Sunday, January 31, 2010

Deficits and debts in plain English


National deficit

2010 Estimate: $1.4 trillion - CBO

What it is:

The deficit is the yearlong difference between "what the United States Government takes in from taxes and other revenues" and what the government spends. - U.S. Department of the Treasury.

What that means:

The projected deficit is the highest the U.S. has ever had, meaning the government has either been collecting less money, spending more, or both.

"The high deficits are an outrage" Chris Edwards, an economist at the libertarian CATO Institute in D.C., said. "They are unethical."

Others say the increased spending was necessary.

"It's clearly too much, but that has to be put in the obvious context of the recession," said Andrew Yarrow, vice president and director of Public Agenda's D.C. office. The group generally opposes higher deficits.

"Most would agree that the government had to do something," he said.

Michael Linden, associate director for tax and budget policy at the Center for American Progress, said, "The current deficit is not a concern. It is very high, but that's mostly a function of the emergency spending that had to happen."

CAP is a progressive group founded by former Clinton administration officials.

The deficit isn't just caused by spending, Linden said. The government has collected considerably less tax revenue this year because people were making less and because the government wanted to stimulate the economy by letting people keep more of their own money, he said.

Public debt

2009 Calculation: $7.6 trillion - CBO

What that means:

The public debt consists of all the deficits of previous years added together. It is all the debt owed by government branches. - U.S. Department of the Treasury.

Public debt is often confused with national debt, an estimate that includes the money different branches of government owe to one another and is therefore considerably higher than public debt. It's the national debt the Senate voted to raise this week.

What that means:

For most of national history, the U.S. didn't have a public debt.

"Other than during the Civil War and the World Wars, the U.S. largely balanced its budget until the late 1960s," Yarrow said.

U.S. public debt has been building up for the last half century.

"It's really the spending that's out of control," Edwards said. Wars over the past couple decades, domestic spending and tax cuts during the Bush years and recent stimulus plans have been expensive, he said. "Both parties are to blame."

Not all say the high debt is a problem.

"Right now the debt is at a manageable level," Linden said.

"It really can't get too much higher" without some risks coming into play, he said.

Lowering debt would mean making some sacrifices.

"In many ways, Americans have really wanted to have it all," Yarrow said.

"They've wanted to have more spending, but they've wanted to pay less in taxes, and that just doesn't add up," he said. "The government has played along with them."

Long-term effects of the public debt and deficits

The public debt "doesn't have any effect in the near term," Linden said. "It's a high public debt, but it's not too much of a burden. The problem is if it continues to rise."

But Yarrow cautioned, "If we do nothing, entitlement programs," including Medicare and Social Security, "will compose all of the budget."

The debt will hit younger workers the hardest, Edwards said.

"There's a huge threat of enormous tax increases for young workers in the future," he said. "The increasing power of the elderly lobby will put pressure on politicians to raise taxes on young workers."

Many countries, waiting on the U.S. to pay back loans, are starting to question the value of holding U.S. debt, Yarrow said.

If these countries were to pull money out of U.S. markets, they could cause "severe panics in financial markets," he said.

This debt may be a problem for future generations.

"Money borrowed by the federal government must be paid back by future generations with interest," Rep. Mike Pence, R-Ind., said in a press release this week.

"There are a lot of ways this can hit individuals down the road," Yarrow said. "And not too far down the road."

Obama to Propose $3.8 Trillion Budget


Congressional aides are preparing to slog through an expected $3.8 trillion in spending to be proposed by President Obama on Monday when his fiscal year 2011 budget is delivered to Capitol Hill.

Sources tell Fox News the proposed budget predicts the national deficit will crest at a record-breaking $1.6 trillion in the current fiscal year, then start to recede in 2011 to $1.3 trillion, then to $700 billion in 2013.

Still, the administration's new budget to be released Monday says deficits over the next decade will average 4.5 percent of the size of the economy, a level which economists say is dangerously high if not addressed, said the congressional official.

