With their vote this week to impose strict limits on future federal spending, House Republicans continued an argument not so much with Democrats as with demography. The real current they are seeking to reverse is not some ideological drive from President Obama to convert America into Sweden; it’s the inexorably rising cost of providing retirement security, especially health care, to an aging society.
The cut, cap, and balance bill that Republicans muscled through the House would authorize an increase in the federal debt ceiling only after Congress approved a constitutional amendment to balance the federal budget. The bill doesn’t specify the spending level at which Washington must balance the budget, but each of the major balanced-budget proposals that House Republicans have already introduced would eventually limit federal spending to an amount equal to 18 percent of the nation’s total economic output.
Federal spending hasn’t represented that small a share of the economy since 1966, when it stood at 17.8 percent. That’s an especially revealing comparison because 1966 was the year when Medicare went into effect—the first guarantee of health coverage for the nation’s seniors. The program didn’t even begin until July 1; Washington spent only about $100 million on it that first fiscal year. Medicaid, which provides care for both the poor and the elderly, was also just getting started; it cost the federal government only about $800 million in fiscal 1966.
Since then, those two programs, along with Social Security, have provided much of the upward pressure on spending. From 1948 through 1966, federal spending averaged just over 17 percent of the economy—about the level that House Republicans are hoping to restore. Since 1967, federal spending on average has grown to just below 21 percent of the economy.
The difference between the two eras is entirely explained by the growth in federal payments to individuals—preponderantly, entitlements for the elderly. In the first period, essentially before Medicare and Medicaid, Washington spent on average an amount equal to 4.2 percent of the economy each year on payments to individuals. Since 1967, the average annual cost of payments to individuals has more than doubled, to 10.5 percent of the economy. If you do the math, that means that as a share of the economy, Washington actually has spent slightly less on everything else—defense, national parks, education, environmental protection—over the past 40 years than it did in the previous 20.
Within the overall explosion in federal payments to individuals, the key driver has been health care—again, predominantly for the elderly. In 1965, federal health care spending equaled less than 1 percent of the economy. Today, the figure stands at 6.3 percent. That’s not because of Obama’s health care legislation, which doesn’t generate significant spending until 2014 and is projected to largely pay for itself by restraining Medicare’s growth; it’s because Medicare and Medicaid now cost nearly $800 billion annually.
Two factors above all are swelling those programs. One is the unbroken rise in per capita health care spending as medical technology advances. The other is the growing elderly population. When Medicare began in 1966, it served about 19 million seniors. Today, the program serves nearly 48 million. Its trustees project that by 2035 that number will approach 86 million.
Against that overwhelming demographic pressure, mandating that federal spending return to its 1966 level is like ordering the tide to reverse its course. Although many Republicans want to cap federal spending at 18 percent of the economy, the nonpartisan Congressional Budget Office projects that Social Security, Medicare, and Medicaid alone will consume about 15 percent of the nation’s total economic output by 2035. And under other scenarios that CBO has explored, even that figure might be optimistic.
That prospect points toward two large conclusions. One is that it’s unrealistic to limit federal spending to levels last seen when the elderly represented only about half as large a share of the population as they will in the decades ahead. Given the demographic demands, future federal spending will almost certainly require more than 21 percent of the economy—although likely less than the swollen 25 percent level reached after 2009’s stimulus program. A corollary is that sooner or later, the demands of providing for an aging society without gutting everything else that government does will require Washington to raise more revenue.
The second large conclusion bookends the first: It would be irresponsible to surrender to demography as fiscal destiny. Unless Washington controls entitlement spending, especially by slowing the overall rise in health care costs, these programs will bury all other public needs and impose unacceptable tax burdens on a working population shrinking in relative size; by 2035 there will be only half as many working-age Americans per senior as there were in 1966.
Too many Democrats resist the need to restrain entitlements, and even more Republicans refuse to admit the need for more revenue. Yet only by moving on both fronts—beginning in the debt-ceiling standoff still convulsing the capital—can the nation go gray without falling dangerously into the red.
This article first appeared at National Journal.
