04
Aug
2011
Debt Deal Bask
I’m probably going to be on Judge Napolitano’s show tomorrow (Friday), discussing the stock market drop and possibly the debt deal. Do you folks have any good summaries of the debt deal? E.g. people showing how much the debt still increases, how the tough spending cuts are pushed into the future, etc.? I know there must be a ton of stuff, but I don’t have time to wade through it all, so I’m hoping you can point me to some good summaries.
CBO had rosy growth scenarios projecting $9.5 trillion in new debt over the next ten years, thanks to 8% annual growth in budget expenditures. But thankfully, those Republicans fought valiantly to maybe, hopefully, perhaps, well possibly not so much… cut $2.5 trillion over ten years… reducing the new unrealistically rosy projection to only $7 trillion in new debt over the next decade.
This is probably a good time to mention that you continue to be dead wrong about inflation and the importance of the deficit and debt.
David, I’ll grant you that I have been wrong about CPI. But how am I wrong about the importance of the deficit and debt? I said back in April to get out of the stock market because this has been a manipulated recovery. I’m not obviously wrong in that advice.
lol Bob, there are psychics who warn people to get out of the stock market every day. You haven’t demonstrated your model is any better than theirs.
Where’s the evidence that the deficit and debt are important right now? We have a falling yield curve, falling inflation, falling stocks, falling commodities, etc.. It’s not the Austrian story you’ve been telling at all.
It is consistent however with a debt crisis in the Euro zone, coming spending cuts here, and a Japanese Yen that’s so strong the Bank of Japan is going to do more QE and a trade-weighted currency intervention.
And a sinking economy may actually making balancing the budget much harder. Not only is GDP not growing as fast, but more people are on benefits, and hence less likely to support having them cut. And, of course, almost no one wants tax increases.
Yes, his story is all wrong. And why is the Yen so strong in spite of a much higher debt/gdp ratio, several rounds of QE, permanent deficits and downgraded credit ratings? Because Japan is a net exporter and the US a net importer.
Balancing the budget will not be harder. It will be impossible. Remember (S-I) = (G-T) + (X-M).
So in order to achieve a balanced budget (G-T=0) you must have S-I=X-M. That is, given the trade deficit (X-M<0) the non government sector must be in deficit too (S-I<0), which is the opposite of what is happening now with the non government sector saving to pay down its debt.
There is no way cutting government spending will reverse this trend unless the trade deficit magically disappears and turns into a trade surplus.
http://marginalrevolution.com/marginalrevolution/2011/08/cuts.html
http://marginalrevolution.com/marginalrevolution/2011/08/discretionary-spending-over-the-next-ten-years.html
Rand Paul’s statements on it are pretty interesting: http://paul.senate.gov/?p=press_release&id=280
David- He hasn’t been wrong yet, actually. The stimulus money is just now beginning to flow into the economy because the banks were holding it to appear profitable. The stipulation on the increase in the money supply leading to increased market prices is that it has to actually hit the markets. If the Fed prints off a bunch of bills then stores them in their basement, that won’t lead to inflation. That’s more or less what has happened, but the banks are acting as the basement. They will start using those dollars eventually, though, and when they do the predictions of inflation will be realized.
Charlie V, thanks for the assist, but I was indeed wrong about CPI. I went out on a limb and made specific forecasts about it, and I was wrong. I don’t think that Krugman et al.’s model is the right one, but I was assuming that investors would eventually see things the way I do, thus crashing the dollar. They obviously haven’t yet done so, so my predictions were wrong in that respect.
Being wrong about CPI is one thing. You are not obviously wrong about asset price inflation. QEII stops, equities crash… sounds plausible to me.
It hasn’t fully happened yet. For one, prices should have been far lower, had liquidation been allowed in 08, so there is plenty of relative inflation. But the real inflation will hit when defaults begin to happen. From the government to the individual. Fed will print money, foreign goods will stop coming ashore and their dollars will. It will get nasty. CPI is a joke anyways.
Charlie, I can tell you’ve never made a dime in the markets.
Yep us Austrian rubes don’t know anything as we’ve stocked up on gold and silver over the years. I don’t watch the markets, gold and silver have been plummeting the last few years, right?
