It's Still the Economy, Stupid
Happy Friday.
When people are brave enough to identify themselves as republican to me, I reasonably ask how they can continue to support a failed administration.
The answer is always, "I don't necessarily agree with Bush, I just support the economic ideals of the party." Of course, I note in response that Dubbya is the leader of the party and if they support it, they necessarily support him. Nice try.
I also ask what "economic ideals" they believe the party represents. Inevitably, it is something to the effect of "people working to make it on their own" (again, an odd thing considering the president's silver spoon and the party's position against the estate tax) and fiscal responsibility.
Ok, now we are getting somewhere. Fiscal responsibility: small government, controlled spending, budget surpluses, and a long-term outlook.
In fact, however, the current administration’s (voodoo) economics requires the country to borrow $782 billion a year--more than six percent of GDP--mostly from foreign governments and central banks (e.g. China). It is estimated that by the end of the year America’s indebtedness to other countries will reach 28% of GDP.
Of all the scandals plaguing the current administration, perhaps none is more severe than its mismanagement of the economy and the resulting threat to the nation’s future economic viability and security.
As the below article explains, the president's "faith-based initiatives" have no role in fiscally responsible government.
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Our Faith-Based Future
The White House remains unperturbed by the growing prospect of economic calamity
by Clive Crook
Once upon a time Democrats were big spenders and Republicans were fiscal conservatives. That was a while ago. Ronald Reagan's defense buildup and tax cuts caused deficits to soar in the 1980s, and it was Bill Clinton who brought the budget back into surplus in the 1990s, partly by curbing spending. But those fiscal role reversals were timid by today's standards. Since 2000 the Democratic Party has been left in the dust when it comes to spending.
The Republican Party is the new, undisputed champion of big government. The Bush administration has presided over an explosion of public borrowing, fueled partly by tax cuts but also by huge new outlays. Both sides of the public accounts were out of control even before the enormous increases in spending to cope with Hurricane Katrina and the persistently dire situation in Iraq (see "Disasters and the Deficit," next page). The administration's incompetent handling of the hurricane will exact its own price over and above disaster relief, as the White House tries to buy its way back up in the polls. The Republican Party's former reputation for prudent fiscal management is no longer merely compromised; it is ruined, perhaps for good.
Among Republicans in Congress squeaks of complaint are heard here and there. But the White House has drowned them out. Before Katrina, at any rate, the administration was still insisting that the budget deficit would fall over the next few years. That prediction might have been right if Katrina and Rita had not happened and if Iraq had come good—at least if one further assumed that no other emergencies would arise, that most of the administration's tax cuts would be reversed by the end of the decade (which the administration itself, of course, is determined to block), and that demographic pressures (which are causing the government to pile up vast liabilities for Social Security, Medicare, and Medicaid) would magically abate. On this side of the looking glass the deficit will not shrink unless something bold is done.
For those who find its budget forecasts unconvincing the White House has another line—one that slightly undercuts its assurances of fiscal responsibility. It is that the deficit does not matter. Economists have been predicting fiscal meltdown for years, officials point out. It has not happened and it won't, they say, even if the deficit sticks. The reason is that foreign investors just love this country's assets.
The resulting flow of funds—a global vote of confidence in American capitalism—means that the government can borrow without strain. Spend more, tax less, be happy.
It sounds like a confidence trick, and in the end it is—though, like all the best scams, it contains particles of truth. For much of the past decade private foreign investors have poured funds into the United States because they saw faster economic growth and better returns than were available elsewhere. As long as that kind of investment keeps flowing in, the deficit can be financed painlessly. Government spending still has to be paid for eventually, mind you—it is only a question of taxes today or taxes tomorrow. But a willing inflow of capital means that the eventual, inescapable cost to American taxpayers can be postponed at little risk.
Another thing helps. America enjoys the rare privilege of being able to borrow what it needs—currently on the order of $782 billion a year—mostly in its own currency. Countries heavily in debt usually have to borrow in a foreign currency. If they later get into trouble and the foreign-exchange market drives their currency down, the burden of their debt, measured in local money, weighs heavier, pressing them into an even deeper hole. But if the United States got into that kind of fix and the dollar fell abruptly, the value of America's debt would not rise. Instead the countries that had lent the dollars would see the value of their investments (measured in yen, say, or euros) fall.
As far as the United States is concerned, this is an excellent arrangement. With foreign lenders choosing to carry more of the risk, a credit-hungry America can afford to be less cautious.
