Thursday, April 30, 2009

Remember, President Obama pledged to cut the budget deficit in half


Earlier this year, and based upon the observation that his administration had inherited a $1.3 trillion budget deficit, President Obama pledged to cut the budget deficit in half. Mr. Obama also talked tough about reining in the deficit longer-term:

“We are paying the price for these deficits right now," Mr. Obama said, estimating the country spends $250 billion - one in every ten dollars of taxpayer money - in interest on the national debt. “I refuse to leave our children with a debt that they cannot repay.”
CBS News

While none of Mr. Obama’s bailout/stimulus policies have been focused on budget deficit containment, this appeared to be changing
last week when Obama called for budget cuts and pledged that his actions would "start setting a tone" in Washington. However, when the President unveiled that he was initially gunning for a mere $100 million in cuts it was difficult not to laugh. After all, and as Bloomberg recently noted, $100 million “would cut this year’s projected deficit by about 0.006 percent”. Since taking office the deficit has jumped by more than $500 billion, and President Obama feels it necessary to publicly state that he has asked his Cabinet chiefs to take the next 90-days to claw-out $100 million in cuts?

U.S. Treasury again increases auctions of 30-year bonds


The U.S. Treasury Department announced on Wednesday that the number of times it auctions 30-year bonds will be increased to 12 times a year in an effort to deal with the government's soaring debt.

This was the second time this year the Treasury decided to boost the number of auction times of 30-year bonds. Just three months ago, it doubled the frequency of the auctions from four times annually to eight.

At the same time, the Treasury said it will raise 71.0 billion dollars in a series of auctions next week to refund approximately 52.2 billion dollars of privately held securities maturing or called on May 15, 2009 and to raise approximately 18.8 billion dollars.

The upcoming refunding will include auctions of three-year and 10-year notes and the 30-year bonds, according to a statement by the Treasury.

The 71 billion dollars will be part of the government's total borrowing needs for the April-June quarter. The government will have to borrow 361 billion dollars in the second quarter, a record amount for the April-June period, the Treasury estimated on Monday.

It is the third consecutive quarter the government's borrowing needs have set records for those periods.

And the estimate for borrowing this current quarter was much larger than borrowing needs of just 13 billion dollars in the year-ago period.

During the July-September quarter, the government will need to borrow 515 billion dollars, down slightly from the year-earlier level of 530 billion dollars, the Treasury also estimated.

The government borrowed 481 billion dollars in the first quarter of this year.

The huge borrowing needs reflect the soaring costs of the government's economic stimulus package and financial rescue program, and the recession, which has resulted in a sharp decline in tax revenue.

The recession, which started in December 2007, also has boosted government spending for benefit programs such as unemployment insurance and food stamps.

The Obama administration is projecting the federal budget deficit to rise to 1.75 trillion dollars in fiscal year 2009, which ends on Sept. 30, 2009, from the previous record of 454.8 billion dollars set in fiscal year 2008.

To cover the government's borrowing needs, U.S. Congress boosted the limit for the national debt to 12.1 trillion dollars in February this year. The national debt now stands at 11.1 trillion dollars.

Wednesday, April 29, 2009

Record Deficits Expected in Q3


The Treasury Department will need to borrow $361 billion in Q2, a record for the April-June quarter (see Investment News article), making for three straight quarters of record borrowing. The Treasury is also estimating it will need another $515 billion in Q3. The projected federal deficit for the year ending Sept. 30 will come to $1.75 trillion, another record, and quadruple the previous $454.8 billion deficit set last year - which was also a record. The national debt is currently at $11.1 trillion, but new limits will be raised to $12.1 trillion to account for the increased spending and borrowing.

The numbers are simply staggering, and make the recent proposal by the President to reduce the budget by $100 million seem to be just a drop in the bucket (see Washington Post article). In fact, regardless of your views on the $100 million, and spending cuts in general, a recent Youtube video gives you an idea of the size of the current budget, borrowing, and deficits, and shows you just how much (or little) $100 million amounts to (see YouTube video). Staggering indeed.

U.S. Treasury to Sell $71 Billion in Long-Term Debt


The Treasury plans to sell a record $71 billion in quarterly auctions of long-term debt next week as the government seeks to finance its unprecedented fiscal stimulus and financial rescue programs.

The amount was in line with the median forecast of analysts surveyed by Bloomberg News. Government debt managers also plan to boost the auctions of 30-year securities to once a month from the current schedule of eight times a year, a Treasury statement in Washington showed today.

Increased bond sales will help to lengthen the duration of federal debt outstanding at a time when long-term rates are historically low. That may help to hold down the government’s interest costs as it finances the record deficit.

Monday, April 27, 2009

Buffett Was Wrong About Our National Debt Problem


Now, in a misguided Keynesian approach to solving the financial crisis (which is not unrelated to the problem of government overspending in the first place), Obama and the others are spending a trillion dollars MORE of money WE DON’T HAVE. Of course, this is not a Democrat or a Republican issue. Democrats like to spend money, Republicans like to cut taxes. BOTH are equally dangerous. No one will want to do it, but what this country needs is higher taxes, lower spending and a higher personal savings rate. How the hell are we gonna pull that one off??

I don’t think we will. And that is why I think Buffett was wrong. Washington, now more than ever, lacks the political will to correct this problem. And that is why we are doomed. Sadly, what will eventually happen is the government will have to print enormous sums of new money, causing hyperinflation and prohibitively high interest rates. What it cannot do, ironically, is choose to simply default on its mountain of debt as the Russians did in the 90s. This is because the vast majority of our debt is actually owed to ourselves, via Social Security and Medicare entitlements. What a freaking trainwreck.

