Tag Archives: national debt

Stockman’s ‘Four Deformations of the Apocalypse’

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Four Deformations of the Apocalypse

By David Stockman

July 31 (NYT) — If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

Yet another ‘expert’ with fear mongering with ‘the US is the next Greece’ nonsense. So much for whatever positives may be left of his legacy.

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

At least they are practical enough to add to aggregate demand when needed.
Does anyone think there is an excess of demand that calls for a tax hike?
Any call for a tax hike on ‘fairness’ should be ‘paid for’ with at least an offsetting tax cut somewhere.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one. The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.

That’s been adding to our real terms of trade and standard of living on an epic scale, and, ironically, the rest of the world is fighting to continue it while we are pressing to end it. Go figure!

It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.

He was right. It continuously self corrects to reflect rest of world savings desires of $US financial assets.

It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolve Friedman’s $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.

Yes, to our advantage!

In fact, since chronic current-account deficits result from a nation spending more than it earns, stringent domestic belt-tightening is the only cure.

Leave it to Dave to promote a cure for prosperity.

When the dollar was tied to fixed exchange rates, politicians were willing to administer the needed castor oil, because the alternative was to make up for the trade shortfall by paying out reserves, and this would cause immediate economic pain — from high interest rates, for example. But now there is no discipline, only global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve.

It’s not from the Fed, Dave, it’s from the Treasury deficit spending and private deficit spending.

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

Public sector deficits = non govt savings of those financial assets. And the unemployment rate and inflation rate are telling us federal deficits are too small to provide the savings demanded by the rest of us.

In 1981, traditional Republicans supported tax cuts, matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration’s hastily prepared fiscal blueprint, however, was no match for the primordial forces — the welfare state and the warfare state — that drive the federal spending machine. Soon, the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending exempted from the knife most of the domestic budget — entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans’ fiscal religion.

And over the next 10 years inflation came down from over 12% to 3%, even with all the deficit spending because savings desires were even higher, and continue to grow geometrically due to tax advantaged pension contributions, etc.

Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation,

Volcker did not crush inflation. If anything, his high rates added to business costs and unearned income long after inflation turned down due to positive supply shocks in the energy markets, helped by the dereg of natural gas in 1978 that did the lion’s share of cutting the demand for crude for electricity generation.

enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts. By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s. Then, after rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures, George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy.

Not my first choice for Federal spending, but certainly did the trick of turning the economy in 2003.

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

The real problem with the financial sector is that it preys on the real economy with both a massive brain drain and a drain of other real resources as well.

But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

They didn’t get free money to cover their bad debts. All losses were deducted from shareholder value. Some banks lost all shareholder funds and were liquidated or sold (with the FDIC realizing losses after the shareholders were wiped out)
Functionally, tarp was regulatory forbearance, not a federal expenditure.

The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12 percent, to 68 million from 77 million. The only reason we have not experienced a severe reduction in nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.

Not true. The trade deficit is an enormous benefit. For a given size govt, it allows for lower taxes/higher deficits so Americans can have enough spending power to buy both all we can produce at full employment plus whatever the rest of the world wants to sell us. In 1999/2000, unemployment fell below 3.8%, even as the trade deficit soared to $380 billion.

It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.

Agreed!!! However this has nothing to do with the rest of what he’s been droning on about. In fact, higher deficits are usually result in stronger economies which are associated with lower income inequality.

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.

No, we need a full payroll tax holiday, $500 per capita revenue sharing for the states, and an $8 transition job for anyone willing and able to work.

David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.

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The Political Genius of Supply-Side Economics

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Where am I wrong, if at all?

I agree with the political analysis.

I know Bruce Bartlett and he’ll be the first to tell you he does NOT understand monetary operations. Even simple statements like ‘China keeps its dollars in its reserve account at the Fed’ seem to cause him to glass over. He can only repeat headline rhetoric and has no interest in drilling down through it.

Krugman’s column a week ago, however, may have been a major breakthrough. He conceded the issue of long term deficits was inflation and not solvency. And while his maths and graphs disqualified him from participating in the inflation debate, it so far seems to have shifted the deficit dove position to much firmer ground.

A Congressman might vote to cut Social Security due to fear of Federal insolvency, with all ‘noted’ economists arguing only how far down the road it may be, along with dependence on foreign creditors.

However, I doubt most Congressman would vote to cut Social Security based on some economists predicting possible inflation in 20 years.

So even though Krugman’s reasoning was simply ‘they can always print the money’ followed by highly suspect graphs and statements about how someday that could cause hyper inflation, hopefully it did shift the discussion from solvency to inflation, where it belongs.

So now the hawk/dove question is, as it should be, whether long term deficits imply long term run away inflation. And while the correct answer is: depends on the offsetting demand leakages/unspent income like pension contributions and other nominal savings desires. Just the fact that the debate shifts away from solvency should be enough for a change of global political attitude.

And, if so, this opens the door to a new era of prosperity as yet unimagined.


The political genius of supply-side economics

By Martin Wolf

July 25 (FT) – The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world’s most important economy, it also matters greatly for the world.

My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done.

Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives – for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

Today’s extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.5 per cent of GDP. In any case, the stimulus was certainly too small, not too large.

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter, as former vice-president Richard Cheney isreported to have told former treasury secretary Paul O’Neill. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not. The faith has outlived its economic (though not its political) rationale.

So, when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military.

Indeed, this is precisely what John Kyl (Arizona), a senior Republican senator,has just said:

“[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans”

What conclusions should outsiders draw about the likely future of US fiscal policy?

