflation-palooza and it was horrible. The old definitely were hit the hardest. Social Security COLA's came way-late, savings were eroding to nothing, etc.
Poor, as you say, were close behind.
I'd imagine having a kid in college, where tuitions will soar, won't be a picnic either.
A doubling of the price level in 10 years? I would suggest that the great majority of people do not have the capabilities of doubling their income in 10 years.
Second Keith -
#1 Why do you think it's a good idea to increase spending to WWII levels when, as you've pointed out, we have no foundation for re-course of that spending.
#2 Do you think that any of the spending passed by Congress or initiated (without congressional approval) by the Obama administration is actually the type of spending that is efficiently stimulative?
The stimulus that was passed is slowly being distributed (not yet spent, but put into the coffers of those who would spend it) and would be partially spent this year, somewhat spent next year, and trail off in 2011/2012.
However, from what I'm seeing, we've hit bottom and we're either going to stagnate, slowly grow, or quickly rectify. The largest problems, IMHO, have been dealt with and the aftershocks that are still out there will not scare people back under their beds.
So how is this spending, that will likely occur in a distributed fashion during a recovery, going to help?
I'd really love to hear your response to these questions Megan, as I don't understand this thinking at all and I know you to be wiser than I on these subjects.
Joe
The same, of course, could be said of the Obama Administration, whose vast spending plans and agenda for reorganizing large swathes of the American economy suggest hubris on a breathtaking scale.
We were on the verge of The Great Depression II. Most would agree that The Great Depression I was a major contributing factor to WWII. What they are doing seems resonable, given the economic risks we are facing and the geo-political risks that would result from a repeat of the 1930s.
Well, I noticed that Austan Goolsbee has also advanced the argument that we have staved off Great Depression II, so clearly this is a meme that is spreading. The notion that the Obama Administration has also averted World War III, however, is a new one.
Sorry, but I don't buy it. To the extent that immediate action was needed to staunch the bleeding this was done by the Bush Administration with TARP and actions by the Fed. The stimulus bill makes little sense in the context of preventing another depression. If government money is needed -- and I am hardly convinced it is -- then a back-loaded stimulus bill hardly seems the answer when money would do the most good NOW.
I also find it a rather strange coincidence that the provisions of the stimulus bill -- unread by the Congressmen who voted on them -- were largely a Democratic wish list. The stimulus bill and follow on legislation set to be introduced promotes deeper government involvement in health care, energy and transportation. Funny how the needs of the economy and the longtime desires of Democrats coincide.
But as Rahm Emanuel said, never let a good crisis go to waste.
Is 7% a year for 10 years really that bad vs. all the other options?M
jmo3: Perhaps not. I think the problem, though, is keeping it at only 7% a year. Once inflationary expectations start to become widely assumed and accounted for, there is (I think) a tendency for the inflation rate to get higher and higher, as rational businesses, consumers and workers seek to protect their profits, living standards and paychecks. And at any rate, for purposes of our discussion, the critical factor isn't so much what happens at home, but what actions foreigners take to protect themselves from dollar inflation. I reckon that means higher interest rates -- probably much higher, which defeats the purpose of inflation in the first place, maybe sending us back into deep recession.
See my response, above. 7% - particularly to the great many Americans who haven't seen inflation above 4% in their lives - will tear this place apart if it lasts more than a few months.
Jasper,
How would the Chinese be able to maintain the renmimbi's peg to the dollar, in an era of dollar inflation? The only way I can see is inflating their own currency, while at the same time buying ever more treasury debt.
jmo,
If inflation were going to be 7% a year, what would you do?
Be happy that my mortgage payments are getting 7% smaller every year. Make sure to continue to switch jobs every 2-3 years so as to maximize my earnings. Why, what should I do?
heh. That is truly amusing.
Mortgage payments getting smaller?
Derek
Why, stay out of dollar denominated assets that don't pay very high rates of interest, which, of course, increases the incentive to inflate even more than before.
"If inflation were going to be 7% a year"
Well -- that would imply interest rates in the 10% to 15%+ range.
Imagine how many homes could be bought with mortgage rates in that range?
How many new business get knee capped because they cant afford debt financing in that range?