Ronald Brownstein, a two-time finalist for the Pulitzer Prize for his coverage of presidential campaigns, is National Journal Group’s Editorial Director, in charge of long-term editorial strategy. Prior to joining Atlantic Media, Brownstein was the National Affairs Columnist for the Los Angeles Times. He appears regularly on national television, including NBC, ABC, CBS, and MSNBC, and served as a political analyst for CNN from 1998 through 2004.
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I just wonder how much Obamacare really will impact our National Debt. We must do something about the Washington politicians in 2012. We so sorely lack real true leadership.
Put the golf clubs down Mr. President and get to work on reversing this train wreck you had the country on right now.
Paolo –
I hear what you’re saying and it’s a reasonable argument. While it’s hard to trust politicians to do anything in an honest and straightforward manner, my personal preference would be to divide federal spending into an operating and a capital budget. Just as very few prospective homeowners could buy a home for cash, taxpayers should not be expected to pay cash for assets from office buildings to fighter planes that are expected to last for 30 years or more. Taxes should fund the operating budget, including depreciation on capital assets and “normal” defense spending over an economic cycle. We could run deficits to cover the cost of wars and catastrophic events like Hurricane Katrina and we could run deficits during recessions. There are certain categories of spending, such as education that people could differ about with respect to whether it should be considered an operating expense or a capital investment. This creates opportunity for mischief, of course.
Since states and localities also often look to the federal government for financial help during difficult economic times, I think it’s important to maintain significant borrowing capacity to be able to respond to challenging and unusual circumstances. I also don’t want excessive debt to create a powerful incentive for policymakers to deliberately increase the inflation rate in order to reduce the real value previously incurred debt. An inflation rate in the 2% range is fine as investors can easily factor that into their expectations when they bid for Treasury bonds and notes. The sharp increase in inflation from 1974 to 1981 was a disaster for bond investors as they did not contemplate inflation close to what occurred during that time when they bought their bonds. Finally, I think the population in general should limit their expectations as to what they want from government to what taxpayers, including the broad middle class, can reasonably afford and we should try to develop a consensus among policymakers as to what constitutes a “fair share” tax burden as a percentage of income, especially in the upper portion of the income distribution. It can’t be always just more than whatever they’re paying now no matter how much that is.
Barry, I agree with most of what you say and share the belief that investments should only be done on worthwhile projects. I am not in favor of not-worthwhile spending just to increase the availability of treasuries. What I’m in favor of is setting the level of taxation slightly below the amount of money required for worthwhile projects so that as the economy grows there are enough treasuries to satisfy the need for them. Obviously, this is not a concern these days, but it was a concern as recently as 2000 when Greenspan, fearing that we would run out of treasuries, asked for lowering taxes to generate some deficit.
I do disagree with your last point. The current real interest rate (after inflation adjustments) of overall government debt is roughly zero (see the rate for 5 or 10 year TIPS). In real terms, it basically costs nothing for the government to hold this debt. If you also factor in the withholdings on nominal interest payments to taxable entities, the government is actually making a small profit. So that nominal 1.7% of GDP that you mention is not actually being spent or diverted from any other project. It’s simply being rolled back into the overall debt where inflation is chipping off about 1.7% of its value.
Paolo –
I don’t have any problem with federal debt for worthwhile capital projects as I said previously. I also don’t have a problem with borrowing, at least to some extent, to finance wars because protecting freedom and our legitimate national security interest benefits future generations as well as our own. Running deficits during recessions is also fine by me though I would like to see the operating budget balanced over an economic cycle. I’m not in favor of non-worthwhile current spending just to run up debt so the Federal Reserve has enough debt securities outstanding to manipulate the money markets. It or the Treasury can extend credit to banks that run into financial difficulty and it could act as a buyer of last resort or guarantee repayment for investment grade corporate debt during periods of financial stress such as the fall of 2008.
I agree that the banking system has generally served us well over the last 100 years or so though the previously discussed housing bust caused a lot of harm this time around. Virtually everyone was guilty of assuming that house prices would continue to appreciate indefinitely but nobody contemplated that they would decline significantly in every market at more or less the same time. Previously, prices might decline in some markets but not all markets. This was clearly a black swan event.
I think the country would be net better off if the 1.7% of GDP that we are now spending to pay interest in our accumulated debt were 100-125 basis points less than that amount with the resources freed up for numerous other worthwhile priorities in both the public and private sectors.