Sunday, April 26, 2009

Obama asks for ideas on curbing federal spending

From AP

Think you can do better than your federal boss? President Barack Obama wants to know how.

Obama on Saturday announced a plan for federal workers to propose ways to improve their agencies' and departments' budgets. The president said employees' ideas would be key as his Cabinet officials cut millions from the federal budget and trim the deficit.

"After all, Americans across the country know that the best ideas often come from workers, not just management," Obama said in his weekly radio and Internet address. "That's why we'll establish a process through which every government worker can submit their ideas for how their agency can save money and perform better. We'll put the suggestions that work into practice."

Can you believe we're only 6 months into the fiscal year and the nation is broke?

National Debt Day 2009


April 26th marks National Debt Day, the day when our government runs out of operating money and starts borrowing to function. Can you believe we're only 6 months into the fiscal year and the nation is broke?

This is the earliest Debt Day on record, with most past debt days landing in July or August:

2002: Sept. 2

2003: July 29

2004: July 27

2005: Aug. 14

2006: Aug. 27

2007: Sept. 9

2008: Aug. 5

2009: April 26

The Obama (yes, AND Bush) Administration's stimulus funding, as well as layers of bailouts and corporate takeovers, have pushed the Debt Day to a record early date.

Families and households don't have the luxury of a debt day. We're forced to balance our budget every month or else we get bogged down in quicksand known as unsecured consumer debt. Our family should not have to balance our budget and still participate in this national fiasco. But we all do.

Right now each of us owes $35,000 to our national debt. The next generation will owe double that the minute they're born. Isn't it nice to know that the federal government is looking out for our best interests?

Happy Debt Day, fellow citizens!

Obama Calls for Return of 'PAYGO' Rule


President Obama is looking to the past to help reduce growing federal budget deficits threatening the country's future.

In his weekly radio and Internet address Saturday, Obama called on Congress to pass a pay-as-you-go legislation, known as PAYGO, that would require new federal spending to be offset by budgetary cuts or tax hikes.

"We need to adhere to the basic principle that new tax or entitlement policies should be paid for," he said, asserting that PAYGO "helped transform large deficits into surpluses in the 1990s. Now we must restore that sense of fiscal discipline."

Fiscally conservative Democratic lawmakers, known as Blue Dogs, told Obama on Friday that they're working on a PAYGO plan and that they prefer to offset new spending with spending cuts elsewhere. Rep. Baron Hill of Indiana will introduce legislation next week, a Democratic aide told

The federal deficit is projected to hit a record high of more than $1.8 trillion this year, due in large part to the government providing aid to Wall Street firms and other struggling companies, as well as Obama's $787 stimulus package. Pay-as-you-go legislation wouldn't affect that spending.

Thursday, April 23, 2009

Dispelling myths about Tea Parties


Contrary to the popular perception of MSNBC, CNN and the liberal blogosphere, this was a true grassroots movement brought about by non-profit organizations using the Internet to spread the word and organize possibly 2,000 events attended by up to 1 million people. There was no official organization by the National Republican Committee, no origins in Fox News and nobody was protesting the fact that the Democrats hold the majority control of the government.

European Budget Deficits Fuel Concerns


Government budget deficits in the European Union last year were larger than expected, fueling concerns among policy makers that state finances can't support more fiscal stimulus spending. The total government budget shortfall in the 27-nation bloc was 2.3% of gross domestic product last year, up from 0.8% in 2007, according to Eurostat, the EU's statistics agency.

Will New Fed 'Tools' Avert Hyperinflation?


Now the reason prices haven’t exploded is that the demand to hold U.S. dollars has also increased dramatically. (That’s also what happened in the 1980s: the Reagan tax cuts and Volcker’s squelching of severe price inflation made it much more attractive to hold dollars, and so the Fed got away with printing a bunch even though the CPI didn’t increase wildly.)

Once people get over the shock of the financial crisis, the new money Bernanke has pumped into the system will begin pushing up prices. Others have used this analogy before me, but it’s still apt: The U.S. economy right now is like Wile E. Coyote right after he runs off a cliff but hasn’t yet looked down. Once the spell of a “deflationary spiral” is broken by a full quarter of significant price hikes, there will be an avalanche as people come to their senses.

Some analysts concede that the traditional Fed policies have indeed left the dollar vulnerable to serious devaluation, but they think the central bank wizards can save the day by acquiring new “tools.” For example, San Francisco Fed president Janet Yellen has been arguing that the Fed should be able to issue its own debt, to give the Fed more flexibility. The idea is that when the time comes for the Fed to sop up the excess reserves it has pumped into the banking system, it would be devastating to the incipient economic recovery if the Fed has to dump a bunch of mortgage-backed securities, or Treasury bonds, back onto the market. This would ruin the banks with MBS on their balance sheets, and/or it would push up interest rates for the government. Thus, the Fed would have painted itself into a corner, and it would have to choose between massive CPI hikes or a renewed recession. To avoid that nasty tradeoff, Yellen argues that if the Fed could sell its own debt, then it could drain reserves out of the banking system without unloading its own balance sheet.

For a different idea, economists Woodward and Hall think the Fed just needs the ability to charge banks for holding reserves. The Fed already (recently) obtained the right to pay interest on reserves, and so Woodward and Hall think the Fed should also have the ability to do the opposite, i.e. to be able to pay a negative interest rate on reserves that banks hold on deposit with the Fed.