We have lived without serious inflation for so long, we tend to forget just how corrosive it is on people's standard of living -- and of course -- the ones who really pay? The working poor / lower middle class.
Derek,
"If inflation were 7% a year and you owned the amount of treasury bonds that the chinese own, what would you do?
Someone downthread talks about avoiding war. I know, let's piss off the chinese. Really piss them off by knee-capping their economy and potential for growth. That should make for a real peaceful future.
Derek"
Buy more treasuries while also attempting to inflate the renminbi in order to maintain the peg to the dollar. The peg must be maintained in order to prevent a collapse of China's export dependent economy.
There is one possible pool of forced savings that I expect to see the government grabbing for soon.
As we all know, many Americans have 401k and IRA plans. Those plans are volatile, sometimes losing value and leaving hard-working families in the lurch.
To protect working families, we need some basic, common-sense regulations on what investments those Wall Street bankers can force people to have in their retirement accounts. All IRA / 401k administrators should be required to invest at least 25% of funds under their management in riskless treasury bonds so as to ensure that working families don't discover that Wall Street fatcats have lost their savings.
That's a prediction that I've made to some friends and now am making here: by the end of the Obama administration, tax-deferred retirement accounts will be required to keep at least 25% of their investments in treasury bonds. With total tax-deferred accounts standing at around $10 trillion, that's an extra $2.5 trillion that would be loaned to the government - plus 25% of all new contributions.
25% is for pikers. Will be 50% or more.
You magnificent bastard. Please use your powers for good instead of evil.
You SOB! Never speak this again! Megan - Delete his comment or edit it to something non-sensical.
:)
Seriously though - If a substantial amount of my 401k funds were required to go into low yield bonds, then my potential return would decrease even with the tax benefits. I would re-evaluate; as long as the 401k option remained better than privately investing, then it's still a net positive.
I'm in my mid-to-late 20s though; putting 25-50% of my portfolio into low yield bonds at this point would be devastating to me.
Requiring someone to do the same at the age of 55 would be alot different though.
I think if the government did force something like this on 401k/403b plans, you'd see a large influx of money move into Vanguard IRAs or the like.
Joe
I just did something that I haven't done in my own pants for well over 40 years...
Mortgage payments getting smaller?
Huh? My mortgage payments stay the same no matter what happens to inflation. If we have 100% inflation (7% for 10 years) my mortgage payments would fall by half in inflation adjusted terms.
Was that a serious response?
Your mortgage payments only stay the same if you have a fixed rate mortgage. (If you do, good for you!) These days, many people seem to prefer interest-only and ARMs though. If inflation shoots up, so will interest rates. And then we'll have another housing crisis, which I think would be far more severe than the previous/current one.
You have a fixed rate mortgage for the term of your mortgage?
This stuff is tiresomely familiar. You say you'd change jobs every 2-3 years. What jobs?
1980 ish. Saskatoon. A guy had a 20 year term, 14 years into it. Interest rates were high due to high inflation. No one would renew his mortgage, because the banks were getting squeezed and were tight, and the payments were too high for his income. Income never keeps up with inflation.
So while your income is losing value, your outgoing costs are getting higher. Taxes. Right now in the town I live in, taxes on a house are higher than what I paid for rent when I moved here. Etc.
Fixed assets like land are great when inflation hits. Great like surviving WW1 gas attack.
All around you anyone financing assets; stocked shelves in grocery stores, payroll for the guy fixing your car, a/c, will need high rates to cover asset losses. Which drives prices up or availability down.
This isn't going to be boom inflation, where demand drives prices up. It is currency devaluation.
Derek
Look, we get that inflation is good for net debtors. What do you think creditors will do when they see their assets get slashed by 50%?
After 10 years of 7% inflation your mortgage payment would likely be a smaller percentage of your income hence it is "smaller".
That assumes that your income keeps pace with inflation. As someone who lived through the double-digit inflation of the Carter years (and early Reagan years), I can assure you that it doesn't.
And for the many retired people whose retirement incomes don't increase annually according to the CPI, inflation is a real problem that can't be solved by changing jobs or working harder.
The ultimate issue is what price that the US will need to pay to borrow the money that it needs. Just so long as the US maintains safe haven status with a reserve currency, that rate should be some reasonable spread above inflation.