Barry – Open market operations by the feds is the primary tool used to regulate the money supply. And even that has proved to be inadequate in the last couple of years as the fed has had to resort to direct asset purchases to increase liquidity beyond what you can do with 0 interest rates. Changing the reserve requirement as you suggest is essentially useless these days since the only assets that are subject to this requirements (bank accounts) comprise only a small part of the liquid assets in circulation (does not include money markets, commercial paper, etc.). I don’t think it is a good idea to take away from the fed the main tool that it has (and every other western free market has) to effect monetary policy.
Countries with controlled economies like China obviously don’t need open market operations. The government there owns and controls all the banks and can control the money supply by simply creating more or less money via bank loans. I don’t think we want to emulate that model.
Sovereign funds are not terrible, but can be problematic because the government becomes responsible for investing and placing bets in real businesses and assets and that is interfering with the free market. I prefer a government that facilitates credit in a reasonable manner and let’s private enterprises do the investing. I also prefer that in normal times, wealth be controlled by the private sector and not by the government.
Small countries like Singapore or Hong Kong, don’t really have a monetary policy, they just peg their currency to the dollar, the euro, or some other basket of currencies. I don’t think we want to follow that example either.
It’s easy to follow the populist theme these days of bashing all the bankers and all the central bankers. But, the banking system that has been in place for the last century has been the corner stone of our prosperity in the 20th century.. I’m not against changing it to improve it, but we need to be very, very careful that we don’t make it worse.
the kaptcha is a cruel mistress
“This is a subjective statement unless your a communist. What is an equitable distribution, give me a number Peter, what percent of income should the bottom 10% make?’
I won’t fall into your false trap of a specific “number”, it’s arrived at from policy. But for some research and insight you can read this:
http://www.economics.neu.edu/papers/documents/03-006.pdf
As well, what do you think was the proper income distribution in Communism where party leaders and cronies were at the top and everyone else was at the bottom? Extremes from any system are not a solution.
Well Nate I tried to post a reply but it disappeared into the abyss of THCB cyber black hole. An attempt to re-post said I’d already said that. Now THCB is not accepting anything.
“Argentina has so far failed to reach an equitable distribution of income (the wealthiest 10% of the population receives 31 times more income than the poorest 10%).”
This is a subjective statement unless your a communist. What is an equitable distribution, give me a number Peter, what percent of income should the bottom 10% make?
“Maybe you could give us a list of who you would pay and who you wouldn’t. ”
Sure Ptert send me a list of the 80 million checks they cut and I’ll tell you which ones would be released and which won’t.
This is on RCM discussing this. Sounds pretty familiar, rich bankers using favord laws for the benefit of rich bankers at the cost of the public. Washington bails out the mortgage giants so they can forclose on the homeowners and make a fortune like Soros with OneWest/IndyMac. Americans did not benefit at all with the Soros deal, he makes more money to take people’s houses then if they worked with them. They want us to believe the central bank is in our best interest, I don’t think it is
Of course it’s arguable that stability wasn’t the sole reason the Fed came into existence as is often assumed. As writer G. Edward Griffin observed in The Creature from Jekyll Island, its unannounced purpose was initially to drive out competition that was increasingly crimping the profits of money-center banks.
According to Griffin, by 1910 the number of banks in the US was increasing at a very high rate, and the majority “were springing up in the South and West, causing the New York banks to suffer a steady decline of market share.” In 1913, when the Federal Reserve Act was passed, non-national banks accounted for 71% of all banks, and they could claim 57% of total deposits. From 1900 to 1910 70% of the funding of corporations was generated internally, which meant that financial innovation inside and outside traditional money center banks threatened to make them irrelevant.
The Federal Reserve Act of 1913 would serve to halt the market share decline of the traditional banks, because those banks, according to Secrets of the Temple author William Greider, would have “dominance over the new central bank,” and in the bargain they would “enjoy new insulation against instability and their own decline.” To put it more simply, as large banks all, they would have access to cash during shortfalls thanks to the creation of an entity that would restore and perpetuate their dominance.
just becuase central banks did something good in 1913 doesn’t mean they are capable of doing it in 2020. Can’t say I am very impressed with the performance of the central banks and IMF last couple decades, maybe they have passed their usefullness?