How does this avert the threat of hyperinflation? Simple, according to Woodward and Hall. If banks ever start loaning out too much of their (now massive) excess reserves, and thereby start causing large price inflation, then the Fed can simply raise the interest rate it pays on reserves. Banks would then find it more profitable to lend to the Fed, as it were, rather than lending reserves out to homebuyers and other borrowers in the private sector. VoilĂ ! Problem solved.

Obviously these tricks can’t avoid the consequences of Bernanke’s mad money printing spree. At best, they would merely push back the day of reckoning, while ensuring that it grows exponentially (quite literally).

Tuesday, April 21, 2009

Not all economists agree


By Peter Schiff

In his speech last week summarizing his administration's economic policies, President Barack Obama grossly overstated the support these policies enjoy by claiming, "economists on the left and right agree that the last thing the government should do during a recession is cut back on spending". There are a great many economists who were surprised to learn that, apparently, they now agree with the president.

Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending.

As one of those mythical economists who do not agree with the president, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it's the reason we are now headed for an inflationary depression.

We do not need, nor should we attempt, to replace lost demand. As Obama himself pointed out in the same speech, Americans have been borrowing and spending too much money. These actions created artificial demand, underpinned by the illusion of real wealth in overvalued stock and real estate markets. Given his intelligence and rhetorical training, it is hard to fathom how Obama cannot notice the inherent contradiction in his argument.

While he commended millions of American families for making the hard choices to reduce spending, pay down debt and replenish savings, Obama later outlined the government's intention to spend every American household deeper into debt, thereby undermining all the good that personal austerity would have otherwise produced.

Obama also made the clear-eyed observation that the foundation of our economy was unsound and that a sturdier one needed to be laid. To do this, he even asserted that the US needed to import less and export more. This has been one of my fundamental points. Our economy is unsound precisely because it is built on a foundation of consumer debt Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed.

By interfering with this process, Obama prevents the very transformation he acknowledges must take place. When the government spends what individuals save, private investment is crowded out. Society is deprived of the benefits such savings would otherwise have brought about. How can we lay a solid foundation if the government takes away all our cement?

This brings up an oft-repeated, but oft-forgotten, point: government does not have any money of its own. It only has what it takes from the rest of us. If individuals repay their debts, but their government takes on additional debt, we are all simply swimming against the tide. All forward progress is lost as private debt is replaced by public debt, which must be repaid by private individuals. Whatever gains individuals hope to achieve are negated by the higher taxes or increased inflation necessary to repay their share of a larger national debt.

Obama claims that much of the additional debt is not going to finance consumption, but rather "critical investment". This is a vain hope. In the first place, much of what he categorizes as investment, such as additional spending on education, is not investment at all. Yes, an educated workforce is important, but throwing more government money at education will do nothing to achieve this goal. Spending money on education and calling it an investment squanders resources that otherwise would have financed real investments. In the second place, to the extent some government money is invested, those investments will likely be less efficient than those the private sector might otherwise have financed. There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. "Five-year plans" didn't work in the Soviet Union and they won't work here. If the government simply builds bridges to nowhere, society gains nothing.

If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are therefore abandoned, with capital reallocated to more successful ventures.

Conversely, when governments invest money these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success.

Obama himself proves this by allocating still more funds to government-run schools and student loan subsidies. Other examples, such as Amtrak, the New York Metropolitan Transportation Authority, the US Postal Service, mortgage guarantors Fannie Mae and Freddie Mac, and countless others, prove this process is never-ending - until perhaps the bureaucracy collapses under its own weight.

When it comes to government making tough choices, Obama talks a good game but refuses to actually make any. However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It's unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.

Monday, April 20, 2009

Tea Party message less spending, taxes, deficits


We see Obama, Democrats, and past deficits by Republicans, literally bankrupting our nation on the installment plan. The kavetching and whining on the left and in the media about who's organizing these Tea Party protests, is the height of hypocrisy. I went to both the Chico and Redding protests and found nothing but local organization, and no corporate lobbyist/ Republican operative/Dick- Army-emailed involvement.

Our truly bottom-up movement is denigrated, insulted and marginalized by snotty news people and leftist bloggers (Remember the incessant, fawning coverage of Cindy Sheehan and the two dozen Code Pink demonstrators at Bush's Crawford ranch?).

The truths behind the tea parties


The banking collapse and the economic meltdown have prompted many Americans to turn to the federal government as indispensable savior, telling Congress and the president: We hope you can fix it; we want you to do whatever is necessary to fix it; and we don't care what it costs.

That was not the sentiment in evidence at the tea-party protests held on Tax Day.

There, the message was one of great skepticism about the efficacy of the government's remedies and great apprehension about the expense (along with some of the extremist lunacy that accompanies any mass movement). The scale of the federal response to the crises has come as a frightening surprise to many Americans, who suspect the cure will be worse, and less transitory, than the disease.

Follow the trail of debt


The tea party is not a joke. Richard Nixon in 1969 was the last president to submit a black budget (not adding to the national debt). Since then, every president has added to the national debt. When Bush took over, it was $5.7 trillion. When Bush left office it was $10 trillion.

Since Nixon, we have had six presidents — two democrats (Carter and Clinton) and four republicans (Ford, Reagan, Bush and Bush). The two democrats added less to the national debt than any one of the republicans.

