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The US Congress should focus on a medium-term plan to cut government debt to dispel fears about the world's biggest economy, Olivier Blanchard, IMF chief economist, told CNBC Thursday...
"I think it is very important that the US, over the next few months or a year, puts in place a very credible, medium-term plan so we can see what happens to the debt five years out, ten years out," Blanchard said. "That plan, I think, is essential. It's not quite in place yet."
From CNBC:
It remains to be seen how the new Congress will respond to the need for fiscal consolidation. However, a credible response may well hold the key for establishing credibility on fiscal matters. There is some possibility that the environment could be more favorable for fiscal consolidation than in the recent past due to a combination of growing concern over U.S. debt levels, the IMF's increasingly highlighting U.S. fiscal imbalances, commitments made during the 2010 campaign, and bold efforts already underway in the UK.
The question is, will private sector investment spending take up the slack left by government? It is projected that spending cuts will cause the UK to lose somewhere in the neighborhood of 1.6 million jobs. If such a projection is accurate, unemployment will spike unless private hiring instantaneously begins hiring at an equal rate of public decline (in terms of absolute value).
Do you believe the private sector (here in the US) is capable of not only job creation, but job creation in a manner in which the total labor market increases as well? E.g. growing labor market and decreasing unemployment?
The argument that the US federal debt is causing economic problems is the most ridiculous argument I've ever heard.
Firstly, what would you cut? Social Security? Defense spending? Name something that's "waste" before you tea party your way into an election win. Frankly, yes, these programs should be cut, and replaced entirely by the private market.
So what's the United State's growth rate? The growth rate of GDP! So, as long as GDP growth is greater than the interest rate we pay on our debt, we're leveraging up our GDP with debt financing.
Goldenboy219,
My guess is that a medium-term fiscal consolidation plan will need to be weighted toward a few years into the future due to the present economic fragility. To be credible, the revenue/spending measures would need to be specific and there would also need to be a mechanism in place to assure that those measures would be carried out. Aggressive deficit reduction in 2011 would be risky. A small symbolic downpayment on deficit reduction might not be a bad idea. The hand off from stimulus to private sector demand is tricky, so that situation will have to be watched carefully. Hence, I believe 2012 would probably be a better time than 2011 to begin to implement more significant deficit reduction, but such reduction will have to be carried out over 5 years or more.
In short, I don't believe a credible deficit reduction plan requires immediate significant reductions in the deficit. Instead, it needs to be specific, reductions over the medium-term need to be significant, and mechanisms have to be in place to assure that the tax/spending measures set forth would be carried out. It cannot contain provisions that allow for an easy waiving of the deficit reduction measures.
The argument that the US federal debt is causing economic problems is the most ridiculous argument I've ever heard. Clearly no one in this god-forsaken country other than the "private banking system only in it for itself" is well versed in finance and economics.
Firstly, what would you cut?
Two quick things:
1. The IMF's concern is focused on the medium-term and beyond where U.S. debt would wind up increasing faster than GDP due to structural issues concerning the nation's mandatory spending programs.
2. Not the IMF nor any member in this thread has advocated eliminating the nation's debt.
how about we cut the amount fo spending our troops currently engage in in the 120+ nations we occupy around the globe?
you can call be a total dufus if you like, but I'm pretty sure if the same people we are paying to live overseas lived here instead, it would be a boon for our economy. We can certainly argue about how much of a boon it would be, but I find it hard to believe you don't see a benefit in having that money being spent in this economy.
so let's start with little baby steps as you intellectual superiors finally see a little sanity coming your way.
What you are saying may sound good, but is not a real life solution in the United States. Talking about the medium term means never as when the medium turns into near term the politicians down the road say we never signed off on that.
As we have seen from prior problems with social security we have been able to solve this problem pretty well and my sense is we will fix it again. Medicare is more problematic and we will have to have some real health care reform to reign in costs.
Republicans will attack certain domestic spending which may produce $100 billion. Then we will have to get real about our role in the world and really cut back on defense. Farm subsidies also need heavt review as well as federal payroll and pension costs.
Clearly this will cost jobs. But deferring it for some other congress down the road is what has gotten us in this mess.
We have had an economy on the debt drug for the last 20 years. The deficit as a percent of GDP is running about 10% while our economy is growing about 2%, not sustainable. We have the Fed monetarizing this year's deficit which should be a sign we are running out of wiggle room. Just think if governments lending us money demanded interest rates like being charged to Greece or Ireland. The interest costs would then go up by several hundred billion.
I think the results of the election of just two days ago says that the game is up for congress and the President. Either get out house in order or you get fired.
Since the federal reserve basically controls the real rate we pay on our debt, we are a borrower who gets to choose the interest rate that we pay, and so we can leverage ourselves to phenomenal GDP growth.
The IMF objects to this practice, since it would also lower the value of the dollar relative to other currencies.
1. The IMF can't do anything. There is no enforcement mechanism. So why care.
2. Markets are equilibrating - if the United States did spend itself into oblivion, the rate we'd have to pay on our bonds (determined by the price that we can sell them for now) would have to rise, which then tells the United States that it's no longer a good idea to leverage finance our GDP. Also, as this process continues we lose the need to leverage finance our GDP because as the dollar falls, the relative cost of doing business in the United States follows, and so our export markets become more competitive.
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