Obama needs a math lesson
Obama said today - "we can only spend a dollar if you save a dollar elsewhere".
How can he say that with a straight face when the budget he proposed plans to run an approximate $1 trillion deficit every year for the next 10 years?
Today total US debt is $11.3 trillion and rising rapidly. The Administration projects that to rise another $1.85 trillion in 2009 (13% of GDP) and another $1.4 trillion in 2010. The CBO projects over $9 trillion in additional debt from 2010 through 2019. Just back in January the 2009 deficit was estimated at "only" $1.2 trillion. Things have gone downhill fast.
The CBO assumes a rather robust recovery in 2010, with growth of about 3% and then up to 4.5% in 2011. But they also project that unemployment will continue to rise. It will be a strange recovery with the economy up 4% and unemployment isn't falling.
This year the Administration's plan is to borrow 50% of every dollar spent. The CBO projects that nominal GDP will grow about 50% over the next 10 years. But revenues are projected to double, which suggests massive tax increases in relation to GDP. The deficit in 2010 is almost 10% of GDP. Ten years from now the deficit is projected to be $1.2 trillion. And that is if government costs do not go up and inflation only averages 1.1% for the next few years.
Deficits are not necessarily a bad thing if kept in check and restraint is shown. But everyone cannot run deficits at the same time. Sooner or later the bond markets will call a halt to $1 trillion deficits. The deficits will not be funded at anywhere close to an interest rate that will not break the budget. (Pretty soon we could be spending 20-25% of our revenues on interest expense). We saw that happened with Britain's S&P rating and Bill Gross thinks the same thing will happen in the US.
With all the bad economic news out there, rates should be going down, not up. The bond market is telling us the deficit simply can't be financed down the road.
The game doesn't end if there are reasonable deficits. It ends with deficits that cannot be financed except by monetization. And that will tank the dollar, except against all the other countries that are monetizing their debt. When you run deficits that are 4-6-8% or more of GDP, at some point things simply back up.
If you can stomach it, all the data mentioned is avaialble on www.cbo.gov
There are certainly some people who agree with you but Martin Wolf, for one, does not. His column in the FT last Wednesday pointed out that three month's ago the inflation adjusted ( "real")rate on T notes was zero. Thatwaa the bad indicator for the economy not the current real rate of two hundred basis points.
That real rate of zero which Obama inherited reflected the bond market's fear that we were heading towards such a disasterous deflation that the commercial bond market was unsafe.No one wanted to tie money up in corporations which were heading towards a disaster.
The real rate of 2% which prevails now reflects the bond market's belief that Obama was able to count well enough to convince the market that we've avoided deflaion and therefore it's reasonable to buy corporates. Which automatically means the Treasuries return to normal yields.
You could look this up for yourself by going to the FT and reading Wolf's analysis
Of course Krugman says the same thing but since you're a conservative you won't believe them.
So I recommend Wolf.
June 9, 2009 11:06 PM | Reply | Permalink
Only time will tell. I am betting on Taylor and Ferguson, who's articles in the FT took the opposite view. But we will know soon enough as the government is soon going to be issuing very large amounts of T-bonds over the course of this year.
June 10, 2009 6:05 AM | Reply | Permalink
As you say, time will tell.
June 10, 2009 7:57 AM | Reply | Permalink
Sure would be nice if the Bush administration, with the eager help of Congress, had not run up such debts, huh?
June 10, 2009 9:52 AM | Reply | Permalink
The Bush deficits are nothing compared to what Team Obama are putting in place. Bush never saw the deficit as a % of GDP get to double digits. And the total debt as a % of GDP also never got this high.
June 10, 2009 11:15 PM | Reply | Permalink
Write your Republican Party MCB, they need a math lesson more than Obama because the GOP even wants to extend tax cuts for the wealthiest Americans, which helped add to the 53% of the projected deficit caused by Bush policies.
June 10, 2009 11:28 AM | Reply | Permalink
Well, if all you can do is change the subject, that's all you can do.
But last time I checked the current trillion dollar deficits for the next 10 years are being driven by the current administration's proposed budget and the current Democrat controlled Congress.
Your link didn't work so I'm not sure how to respond to your claim about the tax cuts "which helped add to the 53% of the projected deficit caused by Bush policies". That statement doesn't make sense to me. And I don't see how it's relevant, if it's supposed to mean what I think you're trying to say. I'm curious to hear your response (just like I'm still waiting to hear about tax havens, etc.)
June 10, 2009 11:21 PM | Reply | Permalink