Monday, July 28, 2008

After the blame has fallen...

Well, the party is about over, and the maitre d' is looking for the host.  Our budget deficit is going to be a record, even though we aren't sure how huge it truly is.

It may be our ability ot soak up the savings of the world has overrun the ability of others to save.  Not only that, people who have been buying our debt are beginning to think about spending some instead.

For once, a consensus seems to be emerging there is little upside in shortfall.  If the economy were galloping along, a deficit is a regrettable but manageable problem.  But our current situation is far from that.
It’s bad, really bad. The worst part is that we don’t even know how bad it is.

The 2009 unified budget deficit is estimated now at $490 billion. Some of that number is expected and fine - during a recession taxes fall and certain expenses like unemployment benefits rise.

It’s still a really big number - and it turns out that the real deficit is much, much higher.

First, the number doesn’t account for $80 billion in war costs.

Next, the number is for the “unified” budget deficit. “Unified” in federal budget speak means the cash in, cash out budget. This ignores serious obligations the government has taken on this year - veterans benefits to the hundreds of thousands of troups serving overseas, Medicare and Social Security payouts to the baby boomers etc etc.

The real government budget deficit is the number that takes into account all these future liabilities. It is *probably* $200 billion higher than the fictional unified budget deficit, but no one really knows. [More]

While I understand the relationship between our enormous economy and the debt we can reasonably carry, I think we have passed the point of rational leverage. The test of this problem will be sales of our debt, and what interest rate is necessary to attract foreign buyers.

When farmers lobbied for a huge Farm Bill, we did not care where the money would come from. Ditto every other special interest.  Ergo - a record deficit with no end or turning in sight.

In the meantime, look for these tried and true rebuttals:
  1. The deficit is small relative to the size of the economy.  Or in other words, "Deficits don't matter until they approach 5-6% of GDP".
  2. Waste and fraud, fraud and waste, etc.  We somehow magically ferret out all the misspent dollars and apply them to the deficit without cutting programs or raising taxes.  Amazingly, I guess we've never thought about doing this before, or we have never had anyone in Washington who was able to even begin the process. But our problems will be solved simply by taking this obvious step.
  3. I don't want to talk about it.
Folks, there is only one politically realistic way out of this disastrous fiscal impropriety: inflation.  While it will destroy the futures of those who swallowed the Horatio Alger mythos of America, and reduce our currency to laughingstock, it will make our enormous debt less of a problem for this generation.

This suggests zooming prices with matching interest rates, and cash as a poor investment choice.

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