The Deficit Runs Amok
George Savage ·
Jan 26, 2011 at 8:22am
A year ago the 2010 budget deficit was supposed to come in at $1.2T and the red ink for 2011 was forecast at about $900B. The actual 2010 budget deficit totaled over $1.4T and now the CBO tells us that this year's deficit will hit a new record: $1.5T. But don't worry, the deficit will decline next year--it's always next year, isn't it?--to only $1.1T.
Last night the president hardly noticed the deficit. How can we save our country from certain financial ruin--right now it's just a question of timing--when Mr. Obama remains fixated on "investing" rather than cutting?
(H/T Matt Drudge)
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May '10
Re: The Deficit Runs Amok
We seem to be on the same frequency; I just posted in the Member Feed about this.
By my math, when Obama's term ends in Jan 2013, the national debt will be at least $16.5 trillion.
Also, this is the year the debt "eclipses" the GDP. See the graph at WolframAlpha. And notice the trend: GDP growth is slowing, while debt growth is accelerating.
Assume Washington brings the deficit down to $800 billion per year after 2012. In 2020, the national debt will be nearly $23 trillion dollars.
By the way, the CBO estimates that annual interest payments will be almost $800 billion by 2020. (Some say this is optimistic due to rising interest rates.) This will put additional squeeze on an already squeezed budget. Add in growing "obligations" such as Social Security, Medicare, Medicaid and so on, and keeping the annual deficit below $1T in the long run looks like wishful thinking. The exponential growth of the debt plus the strong growth of "benefits" will be very difficult to overcome, even assuming we had the proper political leadership.
Can anyone tell me, realistically (given our political environment), how we can avoid a default?
Edited on Jan 26, 2011 at 8:46amMay '10
Re: The Deficit Runs Amok
The good news is that crisis facilitates the drive for fundamental change. The bad news is that not even the "reformer" GOP has yet completely woken up to the seriousness of our situation. Ryan, Henserling, Coburn, DeMint and some others understand. Many of the rest are making relatively unconvincing noises.
The current GOP target is $100Billion in savings. This is akin to attacking a battleship with spitballs as your figures show. If they can't even achieve concensus on cuts required in discretionary spending, what hope is there for meaningful and effective entitlement reform?
People talk about having ( a plan) to resolve this fiscal insanity within a few years. If we do not make serious progress in coming months and states begin to default, I don't think we have that long.
Re: The Deficit Runs Amok
Another issue is confidence in the USD as a globally held repository of wealth. If confidence in our government's ability to repay its debts cracks, we can expect a sudden loss of interest in holding dollars--the desire to get out before the dollar is actively devalued--this will lead to an immediate and substantial increase in interest rates, which will in turn worsen the underlying fiscal situation dramatically. Inflation will also soar. Overnight.
History shows that this sort of financial crisis is nearly instantaneous. Everything is just fine until it isn't. And the crisis has real consequences.
Why take the risk? Cut the deficit in half right now. Today. Then continue cutting in half each fiscal year. In three years we will no longer be adding to debt as a percentage of GDP. Afterwards, we will start paying it all back.
May '10
Re: The Deficit Runs Amok
George Savage: If confidence in our government's ability to repay its debts cracks, we can expect a sudden loss of interest in holding dollars--the desire to get out before the dollar is actively devalued--this will lead to an immediate and substantial increase in interest rates, which will in turn worsen the underlying fiscal situation dramatically. Inflation will also soar. Overnight.
History shows that this sort of financial crisis is nearly instantaneous. Everything is just fine until it isn't. And the crisis has real consequences.
[emphasis added]
You're exactly right. The "unthinkable" becomes reality because we refuse to think about it, much less take action. And when it does become real, it does so with a vengeance.
May '10
Re: The Deficit Runs Amok
George Savage:
History shows that this sort of financial crisis is nearly instantaneous. Everything is just fine until it isn't. And the crisis has real consequences.
Gerald Weinberg's classic little book, "The Secrets of Consulting", contains a wealth of useful aphorisms, principles and "laws", including a personal favorite that goes:
"It may look like a crisis, but it's only the end of an illusion"
We can maintain a comforting illusion, even if we know it is illusory, for quite a while. There comes a time, however when the illusion, like any complex net of lies, becomes unsustainable and, as you said, it vanishes in a blink.
We may need such a shock before we are prepared take effective action. Such action, to be truly effective, is going to hurt. We will need to reach a state where even the pain of deep spending cuts looks like relief. Not a happy prospect, alas.
Jan '11
Re: The Deficit Runs Amok
What does it mean for a country to default? Does it mean that we miss payments on the bonds that China bought? Does it mean that we miss Social Security payments to retirees to pay the interest to bondholders? In either case, it would seem to me that all we have to do is print the money to pay up to avoid default. Sure, we would stop talking about the risk of inflation and start talking about the consequences. But all that is a function of how many dollars are out there now, right?
Every country who has printed their way out of debt destroyed its economy through inflation. But none of them ran a global reserve currency. If there are 200 trillion dollars <wild guess> out there, what would happen if we printed out an additional trillion every year for 30 years? Would that be better or worse than sovereign default?
May '10
Re: The Deficit Runs Amok
George, The US$ has already gone down significantly during the last decade. The Euro started at parity with the dollar, slid into the 80s and climbed steadily to the mid 130s. We have lost 20% versus third world currency like the Philippine peso! I now have over half my worth outside the USA for this reason + the financial insecurity issue re. the debt and fiscal policy.
As to what it would be like when we hit the wall, just ask someone from Argentina and Mexico what it feels like to have your net worth drop 50% overnight and then have the rest inflated away.
May '10
Re: The Deficit Runs Amok
How do you do that? I've been looking for ways to start putting some amounts overseas (starting obviously with less than $10K) but it just seems like there are so many inconveniences and barriers set up to prevent people from doing so. Any banks or other mechanisms (legal of course) that you could recommend?