Maybe a modern monetary system is one without central banks bungeling from disaster to disaster?
“Which of these is not better off today?”
Better off from what Nate, total collapse?
Maybe you should ask American voters if they would think the results of default (real or imagined) would be worth it. As for Argentina, maybe a little research on the whole situation might put the “default doesn’t matter” view in perspective.
http://en.wikipedia.org/wiki/Argentine_economic_crisis_%281999%E2%80%932002%29#Recovery
“While unemployment has been considerably reduced (it has been hovering around 8.5% since 2006), Argentina has so far failed to reach an equitable distribution of income (the wealthiest 10% of the population receives 31 times more income than the poorest 10%). This disparity, nevertheless, compares quite favorably to levels seen in most of Latin America.”
And I guess The “disparity levels” also compare quite favorably with the U.S. as well. At least Wall Street would accept this, I doubt the rest of the voting public would tolerate it for too long and would realize that the carrot is just not achievable.
“Not raising the debt limit doesn’t mean we can’t pay our debt it just means we will have to cut other spending.”
Maybe you could give us a list of who you would pay and who you wouldn’t. Right now there are 70,000 workers laid off because the FAA budget has been paralyzed. Is this your recipe for recovery?
Paolo –
I, for one, would love to have the chance to find out how debt markets and the economy more generally would function if government debt were rarely more than, say 10% of GDP. For example, instead of the $3.6 trillion of U.S. debt now held by federal trust funds including Social Security and Medicare, which will eventually have to be converted to debt held by public investors to meet their obligations, I think it would be better if the money were invested in real assets. Other countries including Norway, Singapore and China have sovereign wealth funds. We would just need to limit their ownership of any one private company to preclude undue influence over its affairs.
The Federal Reserve has other tools at its disposal to regulate the money supply including changing bank reserve requirements. It could also have a large standing line of credit or authority to issue government bonds as needed to deal with financial crises to be repaid later out of profits and fees paid by member banks.
In the worst case, surplus government funds could be held in non-interest earning demand deposits at banks. More rigorous oversight of banks would be required as would better functioning insurance markets to protect bank deposits. Alternatively, the FDIC could have far higher insurance limits but it would need to ensure that the premium it charges banks is sufficient to meet its obligations. It could also have a backup federal line of credit to protect depositors which, again, would be repaid in the form of higher premiums on bank deposits later.
If, in the end, all this meant that borrowers paid somewhat higher interest rates than under the current system and homeowners had to make at least a 20% down payment instead of 3% or even nothing to buy a house, it wouldn’t be such a bad thing, in my opinion. At the end of the day, it’s perfectly appropriate to finance sound capital projects with long term borrowing but current consumption and operating expenses should be paid for with current income or short term credit card like borrowing to allow for minor timing differences between incoming cash flow and outgoing expenses.
“Personally, I think mortgage loans should require a 20% down payment like they did once upon a time in the 1970’s and before. If it means the home ownership rate is 10-20 points lower that it’s been in recent years, so be it. People can rent instead.”
Barry, I’d love that, I’d get a lot more business. I’ve rented and owned and have come to realize that home ownership should be counted on as more lifestyle than investment. If you add maintenance/improvement/mortgage costs the only way you can justify owning is a substantially rising value. If you do it with sweat equity then you have to count on time lost from other stuff in your life. The hardest thing now is assessing present/future value, unfortunately too many people rely on RE agents and their appraiser shills.
Here’s a good illustration of when the housing market larceny started. Coincidence?
http://www.jparsons.net/housingbubble/
To illustrate where the banks are now a local bank manager described that he can’t even loan $2000 with a $10,000 CD as collateral without a full credit investigation for a long term and known customer.
“What would be wrong with no treasuries? ”
You wouldn’t have a modern monetary system. You’d be going back to the 1890s. Read Milton Friedman to see how central banks should use treasuries to set monetary policy. Conservatives used to like him before the crazies arrived.