First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).

Second, the White House will probably veto these cuts, making itself even more politically unpopular.

Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.

Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

Where am I wrong, if at all?

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NYFed

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Good find!

I recommended this years ago when Karim first introduced me to his Treasury contacts.
It moved forward and was passed around for discussion, but the dealers quashed it.

An unlimited lending program could replace much of the generic libor swap market.

Wish they would revisit it.

Why Is the U.S. Treasury Contemplating Becoming a Lender of Last Resort for Treasury Securities?

“A backstop lending facility turns this understanding on its head: the Treasury would be issuing securities not because it needs cash, but because market participants need securities.”

They don’t notice a difference between gold standard and “modern money”, actually they draw a parallel:

“… the markets for borrowing and lending Treasury securities in the 21st century are broadly analogous to the 19th century market for borrowing and lending money. Dealers and other market participants today have short-term liabilities denominated in Treasury notes; 19th century banks had deposit liabilities. Additionally, there is limited elasticity in the supply of individual Treasury securities today, just as there was limited elasticity in the supply of base money in the 19th century. A backstop securities lending facility would enhance the elasticity of supply of Treasury securities in the same way that the Federal Reserve Banks enhanced the elasticity of currency a century ago. It would mitigate chronic settlement fails, just as the Federal Reserve System mitigated suspensions of convertibility of bank deposits.”

They don’t discuss interest on reserves (and they should, these being functionally equivalent to Tsy securities).

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Feds’ budget tricks hide trillions in debt

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Feds’ Budget Tricks Hide Trillions in Debt

-Scott Burns
Every year, tens or even hundreds of billions of dollars are quietly added to the national debt — on top of the deficits that we hear about. What’s going on here?

Burns doesn’t get it.

When it comes to financial magic, the government of the United States takes the prize. Sleights of hand and clever distractions by purveyors of line-of-credit mortgages, living-benefit variable annuities and equity-indexed life insurance are clumsy parlor tricks compared with the Big Magic of American politicians.Consider the proud trumpeting that came from Washington at the close of fiscal 2007. The deficit for the unified budget was, politicians crowed, down to a mere $162.8 billion.

In fact, our government is overspending at a far greater rate. The total federal debt actually increased by $497.1 billion over the same period.

But politicians of both parties use happy numbers to distract us. Democrats routinely criticize the Republican administration for crippling deficits, but they politely use the least-damaging figure, the $162.8 billion. Why? Because references to more-realistic accounting would reveal vastly greater numbers and implicate both parties.

No, because they are right and Burns is wrong.

You can understand how this is done by taking a close look at a single statement on federal finance from the president’s Council of Economic Advisers. The September statement shows that the “on-budget” numbers produced a deficit of $344.3 billion in fiscal 2007. The “off-budget”> numbers had a surplus of $181.5 billion. (The off-budget figures are dominated by Social Security, Medicare and other programs with trust funds.)

Correct. Net government spending in the non government sectors is what ‘counts’. Intergovernment transfers of anything are of no economic consequence to the rest of us. They have no current year impact on aggregate demand.

Combine those two figures and you get the unified budget, that $162.8 billion. In the past eight years we’ve had two years of reported surpluses and six years of reported deficits. Altogether, the total reported deficit has run $1.3 trillion.But if you examine another figure, the gross federal debt, you’ll see something strange. First, the debt has increased in each of the past eight years, even in the two years when surpluses were reported. Second, the gross federal debt, which includes the obligations held by the Social Security and Medicare trust funds, has increased much faster than the deficits — about $3.3 trillion over the same eight years.

They are correct, as above, by not including transfers of securities from one government agency to another.

That’s $2 trillion more than the reported $1.3 trillion in deficits over the period. Can you spell “Enron”?

Pass on the comebacks and go on to the text.

In other words, while our reported deficits averaged $164 billion over the past eight years, government debt increased an average of $418 billion a year. That’s a lot more than twice as much. How could this happen?

How can a responsible new sight publish this nonsense???

Easy. The Treasury Department simply credits the Social Security, Medicare and other trust funds with interest payments in the form of new Treasury obligations. No cash is actually paid.

Why should it be???

The trust funds magically increase in value with a bookkeeping entry.

That’s all the $ is in any case – a bookkeeping entry. Get over it!

It represents money the government owes itself.

Right, which has no current year effect on the real economy. It changes buys or sells of real goods and services.

So what happens if we take out the funny money?

What does ‘take out’ mean? Simply transferring from one account at the the fed to another. More entries. Can’t be anything more. That’s all the $ is.

When the imaginary interest payments are included, Social Security and Medicare are running at a tranquilizing surplus (that $181.5 billion mentioned earlier). But measure actual cash, and the surplus disappears.

What is ‘actual cash’???

In 2005, for instance, the Social Security Disability Income program started to run at a cash loss. 2007 is the first year that Medicare Part A (the hospital insurance program) benefits exceeded income.

The same thing will happen to the Social Security retirement-income program in six to nine years, depending on which of the trustees’ estimates you use. During the same period, the expenses of Medicare Part B and Part D, which are paid out of general tax revenue, will rise rapidly.

Point???

Despite this, the Social Security Administration writes workers every year advising them that the program will have a problem 34 years from now, not six or nine years. In fact, the real problem is already here. It will be a big-time problem in less than a decade.

Define ‘big time’. Government going to bounce checks? If the government runs deficits in the out year that are ‘too large’ the evidence will be inflation, not solvency. If he thinks there’s a potential inflation issue, fine, but he doesn’t or he would have said it.

Count on it.

Count on more of this nonsense.

♥

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