That is, probably not beaten the markets much at all.
http://www.cbo.gov/ftpdocs/123xx/doc12357/BudgetControlActAug1.pdf
According to the CBO baseline spending (go here, page 18), which I understand is the baseline for the cuts of $2.4 trillion, the Federal government will spend $46.1 trillion over the next ten years. So we’re going to go from 46.1 trillion over the next ten years to a mere $43.7 trillion? I know Mr. Krugman claimed the debt deal “slashed government spending.” This year we’re going to spend about $3.8 trillion. For further perspective, in the ten years between 2002 and 2011, the Federal government spent $28.1 trillion dollars. (This includes estimated outlays for 2011 but it will be close. Source for the numbers is here. It does not include inflation which would bump these numbers up a bit if we wanted to compare them to today’s dollars. But inflation hasn’t been big enough. We’re spending a lot more than we did ten years ago.) Do you think that if the “cuts” actually happen that it’s going to take a big toll on the poor and the middle class? Throw in the other $1.5 trillion that might happen later and that gets you all the way down to $42.5 trillion over the next ten years, an average of a mere $4.25 trillion per year. Yes, those are draconian slashes in government spending. George Orwell, please call your office.
Data links in the article (CBO)
http://cafehayek.com/2011/08/shame-on-you-joe-nocera.html
Not the best:
http://johnbtaylorsblog.blogspot.com/2011/08/why-much-was-accomplished-in-debtbudget.html
Thanks.
http://pileusblog.wordpress.com/2011/08/03/future-government-spending/
http://www.downsizinggovernment.org/budget-deal-doesnt-cut-spending
hope that helps
stefan molyneux has a good overview, as well
http://www.youtube.com/watch?v=zqTXgNM8Kcs&feature=channel_video_title
It might also be helpful to point at the accuracy of past budget projections:
http://www.zerohedge.com/article/rick-santellis-meet-press-appearance-113-trillion-future-rounding-error-and-metamorphosis-am
Nothing is really being cut, the projected rate of growth has been slightly reduced and further it is mostly back-loaded and not guaranteed to survive the next Congress anyway. Some are arguing about nominal dollars vs. real dollars and saying that compared to GDP growth or compared to per capita as population increases the “growth reduction” actually is more like a “cut,” but at best it’s a rounding error related to whatever you think inflation and GDP will look like in the coming years… I say it’s like a 400-pound man who says, “Y’all thought I was going to weigh 500 pounds ten years from now. Well you convinced me to only go up to 495 pounds.”
On the “hard decisions in the future” it might be worth discussing exactly why this is.
So the obvious reason is politicians hate making tough decisions, and this is certainly a part of it. But it’s worth highlighting that serious people who may not agree with you on all things debt-related (but who someone like you and Napolitano’s viewers still might take somewhat seriously) have said for a long time that:
(1.) short term debt tied to the business cycle up to and even exceeding 100% of GDP is managable precisely because it is not recurring, our bonds are in high demand and will be for the forseeable future, and we’ve seen other advanced economies carry far heavier debt burdens, but that
(2.) the real, genuine threat to the American economy is in fact the long-term debt driven not so much even by Social Security as by Medicare. People like me who are deficit-hawks of some variety see this (Medicare) as the primary threat in the medium to long term, rather than things that you all might point to (like stimulus, TARP, etc.). Those other things constrain our options of course – but the reason why a lot of the big cuts come in the future is primarily because a lot of the big debt problems come in the future.
I think there’s a fundamental disconnect in some of these discussions. When I say I’m worried about the debt and deficits I’m primarily thinking of structural things and Medicare. Some people are primarily thinking of immediate deficits, which honestly worry me very little. But not everyone realizes the difference between these two views, and so they think policymakers are merely kicking the can down the road when they talk about long-term debt. Some vulnerable politicians certainly are kicking the can down the road, but a lot of people focus on long-term debt for a good reason.
Not that it’s incumbent upon you to represent that opinion – but if it comes up, I think that’s the other side’s view (I’m not sure if he usually has someone from the other side on or not).
some quick one liners:
– no one’s actually planning on reducing the debt anytime in the near future; at best they’re planning on reducing the rate of increase in the debt
– the fact that many consider a reduction in the rate of increase in our debt to be “draconian” bodes rather poorly for our prospective of ever running a budget surplus and paying down the principal
– This is by no means the first time Congress has promised to increase spending now and then cut spending several years down the road; rarely have they ever delivered on the latter
let you know if i think of any more