It's time to live within our means once again
The president had some bold words for the American public earlier this week. He said things that some people didn't want to hear. He talked about responsibility and sacrifices.
"We simply cannot continue to spend as if deficits don't have consequences, as if waste doesn't matter, as if the hard-earned tax dollars of the American people can be treated like Monopoly money, as if we can ignore this challenge for another generation.
". . . It's time to save what we can, spend what we must and live within our means once again."
- President Obama, 2010
After saying these bold words he then presented Congress with a plan for the largest deficit in American history. I guess politicians are immune from irony.
First of all, let's break down the budget itself.
Notice how the military budget is the largest item on the agenda, yet Obama's plan to freeze spending exempts military spending. How can you possibly expect to get spending under control when you exclude the largest item in the budget? It's a joke.
And it's not like we don't spend enough money on guns and bombs. It's the one area that we overwhelm the rest of the world. Our spending priorities are all screwed up.
Some neo-Keynesians may warn about the dangers of cutting spending while the economy is weak. On the surface that may be a real concern, but it ignores the most important and relevant issue: is the spending doing any good?
For instance, we could spend billions of dollars paying people to dig ditches and then fill them back in. Would this be a good way to spend the taxpayer money? Of course not.
Ironically if we had spent that money on ditch-digging/filling-in we might have had more to show for the monstrous deficits of last year.
For starters, we spent at least a trillion dollars bailing out the Wall Street banks. Why was it important to bail them out? Well, the only useful purpose of banks is to loan money. Did they use the bailouts to loan the money? No.
What the Wall Street banks executives did do is give themselves record bonuses. Personally I think putting unemployed people to work digging ditches would have been a better use for the money.
That isn't the only way we spent taxpayer money last year. We also spent trillions of dollars on the housing market. Was that money well spent? Let's see what SIGTARP has to say.
To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
In other words, we've spent countless dollars taking Wall Street's bad investments in the housing bubble and uploading it onto the public balance sheet. Do you think this is a good use of taxpayer money? Wouldn't it have made more sense to spend the money on rebuilding our railway and electrical infrastructure?
Then there is the questionable wisdom of using taxpayer-funded mortgages so people could flip houses.
My point is that people shouldn't get hung up on the amount of money, but instead they should concentrate on how poorly it is being spent.
With that said, I am now going to contradict myself and point at the sheer size of the coming budget deficit.
You aren't living within you means if the debt is going up far faster than the GDP.
The $1.6 trillion deficit forecast for the current year represents 10.6 percent of the U.S. gross domestic product, making it the biggest by that measure since World War II, according to administration figures. The deficit in 2009 was $1.4 trillion.
Now I'm going to contradict myself again. I said above that military spending was the one area where we overwhelmed the rest of the world.
The truth is that there is another area we are even more dominant: borrowing.
This brings up the question of who is going to lend us all this money? Morgan Stanley recently asked that question, but failed to come up with an answer. What they did was find a huge gap with nothing to fill it.
Why is that? One reason is because foreigners, and especially China, has balked at funding our ever greater borrowing demands.
"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."
The other reason is because the Federal Reserve, which has funded these massive deficits so far, is about to end its buying programs.
In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.
How this will all end up is beyond my ability to predict, but I can say for certain that unless we fix our priorities right now, we are going to all suffer.
- midtowng's blog
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- Email this Blog entry
- 3 points
As a post-Keynesian I will say how to spend does matter
Again, I have said this before and I know it's hard to overcome the way we have been taught but - federal government is not like a household or a business. So, when you say "live within your means". From a government perspective, this only matters if we are operating at full employment and full capacity which we are far from.
If we are operating at full employment - GDP would be much much higher and all these ratios to GDP would not look as bad. Revenues would be higher as well.
RebelCapitalist.com - Financial Information for the Rest of Us.
Oops I outed myself.
Post-Keynesian economics
RebelCapitalist.com - Financial Information for the Rest of Us.
Government is different than household/businesses
Two very big reasons:
1) Government cannot be forced into insolvency;
2) Fiat currency system
RebelCapitalist.com - Financial Information for the Rest of Us.
I beg to differ
Governments get forced in default all the time. Argentina circa 2001 was a good example. Zimbabwe a year or so ago is another.
Within a year or two you will either see Greece join the club, or a massive bailout.
Then, of course, there is the what level of government. Cities and counties around the country are going into default, and soon states will join them (although there is no bankruptcy mechanism for states right now).
My overall point is that if people don't lend America money then we will default - either by the traditional way, or by the printing press. Either way it is breaking a promise of repayment.
Several things:
1) Zimbabwe - is a much more dysfunctional government than ours - it is about context.