But not this much less. If America were borrowing at half the present rate, it could probably relax. But $782 billion a year—more than six percent of GDP—is outlandish. Such reckless behavior has made America's privileged place in the world economy as much a curse as a blessing. Foreign capital is no longer voting as confidently for America. Private investors are spending less than before on American assets. Lately the slack has been taken up by foreign governments and central banks, which are pursuing not profit but doubtful policy goals of their own. (China's holdings of dollar reserves are already far greater than makes sense for China.) At some point these lenders are going to curb investment in American assets. Should this happen suddenly, here are some of the likely consequences: a spike in interest rates as the government is forced to find new takers of its debt, at dearer terms; a surge in personal bankruptcies and a sharp curtailment of spending among America's heavily indebted households; a stock-market crash; an increase in inflation; and a slide back into recession.
The present course of fiscal policy is not certain to end badly, but the risks are increasing. This summer, before Katrina, the economist Brad DeLong put the chance of a major U.S. financial crisis at 20 percent. The former Fed chairman Paul Volcker puts it at 75 percent within the next few years if we don't change our policies. Stephen Roach, the chief economist at Morgan Stanley (and a notorious pessimist), thinks it's about 90 percent. Whether any of these predictions is close to the mark is anyone's guess, but that's not the point. The point is that the chance of a bad outcome is substantial—and much higher than it needs to be.
Changing course now—before circumstances leave no choice—would be hard even if the administration believed it had to act. Starting from here, the combination of higher taxes and lower public spending required to bring the deficit down to manageable levels is politically daunting. Yet at the same time, Katrina has perhaps created a political opportunity to undo some of the fiscal damage this administration has wrought—by, say, curbing tax cuts and scaling back the Medicare prescription-drug bill.
Unfortunately, big-government Republicans see no need for such measures; they look at deficit hawks and see Chicken Littles. But this fiscal environment is more dangerous than any other America has faced in its modern history. Without corrective action the sky may fall.
When people are brave enough to identify themselves as republican to me, I reasonably ask how they can continue to support a failed administration.
The answer is always, "I don't necessarily agree with Bush, I just support the economic ideals of the party." Of course, I note in response that Dubbya is the leader of the party and if they support it, they necessarily support him. Nice try.
I also ask what "economic ideals" they believe the party represents. Inevitably, it is something to the effect of "people working to make it on their own" (again, an odd thing considering the president's silver spoon and the party's position against the estate tax) and fiscal responsibility.
Ok, now we are getting somewhere. Fiscal responsibility: small government, controlled spending, budget surpluses, and a long-term outlook.
In fact, however, the current administration’s (voodoo) economics requires the country to borrow $782 billion a year--more than six percent of GDP--mostly from foreign governments and central banks (e.g. China). It is estimated that by the end of the year America’s indebtedness to other countries will reach 28% of GDP.
Of all the scandals plaguing the current administration, perhaps none is more severe than its mismanagement of the economy and the resulting threat to the nation’s future economic viability and security.
As the below article explains, the president's "faith-based initiatives" have no role in fiscally responsible government.
___________________________________________________
Our Faith-Based Future
The White House remains unperturbed by the growing prospect of economic calamity
by Clive Crook
Once upon a time Democrats were big spenders and Republicans were fiscal conservatives. That was a while ago. Ronald Reagan's defense buildup and tax cuts caused deficits to soar in the 1980s, and it was Bill Clinton who brought the budget back into surplus in the 1990s, partly by curbing spending. But those fiscal role reversals were timid by today's standards. Since 2000 the Democratic Party has been left in the dust when it comes to spending.
The Republican Party is the new, undisputed champion of big government. The Bush administration has presided over an explosion of public borrowing, fueled partly by tax cuts but also by huge new outlays. Both sides of the public accounts were out of control even before the enormous increases in spending to cope with Hurricane Katrina and the persistently dire situation in Iraq (see "Disasters and the Deficit," next page). The administration's incompetent handling of the hurricane will exact its own price over and above disaster relief, as the White House tries to buy its way back up in the polls. The Republican Party's former reputation for prudent fiscal management is no longer merely compromised; it is ruined, perhaps for good.