Look back historically, and it's fairly obvious that the long bond rate is not particularly correlated to the relative amounts of the debt or the deficit. Just so long as the market can tolerate those levels of indebtedness and believe that their bonds won't default, we can still get away with it. Even at its weakest, the US still gets to pay relatively low prices for its money. By any standard, a 10-year below 4% or so is still cheap money.
If the treasuries bubble that we just had should tell you anything, it's that we certainly had safe haven status circa early 2009. We will probably lose it one day, but for now, we still have it. We may behave like Iceland, but we're too big to suffer like Iceland. For now, we can still push the envelope (although we can't be reckless about it.)
Not that I'm thrilled about putting the country into hock, but if there is a concerted effort to reduce the deficit and economic growth to support it, it should be manageable over the medium term. Clinton paid off the Reagan deficit, and we'll need to do the same with the Bush-Obama deficit.
Of course, you do know that we're going to need some asset bubbles to get there. If you want to buy a house, the next year or two would be the time to do it, at least in most parts of the country.
Look back historically, and it's fairly obvious that the long bond rate is not particularly correlated to the relative amounts of the debt or the deficit. Just so long as the market can tolerate those levels of indebtedness and believe that their bonds won't default, we can still get away with it.
Isn't that precisely the issue at stake- how much debt will the market tolerate? Last week's spike in yields should serve as a wake up call. Historical correlations will matter less and less as investors get nervous about US spending.
Sure, that's the ultimate issue. And it's reasonable to say, as you basically do, that "deficits don't matter until they suddenly do." So long as it doesn't get too large, we can borrow a lot.
However, I worry that deficits won't matter unless we act as though we can take for granted the fact that they won't matter. It begins to sound a little too much like taking for granted that house prices always go up. They tend to, but too much faith in them always going up helps lead to speculative bubbles that eventually pop.
In the mid to late 70's and into the 80's, my income rose faster than inflation; my home value rose faster than my income...it would have been very tough to move as interest rates were astronomical. So we stayed put and spent more. My retirement contributions grew as my income grew and when the stock market took off my retirement plan went with it. Now retired, what is different? One way or the other the Fed must monetize the debt they create. What's new?
Isn't that precisely the issue at stake- how much debt will the market tolerate?
You're right, it is. But this approach taken by Ferguson doesn't answer that question. Thus far, treasury sales indicate quite a bit of interest in US short-term paper. That suggests that the markets have no concerns about the US per se, but that they sure don't want to lock in rates this low if we are going to have economic growth that will effectively render these yields as something close to zero, net of inflation.
Last week's spike in yields should serve as a wake up call.
The bursting of the treasury bubble, which was perhaps the most obvious bubble in recent economic history, hasn't been a "wake up call" so much as an inevitable correction.
As I type this, the 10 year is 3.57%. Have you compared that to historical data to see how bloody cheap that is?
An economy deemed to be in free fall would not be able to get away with rates this low on long-term money. Aussie 10 year bonds yield 5.5%, while the Brazilians have a 12% yield on 8 year money.
Put this in perspective, and understand that a correction in long term yields is not the same as the end of the world, and within reason, it is actually desirable. When rates dropped into the 2% range in December, that was absolute sheer panic that could not be expected to be permanent, not a new equilibrium price. Unless you're a fan of deflation and panic, there is no way that you should want rates to be as low as they were at the end of last year.
The bursting of the treasury bubble, which was perhaps the most obvious bubble in recent economic history, hasn't been a "wake up call" so much as an inevitable correction.
As I type this, the 10 year is 3.57%. Have you compared that to historical data to see how bloody cheap that is?
Do you really think the bubble has finished popping? Where do you see this number headed in the short term? Or put another way, what do you think about the probability of the following events occurring within the next 12 months:
10-year yield drops below 3%
10-year yield remains between 3% and 5%
10-year yield goes above 5%
Right, I don't think anyone's arguing that the Treasury bubble has fully evaporated. But it looks like it's in the process of evaporating. This means bad things for the administration's budget projections. When you factor in currently negligible inflation, the 10-year rise is a little--not yet a lot--but a little disconcerting.
Agreed. Particularly given the fact that the rates have been so low for so long.
The US Housing and consumer credit markets have gotten use to rates that would seem absurd outside of Japan. But they are what they are.
