Government Spending Is The Problem and The Interest on The National Debt Will Stop It As Will Stopping The Spending — Videos

Posted on October 20, 2013. Filed under: American History, Blogroll, College, Communications, Constitution, Economics, Education, Employment, European History, Federal Government, Federal Government Budget, Fiscal Policy, Food, Foreign Policy, government spending, history, Illegal, Immigration, Inflation, Investments, IRS, Law, liberty, Life, Links, Macroeconomics, media, Microeconomics, People, Philosophy, Photos, Politics, Psychology, Public Sector, Rants, Raves, Tax Policy, Taxes, Terrorism, Unemployment, Unions, Video, War, Wealth, Wisdom | Tags: , , , , , , , , , , , , , , |


“For the fiscal position of the federal government is in fact much worse today than is commonly realized. As anyone can see who reads the most recent long-term budget outlook—published last month by the Congressional Budget Office, and almost entirely ignored by the media—the question is not if the United States will default but when and on which of its rapidly spiraling liabilities.”

~Niall Ferguson

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Niall Ferguson Says 100% Certain Greece Will Default

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Niall Ferguson to Paul Krugman: You’re Still Wrong About Government Spending

Niall Ferguson: The Shutdown Is a Sideshow. Debt Is the Threat

An entitlement-driven disaster looms for America, yet Washington persists with its game of Russian roulette.


In the words of a veteran investor, watching the U.S. bond market today is like sitting in a packed theater and smelling smoke. You look around for signs of other nervous sniffers. But everyone else seems oblivious.

Yes, the federal government shut down this week. Yes, we are just two weeks away from the point when the Treasury secretary says he will run out of cash if the debt ceiling isn’t raised. Yes, bond king Bill Gross has been on TV warning that a default by the government would be “catastrophic.” Yet the yield on a 10-year Treasury note has fallen slightly over the past month (though short-term T-bill rates ticked up this week).

Part of the reason people aren’t rushing for the exits is that the comedy they are watching is so horribly fascinating. In his vain attempt to stop the Senate striking out the defunding of ObamaCare from the last version of the continuing resolution, freshman Sen. Ted Cruz managed to quote Doctor Seuss while re-enacting a scene from the classic movie “Mr. Smith Goes to Washington.”

Meanwhile, President Obama has become the Hamlet of the West Wing: One minute he’s for bombing Syria, the next he’s not; one minute Larry Summers will succeed Ben Bernanke as chairman of the Federal Reserve, the next he won’t; one minute the president is jetting off to Asia, the next he’s not. To be in charge, or not to be in charge: that is indeed the question.

According to conventional wisdom, the key to what is going on is a Republican Party increasingly at the mercy of the tea party. I agree that it was politically inept to seek to block ObamaCare by these means. This is not the way to win back the White House and Senate. But responsibility also lies with the president, who has consistently failed to understand that a key function of the head of the executive branch is to twist the arms of legislators on both sides. It was not the tea party that shot down Mr. Summers’s nomination as Fed chairman; it was Democrats like Sen. Elizabeth Warren, the new face of the American left.

Yet, entertaining as all this political drama may seem, the theater itself is indeed burning. For the fiscal position of the federal government is in fact much worse today than is commonly realized. As anyone can see who reads the most recent long-term budget outlook—published last month by the Congressional Budget Office, and almost entirely ignored by the media—the question is not if the United States will default but when and on which of its rapidly spiraling liabilities.

True, the federal deficit has fallen to about 4% of GDP this year from its 10% peak in 2009. The bad news is that, even as discretionary expenditure has been slashed, spending on entitlements has continued to rise—and will rise inexorably in the coming years, driving the deficit back up above 6% by 2038.

A very striking feature of the latest CBO report is how much worse it is than last year’s. A year ago, the CBO’s extended baseline series for the federal debt in public hands projected a figure of 52% of GDP by 2038. That figure has very nearly doubled to 100%. A year ago the debt was supposed to glide down to zero by the 2070s. This year’s long-run projection for 2076 is above 200%. In this devastating reassessment, a crucial role is played here by the more realistic growth assumptions used this year.

As the CBO noted last month in its 2013 “Long-Term Budget Outlook,” echoing the work of Harvard economists Carmen Reinhart and Ken Rogoff : “The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline. Those economic differences would lead to lower federal revenues and higher interest payments. . . .

“At some point, investors would begin to doubt the government’s willingness or ability to pay U.S. debt obligations, making it more difficult or more expensive for the government to borrow money. Moreover, even before that point was reached, the high and rising amount of debt that CBO projects under the extended baseline would have significant negative consequences for both the economy and the federal budget.”