Among Republicans in Congress squeaks of complaint are heard here and there. But the White House has drowned them out. Before Katrina, at any rate, the administration was still insisting that the budget deficit would fall over the next few years. That prediction might have been right if Katrina and Rita had not happened and if Iraq had come good—at least if one further assumed that no other emergencies would arise, that most of the administration's tax cuts would be reversed by the end of the decade (which the administration itself, of course, is determined to block), and that demographic pressures (which are causing the government to pile up vast liabilities for Social Security, Medicare, and Medicaid) would magically abate. On this side of the looking glass the deficit will not shrink unless something bold is done.
For those who find its budget forecasts unconvincing the White House has another line—one that slightly undercuts its assurances of fiscal responsibility. It is that the deficit does not matter. Economists have been predicting fiscal meltdown for years, officials point out. It has not happened and it won't, they say, even if the deficit sticks. The reason is that foreign investors just love this country's assets.
The resulting flow of funds—a global vote of confidence in American capitalism—means that the government can borrow without strain. Spend more, tax less, be happy.
It sounds like a confidence trick, and in the end it is—though, like all the best scams, it contains particles of truth. For much of the past decade private foreign investors have poured funds into the United States because they saw faster economic growth and better returns than were available elsewhere. As long as that kind of investment keeps flowing in, the deficit can be financed painlessly. Government spending still has to be paid for eventually, mind you—it is only a question of taxes today or taxes tomorrow. But a willing inflow of capital means that the eventual, inescapable cost to American taxpayers can be postponed at little risk.
Another thing helps. America enjoys the rare privilege of being able to borrow what it needs—currently on the order of $782 billion a year—mostly in its own currency. Countries heavily in debt usually have to borrow in a foreign currency. If they later get into trouble and the foreign-exchange market drives their currency down, the burden of their debt, measured in local money, weighs heavier, pressing them into an even deeper hole. But if the United States got into that kind of fix and the dollar fell abruptly, the value of America's debt would not rise. Instead the countries that had lent the dollars would see the value of their investments (measured in yen, say, or euros) fall.
As far as the United States is concerned, this is an excellent arrangement. With foreign lenders choosing to carry more of the risk, a credit-hungry America can afford to be less cautious.
But not this much less. If America were borrowing at half the present rate, it could probably relax. But $782 billion a year—more than six percent of GDP—is outlandish. Such reckless behavior has made America's privileged place in the world economy as much a curse as a blessing. Foreign capital is no longer voting as confidently for America. Private investors are spending less than before on American assets. Lately the slack has been taken up by foreign governments and central banks, which are pursuing not profit but doubtful policy goals of their own. (China's holdings of dollar reserves are already far greater than makes sense for China.) At some point these lenders are going to curb investment in American assets. Should this happen suddenly, here are some of the likely consequences: a spike in interest rates as the government is forced to find new takers of its debt, at dearer terms; a surge in personal bankruptcies and a sharp curtailment of spending among America's heavily indebted households; a stock-market crash; an increase in inflation; and a slide back into recession.
The present course of fiscal policy is not certain to end badly, but the risks are increasing. This summer, before Katrina, the economist Brad DeLong put the chance of a major U.S. financial crisis at 20 percent. The former Fed chairman Paul Volcker puts it at 75 percent within the next few years if we don't change our policies. Stephen Roach, the chief economist at Morgan Stanley (and a notorious pessimist), thinks it's about 90 percent. Whether any of these predictions is close to the mark is anyone's guess, but that's not the point. The point is that the chance of a bad outcome is substantial—and much higher than it needs to be.
Changing course now—before circumstances leave no choice—would be hard even if the administration believed it had to act. Starting from here, the combination of higher taxes and lower public spending required to bring the deficit down to manageable levels is politically daunting. Yet at the same time, Katrina has perhaps created a political opportunity to undo some of the fiscal damage this administration has wrought—by, say, curbing tax cuts and scaling back the Medicare prescription-drug bill.
Unfortunately, big-government Republicans see no need for such measures; they look at deficit hawks and see Chicken Littles. But this fiscal environment is more dangerous than any other America has faced in its modern history. Without corrective action the sky may fall.
posted by Happy Friday | 7:25 AM
2 Comments:
Greenspan Points to Danger of Rising Budget Deficits
By HEATHER TIMMONS
LONDON, Dec. 2 - Alan Greenspan, the chairman of the Federal Reserve, warned of the dangers of rising budget and trade deficits in two speeches on Friday.
Speaking at a meeting here of the Group of 7 finance ministers, he said the growing American trade deficit could be "quite painful" for the world economy if it was not arrested. He urged the United States and other countries with trade deficits to stop the "pernicious drift toward fiscal instability."