If short term rates get up much past 2% without seeing some serious recovery first, that's not good news.
What were they last week. Last month. Last year.
Rate of change is the indicator to watch.
Derek
I worry that deficits won't matter unless we act as though we can take for granted the fact that they won't matter. It begins to sound a little too much like taking for granted that house prices always go up.
The issue for the US will be to manage the perception of default risk. That will require continued economic growth, a well tempered Fed, and a default rate of zero.
Looking at the California problem, I think that it may also involve an Alexander Hamilton style solution of moving some of this state and local debt onto the federal balance sheet. As a nation, we absolutely need to keep making our payments as agreed if we want to maintain our credibility.
I'm not sanguine about it, either, these are scary times. I suspect that we'll be fine, but the risk that we won't be isn't quite, zero, either. Unfortunately, there is no alternative.
jmo3 writes:
The Obamanaut defense is a bit wierd - it's "if it is theoretically possible that there could be any useful spending, then Obama's spending is good."
Before the Obama stimulus bill, Alice Rivlin suggested that we have two bills - a "stimulus" bill that contained only spending that would occur within the next 15 months, then stop, and an "investment" bill that contained ongoing investments. IMHO, that was a pretty good idea.
Instead, Obama committed the US to gigantic out-year spending in return for minimal stimulus. The best that the stimulus defenders can do is anecdotal stories about companies who have hired a grant writer or two because they hope that stimulus is coming.
If Obama had a realistic plan to get the debt under control, I could stomach a deficit for a few years, but AFAICT he has the exact opposite - a plan to commit the US to substantially more spending, indefinitely, backstopped by the hope that sometime down the road, he can get Americans to agree to ration health care and/or to impose substantial energy taxes without any consequent tax relief in other areas.
I have it on good authority(or so they claim for themselves) that the next bubble is going to be in the education industry. This being in the service sector, there might be a bit of a problem ;-)
Do you really think the bubble has finished popping? Where do you see this number headed in the short term?
I can't claim psychic abilities, so all that I can offer is a SWAG.
But rather than do that (my SWAG may or may not be accurate, and I don't expect anyone to act on it), let's say just for fun that the 10-year ends up stabilizing in the 5-7% range once the recovery is well underway, which would put it a good 150-350 bp above where it is now.
A 5-7% rate would be typical of what we had between the early 90's and the early part of this decade. That was also typical between the late 60's and the early 70's. It wouldn't be unusual, and it would be well within historical norms. That pricing should be manageable.
The deficits are worrisome, but I would focus more on growth, because that is what wil be needed to both support the US credit rating and to generate the income required to service and reduce the debt later when we can afford to do it. If we fixate on the debt, we'll have deflation and negative growth, which are the last things that we need at the moment.
A 5-7% rate would be typical of what we had between the early 90's and the early part of this decade. That was also typical between the late 60's and the early 70's. It wouldn't be unusual, and it would be well within historical norms. That pricing should be manageable.
5-7% might be in line with historical norms, but remember that we'll be making interest payments on a significantly larger principal (debt projected to hit 100% of GDP). That's a serious chunk of the country's budget.
When you factor in currently negligible inflation, the 10-year rise is a little--not yet a lot--but a little disconcerting.
The yield curve is at points that have been typical prior to economic recoveries. It was at this point throughout much of the 80's, the early 90's and again after the burst of the dot.com bubble earlier this decades.
Now we're correcting from an exceptionally low rate of return for treasuries. This sort of correction is going to be dramatic by design, just as the end of the oil bubble was breathtaking in its correction.
The overall rate is still low. If the market hated US paper relative to other economies, it would be (a) looking for an alternative treasury to call home and (b) expecting a hell of a lot more than 3.56% (which is what they want as I type this.)
remember that we'll be making interest payments on a significantly larger principal (debt projected to hit 100% of GDP). That's a serious chunk of the country's budget.
I don't disagree with you, we are obviously heavily levered and it's going to be a bit of a tightrope act.
I sense that we are going to have to overhaul how our economy generates growth. Higher income taxes, and maybe a federal VAT, seem inevitable.
And then there's Aric's prediction. He has a point, I could see that happening, too. Ms. McArdle's right in that we had a captive audience for the US' war debt in the 40's that we don't have today, and this crisis would provide the perfect opportunity/excuse to do it.