Just how negative becomes clear when one considers the full range of scenarios offered by CBO for the period from now until 2038. Only in three of 13 scenarios—two of which imagine politically highly unlikely spending cuts or tax hikes—does the debt shrink from its current level of 73% of GDP. In all the others it increases to between 77% and 190% of GDP. It should be noted that this last figure can reasonably be considered among the more likely of the scenarios, since it combines the alternative fiscal scenario, in which politicians in Washington behave as they have done in the past, raising spending more than taxation.

Only a fantasist can seriously believe “this is not a crisis.” The fiscal arithmetic of excessive federal borrowing is nasty even when relatively optimistic assumptions are made about growth and interest rates. Currently, net interest payments on the federal debt are around 8% of revenues. But under the CBO’s extended baseline scenario, that share could rise to 20% by 2026, 30% by 2049, and 40% by 2072. By 2088, the last date for which the CBO now offers projections, interest payments would—absent any changes in current policy—absorb just under half of all tax revenues. That is another way of saying that policy is unsustainable.

The question is what on earth can be done to prevent the debt explosion. The CBO has a clear answer: “[B]ringing debt back down to 39 percent of GDP in 2038—as it was at the end of 2008—would require a combination of increases in revenues and cuts in noninterest spending (relative to current law) totaling 2 percent of GDP for the next 25 years. . . .

“If those changes came entirely from revenues, they would represent an increase of 11 percent relative to the amount of revenues projected for the 2014-2038 period; if the changes came entirely from spending, they would represent a cut of 10½ percent in noninterest spending from the amount projected for that period.”

Anyone watching this week’s political shenanigans in Washington will grasp at once the tiny probability of tax hikes or spending cuts on this scale.

It should now be clear that what we are watching in Washington is not a comedy but a game of Russian roulette with the federal government’s creditworthiness. So long as the Federal Reserve continues with the policies of near-zero interest rates and quantitative easing, the gun will likely continue to fire blanks. After all, Fed purchases of Treasurys, if continued at their current level until the end of the year, will account for three quarters of new government borrowing.

But the mere prospect of a taper, beginning in late May, was already enough to raise long-term interest rates by more than 100 basis points. Fact (according to data in the latest “Economic Report of the President”): More than half the federal debt in public hands is held by foreigners. Fact: Just under a third of the debt has a maturity of less than a year.

Hey, does anyone else smell something burning?

Correction: Net interest payments on the federal debt are about 8% of revenues. The Oct. 5 op-ed “The Shutdown Is a Sideshow. Debt Is the Threat” misstated the payments as a percentage of GDP.

Mr. Ferguson’s latest book is “The Great Degeneration: How Institutions Decay and Economies Die” (Penguin Press, 2013).


Niall Ferguson Gets It Backwards, The Budget Deficit ‘Threat’ Is An Opportunity

John Tamny,


Back in 2008 in the lead-up to the 2008 presidential elections, John Stewart’s Comedy Channel show did a feature on John McCain going back to 1980. Each year offered a video clip of the Arizona Senator warning of a looming fiscal crisis related to the nation’s budget deficit.

Though one would be foolish to use The Daily Show as an economics lesson, the underlying point of the McCain segment was valid. Politicians, economists and mere members of the U.S. citizenry have been predicting deficit doom for as long as this writer’s been sentient, and probably even as long McCain’s been kicking.

All of which brings us to a recent Wall Street Journal Op-ed by British historian extraordinaire, Niall Ferguson. Though he seems to admit to joining an echo chamber that’s rather long in the tooth, Ferguson is the latest, and surely not the last to, in his own words, yell that the fiscal “theater is indeed burning.”  At this point we could fill several Rose Bowls with prominent individuals who’ve made the same argument. As he wrote last Saturday:

“For the fiscal position of the federal government is in fact much worse today than is commonly realized. As anyone can see who reads the most recent long-term budget outlook—published last month by the Congressional Budget Office, and almost entirely ignored by the media—the question is not if the United States will default but when and on which of its rapidly spiraling liabilities.”

This is in no way meant to dismiss Ferguson’s basic point. Maybe the horrid deficit tomorrow that never seems to come is on our doorstep, but at least for now it should be said that the television version of The Boy Who Cried Wolf made for modern consumption would star an angry adult male predicting deficit doom. Or maybe this is much ado about nothing. Better yet, maybe the proper way to look at the deficit question is to cease all the doom and gloom, and view the deficit as an opportunity.

For one, assuming we reach the point that all the deficit worriers talk about whereby the U.S. budget is consumed by interest payments, let’s look at the positives. Figure if Congressional appropriations are reduced to interest payments, it will be much more difficult for the fiscally incontinent members of both political parties to dream up new ways to waste our money.