Thursday, January 21, 2010

Missing the Target

Unlike previous recessions, the current downturn was not caused by Federal Reserve tightening and therefore couldn't be reversed by lowering interest rates. President Obama was correct to conclude that boosting economic activity required a fiscal stimulus.

Unfortunately, despite the talented team of economists in the administration, most of the president's economic policies have done little to help the problem. And indeed, many of these policies have created even more problems than they solved.

For starters, the president allowed congressional Democrats to design the $787 billion stimulus package. The result was an unnecessarily large increase in the national debt for a very modest rise in gross domestic product, with too much emphasis on redistributing income and preserving public-sector jobs and not enough on raising economic activity. Only about one-fourth of the nearly $800 billion will be used for government spending that adds directly to GDP. In contrast, the funds given to households will be largely saved or used to pay down existing debts. And the dollars that went to state governments relieved pressure to use their "rainy day" funds or levy temporary tax increases.

The Global Debt Bomb

Whether or not you believe the spending spree was morally justified, you have to be concerned about the prospect of a dismal, debt-burdened fiscal future. More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. The coauthor, with Harvard professor Kenneth Rogoff, of This Time It's Different: Eight Centuries of Financial Folly (Princeton, 2009), Reinhart has found that a 90% ratio of government debt to GDP is a tipping point in economic growth. Beyond that, developed economies have growth rates two percentage points lower, on average, than economies that have not yet crossed the line. (The danger point is lower in emerging markets.) "It's not a linear process," she says. "You increase it over and beyond a high threshold, and boom!" The U.S. government-debt-to-GDP ratio is 84%.

Senate discussing a raise in national debt ceiling to above $14 trillion


The Senate opened debate Wednesday on a plan to raise the nation's debt limit by $1.9 trillion, a move that Democrats hope will see the Treasury through this fall's congressional elections.

The record increase would raise the Treasury's legal ceiling for borrowing to $14.3 trillion -- about the size of the nation's overall economy.

Treasury expects to exceed the current debt limit of $12.4 trillion as soon as next month. Much of that borrowing is between government agencies; borrowing from foreign governments and other private investors stands at about $7.8 trillion, or around 54 percent of the nation's gross domestic product, a level that has been rising rapidly in the aftermath of the deepest recession in a generation.

Monday, January 18, 2010

U.S. debt to reach $50 trillion by 2030


Fred Bergsten, former assistant secretary of international affairs for the Treasury, sounded the alarm that dollar deficits may not be funded for long by foreign nations, including China, in the Nov./Dec. 2009 issue of the Council on Foreign Relations "Foreign Affairs" magazine.

By 2030, Bergsten anticipates the net foreign debt of the United States will exceed $50 trillion, or 140 percent of gross domestic product.

He predicted that by 2030, the United States will be paying $2.5 trillion a year to the rest of the world, equal to the nation's current total spending on health care

, just to pay the interest on U.S. debt.

Bergsten warns the U.S. debt crisis is so severe that the Obama administration must both reduce federal budget deficits and embrace a declining dollar, or face a collapse of the U.S. economy.

"These projections suggest that the United States' annual current account deficit will thus climb to almost $6 trillion by 2030, more than seven times its previous high," he wrote. "Such a sum would account for more than 15 percent of GDP, or two and a half times the peak rate of 2006, and would be at least triple the accepted international norm for sustainable current account deficits, which is four or, at most, five percent of GDP."

He continued, "It has long been known that large external deficits pose substantial risks to the U.S. economy because foreign investors might at some point refuse to finance these deficits on terms compatible with U.S. prosperity.

"Any sudden stop in lending to the United States would drive the dollar down, push inflation and interest rates up, and perhaps bring on a hard landing for the United States – and the world economy at large."