2) Argentina issued "foreign currency" bonds - ie. u.s. dollars which they defaulted on and they pegged their currency to US$. This is a HUGE difference.
3) Greece doesn't have sovereign fiat currency - it has the Euro - another big difference.
4) Most state and municipal governments are required to balance budgets - Federal government does not.
To your overall point, there will be a "lender" to America the question in terms of bond market is at what price. We have a very powerful thing - tax system. There will not be a broken promise to repay.
RebelCapitalist.com - Financial Information for the Rest of Us.
Ignoring the exception
Those exception you list encompass most of the countries on Earth. In fact very few nations don't fall into one or more of those categories.
Nevertheless, I want to address this statement:
I must disagree. In fact, the quote from the Chinese finance minister disagrees as well. I've posted several essays which show that there simply isn't enough money in the entire world for everyone to spend their way out of recession at the same time.
Which doesn't mean much when we are already spending about 40% more than we take in. America is in the same position as California, except that the federal government has a printing press.
There will be if you consider the promise to repay be in dollars of near equal worth.
The exceptions matter
1) control over sovereign fiat currency; and
2) ability to issue debt in your own currency are big deals.
UK, correct me if I am wrong, is the only Euro country that can claim these distinctions. Others are Japan and Australia. I don't think there are too many others.
And these are a very big reasons why US is not like California plus fact California must have balance budget.
The entire world is not spending their way out of recession at same time. Australia pulled back - China has even pulled back.
There is NO promise to repay be in dollars of near equal worth - there is a certain amount of inflation risk even in U.S. government debt. What matters is that private/foreign savers get those coupon payments and principal repayments at end of term - U.S. Treasury does that and it fulfills its obligations.
BTW, how much of what Chinese Finance Ministers say is for Chinese domestic consumption/politics.
RebelCapitalist.com - Financial Information for the Rest of Us.
Damn few exceptions
China has hardly pulled back. They might have the biggest bubble economy in the world at present. As a percentage of GDP, China's stimulus was much larger than ours.
There damn well is an implied promise. If there wasn't then interest rates would be sky high right now.
OK maybe not China,
But, I still disagree with your original point: "the entire world is spending its way out of the recession". Look at countries that couldn't "spend their way out", countries that don't have a sovereign currency - Spain, Ireland, Greece. Germany didn't have to. Canada didn't have to. Brazil didn't have to. Who else?
As for interest rates and deficits, besides our low long-term interest rates, look at Japan. Japan has had very high deficits to GDP and their interest rates are just as low.
An "implied promise" is worth jack in the bond market - either you can pay or you can't. Interest rates are still pretty low so I guess the bond market is thinking we can pay and I don't care what CDS market is saying.
RebelCapitalist.com - Financial Information for the Rest of Us.
midtowng, I believe you are sincere and genuine when
it comes to the deficit but there are many others who use cutting the deficit a ruse for destroying our meager social safety net:
GOP Rep: Let's Privatize Social Security and Cut Benefits
RebelCapitalist.com - Financial Information for the Rest of Us.
Re:
Rebel, just because someone wants to use something as an excuse to move forward a political agenda, doesn't mean the excuse doesn't have merit. It only means they are opportunists.
Never let a crisis go to waste
I cannot remember who said that, but it's along the lines of disaster capitalism, i.e. create a crisis or when a crisis occurs...that's when to screw the people before they even know what hit them, or take some crisis and use to to advance your own agenda.
I think it was Milton Friedman but could be wrong.
Historic quote
Malthus, Friedman & Naomi Klein (repeating Friedman, I think..).
Don't see any merit whatsoever
Instead, all I see is a continuation of business as usual in the American Empire. The person in the White House once again proposes a budget with increased war spending, decreased domestic spending.
Next, he claims he's going to raise taxes on corporations.
Huh???? The majority of the corporations -- beginning at the top richest ones, then going down -- don't pay fed taxes. Therefore, the tax burden is shifted further onto the smaller companies and businesses, which will further affect the lower echelon workers normally.
Next, they claim that healthcare spending is the single largest piece of the GDP? Or the deficit? Or something else equally confusing?
Simply stated, the single largest spending -- non-military, non-imperialism, is the phantom spending from the loss or lack of tax recovery from the richest corporations and individuals.
A lot of reframing going on; very little real logic in the matter.
Everything appears to be to squeeze every last cent from the Future Serfs of America (FSA).
ya got this one right midtowng!
Man, o man have I also been harping on the type of spending, the damn "Stimulus" isn't true Keynesian by even the basic equation.
I agree and one would think this is where the budget deficit people and the deficit spending to stimulate an economy people could come together...
because they are not, nope, not at all getting the most bang for the buck.