The “party of fiscal responsibility” ran the national credit card up to $10 trillion with a little help from the “tax and spend” party. Now they are screaming because the debt is coming due.

Social Security and Medicare Will Cost More Than The Value Of Everything In The United States


Here's the good news: future costs of Social Security and Medicare won't require higher taxes. Now here's the bad news: the reason these programs won't require higher taxes is that they'll be so expensive that there's no possible way to pay for them through taxes. Everything in the US (not counting people) is worth about $50 trillion and those two programs will cost $80 trillion, unless they are reformed.

Obama: Cut Budget by 1/35,000th


"If we're going to rebuild our economy on a solid foundation, we need to change the way we do business in Washington. We need to restore the American people's confidence in their government -- that it is on their side, spending their money wisely, to meet their families' needs," Obama said in his weekly radio and Internet address, released while he attended the Summit of the Americans in Trinidad.

Obama wants his Cabinet agencies to report a collective $100 million in savings in the next 90 days.

Some agencies have already pinpointed specific savings.

Friday, April 17, 2009

The National Debt and the U.S. Selling Spree


The actual numbers are actually terrifying, as, “Receipts for the month fell 28 percent to $128.96 billion from $178.82 billion a year earlier”! Tax revenues fell 28%? Yow!

This can only mean that people are spending less money, and that means that they are borrowing less money, which makes the “deflation problem” worse, which means that the Congress and the Fed will doubtlessly redouble their efforts to kill us with inflation in the money supply which creates inflation in prices and inflation in the size of government! Gaaaahhhh! We’re freaking doomed!

My involuntary screams of terror seemed so long and loud that I quickly realized that I was not properly anesthetized to be looking at such horrifying statistics. So, after a couple of long, thirsty pulls on a bottle of bourbon with a beer back, I soon felt I was ready to look at that again. Maybe kick some butt this time!

Squaring my shoulders, I soon saw that I was right; my eyes were now crossed and everything was blurry and spinning around! Much better! Hahaha!

So, instead of looking at this inflationary horror and getting “the spins”, I instead hear James Turk of the Freemarket Gold & Money Report apparently poking fun at me for being concerned about ordinary inflation, saying, “hyperinflation does not arise from banks lending too much money. Rather, hyperinflation invariably occurs for only one reason – too much government spending that leads to too much government borrowing and these debts are then turned into currency by the government’s captive central bank. And that scenario describes exactly what is happening in the United States today.” Exactly!

Thursday, April 16, 2009

Treasurys mixed on promising economic readings


NEW YORK (AP) — Treasurys ended mixed Wednesday after more data indicated that the economy might be nearing a recovery.

Treasurys had been rising earlier this week as investors sold off stocks and flocked to safer investments. But Wednesday's positive economic news helped stocks stage a rebound and encouraged some investors to halt their Treasury buying.

An index of New York manufacturing activity showed that activity has been contracting at a slower pace in April than expected. Also, the National Association of Home Builders said homebuilder optimism in April logged the biggest monthly gain in five years, while the Federal Reserve said five of its 12 regions reported moderation in the rate of economic decline.

Still, the movements in the bond market were modest, as investor demand for government debt remains high. Treasury data released Wednesday on total U.S. debt purchases in February showed a rise of $26 billion, compared to a decline of $13 billion in January.

The benchmark 10-year Treasury note rose 6/32 to 99 27/32. Its yield fell to 2.77 percent from 2.79 percent late Tuesday.

The 30-year bond fell 2/32 to 97 2/32, and its yield was unchanged at 3.66 percent.

The two-year note was flat at 100 1/32, and its yield was unchanged at 0.86 percent.

The yield on the three-month Treasury bill fell to 0.14 percent from 0.16 percent. The discount rate was 0.15 percent.

The cost of borrowing between banks fell. The London Interbank Offered Rate, or Libor, on three-month loans in dollars edged down by 0.01 percentage points to 1.11 percent. The equivalent rate for three-month loans in euros dropped 0.01 percentage points to a record low of 1.41 percent.

Einstein was right about taxes


Hundreds of cities in all 50 states are expected to throw thousands of TEA parties (Taxed Enough Already) across the nation today to protest what organizers call irresponsible spending of tax dollars by elected officials. In Highland County, a tea party is scheduled for 5 p.m. at the county courthouse lawn.

"Our founding fathers warned about the national debt," said historian David Barton, the keynote speaker at next week's Citizens for Community Values banquet in Cincinnati. "In a relatively short period of time, we have seen an explosive increase in government spending and national debt. Previous generations avoided these unhealthy practices, being guided by wise political leaders who understood the blessings of frugality and the dangers of debt. For example, Alexander Hamilton, America's first secretary of the treasury and also a signer of the Constitution, wisely declared, 'Allow a government to decline paying its debts and you overthrow all public morality - you unhinge all the principles that preserve the limits of free constitutions. Nothing can more affect national prosperity than a constant and systematic attention to extinguish the present debt and to avoid as much as possibly the incurring of any new debt.'"

Barton said Americans should also heed the words of fellow founding father, Thomas Jefferson.

"Perhaps no founding father was as forthright on this topic as Thomas Jefferson, who said, 'If the debt should be swelled to a formidable size, we shall be committed to the career of debt, corruption and rottenness. ... The discharge of the debt, therefore, is vital to the destinies of our government. The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale. I economy among the first and most important of republican virtues, and public debt as the greatest of the dangers to be feared.' Jefferson even wisely foresaw where America generally finds itself today, saying, 'I am not among those who fear the people. ... and to preserve their independence we must not let our rulers load us with perpetual debt. We must make our election between economy frugality and liberty, or profusion excess spending and servitude.'