If that instability "is not arrested and is compounded by a protectionist reversal of globalization," he went on, "the adjustment process could be quite painful for the world economy."
In a separate videotaped speech to the Philadelphia Federal Reserve Bank's policy forum, he said the nation had weathered hurricanes Katrina, Rita and Wilma well and noted that the economy was expanding at a good pace. But he cautioned that the United States budget position "will substantially worsen in the coming years unless major deficit-reducing actions are taken."
Mr. Greenspan, 79, who is leaving his post at the end of January, has been touching on similar themes in recent months. He seems to want to end his career with a firm call for fiscal discipline.
In the videotaped speech, he said that policy makers needed to restore "procedural restraints on the budget making process" that had been "violated with increasing frequency" since the end of the 1990's and were allowed to expire in 2002.
The nation's budget problems will not be solved just by enacting new rules, Mr. Greenspan added. "The fundamental fiscal issue is the need to make difficult choices among budget priorities," he said, and "this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age."
Baby boomers will start retiring in 2008, Mr. Greenspan noted, putting stress on Social Security. In addition, the "soaring cost of medical care" for the aging population will place "enormous demands on our nation's resources."
He said he did not believe that major increases in taxes were the solution.
"Tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base," he said, adding that the government should seek to "close the fiscal gap primarily, if not wholly, from the outlay side."
Mr. Greenspan also seemed to suggest a later retirement age. "I fear that we may have already committed more physical resources to the baby boom generation in its retirement years than our economy has the capacity to deliver," he said.
He urged that changes be made "sooner rather than later" to the system. "We owe future retirees as much time as possible to adjust their plans for work, saving and retirement spending," he said.
Similar discussions are under way in other countries. Earlier this week, Britain's pension commission recommended raising the retirement age to 67 from 65, and possibly higher, to make sure there is enough money in public coffers.
In discussing trade deficits in his speech in London, Mr. Greenspan admitted that "we do not as yet have a firm grasp of the implications of cross-border financial imbalances." But, he said, deficits that "cumulate to ever-increasing net external debt, with its attendant rise in serving costs, cannot persist indefinitely."
The London meeting was in part a salute to Mr. Greenspan. Sir Alan, as he is known in Britain (he was knighted in 2002 for his contributions to the world's economic security), was given several gifts by Britain's finance minister, Gordon Brown, including a handwritten copy of the Stamp Act, which helped spur the American Revolution, and a handwritten record of the dividend paid to George and Martha Washington by the Bank of England from a bond that raised money to pay the cost of keeping British troops in the United States.
To hear Alan Greenspan covering his ass, working overtime to preserve his historical legacy, is an outrage. For "Easy Al" Greenspan to wax fiscal conservatism at this juncture is like the parent who spoiled his child for 18 years complaining of the young lad's profligacy in early adulthood.
Greenspan's accomadationist Fed has more of a role is this economic mess we're in than anything else. His money-printing/credit-enhancing solution to all economic woes has inexorably led to our current fiscal crisis.
To wit, the New Economy Bubble imploded in 2000; Greenspan sent interest rates close to zero and flooded the markets with liquidity. The result: decreased personal savings and an unprecedented shift of capital from equities into real estate. So now, rather than an equities bubble, we have a housing bubble. And what supports the housing bubble? Ever more money & credit, and more debt borrowed against these inverted-pyramid homes, valuable on paper, but backed with . . . nothing.
And yes, the GOP has worked closely in this theft of American wealth (devalued currency = tax). The GOP may not "really" tax us, but by inflating the dollar they are stealing a portion of every cent we earn or save (the few of us who save).
And please, do not believe the government's "Core CPI" inflation figures. Step back and allow logic to explain: Increased money supply (which no one doubts) against an economy that's clearly not expanding except to the degree that the Fed keeps feeding it, making it fatter? Sounds inflationary to me. And look around. Prices are going up everywhere: commodities, including oil; housing; medical care; education; food (you know, all the areas not included in "Core CPI").
What we need to watch out for is a sly lowering of rates/additional influx of money by Bernanke late next summer, just in time to apparently salvage things for the GOP in time for mid-term elections. A judicious injection of liquidity will alow for a brief sense of improvement, as the markets respond and folks find more dollars in their pockets. They won't discover that the dollars are grossly devalued until after the first Tuesday in November.
*This* is what the press, the voice of opposition should be talking about. Let's start.
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