Taking the debt discussion local for a moment, California has long been fingered by the same deficit-fearing crowd as a likely default prospect, but if so, does anyone think Apple AAPL +0.87%, Google GOOG +13.8%, and Intel INTC -0.19% will suffer higher rates for debt finance alongside the profligate State of California if the latter defaults?

Applied nationally, assuming Treasury goes explicit in its default in the way it’s long been implicit (the dollar that Treasuries pay out bought 1/35th of an ounce of gold in 1971, yet today it buys roughly 1/1300th) in its stiffing of creditors, is it really a certainty that Armageddon awaits as Ferguson presumes? Or is it more likely that investors, burned by Treasury, will migrate away from U.S. debt, along with government debt more broadly?

If so, never explained by the doomsayers is why this would be so bad. Creditors and investors won’t just sit on their money, rather they’ll find better, more hospitable places to put their capital to work. Assuming they charge Treasury 10% for 30-year debt, does anyone think Coca-Cola KO +0.6% will see its debt finance costs rise to a similar level?

If readers assume yes, that market panic would drive rates well beyond the aforementioned number, that too wouldn’t be a forever concept. High prices by virtue of being high naturally beget lower prices down the line as the high rates of interest lure profit-focused investors into the arena. Needless to say, whether investors simply tire of lending to Treasury such that they jack up rates, or if they raise rates in response to an actual default, financial capital won’t sit idle forever. Eventually investors will find new, and infinitely more productive places to deploy their funds. At risk of sounding too ‘tea party-ish’ given Ferguson’s not-so-veiled contempt for the movement, it’s not a reach to suggest that’s Jeff Bezos, FedEx’s Fred Smith, and Berkshire Hathaway’s Warren Buffett are much better allocators of capital than are John Boehner, Nancy Pelosi, and Harry Reid.

Of course to highly influential people like Ferguson, Treasury Secretary Jack Lew, and Fed Chairman Bernanke, default is the unthinkable, and would surely lead to the ‘Mother of All Great Depressions’ as interest rates skyrocket amid panic in the markets, and also in the street. Fair enough, but also wholly unproven. Lest we forget, it was the same crowd, or a reasonable facsimile (Bernanke at least), who told us that a failure to save Citigroup (bailed out five times in 22 years by the Fed) would lead to a decades-long recession.  Yes, in Bernanke’s world the capitalist system can only sustain itself if we run away from capitalism with lightning speed in order to prop up that which the markets don’t want.  Oh well, at the very least consider where all of this default/crisis talk is coming from.

Importantly, there’s another option that’s not talked of enough as a path out of a deficit ‘crisis’ that they regularly warn us about. How about economic growth? It’s really that simple, and if the political class had a clue about how economies grow (they don’t, but too many of us blindly accept their warnings about bank failures, default, global contraction as though they do), they might turn all the deficit worrying to their advantage.

Simply put, economic growth is easy. Taxes are a penalty placed on work and investment, so reduce the penalty on both to get more of both. Regulations don’t work (see the banks overseen by the Fed, SEC and the rest), but they do inhibit the profit motive for distracting executives who should be focused on the shareholder, and by extension, the customer. Trade is why we get up for work each day so that we can exchange our surplus for that of others, so when barriers to trade are put up, we foster inefficiency all the while taxing the purpose of work. Money is how we measure the value of the goods we exchange, and the investments we enter into, so stabilize its value. Notable with money is that in his masterful book, The Cash Nexus, Ferguson wrote of ‘forever’ British debt instruments that forever paid out low rates of interest precisely because the Pound had a stable definition in terms of gold.

To make basic what already is, growing countries never have to worry about deficits simply because their debt is so attractive. Greece isn’t suffering a debt crisis because it owes too much money, rather it’s in trouble because its even more hapless political class doesn’t understand that its debt problems would disappear if it adopted growth policies like the ones listed above. As Forbes contributor Louis Woodhill has pointed out regularly, interest rates on Greek debt became even more onerous once its politicians raised taxes to ‘fix’ the problem. What they missed is that the deficit problem was one of too little growth. It’s much the same here.

In short, rather than worry about a debt ‘threat’ that never seems to materialize, we should view the deficit as an opportunity to implement policies that always work, and that may even turn people like John McCain into optimists. If so, we can then get serious about the real economic problem which is the size of government itself. The raging fire in the theater of the latter is largely smoke free, but it represents all the future Microsofts and Intels, cancer and heart disease cures, and transportation innovations that have never revealed themselves thanks to our wasteful political class consuming so much of our capital. Government spending is what Ferguson et al might focus on if they weren’t so blinded by the ‘horrific’ deficit problems of tomorrow that never seem to come, and that wouldn’t matter much even if they did.


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