The Giant Noodle
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In the wake of collapsed housing bubbles, a nation's debt often soars. Costs associated with bailouts to prevent the collapse of the banking system, countercyclical measures (e.g., unemployment payments), stimulus measures to shore up aggregate demand, and a steep drop in tax revenue push debt higher. Real debt burdens have typically grown more than 80% in the wake of such crises.
I am not sure where the 80% comes from. However growing debt 80% on 2 trillion versus 8 trillion when the economy has not grown that fast would be a problem regardless.
The U.S. has additional issues. First, it made explicit its guarantee of Fannie Mae and Freddie Mac. Even as the government has continued to keep the GSEs' guaranteed debt off-budget, it has for all intents and purposes assumed responsibility for those contingent liabilities. In fact, if the U.S. were simply to disavow those liabilities now, the U.S. could well alter perceptions of its credibility on debt (the precedent would indicate that sovereign debt default in the future is not off the table). The U.S. should work to wind down those entities and replace them with a larger number of smaller entities with strong capital requirements, significantly smaller conforming loan requirements (to eliminate incentives for overleverage), and avoid imposing political or social requirements on them when it comes to mortgage activity. That way, the problems that impact Fannie/Freddie can be addressed.
I agree on this point, however the dems refused to insert this in the upcoming fin reg bill.
At the same time, it faces substantial structural budget deficits that have little to do with the recent cyclical explosion of debt. Unless tax revenues are increased to sufficient levels and the mandatory spending programs are reformed, those structural deficits will persist and grow worse over time. The structural deficits are the result of bipartisan choices made over many decades. It is the structural fiscal situation that needs to be addressed if the U.S. is to avoid a debt crisis in the medium-term or beyond. Right now, it is not on a fiscally sustainable path. Moreover, it cannot grow its way out of its deficits.
Considering a huge portion of the debt happened under Republican watch, then well.. the right should not be touting their horn too much either.
People keep talking about structural budget deficits. I would agree that social security and medicare fit in that category. Are you also including the increasing cost of paying for the debt, a cost that few seem to think about but which will be the largest budget item in the not to distant future.
While we can point fingers and agree that this problem is non partisan ( both parties are guilty) that does not in my view address the point that we are continuing to add to our woes not working to fix them.
Considering a huge portion of the debt happened under Republican watch, then well.. the right should not be touting their horn too much either.
In his testimony before the House Budget Committee, Federal Reserve Chairman Ben Bernanke mentioned that the U.S. is on an unsustainable fiscal path and that it needs to develop a plan to deal with its long-term fiscal imbalances. Relevant excerpts:
Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.
Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits. Notably, this year about 5 individuals are between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes. To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.
Achieving long-term fiscal sustainability will be difficult. But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.
By Garfield Reynolds and Wes Goodman
June 4 (Bloomberg) -- President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.”
The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades.
“Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.”
Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.”
Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s.
“The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury,” Boston-based Fuss said. “Do you really want to buy the debt of the biggest issuer?”
(To save a copy of the chart, click here.)
To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
U.S.
"Banks are stealing money from the public, giving consumers zero percent interest on deposits, and instead of turning over risk to the over-indebted consumers, they're loaning money to the government," Michael Pento, chief economist at Delta Global Advisors, told CNBC.
Banks Buying Treasuries Instead of Lending
Glen Beck and those who follow him seem to think so.So the president is purposely increasing the debt to make us pay higher taxes???
I agree that there should be limits on taxation, but not nessasarally in terms of absolute dollars. Maybe in terms of percentages.There has to be a limit for politicians to raise taxes on us, like up to $20,000,000,000,000!!
Something like $5 trillion of our treasury debt was borrowed from the fed.
they way i've always thought of it is like this: As a taxpayer, you have to haul the country behind you. You throw the strap over your shoulder, and dig in and begin to pull. Then, Republicans come up and shoot you in the foot. So you put Democrats in charge of the effort instead. Then, the Democrat comes and shoots you in the face.
I agree somewhat, but in Obama's case he did not have much choice. Like it or not, the US is in a recession or just coming out, and you do not cut government spending during a recession.. it is the most stupid thing you can do. One would have thought that people could read history books and think just a tad logically.
Now Bush had a choice, but choose to ignore the fact that you should "save up" during the good years so you can use that during the bad years.. he just used used and grew his deficit year after year despite the US economy was booming.