Yes Barry, the nominal amount of outstanding treasuries would remain constant, but the ratio of debt to GDP would continue to decrease until the amount of debt becomes insignificant compared to the size of the economy. For example, our debt during WW2 was in the billions of dollars and that was HUGE compared to the GDP of the time. However, if we would have balanced the budget since then, we would not have enough treasuries today for a functioning debt market. A few billion dollars of debt would not be enough to satisfy the demand for trillions of dollars in government securities. Moderation is key here. Large debts are bad, but zero debts (at a macroeconomic level) are bad as well. In my opinion, a debt of about 40% of GDP has traditionally served us well.
Welcome to TFB, THCB’s younger sister.
What would be wrong with no treasuries? Obviosuly the brokers making billions trading them would not be to happy but most of us won’t lose sleep over that. If private money wasn’t tied up in treasuries then maybe we could get the government out of lending. I rather student loans, mortgages, et all be done privately then with the distorting government lending.
” the same party which famously declared last decade that deficits don’t matter is now insisting on a zero deficit balanced budget amendment. From one extreme to the other.”
Learning from our mistakes is a sign of inteligence isn’t it? While the party name may be the same this is not the same partiers. We had a bad case of RINOitis there for a couple decades, its about kicked now but the new party ain’t going to look like the last.
Nate, I agree that markets can be wrong, and sometimes wildly wrong. My only point is that your prediction of future interest rates is wildly off from what the market is expecting. If you had any confidence on your own prediction you would be buying interest rate swaps and making a a fortune instead of posting your prediction on the Internet.
Yes I did. GDP growth has gone up from -5.1 in 2009 ( revised downward today) to +1.3 for Q2 2011. Tax revenues have gone up since then, although it’s been partially offset by temporary tax cuts like the current SS payroll tax holiday. Tax revenue is expected to go up from 15% of GDP today to about 18% in 2014. If you need more details look at the CBO or the Ryan plan projections.
If there is a US default and/or a double dip then obviously revenue will dip again and the deficit will grow. Unfortunately a lot of people are rooting for this outcome.
Paolo –
If we balanced our budget over an economic cycle on a go forward basis, the existing Treasury debt would remain outstanding as new securities are sold to pay off those that mature. Moreover, if our federal government could be trusted to maintain an honest accounting system, which it probably couldn’t be, we could still borrow to finance legitimate long term capital projects like roads, airport expansions, ports, schools, fighter planes and ships, etc. while we balanced our operating budget. For this to work, economically unsound pork barrel projects would have to be avoided or at least minimized. Also, if we built something that is expected to last, say, 30 years, we would have to depreciate 1/30th of the cost each year and count that as an operating expense to be financed with taxes (over a cycle) even though depreciation is a non-cash charge.
The numerous economists are probably right. The federal government has never run a surplus over an entire economic cycle and probably never will. If it did, then there would not be a treasuries market since the debt/GDP ratio would eventually shrink to zero. In fact, historically the deficit has averaged 2% over the last hundred years and the economy did quite well when this was the case. The last time we had a surplus (2000), the markets were scared that we were going to run out of treasuries (the CBO projected that by 2006 the debt would be zero). The GOP wisely raised the deficit at first, but then it went overboard. Interestingly, the same party which famously declared last decade that deficits don’t matter is now insisting on a zero deficit balanced budget amendment. From one extreme to the other.
That’s not to say that surpluses are always bad. They are necessary during periods of high growth and high inflation to cool down the economy and build reserves for times of crisis. But to insist on balancing the budget at this moment is folly. It’s like curing a headache by blowing your brains out.
Hey Paolo:
” This will be thanks to the expiration of the Bush tax cuts, increase in tax revenue as we get further away from the recession, and decrease in spending as fewer people will be eligible for government assistance under current law.”
Increase in tax revenue as we get further away from the recession?
I may not understand the math but did you look at today’s growth figures for the economy?
Exactly how quickly are we getting away from the recession?
There i sat least a double digit chance now of a double dip recession. How does that figure into your math?
Economic experts, including those at the Federal Reserve, will tell you that the long term potential sustainable real (excluding inflation) growth rate of the U.S. economy is about 3% per year. That’s based on 1% population growth plus 2% productivity growth. While the current and very recent growth rate is lower than that, it’s also been much higher in the past, especially during recoveries from recessions. I think the current recovery is being held back by the extremely depressed construction industry, especially the residential portion of it. The government, I think, has the housing market tied up in knots with all these attempts to modify mortgages and keep people in homes they can’t afford to pay for that the market isn’t being allowed to clear as quickly as it otherwise would.