We can take a host of DHS contracts for example, in the billions of spending with literally no results, nothing to show for them.
That's what's wrong, it's just glorified financial transfer and not in the national interest or true Keynes and massive waste, i.e. digging holes to fill them back up or maybe it's worse than that for someone is charging $1000/hr for one worker to do it (and paying that worker $7/hr to boot).
Magical Tax Numbers Mystery??
Take a look at the 2005 GAO Federal Tax Revenue pie chart below and compare those numbers with the first chart in midtowng's blog here.
Notice anything odd about the proportional tax increase ratios? It really looks peculiar to me? The slight increase in corporate taxes follows the logical trend in the large ongoing decrease in corporate tax recovery (their refusal to pay taxes) as pointed out in the recent Full Spectrum Inequality blog.
I've racked my miniscule brain trying to think up possible scenarios to work out to such proportional tax increases (as, say, comparing the social insurance to the individual tax increases, etc.), but can't think of anything to fit?
keeping profits offshore
They offshore outsource jobs and literally have software programs to calculate the best tax advantage by playing nations against each other. I'm assuming that's what you're looking at as to why corporations do not pay hardly any tax. That's why the largest corporations seem to pay the least, they offshore outsource jobs and keep profits offshore, reinvesting them depending on that overall profit scheme. I need to look into this more too, i.e. I believe quarterly reports are global profits but when it comes to paying uncle Sam, this is the game.
Sorry, you missed my point or I wasn't very clear
Nope, I was using that as an example of the one thing that is understandable --- look at the ratio between social insurance taxes paid and individual taxes --- and the previous ratio --- just doesn't look right, something appears amiss?????
eek, sorry little thick, I see it now
ok, the midtowng's graph is about a 27% ratio of social taxes to income, yet the 2006 graph is 85% ratio of social taxes to income taxes.
Even if I put it as somehow doubling down in the count, on social taxes it's still 42% so who knows..
I think 27% ratio seems to be reality though. I don't know the context, is it possible the GAO had a little GOP graph maker in there, trying to freak everybody on in order to attempt to privatize SS?
I have no idea.
Thanks, but still kind of shocking
Thanks. The GAO has enjoyed a much better track record than any other government-related stats group (such as the OMB - from whence the 2009 graph originates - and CBO), so I don't necessarily doubt them.
It just strikes me as a peculiar numerical oddity that how closely these numbers are converging. Indicative of zero economy? Social insurance - doubled under The Reagan Administration to fund the tax cuts for the wealthiest - should still be significantly under the individual tax revenues?
This should be the primary focus of the news -- not what's blanketing the PopCultureMedia right now: gays and lesbians to be allowed in the military (they were certainly in it back during the draft when I served -- although I'm mystified as to why anyone would wish to be in the military).
This GAO graph makes no sense
just by looking at your own paycheck stub. 27% seems more in line, plus on personal income, SS has a capped amount, around $105k (or so) and then above that isn't taxed.
So, yeah, I agree, but even the GAO can be pressured.
Want to see something on derivatives and the political attack on the GAO as a result?
interview with ex-GAO guy who did the 1995 GAO report on the derivatives ponzi scheme, time bomb. Yes, our lovely government knew about this way back when.
They cut funding to the GAO and I am sure they are probably pressured for you are right, they are the last objective hold out in many ways.
But it does seem that instead of paying attention to them, their damning reports go ignored (as do other agencies).
Thanks for that awesome GAO link/interview
I somehow missed that one, really a tremendous read.
And I'm not surprised at Greenberg's response -- yet another in the infinite amount of indicators as to AIG's culpability in the meltdown and continuing economic downturns.
Not to worry, though. While at the Starr Foundation, Hank has been sure to support "news" programs to bolster Wall Street's accidental perfidy.
I think we got a bigger problem with private debt
Household and business debt is still too high.
RebelCapitalist.com - Financial Information for the Rest of Us.
Did I write something that overlords didn't like?
Funny story (based on YouTube video): I told my youngest son that if you typed "google" in Google that you can crash the internet. I said to him watch - he was freaking out watching - I hit send. By absolute coincidence, a few minutes later Google was actually down - at which point he was in tears worried that I was in trouble. It took a while to reassure him that it wasn't my fault and it what I said about google was a joke.
RebelCapitalist.com - Financial Information for the Rest of Us.
nice, are you talking about the site crash?
Nice joke, there is something wrong with the site, I've got it narrowed down but it's not fixed yet.
Anyone think that our government can never reach
a point of dysfunctional ? Ha, some people would say we are already there.