"I sense that we are going to have to overhaul how our economy generates growth. Higher income taxes, and maybe a federal VAT, seem inevitable."
I'm sorry, but what? Higher income taxes and a federal VAT to help generate growth?
The government does not exist to be grown off the citizenry, nor do moving around and adding new layers to a ridiculously overburdened tax system help to stimulate growth.
I cry when I hear the distinct action of many of our politicians try to link "overhauling the health system" with "stimulating the economy", but stay the hell away from "overhauling our taxation system" as well as stimulating the economy AND increasing tax receipts.
What people expect Obama to do is just amazing as Ann Althouse comments. To some extent he encourages this trip into never, never land as in the 'million green jobs' or GM making money on fuel efficient cars etc. In part it is that we have already gotten to never, never land with a black president. One kind of wonders though does he plan to be able to play the cards we have or does he expect some dealer to continue to give him especially marked cards.
What, you don't think he will shit gold nuggets?
Yancey - I think he already is doing that....it's called quantitative easing.
That is called shitting lead. :~)
No, it's alchemy. It starts as gold and turns to lead :)
Higher income taxes and a federal VAT to help generate growth?
Obviously, income taxes are going to have to increase at some point in order to pay for the deficit. (I suppose that we could take the California approach and just keep selling bonds until we can't afford to service them anymore, but I thought that we didn't like that sort of thing.)
The goal of a VAT would be to curb consumption, which would presumably encourage savings and reduce the trade deficit. Since so much of our disposable income ends up being exported, necessitating even more treasury sales and FDI to make up for it, and since it turns into leverage that blows up in our faces, some efforts to encourage savings would make sense once a recovery is underway.
If a VAT was offset by a corresponding reduction of (or, given our deficit, holding the line on) the income tax, it would be revenue neutral and promote different behaviors than we have now, given that our tax system is currently structured to encourage high consumption and minimal savings outside of retirement accounts. Ironically, that's not a particularly liberal idea, but I suppose that it doesn't sound so good when a liberal says it, now does it?
RW - Tax receipts will have to go up, but they do that when the economy is growing and more people are earning more money, and business is booming.
If you maintain or cut spending and maintain or increase growth, while keeping taxation the same, then tax receipts will increase (on top of inflationary increases in tax receipts) and you will be able to pay off the debt without having to increase the actual tax rates.
I don't see curbing consumption needed from VATs, so much as more normalized lending standards. That's already occured.
But maybe your right. I have every faith though that congress would impose a substantial VAT and a minimal reduction in income tax.
The government does not exist to be grown off the citizenry, nor do moving around and adding new layers to a ridiculously overburdened tax system help to stimulate growth.
It could be argued that infrastructure spending in the US is at a sub-optimal level.
If you go to Germany, as an example, you can drive from Frankfurt to Munich on a billiard table smooth, perfectly maintained, 36" thick autobahn. Gas is $6.70 a gallon. I for one, wouldn't mind $6.70 a gallon gas, if it meant meticulous road maintenance.
I would miss my potholes on the interstate- dodging them keeps me awake and alert, and I can always park the pickup in one and take a nap when needed.
I don't agree that infrastructure spending is sub-optimal. I do agree that it is in no way directed towards the appropriate projects.
The autobahn is brilliantly built because....it's brilliantly built. We don't hold our own roads to the same standards. I guess the autobahn started with a purpose and continues that purpose today.
The stimulus package is a huge boom to new and renovated musuems throughout the country (especially the northeast!). But a new protected national electrical infrastructure? New nuclear power plants? Better roadways for truckers to use?
Nah...
You would be the only one who wouldn't mind, but your broader point is a reasonable one.
Could there be more infrastructure spending? Sure.
Our issue with spending is that it doesnt go where the return is highest -- it goes to districts represented by the most senior legislator
As a side point: I have spend plenty of hours on the German autobahn (around Dusseldorf / Cologne)-- and its nothing special relative to US interstates (maybe I am spoiled living in the US mountain west where the weather extremes arent what they are back east). Besides -- in Germany one can drive from one side of the country to the other in six hours-- they have a lot less freeway to build.