When it comes to the total federal debt, what counts is our ability to service it, not the gross amount of the debt. The cost to service is determined by the amount of the debt in public hands and the average interest rate owed on the debt. Our ability to service is relates to the cost to service as a percentage of GDP.
A normalized interest rate on short term securities like Treasury bills generally compensates investors for perceived near term inflation but provides no real (above inflation rate) return. Longer term bonds maturing in 10 years or more can be expected to yield two to three percentage points above the expected inflation rate during the period the bonds are outstanding.
Numerous economists think we can run a deficit equal to as much as 3% of GDP as long as the economy grows in real terms at that rate and inflation remains moderate. Personally, I would prefer to see us run surpluses in strong economic years, deficits in recession years and balance our budget in aggregate over an economic cycle. As debt outstanding as a percentage of GDP declines, we will have the capacity to deal with external shocks and other unexpected events like wars when they occur.
I find it troubling that reducing our deficit from its current unsustainable level to 3% of GDP is all we need to do. In my opinion, it’s not only not ambitious enough, it’s dangerous to think that we can borrow 3% of GDP year after year on top of what we are willing to raise in taxes as though it’s an additional revenue source that we can spend to curry favor with interest groups to, in effect, buy their votes. States are required to balance their budgets. The federal government should as well, at least over an economic cycle. It does need the flexibility to run deficits to deal with extraordinary circumstances.
its not math its theory, not only that, its theory that has never worked;
Unsurprisingly, it is not a practice that pans out well in reality…
“‘Many countries have tried this and they’ve all failed,’ said Mark Zandi, chief economist at Moody’s Economy.com.
“It’s true that inflation could reduce a small portion of U.S. debt. The International Monetary Fund (IMF) estimates that in advanced economies less than a quarter of the anticipated growth in the debt-to-GDP ratio would be reduced by inflation.
“But the mother lode of the country’s looming debt burden would remain and the negative effects of inflation could create a whole new set of problems.”
The new problems that crop up include:
* Inflation-indexed government spending. Many government obligations, like Social Security, are tied to inflation so those costs won’t go down.
* Future debt issuance. Inflation would make it more costly for the US to issue debt in the future because buyers will demand higher interest rates.
* Unintended consequences. Additional costs to society will develop such as increased economic stress for the poor. The poor tend to have salaries that do not increase with inflation. They also tend to require government aid that needs to match the rate of inflation.
Read more: Why Inflation Won’t Help to Reduce US Debt http://dailyreckoning.com/why-inflation-wont-help-to-reduce-us-debt/#ixzz1TXJGrh7s
Its an academic solution, like healthcare reform, it works great on paper or in a vacum but try it in real life and bad “unexpected” things happen.
fun little site if you want to play no one thinks
http://www.treasurydirect.gov/RI/OFAuctions
ya thats what they told me about real estate in 2007. No one thought property prices would stop growing, boy I wish they had only stopped growing instead of losing 2/3rds of their value.
I own some iridium stock as well I was told the same thing about. Which could also be said about countless stocks circa 1999.
Paolo 2006, The 30-year treasury is at 4.5%, so pretty much nobody in the world believes that the 5 year bond will be 4% in 5 years.
Security
Term Auction
Date Issue
Date Maturity
Date Interest
Rate % Yield
% Price
Per
$100 CUSIP
30-YEAR 02-09-2006 02-15-2006 02-15-2036 4.500 4.530 99.510492 912810FT0
2006 no one thought we would be where we are today, how did that turn out?
“Nate, this is not the Dominican Republic. This is the United States of America. Do you not see a difference?”
Is this an argument, questions or what?
We have 4 words in our name they have 2? Their’s rolls off the tongue a little better, nice exotic sound to it? They have better climate?
instead of playing what ever game your playing how about you point out the difference Margalit and argue why it is material then asking rehetorical questions? Well of course its becuase you don’t know what the difference is and why it matters.
Constitution says a lot of things, we think, then perspective is changed. If we pay our debts but do so a day late the debt is still paid. What if the debtor agrees to take 90 cents on the dollar and we pay it, then our debt is paid.
