The Risk of Runaway Defecits

Discussion in 'Economy' started by jreeves, May 12, 2009.

  1. jreeves
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    jreeves Senior Member

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    The Risk of Debt - Megan McArdle
    So why should we worry about the ability of the government to borrow? For the past decade, at least, the American government has been able to borrow pretty much all the money it wanted without seeming to pay much of a price in terms of higher interest rates. Bush's deficits were worrying in a number of ways, but they certainly didn't crowd out private investments, and we got a good deal on the money.

    But Obama's spending plans are extraordinarily ambitious. His projected deficits for the rest of his possibly presidency are higher than the "runaway" deficits that plagued most of the Bush administration--and after the first few years, that's not stimulus, that's ordinary spending outstripping revenue. For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is? That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.

    The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future.
    Probably, there will be a Republican in charge. Markets hate Republicans.

    But the problems faced by Clinton were modest--moderately higher interest rates, possibly, for ordinary borrowers. The Obama administration is trying to borrow 13% of GDP this year. If bond markets think future deficits are a problem, they can rapidly push up rates to the point where that borrowing becomes unaffordable. And if they do, it will be clear that they are pricing in that ugly, ugly CBO graph:
    $wapoobamabudget1.jpg
    Obama can assure voters that he inherited these deficits. But bond markets pay closer attention to the fact that Obama has already increased the projected deficit he inherited by 50%:

    The White House raised the 2009 budget deficit projection to a staggering $1.8 trillion today. For context, it took President Bush more than seven years to accumulate $1.8 trillion in debt. It also means that 45 cents of every dollar Washington spends this year will be borrowed.

    President Obama continues to distance himself from this "inherited" budget deficit. But the day he was inaugurated, the 2009 deficit was forecast at $1.2 trillion -- meaning $600 billion has already been added during his four-month presidency (an amount that, by itself, would exceed all 2001-07 annual budget deficits). And should the president really be allowed to distance himself from the $1.2 trillion "inherited" portion of the deficit, given that as a senator he supported nearly all policies and bailouts that created it?

    The president also talks of cutting the deficit in half from this bloated level. But even after the recession ends and the troops return home, he'd still run $1 trillion deficits -- compared to President Bush's $162 billion pre-recession deficit. In other words, the structural budget deficit (which excludes the impacts of booms/recessions) would more than quintuple.


    After the recession, Americans can look forward to out of control inflation.

    With a $1.8 trillion budget deficit, is there anyone else that thinks Obama should be cutting more than $17 billion?
     
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  2. Xenophon
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    Xenophon Gone and forgotten

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    Lots of people think that, it's what the tea parties were all about.

    The left dismissed them as racist rednecks and continued their marie antoinette version of politics: 'Let them eat cake"

    Like the late queen, such stupidity will eventually cost them their political necks.
     
  3. Iriemon
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    Iriemon VIP Member

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    A lot dismissed them because they largely sat by quitely while their guy Bush, who inhereted a surplus, ran the debt up to $11 trillion and it was only after a Democrat took office, inhereting a trillion dollar deficit and an economic catastrophe, that they suddenly took this great interest in the debt. Cricitism is less effective when it is smothered in the stench of hypocrisy.
     
    Last edited: May 13, 2009
  4. Toro
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    Toro Diamond Member

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    I agree with this. However, if you are a Republican and you weren't banging you hand on the table and screaming at the top of your lungs that the Bush White House was running needless deficits, then you don't have much credibility.

    Competent fiscal policy is to run surpluses in good times and deficits in bad. You run surpluses so you have some firepower to deal with the bad times. Yet the Bush ran not only deficits in good times - remember, according to the Veep, "deficits don't matter" - but Bush cut taxes while embarking on what is so far the third most expensive war in the history of the nation. Bush should have been running surpluses and paying for the Iraq war as we went.

    With the exception of maybe Ron Paul, pretty much the entire Republican party cheered the White House on while Bush wracked up debt during a time of economic expansion. This is why the Republican party has no credibility on this issue.
     
  5. DiamondDave
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    DiamondDave Army Vet

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    Yet many of the conservative citizens of this country have always complained about wasteful spending, running deficits, and all that stuff, NO MATTER WHO WAS PRESIDENT....

    Did the REP representatives act poorly?? Yep.. and I support getting them out of office, to be replaced with true conservatives, and have for a while now
     
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  6. jreeves
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    jreeves Senior Member

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    Obama will run up the national debt by about 20 percent this year alone, that's why everyone should be concerned. On top of that, the debt will exceed 12% of the GDP. Pile on that the bleak outlook of entitlements and their is disastrous days ahead for this country. Yes I was one those who called Bush out for running deficits of 4 to 5% of the GDP.
     
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    Last edited: May 13, 2009
  7. Iriemon
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    Iriemon VIP Member

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    Good for you, I was also. But most everyone loves tax cuts.
     
  8. jreeves
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    jreeves Senior Member

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    Spending caused the Bush deficits, not tax cuts. Tax revenue was actually increased versus CBO projections of tax revenue. The medicare act of 2003, has got to be the dumbest piece of legislation ever signed into law.
     
  9. Iriemon
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    Iriemon VIP Member

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    Year - Actual Rev. - Proj. Rev.
    2000 2025.2
    2001 1991.2 2135
    2002 1853.2 2236
    2003 1782.3 2343
    2004 1880.1 2453

    Source Actual revenues: CBO Historical table: http://www.cbo.gov/budget/historical.shtml

    Revenues projected by CBO as of Jan 2001: The Budget and Economic Outlook: Fiscal Years 2002-2011
     
    Last edited: May 13, 2009
  10. Toro
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    Toro Diamond Member

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    Spending and tax cuts caused the budget deficits. Had tax cuts not occurred, the deficit would have been narrowed or perhaps eliminated.
     

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