David Stockman, former budget director in the Reagan administration, has been banging this drum for a while if I recall correctly, the one about the inevitable crisis the U.S. is setting itself up for if it doesn’t change its ways. Still, he makes some very good points in an interview with Raw Story, at the same time saying we need to shrink the military, and lamenting that even with a purportedly leftist government the subject isn’t even being discussed.
The problem, the reason everybody in Washington talks about the debt but nobody’s willing to take a stand, is because they don’t have to. For one thing, the Fed is making the cost of borrowing absolutely negligible. For all intents and purposes, Washington these days has a blank check. The other thing is, the government is trading on the name and standing of the United States. The thought of the U.S. defaulting is almost unthinkable (it used to be absolutely unthinkable, but the Panic of 2008 and aftermath we’d imagine put some shadow of a doubt out there.)
So the federal government can issue as much debt as it wants. Any day of reckoning is still more than an election cycle or two away, and that’s as far out as our current breed politicians can think. Besides, if the feta really hit the fan, they could always just sell a national park or two.
The whole Stockman piece is worth reading. Here’s a taste:
“So the addicts in Washington are now unfortunately terrified to stop all this borrowing whether it’s for guns or butter for fear of the economy will collapse…That’s why we’re just at the beginning of solving this massive financial collapse we had in 2008 and not in the process of healthy recovery as some of the pals in the White House or on Capitol Hill or on Wall Street would have you believe.”
This wasn’t the story I was looking to direct you to, but it hits on a theme we’ve been harping on here at Market Talk, so I had to mark it. Perk up your ears, Mouseketeers, because you’re going to be hearing this a lot more in the next couple years.
Real Times Economics picks up on the debt theme, noting that the $13 trillion in U.S. national debt equals 88% of projected 2010 GDP (in a post earlier this week, I compared it to 2009′s GDP and arrived at 90%, but little difference; at current growth rates for both it will soon be 100% of GDP.) That puts the U.S. in a dangerous situation. From the Journal’s Mark Whitehouse:
We’re borrowing to bail out consumers who took on too much credit and couldn’t pay, and to support social-security and Medicare systems we can’t really afford. We’re able to do this because financial markets have maintained a surprising faith that we will eventually get our spending under control, and because the dollar’s role as a global reserve currency has kept our borrowing rates unusually low.
The travails of Greece demonstrate the hazard such easy borrowing terms can create. After Greece adopted the euro, markets began to treat it more like any other European economy, allowing it to borrow at interest rates nearly the same as Germany or France. That, in turn, helped Greece get into much deeper debt trouble than it would have otherwise. As a result, it now has to implement austerity measures that will likely yield much deeper economic pain.
I’ll tell you, folks, we are crossing the Rubicon. We are going to be forced into some very hard choices, choices we have been putting off for years, no matter how the economy’s doing. That’s the real takeaway here, that soon no matter how fast the economy is growing, it won’t be able to keep up with our debts.
I disagree with Mark on one point, though. I don’t think our creditors and the markets are giving the U.S. a pass because they believe the government will eventually get spending under control. There simply is zero evidence that that’s going to happen. No, the markets are giving the U.S. a pass because the thought of a sovereign debt crisis in the world’s largest economy, which prints the world’s reserve currency, and which is in times of trouble the ultimate safe haven, is simply too terrifying to even contemplate.
The most important piece of news this week wasn’t the ADP report, or the weekly jobless claims. It wasn’t the ISM’s service-sector report, or the latest updates on BP’s Gulf oil spill. It wasn’t the Gore’s split-up, or even Armando Galarraga’s stolen perfect game, and it won’t be Friday’s jobs report for May. No, the most important piece of news this week, the one that will have the most lasting impact, was this:
It wasn’t a surprise, of course. Anybody who walks on 45th 44th Street by Sixth Avenue has seen the big debt clock there over the IRS office. It’s been rising steadily. But crossing another milestone, and so quickly after we crossed the $12 trillion mark, really should be yet another wake-up call for the nation. You think the Macondo well’s a real gusher?
Gross domestic product in 2009 was about $14.4 trillion. That puts the national debt at roughly 90% of GDP. That’s a danger zone beyond which nations don’t generally recover. Even for the world’s largest economy, we are passing the point at which we can still earn our way out of our debt, no matter how many jobs we create.
Now, obviously, nobody but nobody wants to call the government of the United States to the mat about its debt. A sovereign debt crisis in the world’s largest by far economy would be like dropping a dozen nuclear bombs on the global economy. Nobody would recover. So expect the world to nervously play along as our duly elected leaders pretend to have a firm grasp on this problem.
But we are at the point where some painful choices are going to start forcing themselves on us (indeed, at the state level, this is already happening.) Higher taxes. Cuts in services. Cuts in benefits and entitlements. Maybe even a shrinking of the military. All the options are going to have to be on the table, because very soon, if not already, we won’t be able to just jawbone this problem any more.
You should read this post with a cup of hot coffee in your hand — because I want you to wake up and smell it.