In just two days this week, the Treasury issued $61 billion in new debt


In just two days this week, the Treasury issued $61 billion in new debt – twice as much money as Japanese households put into their domestic equity funds during all of 2009, itself a 50% jump from 2008.

Yet one "big bidder" still opted to lend the federal government one fifth of that sum, according to bond analysts speaking to the Financial Times at least. And overall, the government's creditors offered to lend Washington three times the money it sought.

Now, if the Treasury didn't need that $61,000,000,000 to cover 6.3 days of spending, the money raised in new bonds between Tuesday and Wednesday this week could cover 12 days of interest due on the outstanding debt, already running above $12.3 trillion and outweighing the market value of every company listed on the New York Stock Exchange.

Friday, January 15, 2010

High U.S. debt means slower growth, history suggests


A new report that reviewed 200 years of economic data from 44 nations has reached an ominous conclusion for the world's largest economy: Almost without exception, countries that are as highly indebted as the United States is today grow at sub-par rates.

The report, "Growth in a Time of Debt," was written by two respected academic researchers who recently published a thick book on eight centuries of economic crises.

There's never been an example when the end result of socialism was not inflation


HR: First, I'm not assuming that reversing this momentum is impossible; I'm just saying it's unlikely, and historically once you start building momentum of spending money and paying people to join government programs and get all kinds of gifts from Santa Claus in Washington, it is unlikely to be reversed. As a financial advisor, my job is to help my constituents make money, and my constituents are not on Wall Street or Pennsylvania Avenue. They're on Main Street. And so my job is to help them figure out what to do with their money in these difficult times. Because I am an optimist, I am convinced that no matter how bad things look, some opportunities are out there somewhere. There's a silver lining in all these clouds.

I know I can't tell the government what to do, even if we changed the administration in the next elections. But in the meantime I can help people know what to do with their resources so that they will suffer the least damage or even prosper and make a lot of money from the environment around us by becoming mavericks. A maverick is a bovine that's left the herd and is probably lonely out there by himself for a while, but the herd will be turned to hamburger, and the maverick will make big money if he knows what to do.

TGR: Let's talk a little bit about knowing what to do and some of your advice. In How to Prosper in the Age of Obamanomics, your recently published book, you are pretty enthusiastic for gold as a hedge against the devaluing U.S. dollar.

HR: Will Rogers said, "Invest in inflation; it's the only thing that's going up." As we move into an inflationary socialist environment, bear in mind that there's never been an example when the end result of socialism was not inflation. I remember being in Russia during the Gorbachev years, when using price controls to try to stamp out inflation merely created shortages. We were on a bus going to a museum, and all of a sudden we had to stop because people were blocking the road, rushing across the street. A rumor was out that a store had some goods, and everybody was carrying an empty gunny sack. They didn't know what they might find, but they wanted it. They knew that they could use it or trade it or sell it.

Thursday, January 7, 2010

National Debt Could Bring Social Collapse


“What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.” – Adam Smith, “The Wealth Of Nations,” 1776.

So – who pays for it all? Who provides the blank check? The producers, who else? Money does not grow on trees, despite what our “leaders” seem to think – if they think at all. And don’t kid yourself about how it’s only the “rich” who will pay for this: there simply aren’t enough rich people in this country to fund a $14 trillion bill.

With a current population of 308 million, the national debt now exceeds $40,000 per capita; when the debt ceiling gets raised again in the next couple of months, that figure will jump to over $45,000 for every man, woman and child in America.

This, I submit, is an absolute looting spree, happening right before our eyes – and, as such, it constitutes the hugest heist in all of human history. It is nothing less than an irrational, amoral, legalized, politically-motivated plundering of the productive assets of the United States, with no thought or reason given to the consequences, of which there can only be one: total, terminal economic dissolution and disintegration.

And what can we expect from such a collapse? Social catastrophe, martial law and the final destruction of the American Republic. What did Rome get when she fell, devastated by taxes and control? The barbarians and the Dark Ages. What did Germany’s Weimar Republic get when she was shattered by hyperinflation? Adolph Hitler and the Nazis.