"Millions of citizens, following the example of America's early residents, have finally decided to draw a line and raise their voice against the government's exorbitant spending and exploding debt," Barton said. "On April 15, citizens at more than 1,000 locations across the country will be sponsoring tea parties."

It's hard to disagree with Hamilton or Jefferson - or even Barton, for that matter. And it's also hard not to be upset with lawmakers who voted for a $500 billion bill without even reading it. I watched as outraged members of Congress talked tough about the millions of dollars of AIG bonuses in a bill and said they'd tax them up to 100 percent - yet freely admitted they didn't know the bonuses part was in the bill.

But, hey, I guess that's the answer to everything these days, more taxes and more government spending - and less paying attention to what you're voting for.

Tax day brings tea party day for protests nationwide


The rally was one of hundreds being staged on Tax Day around the state and across the country by citizens angry at higher taxes and frustrated with growing government spending.

TEA Party looks to educate on dangers of deficits


Local residents fed up with federal deficit spending and continuous stimulus packages going to big business and states are the target of Wednesday's Taxed Enough Already, or TEA.

"It's the interest associated with debt," said David VonGunten, one of the event's organizers.

"What ultimately happens to government is what is happening to families now," he said, referring to credit and economic problems families are facing in the recession.

Wednesday's event will focus on educating voters about the dangers of debt spending and the stimuli and demanding the state of Florida return stimulus money.

Deficit spending makes the United States pay interest money to other countries that can use it for their own benefit; those aims could sometimes be contrary to those of the U.S., VonGunten said.

If the government doesn't borrow, it prints money, which promotes inflation and lowers the buying power of the dollar, he said.

The almost $2 trillion in stimulus money approved by the U.S. Congress will only add to the mounting debt and exacerbate problems, VonGunten said.

Anyone who runs a household budget knows that debt spending is unsustainable, he said.

"If you continuously overspend, will that work for you?" he said.

Debt is Not Money


"Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs."

--Thomas Jefferson letter to Thomas Cooper, 1814.

It appears that the plan today is not to regulate the amount of debt that banks can create, but instead to both print more money and do everything possible to reinflate the debt bubble. (Lacking a return to Hamilton's national manufacturing and trade policy, as a nation we just continue to slip deeper and deeper into Third World status as an importer and debtor -- this may be our only choice if we don't wake up soon.)

If followed, the Summers/Geithner policy can have only one of two outcomes: inflation or another, more serious crash. It's possible we could have both. Apparently the bankers and Summers/Geithner's hope is that neither or both don't happen for at least three and a half years...

Is US national debt nearing the danger zone?


Krugman said the key statistic remains the national debt as a percent of U.S. GDP. Large budget deficits -- even deficits above $1 trillion for consecutive years -- are needed, short-term, to help create demand and pull the U.S. economy out of its pronounced recession.

Long-term, Krugman underscored that the national debt can become a problem, but the United States, with a national debt totaling about 60-65 percent of GDP, is nowhere near levels approaching the "danger zone." For example, Japan ran a national debt equal to 100 percent of GDP in the 1990s, Krugman said.

Krugman also reiterated Sunday his support for a second, major fiscal stimulus package -- one he believes will be needed to fill the large demand hole created by the recession.

U.S. Trade Deficit Narrows as Imports Fall Sharply


As imports plunged and exports stabilized, the United States trade deficit narrowed to its lowest levels in nine years. The trade deficit, which measures the gap between imports and exports, fell to $26 billion in February, from a revised $36 billion in January.

Some economists said the rise in exports would have a positive effect on the country’s first-quarter gross domestic product, and represented another data point contributing to hopes that the economy was beginning to bottom out after more than a year of swift declines.

U.S. February trade gap narrows to lowest since 1999


The U.S. trade deficit shrank by 28.3 percent in February to its smallest since November 1999 as imports tumbled and exports managed to grow slightly in the face of shrinking global demand, a U.S. government report showed on Thursday.

The monthly trade gap totalled $26 billion (17.7 billion pounds), down more than $10 billion from the revised $36.2 billion deficit in January and marking a record seven consecutive months of decline. The February percentage drop was the steepest since a 34.9 percent fall in October 1996.

Wall Street economists polled by Reuters before the report had forecast a February trade deficit of $36.4 billion.

U.S. exports of goods and services in February rose 1.6 percent from January, while imports fell 5.1 percent to their lowest level since September 2004.

"In five months we've unwound six years of a worsening deficit," said T.J. Marta, chief market strategist at Marta on the Markets in Scotch Plains, New Jersey. "This speaks to the magnitude of the collapse of the U.S. consumer sector. It also speaks to the oil collapsing."

Ranking the Devils: Debt, Deficits, Dollar Weakness


Regarding a U.S. comeback, we're all told that debt is worse than dollar weakness. Debt has been demonized, yet bigger debt markets and more mortgages are a necessary part of the solution. Similarly, a large federal deficit is inevitable because of the recession's wallop to federal tax receipts. In contrast, dollar weakness isn't inevitable. It would be another bad Washington choice, a hammer blow to living standards and a terrible denouement to already devastating job losses and economic contraction.