You also aren’t grasping that the August 2 deadline is a bogus date who’s only signifance is allowing Obama to have his extravagent birthday bash that weekend. Outside of Obama’s birthday it has no meaning.
Not raising the debt limit doesn’t mean we can’t pay our debt it just means we will have to cut other spending.
You still don’t seem to get the math. Higher than 2% inflation will actually make it easier, not harder, to support a 3-4% deficit indefinitely.
The 30-year treasury is at 4.12%, so pretty much nobody in the world believes that the 5-year bond will be at 4% in 5 years (it’s at 1.36% today). If you think otherwise, you should quit the insurance business and become a bond trader. You’d make a lot more money and become the new Bill Gross.
and about that 2% inflation;
http://usawatchdog.com/inflation-2011-is-here/
The Shadowstats.com report last Friday said, “There are numskulls in the financial media — toadies to the Federal Reserve — who would like to think that energy and food inflation do not count. Simply put, the monthly December inflation releases for the CPI-U (annualized 6.2% inflation), CPI-W (annualized 7.8% inflation) and PPI (14.0% annualized inflation) were disasters . . .” The credit or the blame for the big spike in inflation is the direct fault of the Fed. “The sharp increases in December energy and food prices were not due to normal price volatility in those areas, instead, they were created directly by Federal Reserve Chairman Bernanke’s ongoing push to debase the U.S. dollar — to destroy the purchasing value of the U.S. currency,” said Williams.
As long as you don’t eat, drive, travel, or use electricity then 2% inflation is achievable. If you wish to eat, drive, or travel and use electricity we have a problem.
Jim Willie at GoldenJackass.com says you can expect inflation to be reported as growth by the government. This will make it look like the economy is recovering when, in fact, it is sinking. In his latest report, Willie said, “Not just emerging economies like China and Brazil are contending with price inflation. The US does too, but it calls it growth, since its economic trackers are much more accomplished decepticons. When job losses mount in the second half of 2011, the lies will be unmasked. The US Fed is the greatest destroyer of working capital in the history of the world. Their balance sheet is negative $1 trillion and growing worse, their highly appropriate report card.”
“With 2% inflation and 2% GDP growth (both conservative assumptions),”
http://www.reuters.com/article/2011/07/29/us-usa-economy-idUSTRE7662I420110729
Output increased at a 1.3 percent annual pace in the second quarter as consumer spending barely rose, the Commerce Department said on Friday. In the first three months of the year, the economy advanced just 0.4 percent,
Simple math isn’t the problem, its the fact we don’t have 2% GDP growth and there is no promise we will have it in the future. Average historical numbers are great, when our debt is back to average historical numbers let me know.
let me know if you need any help with that.
Nate, this is not the Dominican Republic. This is the United States of America. Do you not see a difference?
We pay our debts. The Constitution is not allowing you, or anybody else, to question this simple fact.
There will be no collapse, ever.
With 2% inflation and 2% GDP growth (both conservative assumptions), you can run a 4% deficit forever. The debt/GDP ratio will stabilize at 100%. With 3% inflation and 3% GDP growth (average historical numbers) you can run a 3% deficit forever and the debt/GDP ratio will decrease and stabilize at around 50%.
If don’t believe in simple math, then I can’t help you.
Which of these is not better off today?
Venezuela, July 1998 – defaulted on $270 million worth of domestic currency bonds
Russia, August 1998 – a massive $72,709,000,000 default that rattled the entire global economy. The trouble started in August of ’98 when the country missed payments on local Treasury obligations, and later extended to include foreign currency obligations and MINFIN III foreign currency bonds. Russia’s debts were eventually restructured in later years.
Ukraine, September 1998 – $1.27 billion dollar default
Pakistan, July 1999 – defaulted in July of 1999 but quickly resolved the situation
Ecuador, August 1999 – missed a payment, leading an an eventual restructuring of over 90% of their bonds. Default amount was around $6.6 billion
Ukraine, January 2000 – defaulted again (1.06 billion) in January of 2000. Defaulted on both DM-denominated Eurobonds and USD-denominated bonds. Ended up rectifying the situation by exchanging their current obligations for bonds with a longer term and lower coupon.
