James Pethokoukis

Politics and policy from inside Washington

How BaucusCare is like eating pie

Sep 16, 2009 20:32 UTC

From Greg Mankiw:

In other words, the plan would reduce the deficit if it were carried out as written, but there is good reason based on historical experience to be skeptical that it would be.

Let me try to put CBO’s point in a more familiar setting:

Your friend Joe, who says he want to lose weight, asks you for an extra slice of pie after dinner. Naturally, you are doubtful about the wisdom of the request.

“Ahem, Joe,” you whisper, “Aren’t there a lot of calories in that?”

“Yes,” he says, “but the pie is part of a larger plan. I am committed not only to eating that slice of pie but also to going to the gym every day for the next week and spending at least half a hour on the treadmill. That exercise will more than work off those extra calories.”

“But that’s what you said last week, when you asked for piece of cake. And you didn’t go.”

“Yes, I know” he replies ruefully, “but this time I really mean it….Can you please pass the pie?”

COMMENT

What a joke, a moron interviewing a moron, talking about spending a trillion dollars, comparing it to cheesecake. How did either of these jerks get a job?

Taleb: Suck it up, America!

Sep 16, 2009 14:25 UTC

Nassim Nicholas Taleb (via The Globe and Mail) on why the banks should not have been bailed out and why China should not buy our bonds:

Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren. What is the effect? The doctor has shown up and relieved the patient’s symptoms – and transformed the tumour into a metastatic tumour. We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment. …  A lot of the growth of the past few years was fake growth from debt. So swallow the losses, be dignified and move on. Suck it up. I gather you’re not too impressed with the folks in Washington who are handling this crisis.

Ben Bernanke saved nothing! He shouldn’t be allowed in Washington. He’s like a doctor who misses the metastatic tumour and says the patient is doing very well. The first thing I would tell Chinese officials is, how can you buy U.S. bonds as long as Larry Summers is there? He’s a textbook case of overconfidence. Look what happened to Harvard’s finances. They took a lot of risk they didn’t understand, and it was a disaster. That’s the Larry Summers mentality.

The government bubble

Sep 14, 2009 18:51 UTC

Ed Yardeni gets it right, again:

Central banks, including the Fed, caused the housing bubble. Now they are once again conspiring to inflate the next bubble, i.e., the US Government Bubble. Over the past 12 months through August, they purchased $868.9bn of US Treasuries. Over this same period, the federal deficit totaled $1332.6bn and publicly-held federal debt soared $2005.0bn. This helps to explain the most recent conundrum in the bond market, i.e., why yields remain so low despite huge current and projected federal budget deficits.

The question is how much longer will foreign central banks be willing to fund so much of the US government’s deficit? By funding the housing bubble in the US, they were benefitting their exporters. Now, they are increasingly funding the expansion of the social welfare state in America. How will we ever be able to repay their generosity?

Inflate away the debt? Yes, that is a stupid idea …

Sep 11, 2009 14:53 UTC

As Bruce Bartlett correct observes:

Although it is thought that inflation is an effective way of
reducing the burden of debt, this is no longer true. For one thing, a
declining portion of the debt is financed with long-term securities.
Today, just 3% of the debt consists of bonds with maturities of 20
years or more; 10 years ago, the proportion was four times greater. To
the extent that the debt consists of short-term securities that must
constantly be rolled over, inflation does nothing to erode its value
because interest rates just rise to compensate, raising interest
payments and borrowing, thus maintaining the real value of the debt.

Inflation
will also cause the dollar to fall on international markets, which will
cause foreigners to dump their bonds. With foreigners now owning more
than 50% of the privately held debt, this may force the Treasury to
issue foreign currency denominated bonds. At this point, our finances
will effectively be controlled by foreigners and the International
Monetary Fund (IMF), just like Third World countries.

No one knows the point at which debt becomes unsustainable. According to an IMF report,
the critical point is when a government is borrowing just to pay
interest on the debt. According to the CBO, we will reach that point in
2019 when the federal government is expected to borrow $722 billion and
its net interest expense will also be $722 billion.

COMMENT

Thanks! That’s a sobering new perspective. Of course, one should never play cards with a magician…

Posted by Pete Cann | Report as abusive

The U.S. debt trap: the odds on seven solutions

Aug 28, 2009 16:08 UTC

How will America escape its debt trap? The indispensable Arnold Kling puts some odds on various scenarios. An excerpt:

1. Muddle through. No major change in policy, and no major change in economic growth, but somehow the ratio of debt to GDP remains stable. I give this a 10 percent chance, although it implies that I am miscalculating the path that we are on

2. Technology to the rescue. Some major technologies, probably either wet or dry nanotech, produce so much economic growth that the ratio of debt to GDP stays under control. I give this a 20 percent chance.

3. Policy changes. Congress increases taxes (but does not enact a wealth tax) and/or takes steps to rein in Medicare and Social Security spending.  I give this a 25 percent chance.

4. Inflate away the debt with moderate inflation (between 5 and 10 percent per year). I think this would be politically costly, and it might not be enough to really inflate away the debt (it depends on how quickly bond investors adjust expectations and raise the inflation premium in nominal interest rates). I gives this a 15 percent chance.

5. Wealth tax. The government takes, say, 5 percent of everyone’s personal assets above $100,000. It does this on a one-time basis (or so it says). I give this a 25 percent chance.

6. Hyperinflation. This would certainly expunge the debt, but it would be political suicide.

7. Default. The U.S. simply refuses to pay some or all of its debt.  I think that the combined chances of (6) and (7) are no more than 5 percent, with (7) even less likely than (6).

Me: I think #3 is mostly likely, though I hope #2 happens — and there is a greater chance of that happening than most policymakers realize.

COMMENT

im betting on the gold price. ive taken on many long positions in gold stocks to hedge against the rest of my porfolio. i really beleive that the high level of debt will continue to erode the dollar well into 2020. from this outlook (and the nearly inverse correllation between the gold price and the usdx) i am quite confident. i use http://www.goldalert.com to check the spot gold price. i would definietly recommend gold investment to gain better leverage within the market.

Posted by john major | Report as abusive
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