Throughout history people miscalculated how fast things can change or how hard it hits. Try upsetting the food distribution system and you'll see how long it takes for things to go dysfunctional.
You think people can't or won't revolt if taxes get too egregious? The middle class has yet to find its real voice or its real power. There aren't enough Praetorian Guards on staff to put all the citizens in jail that could reach the boiling point.
Ya all like the idea that China, (who I don't think has been one of our long time allies), owns us? Not the first financial master that I would choose.
Economists can spin it, turn it upside down, inside out but financial responsibility is something that is good for government. Most economists I've known during my business years seem to sometimes leave something out of their process of theory. It doesn't matter if they are Keynesian, Post-Keynesian or go way back to Mr. Smith. They so often leave out common sense. Common sense is lacking in our Washington leaders and therefore they can / will glean onto their chosen economic theory as if it were their basis of God.
How long can they inflate the money supply? Does that not matter anymore? I personally did not enjoy the days of inflation during the Carter years. It was a nasty thief.
common sense
I'll agree with that one and I think a good example of a common sense is missing post is midtowng's new one on the budget deficit and spending.
So often taxes, spending, deficits are used to divide people into political niches, but the real issue is the waste, the spending that doesn't give any bang for the buck.
There is so much policy like this, where it's obviously no common sense and it's also where people of different philosophies on government, taxation and so forth I think can come together.
I agree on waste
Fiscal policy can work and it should be done in the most efficient manner in terms of costs and full employment.
RebelCapitalist.com - Financial Information for the Rest of Us.
Sometimes I think they make wasteful
policy on purpose. It helps keep the people crowing at each other. Each bird pecking at their personal crumb, their group of choice.
Instead of giving the birds the power to produce their own crumbs, government seem intent to limit the crumbs, so that we peck each others eyes out. It all happens before the birds the game at hand.
Now the birds are getting a bit restless, the birds are flying over the heads of those in Washington, they are worried. They are putting up their umbrellas to protect from the bird droppings but the birds are tired of the crumbs. The birds see the wasteful lifestyle of those in Washington, the expensive wines, the expensive meats. All the while there are more birds that see the bleak future for their little birds.
For a while the birds believed the siren song that the USA didn't need capital producing manufacturing, that the USA would be the brains of the world. But eagles are appearing on the horizon to tell the flocks it was a ruse.
Ok....enough of my bird analogy. The point being that people are waking up to the lies and waste.
Question:
Last time I checked, growth in money supply - M1 & M2 - was heading south fast. Did I miss something?
RebelCapitalist.com - Financial Information for the Rest of Us.
Maybe I am the one that hasn't been
watching closely. I only assumed that the government was going about their business-as-usual printing of that there good old fiat.
But apparently the supply chart headed down. If a gun were held to my head I would swear I just checked but time passed me by, something that is accelerating the closer I get to age 60.
Money Supply
All Those Stats Can Be & Are Manipulated
Its likely this was shown for Bernankes confirmation.
This Will Only Continue Till There is a World Currency
When the rest of the world abandons the dollar as the worlds currency reserve (make no mistake this will happen within the next 10 years)then the days of the US printing at will will end.
Problem solved.
I don't think you meant one world
currency. I think you mean that once the dollar is not longer king-dollar it will end. I agree. Once that happens the game they have been playing is over.
I agree with you Jim. It
I agree with you Jim. It looks like we are heading for a one world currency...next stop: one world government? I thought it interesting that the US spends the most on defense, so it appears history is repeating itself...again. Good thing we have "bread and circus" to distract ourselves. (mmm...McFatburgers and American Idol!)
Debt Forgiveness . . . the only solution
First I think the blame should be put where it belongs: on the Central Banks and the World's Elite. They were the ones that destroyed the US economy through offshoring jobs and factories.
I say we take every dime back from TARP, TARPII etc (e.g., about 25 Trillion in reality) and give about $150,000 to each LEGAL AMERICAN CITIZEN. They will have to then pay off all debt (mortgage, credit, student loans etc.).
Next we put forward Basic Income Gauruntee's (Richard Cook), Basic Pension Gauruntees (William Grieder) and more debt forgiveness as necessary (Micheal Hudson).
Next we polish up our nuclear arsenal to ensure no external problems from China. Having done this we can retrench all the money wasted on defence . . . at least cut it by 50% over the next 10 years.
Bottom line. We got screwed by these people and now they have to pay. No more foreclosures or evictions for at least 10 years while we analyse the "crime scene" and determine how we achieve a sustainable economy.
There is still hope.
For more go to my web and check out the "New Agenda for America."
Great web (Economic Populist) by the way!!!
Bruce W. Cain
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