Peru, September 2000 – defaulted on $4.87 billion of debt but rectified the situation within 30 days
Argentina, November 2001 – a massive $82.26 billion dollar default that once again rattled the global economy and worldwide markets. Missed a payment in early 2002 – debt obligations were restructured and the country continued to receive funds from the IMF to aid in their recovery
Moldova, June 2002 – defaulted on $145 million worth of debt, only to rectify the situation a short while later, once to default once again
Uruguay, May 2003 – Argentina’s troubles spread to Uruguay, and the government of Uruguay defaulted on $5.7 billion dollars worth of debt in May of 2003. The country eventually completed a restructuring of their debt obligations with their bondholders
Dominican Republic, April 2005 – Defaulted on $1.62 billion dollars worth of debt in April of 2005. Eventually completed a debt restructuring that ended up extending the maturity of their debt obligations by five years
Belize, December 2006 – Defaulted on $242 million dollars worth of debt in December of 2006
Ecuador, December 2008 – Defaulted on $3.2 billion dollars worth of debt obligations after calling several of their previous debt offerings “illegal and illegitimate”. An unusual situation in that Ecuador is thought to have the resources NOT to default, but chose instead to default for “moral” reasons.
*note* there were other sovereign debt defaults that occurred during this period, including Ivory Coast, Grenada and Seychelles, but
How does a default today hurt future generations? Your ignoring a lot of history to make this claim.
Ask a resident today about the OC default and they probably won’t know what your talking about.
how is Brazil suffering fromt their default of 1999?
Argentina?
I think this is one of the cases where you really don’t know what your talking about. If you look at the performance post default it could easily be argued we would be stupid not to default. I would have no problem telling China, hey sorry all that debt you owe is worthless, consider it trade for all the technology you stole. What are they going to do, not lend to us again, good, it never should have happened in the first place.
You can’t cite any historical references to support your claims of poverty and sorrow that would come from default. You have no idea what your talking about making these claims.
we can borrow at 2.79% now, there is no promise, in fact history says otherwise that we can borrow at that rate 5 years from now. Increase that to 4% and see what it does to our budget.
You can’t run a 3-4% budget deficit forever, sooner or later it will collapse, that is the flaw in the current thinking.
Nate, we can disagree on whether continuing to borrow or not is good or bad, but a default today will only hurt this and future generations, because a lot of additional wealth will be vanishing into thin air, you will end up with a poorer nation and poorer people, which will no doubt elect a government to increase spending in the next elections, which will require more borrowing (at higher rates now), and basically throw us all in a spiraling cycle to the bottom.
So if you want to see massive Democrat majorities in Congress and the White House for the foreseeable (miserable) future, then default is the way to go.
There are proper venues do deal with fiscal policy. This is not it.
“and make no mistake everyone will suffer if he fails.”
I would disagree with this, everyone today would suffer. Future generations would be far better ahead of Obama failed miserably and the government defaulted on the debt and was forced to stop borrowing. There has been a huge transgeneration theft of wealth, anything to stop this would be in the best interest of the future.
The debt ceiling crisis is a political crisis, not a fiscal crisis. If you believe in what free markets tell you (I do), you would know that a country that can borrow money at 2.79% over 10 years is not in a fiscal crisis. Bond traders are a lot smarter than you or me.
If nothing is done at all, the deficit is projected to go down to 3-4% in the next few years, which is not great, but is sustainable. This will be thanks to the expiration of the Bush tax cuts, increase in tax revenue as we get further away from the recession, and decrease in spending as fewer people will be eligible for government assistance under current law.
Of course, it would be much better if we replaced the Bush tax cut expiration with tax reform that broadened the base instead of raising rates. This is actually pretty easy to do if there is a political will. Eliminating just a small part of the tax exclusion for employer-based health insurance or the mortgage interest deduction can raise trillions in 10 years. These and other similar programs are essentially spending through the tax code and are not essential.
It would also be great if we could reform social security to make it actuarially viable after 2040 (pretty easy to do) and reform health care to reduce its rate of growth (not so easy to do). But nobody is going to perish next week if we fail to fix this right now.
If we do go into default, it will be like the man who committed suicide because he was afraid of dying.