Promise to Trim Deficit Is Growing Harder to Keep


President Obama is making final decisions on his budget for next year and is still promising to outline a path to substantially lower federal deficits. But on nearly every front, that goal has gotten harder since his first budget a year ago.

A deeper recession and slower recovery than the administration initially forecast have increased the tab for economic stimulus measures beyond the original $787 billion package, adding hundreds of billions of dollars for programs like unemployment relief and tax credits for homebuyers.

The savings Mr. Obama once projected from winding down the war in Iraq are being eroded by a bigger buildup in Afghanistan than he had initially contemplated. Congress has rejected or ignored his proposals to raise revenues by changing tax rules for multinational corporations and capping deductions by wealthy individuals; for Mr. Obama to reprise those proposals could raise questions about the credibility of the numbers in his budget.

Monday, January 4, 2010

U.S. Nears the Precipice


Economists have long fretted about how an aging population and growing health-care costs will cause the U.S. budget deficit and public debt to balloon -- an outcome that could wreak financial havoc by undermining confidence in the U.S. dollar.

Friday, January 1, 2010

Obama signs U.S. debt limit increase into law


President Barack Obama on Monday signed into law an increase in the U.S. national debt limit to $12.4 trillion, the White House said in a statement.

Coming Soon: The Bill for the Massive U.S. Debt


The Spiraling National Debt

Right now, without counting future unfunded liabilities like Social Security or Medicare, our national debt tops $12 trillion. There are roughly 100 million American households. That's a national debt of roughly $120,000 per family.

In order to keep the government functioning, Congress just increased the federal debt ceiling to $12.5 trillion. And the party isn't over yet.

In an effort to keep mortgage interest rates low, the Fed pledged this month to buy yet another $500 billion of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) guaranteed mortgage securities.

But all that spending has a price. And the bill is about to come due.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the U.S. Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36% of the government's marketable debt - about $1.6 trillion will mature in the next 12 months.

A debtor nation

In all the years of the nation's existence up to the end of 2007, the total national debt held by the public amounted to 36.2% of the Gross Domestic Product (53.8% by the end of 2009). By the end of 2012, based on the proposed budget of the Obama administration, that percentage will be 71.6. Thus, in five years, the debt will nearly double. If the trend is not stopped, then by 2019, the debt will triple to over 100% of GDP.

These projections do not include the overwhelming future impact of the health care reform bill recently passed in Congress, which will cost over $2.5 trillion in its first ten years of implementation. Nor does it include the carbon cap-and-trade or any other pending spending and regulatory bills. Beyond the expenditures contemplated, these actions will stifle domestic economic growth, so necessary for government revenue, and leave the now-global economy in the hands of our potential adversaries.

To put this into perspective, by 2019, three items -- interest on the debt, Social Security, and Medicare-Medicaid -- will account for 92% of all revenue to the federal government. Everything else will have to be funded by borrowing.

If Social Security Gets No Increase, Why Do Federal Workers?


Regarding the Dec. 14 front-page article "1.1 Trillion Plan - Senate Sends Spending Bill to Obama," page A1 and A6 - Spending - Column 3, Paragraph 3, "The bill also approves a 2 percent pay increase for federal workers." The government stipulated that people on Social Security, Social Security Income and Social Security Disability will not be getting a raise next year in their checks because there has been no increase in inflation this year.

If this is true, then where did they find money to give their federal employees a 2 percent raise and why? Why should they get raises, but elderly and sickly cannot?

They're not having to choose between paying bills, electricity, eating or buy medications. They probably make three times what the elderly do.

These people on Social Security have paid into it all their lives, so when the time came for retirement, they thought they would be OK.

We're in a recession. There is no money for increases in Social Security, but there is always money for raises for government employees.