One of the reasons the autobahn is smoother is that Germany doesn't use road salt in the winter. They use pebbles to create stubble in the ice for greater traction. Also, they require drivers to install winter tires for winter.
A doubling of the price level in 10 years? I would suggest that the great majority of people do not have the capabilities of doubling their income in 10 years.
It's inflation - you're not doubling your income - your income is staying the same. People would go from expecting a 2% raise like they do now to a 7% raise. It's not going to cost the company anything as prices will also rise 7% that's why it's called infation. It's really not the end of the world.
* Note: Yes, I understand that 2% is good 7% is kinda bad and 14% is really bad. But, given what we are dealing with some 7% inflation might just be the best option.
It's inflation - you're not doubling your income - your income is staying the same.
That's my point. Price levels will double in those ten years and income will stay the same. One would need to double his/her income in order to sustain the same standard of living.
People would go from expecting a 2% raise like they do now to a 7% raise.
Prices such as wages tend to be sticky and often lag any iflationary indicators. Contracts require renegotiation. People would lose, and the ability of the consumer to engage in long-term financial planning would be seriously hampered.
It's not going to cost the company anything as prices will also rise 7% that's why it's called infation.
It may or may not cost the company, but it will cause any company great difficulty in financing it's operations, as the lenders would be unable to plan for the risk due to inflation. The best option to charge a higher risk premium to account for this. High interest rates lead to slower growth, which leads to depressed wages and unemployment.
High inflation levels implies unstable price levels...high inflation levels often times occur along with an inability to predict inflation. This is why the Fed often targets low and stable levels of inflation. Inflation significantly reduces the ability to engage in long-term planning (or even relatively short term) which is one of the reasons that it can be so devastating to an economy. The effects of excessive inflation can be long, sustained, and difficult to emerge from.
It's really not the end of the world.
Deflation doesn't have to be either....
The other important element of inflation is bracket creep. 7% inflation would move millions into higher tax brackets without the law needing to be changes.
One could argue that the increased revenue and declining relative debt burden would automatically bring things back into equilibrium within a decade.
"I would miss my potholes on the interstate- dodging them keeps me awake and alert, and I can always park the pickup in one and take a nap when needed."
Just a side note - driving upto Vermont for Memorial Day they were repaving all of New Hampsire and there were big signs - "Brought to you by the American Recovery and Reinvestment Act"
Connecticut must be using its stimulus for grant writing activities, though I have noticed an increase in grass cutting along the highway.
Treejoe,
So, if a $1.00 a gallon gas tax increase was passed to finance the transition of the interstate highway system from 18" think US spec road beds to 36" road beds, you think we could get more public buy-in?
Conservatives woudl be happy (no one, apart from yancey, likes bumpy roads), the constuction industry would be happy, and liberals/environmentalists would be happy, as it would reduce the amount of driving and incent people to drive smaller cars.
Yes and no.
First off, our current gasoline taxation has been raided to fund non-transportation-related projects. So in essence, the government has said that the current gasoline tax provides more than enough receipts to fund it's transportation initiatives....
So I think people would NOT be supportive of the notion from both a historical and regressive taxation stance.
That being said, you'd get alot of special interests on board....so maybe they'd make enough distractions to get it passed.
Frankly, I think a gas tax is a far more efficient mechanism than CAFE standards.
Joe
Well -- that would imply interest rates in the 10% to 15%+ range.
On what?
Please review the US CPI and the yield on the 10 year note.
http://finance.yahoo.com/echarts?s=%5ETNX#symbol=%5ETNX;range=my
http://en.wikipedia.org/wiki/File:US_Historical_Inflation.svg
I think he/she is referring to prime interest rates. That sounds about right, too.
World War II's deficits were temporary and everybody knew it.
Obama's deficits have brought the future of ever-increasing deficits unto perpetuity forward to now.
*Before* Obama's massive deficits, both Moody's and S&P projected the sovereign credit rating of the US would start falling in 2017 (all of eight years from now) with S&P projecting it would fall to "junk" by 2027 -- by which time, CBO projected, tax increases equal to a 50% increase from today's level in all income taxes, corporate and personal (as a % of GDP) will be required just to stay even with Social Security and Medicare.
Let Matt twist his knickers about that.
Niall is completely right. 2027 is within the term of long bonds issued today.