Dollar weakness should get more blame than debt for the current crisis. During the 2002--07 Bush-era expansion household debt grew from $8.5 trillion to $14 trillion, an increase of 65% versus only a 33% increase in personal income. The assumption is that the debt growth was wasted on an era of excess, but it wasn't. Liquid assets, such as savings bonds, time deposits and direct stock holdings, grew 68% in that same period, from $15 trillion to $25 trillion. Consumption growth was generally less in this expansion than in the 1990s, when three-year-average real consumption growth hit 5% versus a peak of 3.4% in the 2000s.

Best Way Out of Deficits and Debt

A key step in the national rebuilding process will be to focus some of the fury now blistering debt and deficits onto the weak-dollar policies that keep riling the international financial system. Economic growth will require a rebuilding of innovation and economic freedom and, equally critical, a strong and stable dollar to attract capital back to U.S. assets.

Unfortunately, President Obama has already said that the dollar is "extraordinarily strong," implying a harmful risk of future weakness that was surely noted by investors and China's leaders. Treasury Secretary Tim Geithner, repeating the Bush Administration's weak-dollar phrases, has criticized China for keeping the dollar strong against the yuan and expressed openness to the IMF's basket currency, a backdoor slam at the dollar.

China, Europe and others are patiently but firmly calling for an end to the world's dependence on an unstable dollar. The best U.S. response would be a true policy of dollar stability through thick and thin. Yet the Obama Administration has already restated the horrible Clinton-Bush principle that the dollar should be valued by U.S. economic fundamentals, a recipe for self-reinforcing volatility. This will doom the U.S. and the world to needless instability and momentum-based capital flows. That's a future we should roundly reject in light of the wildly unstable dollar's contribution to the current economic calamity.

A shrunken dollar will help U.S. workers


President Barack Obama’s stimulus will increase the national debt to 77 percent from the 70 percent of the GDP he inherited. Contrary to the fear that the U.S. dollar would devalue as a result, the U.S. dollar has strengthened against most others primarily because the rest of the world is in worse shape.

As other economies recover, the U.S. dollar will likely devalue, causing a degree of domestic inflation. This will help pay down the national debt, just as your fixed-rate mortgage should be easier to handle as your wages in future years are buoyed by inflation.

A shrunken dollar should help U.S. workers because imports may become so expensive that it will, once again, become profitable to hire Americans.

Sunday, April 12, 2009

Budget Expands Government as Economy Contracts


Despite the deterioration of our economy, this is the largest budget ever passed, at $3.6 trillion. Gross domestic product and tax receipts are shrinking. The government has less money to spend this year, and so it spends more - $1.5 trillion more - than it has. When the economy expands, the government expands. Worse, when the economy contracts, the government expands more. Even more troubling is that even though the size of the budget boggles the mind, it is never the final word on federal spending. No allowance has been made for future bailouts and stimulus plans that are highly likely. There are always supplemental bills passed later in the year. War spending is one of those. Spending on Afghanistan is only partially included in budget, with a supplemental request expected in the future. History shows that true costs far exceed estimates. So even though these numbers sound appalling enough, I predict spending will top $4 trillion this year, raising the national debt by over $2 trillion when all is said and done.

As our mountain of debt is projected to double with the new budget, many are wondering how long our country can keep this up before serious repercussions are felt. Obviously we can’t continue down this road indefinitely. Certainly, no country has ever prospered when their public sector spent half or all of the nation’s GDP. Yet we are saddled with leadership that seems unwaveringly convinced that the key to prosperity is public spending. This will be exposed for the lie that it is when our creditors wake up and call in our debt. The temptation at that time will be for the government to simply print up dollars in the amount needed. This type of debt repudiation could signal the end of the dollar as its value sinks to zero. We are seeing all the signs that this could happen. Certainly there are no signs of the alternative, which is paying down debt and taking the path of fiscal responsibility.

Tragically, it is those who save their dollars, the most prudent and responsible among us, that will be hurt most by this irresponsibility in Washington.

President Cites Progress on Economy as Deficit Swells


President Barack Obama offered measured optimism about the economy on Friday after a week that featured some better-than-expected indicators, despite another gloomy turn for the federal budget picture.

With stocks strengthening and even the housing market showing a few signs of life, Mr. Obama said there were "glimmers of hope across the economy." But he cautioned that the economy remains under "severe stress" and added that there is still "a lot of work to do."

"Over the next several weeks you will be seeing additional actions by the administration," Mr. Obama said. "What I just wanted to emphasize today [is that] we're starting to see progress."

In his remarks, which followed a meeting with economic-policy makers, the president added that "if we stick with it, if we don't flinch in the face of some difficulties, then I feel absolutely convinced that we are going to get this economy back on track."

U.S. budget deficit triples to $957 billion for year


The deficit is well on its way to the $1.75 trillion -- or 12.3% of gross domestic product -- that the White House has estimated for the full fiscal year, which ends in September.
The deficit through the first six months is more than three times higher than it was at this time last year. The government has borrowed $1 trillion from the public so far this fiscal year.
In March, the deficit widened to $192.3 billion from $48.2 billion in March 2008. Outlays rose 41% to $321.2 billion from $227 billion, while receipts dropped 28% to $129 billion from $178.8 billion.

Social Security Bomb About To Explode


In the chart above (source), I want you to note the extreme deterioration in surplus funds between the 2008 and 2009 forecasts. Can you spot the trend?

Here’s a prediction – these too will be revised to the worse in about 6 months. I base this prediction on my belief that more people will opt for retirement than are currently projected and that entitlement program tax receipts will be below current projections. Also, nearly every prediction by the CBO has been revised to the worse over the past year so I am “riding the trend” with this prediction.