The December jobs report shouldn’t really come as a big surprise to anybody. We may be stuck in this range for some time. While the economy is done with its spate of disgorging half a million or so workers a month, it is nowhere near a state where it’s adding workers at any appreciable rate.
And that’s the real trick now, to get it to that state. But it’s not going to be easy, it’s not going to be easy at all. And all the while, the nation’s debts continue to add up, and the state of the average American continues its slow slide.
There are a number of large-scale problems facing the economy and the nation. The first and most immediate is this little issue about the nation’s employers not adding jobs. This is kind of a big deal. While fewer people are being fired every month, not many are being hired, and a good percentage of the ones that are finding jobs are finding ones that pay a good deal less than their previous jobs.
The economy needs to add about 125,000 some odds jobs a month just to keep up with population growth. Now add all those new workers to the pool of unemployed workers – a pool that numbers somewhere north of 15M – and you can see that the economy would have to ramp up production significantly to find work for all those people. But there’s a big hitch.
Production won’t ramp up without demand, and demand won’t increase without people who have disposable income in their pockets, and incomes won’t grow unless production’s rising because demand is high, and demand won’t be high unless…well, you get the picture. The federal government can paper over a great many things with fresh greenbacks, it can make a lot of problems appear manageable or nonexistent. But the one thing the government can not fake is consumer demand.
Eventually, something will spark demand, and production, and wage growth. It is (we hope) inevitable. But that thing is currently nowhere on the horizon. Meanwhile, those papered-over problems haven’t gone away.
Maybe $12 trillion in debt’s not such a bad thing after all.
In “How to Run Up a Deficit, Without Fear,” Robert Frank makes three arguments: one, running deficits during a downturn is necessary; two, what really matters is how the money is spent, and three, eliminating the debt can be pain-free.
To eliminate deficits, we need additional revenue. The encouraging news is that we could raise more than enough to balance government budgets by replacing our existing tax system with one that taxes activities that cause harm to others.
Frank is a member of the Pigou Club, a cadre that supports taxing various damaging practices in order to both lessen their frequency and to, well, raise money. You can argue the merits of it, but Frank is just blowing soap bubbles here: the odds of the entire tax code being scrapped in favor of a new one is remote, at best.
Although, I would agree that our tax code is one source of the problem.
Today on Tomorrow’s News Today, we discuss the ECB’s opinion on stimulus programs, as well as stocks and bonds and technical levels, and that stupendous $12 trillion deficit.
The United States of America is $12 trillion in debt.
It’s actually worse than that, but let’s start there. The “National Debt Clock” above the IRS office on 45th Street in midtown Manhattan tripped the $12 trillion level this week. (It actually crossed the mark on Monday, according to the Treasury Department’s website, but I noticed it this morning.)
And that is just the actual, concrete debt. There are tens of trillions more in so-called unfunded liabilities — promises made to current and future recipients of Social Security and Medicare — that push the national debt up to somewhere in the $50-$60 trillion range.
How do you grasp a problem that big? It’s hard. The problem (with grasping it) isn’t that the problem (the debt) isn’t real, it is painfully real, the problem is that it isn’t a problem the way, say, the collapse of Lehman Brothers was a problem. That is to say, in America today, if it doesn’t explode, people don’t see the problem.
But make no mistake, friends, this is a problem that will grind the economy into dust, in a gradual, evolutionary kind of way. It’ll take years, maybe decades, a slow, grueling, almost invisible force. But if we do not address this, now, we, and our children, will wake up one day in a far less prosperous place.
We are going down, as I first saw Harvard’s Greg Mankiw call it, an unsustainable path. And we are barreling down it.
Posted by Paul Vignaon October 12, 2009 Economy, Washington /
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We don't need all that land out west, do we?
Of all the things I read over the weekend, not that I read so much, but I like to keep abreast of things, the most interesting was a story late yesterday that the UK government is looking to sell some of its holdings in order to help pay down debt. From the Journal:
The U.K. government hopes to cut £16 billion ($25.4 billion) from its huge debt pile by selling off a portfolio of state-owned assets and real estate, ranging from a betting service to a book of student loans, Prime Minister Gordon Brown plans to announce Monday.
Now that’s a pretty radical idea; Brown himself called it radical. It’s a drop in the bucket, really — the UK will borrow 175 billion pounds over the next two years — but it shows that governments, and big ones, continue to take steps to combat the downturn that once would have seemed, well, maybe not unthinkable, but certainly unlikely.
And, of course, it makes one wonder about the prospects of the US government adopting such a measure. Maybe selling some extra land. Or a surplus office building they’re not using for anything anymore. When you think about it, there’s probably plenty of things Uncle Sam could sell to pay down the debt.
Of course, with the national debt near $12 trillion, they’d have to sell off more than just a few baubles to really make a dent.
J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees […]
President Reagan’s former budget director David Stockman says Edward Snowden performed a heroic act, the Patriot Act should be repealed, and this whole spying-on-U.S.-citizens thing is a symptom of an out-of-control military-industrial complex. Click here to watch him go on YahooFinance. The author of “The Great Deformation: The Corruption of Capitalism in A […]