So on the epic scale of stupidity Obama comes very low and Bush at the top. But lets not forget that Since Carter we have had 3 Republican Presidents and 2 Democratic Presidents (Clinton and Obama) and Clinton was the only one who actually started to have a surplus, where as Reagan and Bush Sr and Jr spent like drunken sailors even during the boom years. Reagan was the worst, by almost trippling the US debt during his term.
There is no doubt that the debt of the US is a problem, but it is not the biggest problem yet.
Where do you get that figure from? At the end of 2009, the Fed had toal assets of $2.2 trillion. Most of that was in the form of Treasuries and Agency securities, but that's nowhere close to the figure you cite. (http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2009.pdf) If long interest rates go up the value of much of this paper drops and then the member banks get to ante up some "fictional money" to make up the loss. That's tough to do when they have rotten loans up the wazoo and are writing down capital. And, personally, I'm not holding my breath for the IRS to let me slide on sending in my imaginary check next April.
Regardless of the exact figures, my points still stand. I wasn't trying to present exact financial info to the dollar, I was trying to present the fact that despite what some people claim, the fed debt is still managable and our economy does not have to go to H&!! because of it.
The Intergovernmental Holdings section refers primarily to governmental borrowing from the Federal Reserve. This is sometimes referred to incorrectly as "the government borrowing from itself".
To begin with, the twelve regional Federal Reserve Banks are private institutions operating collectively in a quasi-governmental capacity....
But "We Owe it to Ourselves"?
Does the debt matter, after all, don't we owe it to ourselves? Only if you acknowledge that "we" and "ourselves" are in fact very different entities. The Federal Reserve's Z.1 Release gives insight as to who exactly owes the money, and to whom.
Clearly this is a one-way street. Households, government and non-financial businesses are becoming more and more indebted to foreigners, banking and financial institutions. Debt is not wealth. It is a claim on future production.
"The budget should be balanced; the treasury should be refilled; public debt should be reduced; and the arrogance of public officials should be controlled." - Cicero. 106-43 B.C.
http://www.marketoracle.co.uk/Article1571.html
There is a difference between not cuting expenses during a recession and dramatically increasing and wasting money. For example we increased spending by nearly $100 billion a year to have more troops in Afghanistan, how does that help fight our recession.
Increasing entitlements big time which won't show up quickly is a disaster.
Bush Sr raised taxes and got thrown out of iffice for it.
Lastly the rest of the world is starting to understand you can't keep spending money you do not have in the name of fighting a recession today and causing a tremendous problem for the people who follow us. It seems people like you do not care about future generations. Throwing money that is wasted to try and fix a credit problem today without any thought of what the consequences are for others to me seems ammoral.
On your first point, that "We owe it to ourselves": I clicked your first link and read this:
If you think you're going to make the economy prosper by eliminating debt then you need to focus on all debt, not just the National Debt.
Arms production and fixing busted material. Like it or not, it pumps money into the economy. In fact to be brutally honest war generates a lot of income and stimulus in an economy. And there has been theorised that certain countries have pushed for war because of this including the US. If the US had not been in Iraq and Afghanistan, not only would the unemployment rate be much higher, but the money used on those wars would not be pumped into the economy.. and yes most of the money is given to US firms.
Rather increase them during an economic crisis to put more money in the economy. Like it or not, the US relies on consumer spending (something like 70%+), and cutting out entitlements would cut out a huge chunk.
Well that is America for you. Like it or not you need to raise taxes and cut spending and Bush Sr knew that. 8 years of Reagan had put a huge hole in the budget after all.
Oh I care very much about the next generation, and that is why I am saying you have to cut short any recession with stimulus as quickly as possible. And the only way you can do that is to spend money while the private sector gets over its issues but when the private sector does get back in the game, then it is the job of the government to draw down in the spending and save up.
As for throwing away money, that is not the money's fault or the idea of pumping money into the system via stimulus and government spending that´s the problem. It is simple economic theory that has been proven to be successful over and over again.