In the projections for the table above, the CBO has assumed no cost of living adjustments (COLAs) in 2010, 2011, or 2012 and a return to economic growth next year. If either of those assumptions proves wrong, the table above gets smoked to the downside. I give that a better than 90% chance of happening.

Thursday, April 9, 2009

I think the writer has it backwards

In response to:
Deficit-spending a GOP tradition

From John Blethen:

I think the writer has it backwards -- it was the Reagan tax cuts on all brackets that spurred the subsequent two-decade growth. Clinton's tax increases dampened what would have been an even more robust 1990s. The writer seems to think tax increases help the economy. The deficits in the 1980 were because for every two dollars of increased revenue due to the tax cuts Congress spent three dollars. And Reagan spent a lot on rebuilding the military, which led to the peace dividend after the Cold War which Clinton inherited.

Tuesday, April 7, 2009

Growing unease about dollar as US deficits grow


"I think the dollar will continue to drop," Schiff said in an interview. "Based on what we've done, it could lose 70 to 80 percent of its value over the next five to 10 years.

"The dollar is no longer as good as gold. It's no longer better than any other currency."

The dollar's current strength hasn't kept officials in China and Russia from dropping strong hints that the world needs to look for alternatives. Both developed and developing nations are especially concerned about their reserves, which are essentially national savings invested in gold and foreign currencies, mainly dollars.

U.S. Deficit Reaches $1 Trillion for First Half of 2009


The Congressional Budget Office has released preliminary deficit numbers, which indicate that for the first half of 2009 the deficit has already hit $1 trillion, $640 billion more than the comparable 2008 period, when the deficit was $313 billion.

While the outlays can be explained by the massive TARP spending and other stimulus programs, the scariest piece of information is that receipts for March were $125 billion, $54 billion lower than the previous March. Additionally, receipts for H1 2009 were $986 billion, $160 billion lower than $1,146 billion in H1 2008.

It will be interesting how this massive drop on the income side of the budget will be explained by the photogenic President Obama.

Washington always spends more than it says it will


The Congressional Budget Office originally projected the Troubled Asset Relief Program would cost taxpayers $189 billion. That was in January. In a matter of weeks, the estimate grew by 88%.

But anyone who has casually watched Washington for a few years should have known this was coming. They'll have noticed that there are two immutable rules that govern federal programs: They will always cost more than lawmakers and presidents tell us they will, and once they're in place, they'll never go away.

No program is more illustrative of the first rule than Medicare.

When it was created in 1965, government actuaries projected that the hospital portion of the program would cost only $9 billion by 1990. The real cost: $66 billion. That's 165% higher than the initial increase, even after adjusting for inflation.

Officials also missed on their estimate for the cost of all parts of the Medicare program in 1990. That price tag: $107 billion, nearly 10 times the amount ($12 billion) that the House Ways and Means Committee had projected 25 years earlier.

In the current fiscal year, Medicare will cost roughly $425 billion, consuming 16 cents of every taxpayer dollar Washington spends.

No federal program, though, has grown as wildly as Medicare's older sister, Social Security, which was launched in 1937 and sold to Depression-era voters desperate for relief and short on confidence as a modest plan to help older Americans avoid poverty in their retirement.

Growth of the Social Security payroll tax rate has soared from 1% to 12.4% (total of the combined employee and employer "contributions").

Sunday, April 5, 2009

Deficit-spending a GOP tradition


Facts: Under Reagan the national debt almost tripled. By the end of George H.W. Bush's presidency, it had exploded to $4 trillion. Clinton reversed Reagan's course, raising taxes on the wealthy, and lowering them for the working and middle classes. This produced the longest sustained economic expansion in American history. Clinton's budget also allowed the government to begin paying down the crippling debt begun under Reagan. In Clinton's last year, the surplus amounted to $236 billion.

George W. Bush immediately reversed Clinton's policy in order to revive Reagan's and handed out $630 billion in tax cuts to the top 1 percent of income earners. In true Republican fashion, the super rich returned the favor by giving over $200 million to ensure Bush's re-election. Bush blew through Clinton's surplus in his first year. The 2004 deficit reached $415 billion. Its real size was masked by the fact that Bush shifted $150 billion from the Social Security trust fund in order to make the shortfall look smaller, and never included the cost of his war on terror.

So, Clinton moved us from record deficits to a record $236 billion surplus, Republicans moved us from a record surplus to a record $490 billion deficit. But according to the writer, Republicans are the responsible ones? Okey-Dokey!

We Must Rein In a Government Gone Wild


Democrats have controlled the White House, the Senate, and the House of Representatives for three months now, and from their actions, a discomforting narrative has emerged. It’s a pattern of fiscal recklessness that is piling debt on our children and grandchildren—a pattern of flagrant indifference to waste and abuse of taxpayers’ money at a time when every penny counts.

And this week’s ratification of President Obama’s budget by the Democrat-run Congress serves notice to Americans that never-before dreamed of levels of spending, taxation, and red ink are on their way. Republicans countered their complete lack of fiscal discipline with an alternative budget that curbs spending, creates jobs, cuts taxes, and controls the debt.

The majority’s fiscal arrogance has sparked an insurgency not just among Republicans in Congress, but in communities and neighborhoods across America. “Taxpayer tea party” protests are erupting in city after city. In my hometown of Cincinnati, thousands of citizens recently gathered on Fountain Square to protest government policies that are forcing responsible Americans to subsidize irresponsibility. Similar protests are flaring up in cities and towns nationwide.

