Exploding debt threatens America

Discussion in 'Politics' started by madanthonywayne, May 27, 2009.

  1. madanthonywayne Morning in America Registered Senior Member

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    I came across an excellent article on the out of control spending under the Obama administration and its potential consequences.

    Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

    “A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,” as the risk rating agency stated last week.
    Has the US ever before been in danger of losing our triple A rating? If we were to lose our triple A rating, the cost of servicing our debt would skyrocket. How could we possibly service that debt?

    I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?
    So a 60% across the board tax increase. Hmmm. How would that affect the economy? I thought Obama said he'd lower taxes on 95% of the population? What else could we do?

    Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

    And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce.
    100% inflation. Recessions every three or four years. Surely the Obama administration wouldn't pursue this policy, would it?
    The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably.
    There are many excuses the administration and its apologists will advance to justify letting this disaster occur:

    “We have an unprecedented financial crisis and we must run unprecedented deficits.”
    True, but:

    While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession. Such thinking is irresponsible. If you believe deficits are good in bad times, then the responsible policy is to try to balance the budget in good times. The CBO projects that the economy will be back to delivering on its potential growth by 2014. A responsible budget would lay out proposals for balancing the budget by then rather than aim for trillion-dollar deficits.

    “But we will cut the deficit in half.”
    Really?

    CBO analysts project that the deficit will be the same in 2019 as the administration estimates for 2010, a zero per cent cut.
    “We inherited this mess.”
    Again, true. But is that a reason to make it twice as bad?

    The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan’s last year in office, the same as at the end of 2008, President George W. Bush’s last year in office. If one thinks policies from Reagan to Bush were mistakes does it make any sense to double down on those mistakes, as with the 80 per cent debt-to-GDP level projected when Mr Obama leaves office?
    http://www.ft.com/cms/s/0/71520770-4a2c-11de-8e7e-00144feabdc0.html
    The article ends saying that the time for such excuses is over, while the government is talking about creating an agency to regulate systemic risk in the private sector; it is government itself that is creating the greatest systemic risk!
     
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  3. Buffalo Roam Registered Senior Member

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    Just wait till we get hit with the inflation that comes along with all that free money on the market.
     
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  5. baftan ******* Valued Senior Member

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    It's rubbish. If you are aiming to change the entire system, the new socio-political environment would re-define everything including "profit" , "finance" and "debt". So you take risks. Just as todays' computerised economy have produced more output and value than for example 1960s or even 1970s economic predictions could ever imagine. And new system requires investment (money, time and effort). If you do not have it you could find it from somewhere else. Investors check out not only your assets, but the capacity of your project as well. If you convince them, they want to be part of it.

    Else, I mean if there is not a new project, and you put yourself under a debt for just to keep people happy with their "spending money on shit" therapy, yes this would be idiotic. Obama administration is in a sort of situation where taking risks for greater results are acceptable, but letting other countries to lead scientific and economic rollercoaster of the world is not an issue. This is why Obama style visual and principle shake-up was necessary, and this is why he is there and planning to spend the money he doesn't even have it in his pocket.
    Rough times.
     
    Last edited: May 27, 2009
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  7. iceaura Valued Senior Member

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    Sure - end of last year.

    You are beginning to get a picture of what the lefties have been screaming in your ears for a long, long time: W&Co were a disaster, and they were robbing the country blind.

    Bills are coming due, Macho Man blew the money in the kitty, the loan shark is the guy to see. Tough times.
     
  8. nirakar ( i ^ i ) Registered Senior Member

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    I don't think the USA will ever lose it's official (Standard & Poor's Etc) AAA rating because the USA can always repay. But what will be the value of the dollars the USA repays with?

    I have no respect for Standard and Poors or Moody's anyway. They do not do much research when they issue credit ratings for corporate Bonds and are more of a scam than an actual source of information. They are a lagging indicator. Unfortunately our economy needs Bond ratings but to function but has no mechanism in place to pay any institution to create high quality bond ratings.

    I began to worry about the US debt during Reagan and Bush 1. Now I am dropping the debt worry and replacing it with worry about the dollar because I don't think the debt will ever be repaid from taxes. In my opinion the debt will be repaid or at least the interest on the debt will be paid for with the creation of money.
     
    Last edited: May 27, 2009
  9. madanthonywayne Morning in America Registered Senior Member

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    As was discussed in the article linked to in the OP, monetizing the debt (in light of Obama doubling our debt as a percentage of GDP) will requirre 100% inflation just to get us back to where we were under Reagan and Bush! Obama's spending policies are irresponsible in the extreme.
     
  10. iceaura Valued Senior Member

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    Obama has not doubled the US debt, even if you assign the entire budget this year to Obama (which would be silly, but silliness has never stopped the wingnuts).

    Obama's policies have had little or no effect on GDP as yet.

    I'm not sure how you are coming up with these numbers, but you appear to be comparing and exaggerating various different measures of "debt" and "GDP" without paying attention to reality.
     