The problem is the political system. It is the political system that is throwing money away at record amounts and the lack of political will to change the system.... even from the Tea Party or other "revolutionary" groups in the US. They are all in it for the money and that wont change over night. No one is willing to discuss what is needed as we have seen on these boards. The right targets the entitlements, and demands more tax cuts for the rich and companies and less regulation and more free markets (which lead us to the hole we are in now.. /grin), where as the left defends entitlements and demands tax risises for the rich and companies (generally speaking). And everyone avoids the big elephant in the room.. military spending and the little mouse.. pork.
And that is where we are today. The US has one of the lowest tax burdens in the industrialized world, one of the lowest defacto company tax burdens (since most avoid paying tax), some of the most lax regulation in many areas of the world, and some of the most protected markets in the industrialized world. On top of that it has a huge budget. This leaves a huge gap and there is no real willingness to reduce it in a pragmatic way.
To be brutally honest, the US needs to redefine its military. Dump the Marines, so that there are only 3 main branches. Remove troops from Europe and Japan and close the bases and cut its nuclear arsenal to 1/10th of what it is today .. still plenty of nukes to obliterate the planet. Close tons of bases and to be frank, you do not need a million plus troops for god sake. No bid contracts for the military.. wth. An over reliance on private contractors in the military and zero accountability for said private contractors is also mind boggling. They dont make the military cheaper.. they make it far more expensive. No transparency in the spending.. 40k dollar toilet seats?
On top of that there needs far more transparency in your political system. The amount of conflict of interest in pork projects and government procurement that has been exposed the last decade is... mind boggling. The bridge to no where, a library run by a congress members family and so on and so on. On the entitlement front there needs reforms too. Medicaid and Medicare need overhauls, but that cant be done without tackling the huge whale in the room.. healthcare costs and that aint happening with the present system.. simply too much money involved in screwing people and increasing costs... the more costs increases the more profit and the more people you can keep out of the healthcare system the more profit... it is an evil cycle. Social Security needs to be fully financed and a new system for the future be put in place.. you cant just cut everything over night. But there is no political will to do anything because of the money involved. And then there is tax reform.. the fact that a huge minority dont pay any taxes, even symbolic.. is mind boggling. People need to learn that you are a nation and you are all in it together.. does not matter if you only pay 10 dollars a year in taxes or 10 million.. American's need to not only show the solidarity but share the pain of taxes. I have paid taxes since I was 15.. not much at the start, because deductible, but I got a tax return that showed that I did pay to that and that, which was not included in the tax deductible. We live in a modern world.. it can all be done pretty much automatically.
And then there is tax rises ... like it or not, they WILL be needed. You cant cut the amount needed out of the budget to get anywhere near budget parity, because a huge portion is a structural problem.
Now if you tackle all this then maybe you can get things done and get back to a more sustainable budget. As of now, the US is a colossus standing on toothpicks and the rest of the world is propping up the toothpicks hoping that their sugar daddy in consumer spending can keep going.
I will take a look at your links. I dont think that I suggested that eleminating debt is going to make the economy prosper though.
If I withdrew $600,000 out of my bank account to pay my debt, then essentially I would be reducing the capital available for other businesses/people to borrow. But if I then used that money to pay back my creditors, I would essentially be providing $600,000 to lenders who would then replinish their stock of money to lend. So there would be no net positive or negative effect.
If the government withdrew money from our population (by taxation, particularly by taxation on people who are capital providers) then we would have less money available for borrowing and consumption, but if the gov then used that money to pay back it's debts, the stock of money available for borrowing and consumption would be replinished by the same amount that was withdrawn. So there is no net positive or negative effect.
In the grand scheme of things (macro-economically speaking), debt really doesn't matter.
My intended point is that the federal debt is not quite as big of an issue as certain political commentators are making it out to be, and that a plan can be devised which would eleminate the federal debt without harming our economy.
If you tax the people who would be inclined to take money and invest it in productive capital and, instead, give it to the government so it can pay down debt, how is it that there is no net positive of negative effect unless one assumes that government is equally efficient to private enterprise?
As your link pointed out, debt is a claim on future production. If the bank takes the money you pay it and lends it again, then the borrower, presumably a company or household, will have to take a portion of its revenue stream and use that to service the debt. If the bank instead uses that money to shore up its capital position or places it on deposit with the Fed, or the money goes to pay off a foreign creditor who then uses it to buy, say, Special Drawing Rights or gold certificates, then that means no loans, hence no money-multiplier effect in our fractional banking system.
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