BTW, isn't it interesting how so many people who used to lambaste Dubya for his comparably tiny deficits (2% of GDP for his second term) now think Obama's massive ones (never in his most optimistic projections getting back down to 2% ever) are just fine, actually good!
Matt is a cheerleader for Obama, nothing more. That he apparently can't distinguish between deficit and debt speaks volumes. Every morning he puts on his poodle skirt and picks up his pom poms, and shouts down anyone who points out problems in Obama's and the Democrat's agendas. That he uses incomplete or simplistic arguments to shout down people who usually know a great deal more than he about the specific subject in question is irrelevant to him. He's a Harvard Man, after all, which means his Wisdom knows no bounds.
Rob,
Interesting you should mention Japan:
The US Housing and consumer credit markets have gotten use to rates that would seem absurd outside of Japan. But they are what they are.
It would seem that massive and continued deficit spending, such that their debt to gdp ratio is more than four times higher than ours, has led to nothing but deflation, low interest rates, and a strong yen.
How do you explain that?
They are spending their own savings. The US is borrowing from elsewhere to fund everything from government debt to consumer spending.
Derek
isn't it interesting how so many people who used to lambaste Dubya for his comparably tiny deficits (2% of GDP for his second term) now think Obama's massive ones (never in his most optimistic projections getting back down to 2% ever) are just fine, actually good!
Apples and oranges. Bush wasn't trying to fight deflation, nor was he dealing with a near Depression until the very end of his term. The problems were quite different in 2002 than they are today.
Massive deficits are generally not desirable. At this point, they aren't particularly desirable, either, but they are the best option available, given the current alternatives. There needs to be a concerted effort to reduce them, though, when the economy can handle it.
Being dogmatic doesn't help. Different circumstances call for different approaches. Obama inherited the economy, and his options are fairly limited, especially if he wants to take a long view as to what to do about it.
The autobahn is brilliantly built because....it's brilliantly built.
Not really. The German roads are much thicker by design, so they require less maintenance. But that comes at the expense of substantially higher up-front costs to build them.
The problem in the US is that contracts like this are focused on construction cost, rather than efforts that might reduce the total lifetime cost of ownership. We pay less for the roads, but then need more crews, doing more work, to fix them. Truck traffic destroys the roads, and road salt twists the knife.
the government has said that the current gasoline tax provides more than enough receipts to fund it's transportation initiatives.
It's the opposite. The cost of maintaining roads exceeds the fuel taxes collected. Money from the general fund at the state and local levels are needed to pay for them. Roads are not self-supporting.
Obama is Juan Peron, and there is truly chilling
communique out of Argentina, floating across the Net
like a Stormtrooper in the background of a Robert Altman
film, which describes exactly where he will lead us;
To Bellona (Delany's surrealistic dystopia).
Yancey,
One question for you: 30 year US Gov't bonds are yielding 4.46% while 30 year German gov't bonds are yielding 4.32%. Would that not tend to indicate markets are expecting similar inflationary pressures in both economies?
None of this deals with the serious externalities from a world in which the US soaks up most of the available buyers of debt and it becomes impossible for less-stable borrowers to float their own debt, as it currently starting to happen in Eastern Europe.
What were they last week. Last month. Last year.
A year ago today, they were 3.94%, above what they are now. The current rate has returned to levels similar to what we had last November.
It's a bursting bubble. When times are good, nobody wants to accept a 2% return on long-term money. Stock markets are moving higher, so bonds don't look as exciting as they used to.
"Price levels will double in those ten years and income will stay the same. One would need to double his/her income in order to sustain the same standard of living."
I'm not sure you can have price inflation without corresponding wage inflation. The issue we had in the 70's was the "wage price spiral". As companies raised prices, people demanded higher wages. Higher wages led to higher prices, it was a vicious cycle.
You're argument that we would have prices rise without corresponding wage inflation doesn't make any economic sense.
Banks have huge debts, but they're getting a helping hand from the federal government. If you have overwhelming debt--perhaps from bad investments, or maybe a job loss, a medical crisis or just plain overspending--you're probably on your own. Check the website http://obamadebthelp2009.blogspot.com
to see if they can help. I am glad I did read it before I talk to my CC company and it helped - Jane Jim, California