Economics prof says deficits heading toward 'banana republic levels'


Families learning of $163,000 tax 'bomb'

An economics professor from Stanford is warning Americans soon will discover a $163,000-per-family tax "bomb" inside President Obama's budget plans, which have pushed U.S. deficits toward "banana republic levels."

The alert comes from Michael J. Boskin, who praised some of Obama's economic plans in a Wall Street Journal column but saw red flags waving for other provisions.

Boskin, a fellow at the Hoover Institution who chaired the Council of Economic Advisers under President George H.W. Bush, crunched the numbers and found that while Obama inherited a growing and significant budget deficit, his plans will add $6.5 trillion of debt.

"What does $6.5 trillion of additional debt imply for the typical family? If spread evenly over all those paying income taxes (which under Mr. Obama's plan would shrink to a little over 50 percent of the population), every income-tax paying family would get a tax bill for $163,000," he wrote.

"(In 10 years, interest would bring the total to well over a quarter million dollars, if paid all at once. If paid annually over the succeeding 10 years, the tax hike every year would average almost $34,000.) That's in addition to his explicit tax hikes," wrote Boskin.

"While the future tax time-bomb is pushed beyond Mr. Obama's budget horizon, and future presidents and Congresses will decide how it will be paid, it is likely to be paid by future income tax hikes as these are general fund deficits," he said.

"We can get a rough idea of who is likely to pay them by distributing this $6.5 trillion of future taxes according to the most recent distribution of income-tax burdens. We know the top 1 percent or 5 percent of income-taxpayers pay vastly disproportionate shares of taxes, and much larger shares than their shares of income. But it also turns out that Mr. Obama's massive additional debt implies a tax hike, if paid today, of well over $100,000 for people with incomes of $150,000, far below Mr. Obama's tax-hike cut-off of $250,000. … In other words, a middle-aged two-career couple in New York or California could get a future tax bill as big as their mortgage," he warned.

Treasuries Tumble as U.S. Prepares to Sell More Debt Next Week


Treasuries fell as the U.S. prepared to sell an estimated $59 billion in notes and inflation-indexed securities next week, part of a record amount of debt the government is likely to issue this year.

Ten-year notes posted their second weekly decline, contributing to a 1.7 percent loss by U.S. securities this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index. A government report on payrolls was in line with the forecast of economists. The U.S. will need to borrow $3.25 trillion for the fiscal year ending Sept. 30, including sales to replace maturing securities, according to a Goldman Sachs Group Inc. estimate.

Wednesday, April 1, 2009

Entitlement Crash

From IBD

Social Security: Not worried about the government's retirement program because there's still time to fix it? Think again. The system could be operating at a deficit as soon as next year.

Washington has been working under the assumption that Social Security would continue to produce surpluses through 2016. It would not be until 2017 when the system would begin to pay out more than it took in through payroll taxes.

New estimates from the Congressional Budget Office, however, indicate that the date could be moved up seven years.

Last year, the CBO projected that the system would generate an $86 billion surplus in the current fiscal year ending Sept. 30. That has been downgraded to $16 billion, due to the sluggish economy.

In the next fiscal year, beginning Oct. 1, that surplus could be as low as $3 billion, a whisker away, in Washington terms, from being a deficit.

Defenders of the status quo will say that a possible deficit is not an issue. After all, the system has a $2.4 trillion balance in its trust fund that it can tap.

Forget that the trust fund does not actually exist, as Congress has already spent every cent of payroll tax revenue that has exceeded Social Security payouts. Then consider this: If the system starts running deficits seven years sooner than had been expected, the "trust fund" is going to be exhausted that much sooner. The entitlement train wreck that was off somewhere in the future is now suddenly just around the next bend.

Shortfalls During The Depression Have Nothing On Today's Deficit

From IBD

The current recession is well on its way to generating the largest peacetime deficit in America's history. By any fiscal yardstick, the federal budget has never seen anything like the current financial crisis' impact. Like the financial crisis, there is no indication that the deficit it is generating has yet peaked.

The financial crisis and the fiscal crisis diverge, however, in one crucial but overlooked aspect: The fiscal response is more closely related to the size of government than the severity of the economic crisis.

With the passage of the economic stimulus bill, Congressional Budget Office estimates show the federal deficit reaching $1.7 trillion in the current fiscal year. The administration's budget estimates an even higher $1.8 trillion deficit.

Social Security Surpluses Are Near Their End


The days of Social Security surpluses are over, six to possibly eight years earlier than was thought to be the case just a year ago.

Here are excerpts from Hassett's commentary ("Recession Bites Into Social Security’s Surplus"). His first word reveals what he thinks of the nation's political elites, and of the media that are supposed to be watching them:

Almost as gruesome is the news about Social Security’s finances. Social Security has for years been the near-term bright spot in the federal budget. Each year the program has raised $50 billion to $100 billion more in payroll taxes than it paid out in benefits (in some years, the surplus was closer to $200 billion; in fiscal 2008 just ended, it was $180 billion -- Ed.). Sure, deficits were expected far off in the future, but the current program was on sound financial footing.

Those days are, for the moment at least, behind us. According to the latest Congressional Budget Office estimate, the Social Security surplus will be only $3 billion in 2010. That number is almost surely too rosy, and the actual realization next year will be a big deficit.