  11. joepistole Deacon Blues Valued Senior Member

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    Where was all of this concern when the train wreck was being created eight years ago? Now the train wreck is trying to be cleared, these guys (Republicans and their ditto heads) want to put the train back in the ditch and burry it.
     
  12. spidergoat pubic diorama Valued Senior Member

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    And doing nothing would be responsible? No wonder your party is the minority (and sinking fast).
     
  13. S.A.M. uniquely dreadful Valued Senior Member

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    It was a mistake to let Lehman fall. Thats one thing I cannot understand the reasoning behind.
     
  14. iceaura Valued Senior Member

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    The "reasoning" remains unknown, but several explanatory factors are visible.

    For one thing, it was a competitor of Goldman Sachs. For another, the entire crisis has worked to the potential gain of its engineers, who if successfully bailed out will have increased their hold on the US economy - letting Lehman go under and touching off the implosion has worked, so far,if viewed as a tactical move in a power grab. Furthermore, the reins of power then were in the hands of sincere believers in what we may as well call Randite, or possibly Aynal, economics, who were oblivious to the actual economic foundations and operations of the derivatives market (such market operations do not exist, in that world). Only the advent of the actual consequences of Lehman's collapse jolted them from their state of delusion.

    And of course the obvious: emergency response to Lehman's troubles by the well-informed would have required admitting the nature of the bubble everyone involved was riding - which would have meant publicly admitting the nature of what they themselves had been doing for the past few years.
     
  15. S.A.M. uniquely dreadful Valued Senior Member

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    Sounds reasonable. My own thoughts were that one could choose between assuming the financial powers that be are either incredibly stupid or incredibly smart. The incredible stupidity would have been that they overlooked the investment that Lehmans had in the money market funds and hence did not predict the 400 billion dollar run on the credit market that the fall of Lehmans led to.

    The other, ie incredibly smart, is that they did and used Lehman to shut up everyone who was against bailing out the corporations. If we go by the second assumption [i.e. they did the right thing at the wrong time deliberately], it would explain how the corporations are getting tens of billions now [when 14 billion seemed unsurmountable before for AIG] . An additional advantage would be that the huge payouts have desensitised the public to the amounts being thrown into the mess and hence its now easier to pass ridiculously high bills through Congress.

    An additional conspiracy theory is that Lehmans fall made McCain look like a complete fool. After September 15, he never really recovered, when he was leading the weekend before.
     
    Last edited: May 27, 2009
  16. John99 Banned Banned

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    i dont think mccain was ever leading. if he was it was just for a very short peroid.
     
  17. S.A.M. uniquely dreadful Valued Senior Member

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    edit: my mistake. That was a November poll. <scratch conspiracy theory>
     
    Last edited: May 27, 2009
  18. John99 Banned Banned

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  19. madanthonywayne Morning in America Registered Senior Member

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    I was speaking of the projected debt reaching 80% of GDP (double what it was under Bush) as referenced in the article in the OP.
    That quote was from right before the election. Pretty much the last poll to ever show McCain ahead. But, as you said, McCain was in the lead after the Republican convention and only lost the lead when the economic crisis began to develop. Especially after McCain tryed to cancel the presidential debate so he and Obama could be in Washington to help deal with the crisis and Obama declined.
     
  20. Not my puppy Registered Senior Member

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    John99, it is getting harder and harder to blame Bush but that will not stop the true Bush haters; they are delusional and lost in the past.

    But our debt is a growing problem and the policies of our government have caused the problem and are continuing to cause the problem. If Pres. Obama wants to keep his angelic image he had better actually do something to fix the problem. It is virtually inconceivable that he will do that because he will implement his agenda of socialism while his party has complete control. It doesn't matter to him or the current leading party control that we will not be able to recover.

    What "not be able to recover" will mean is that it will be the talk of D.C. after the people throw out the current dogs in exchange for a new set of dogs. But there will be hearings and charges against the Pres. and the radicals who are calling the shots as our country fades into the has-been's of history.

    Buy gold and I am not just spamming about that.
     
  21. S.A.M. uniquely dreadful Valued Senior Member

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    For some reason I thought the McCain crisis [when he made that " US economy is basically sound" speech] was closer to the Lehman one. My bad.
     
    Last edited: May 27, 2009
  22. Norsefire Salam Shalom Salom Registered Senior Member

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    You know, when you tell some people that all the gov't does is "tax and spend", they'll say "well what else can we do?"

    You know what the gov't can do? Nothing! That is what it should do. Let the market function and stop with the regulations and taxes and money out of no where.
     
  23. iceaura Valued Senior Member

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    I know that, I just can't figure out where those numbers are coming from or how Obama would be responsible for anything like that.

    W's tax policy and spending practices were projected to double the national debt, on their own, before 2012, for example. That was before W's TARP bailout of the Republican bankers. Are these projections from the same tax assumptions as those? Because relabeling the current taxation setup as "Obama" policy is a bit strange, but what other assumptions can there be?
     

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