Deficit Truly Is A Problem
July 28, 2016 at 4:25 p.m.
By Gary [email protected]
But if I was I would have thought during the W years that he and his neocon buddies were deliberately trying to bankrupt the country.
After all, that would be a pretty clever way of eliminating all those government programs and privatizing all those government services. You know, the "starve the beast" theory.
These days, I'm pretty confident President Obama isn't trying to bankrupt the country. He likes government programs. Heck, he wants more of them with regard to health care, energy and the like.[[In-content Ad]]Problem is, whether he wants to bankrupt the country or not, these days he and the crowd in DC are running the risk of doing just that.
Back in 1991 a best-selling book, "Bankruptcy 1995: The Coming Collapse of America and How to Stop It" was written by Harry E. Figgie and Gerald J. Swanson.
It was that book that some people say helped nudge then-candidates Bill Clinton and Ross Perot to make fiscal sanity in Washington huge planks in their campaign platforms.
Some people even go as far as to say it was that book that staved off the eventual "bankruptcy 1995" because of the way it influenced politicians and policy.
And if you remember, when Bill Clinton got into office, he and the Dems passed a budget with a tax increase. That coupled with a tech boom brought the government to a budget surplus for the first time in three decades.
Of course then comes W and his crazy spending and we're back in deficit mode.
And now comes President Obama and the deficit problem is off the charts. Honestly, I truly don't understand what these guys in DC are thinking. I hear President Obama continually reminding us of how he "inherited a $450 billion budget deficit." That is absolutely true. But what's his answer to that problem? Turn it into a $1.6 trillion deficit in his first year. What?
So with a collapse in the world of finance, an enormous trade deficit, a national debt of $12 trillion and the currency looking shakier by the day, it may not be a bad time to ask if the US isn't headed toward bankruptcy - again.
The difference is, the warning signs are a lot stronger today than they were in 1991.
In 2008, the budget deficit was a staggering $459 billion. That's the one that President Obama inherited. The fiscal 2009 deficit (fiscal 09 ended at the end of September) was $1.5 trillion.
Even the most optimistic government types concede that fiscal 2010 could see a single-year deficit of $2 trillion.
This is not good.
The national debt currently is $11.9 trillion. If you consider another $2 trillion that will likely be added in fiscal 2010, national debt becomes $13.9 trillion.
Gross National Product is the total market value of all the goods and services produced by a nation during a specific period of time. Right now, in the US, GNP is running at around 14.5 trillion a year.
Now remember, these guys were freaking out and writing this stuff in 1991 when the GNP was $5.9T and the national debt was $3.8T. National debt was a mere 63.4 percent of GNP.
At the end of 2008, debt was 78.1 percent of GDP. At the end of 2009 it will be in the range of 82 percent. After 2010, depending on where GNP goes, it could reach 90 percent.
Back in 1991, when the guys who wrote "Bankruptcy 1995," they talked about what would trigger national insolvency and what would likely happen next.
They say that when national debt (right now $11.9T) surpasses 100 percent of the gross national product (right now $14.5T), the crisis begins by hyperinflation, panic, or a mixture of the two.
Here's their take, circa 1991:
Death by hyperinflation.
"One way to attempt to deal with spiraling deficits is for the US Treasury to force the Federal Reserve Bank to buy all the debt it needs to offer to pay its bills. The Treasury "monetizes" debt or, put another way, prints money, as the Federal Reserve prints dollar bills in exchange for the budget IOUs. To absorb these extra dollars, interest rates on debt are raised by the banks. This in turn causes the carrying cost of debts and the deficit to increase - a vicious cycle. So many new dollars entering the economy causes demand to increase (as those who hold the dollars are able to spend more). This in turn causes the prices of those items to increase. As trust in the currency begins to break down, consumers make sure that they spend their ever-inflated dollars immediately. This speeds up the cycle, causing interest rates and inflation rates to rise at the level of 1 percent a month, and then even more ever faster until at last the currency is seen as worthless, and the entire currency-based economic system breaks down.
Astute individuals may observe several warning signs. If the US hyperinflation were to resemble the 1980s episodes of hyperinflation of Bolivia, Argentina, and Brazil, the actual trigger for the above-described inflationary spiral would be a real estate boom followed by an actual deflation in real estate values that then begins to spread into the rest of the economy. The US might not be able to collect enough in taxes to service its debt. The Federal reserve buys that debt. Interest rates rise. Stories appear in the media as banks and economic commentators fret about the growing money supply.
OK, honestly, how prophetic are these guys? The other scenario, again, as outlined in 1991.
Death by panic.
Death by panic would occur if, instead of monetizing the debt, the US Treasury continued to sell its debt to investors.
Higher interest rates mean that those who own existing fixed rate income assets (i.e., last year's bonds) - such as pensions and insurance trusts - find those bonds decreasing in price. This is what happened in the 1970s, when US Treasury Bonds received the nickname "Certificates of Confiscation", because every year their real value became less and less. Eventually, if the cycle continues, some pension funds and insurance annuity trusts become insolvent. They default and go out of business. Those who were counting on the pension benefits or annuity checks find their income slashed.
Confronted with ever higher pension and other expenses, companies either shut down or move overseas.
Consumers withdraw money from safe institutions like FDIC insured banks and seek out higher-paying riskier income streams, such as money markets (or for that matter, junk bonds), as banks are unable to match the higher interest rates offered. This flood of cash does temporarily increase investor income, but the income then declines as too much money is chasing the same income stream (called "reaching for yield"), driving the yields on even risky income producing assets down.
Companies begin to close less profitable operations. For example, GM closes the Oldsmobile division.
As the value of the dollar plummets, foreigners buy more and more (relatively cheap for them in their local currencies) US assets, including entire US companies, sometimes just shutting them down afterward.
At the very end, Social Security and Medicare, and other government services (like infrastructure maintenance) are slashed or simply stop. The value of US Treasuries plunge in a panic as respected foreign investors, government ministers or central bankers declare that the US in insolvent and cannot pay its bills.
Hmmm. I bet that little bit about GM sounded pretty alarming, back in 1991. Little did they know.
Honestly, this is not a rhetorical question. How can we get through to these politicians that we have to start severely limiting the growth of government?
They know all of this. This is not news to them. And what are they talking about? Health care and cap and trade - huge expansions of government.
Someone help me understand. I don't get it.
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But if I was I would have thought during the W years that he and his neocon buddies were deliberately trying to bankrupt the country.
After all, that would be a pretty clever way of eliminating all those government programs and privatizing all those government services. You know, the "starve the beast" theory.
These days, I'm pretty confident President Obama isn't trying to bankrupt the country. He likes government programs. Heck, he wants more of them with regard to health care, energy and the like.[[In-content Ad]]Problem is, whether he wants to bankrupt the country or not, these days he and the crowd in DC are running the risk of doing just that.
Back in 1991 a best-selling book, "Bankruptcy 1995: The Coming Collapse of America and How to Stop It" was written by Harry E. Figgie and Gerald J. Swanson.
It was that book that some people say helped nudge then-candidates Bill Clinton and Ross Perot to make fiscal sanity in Washington huge planks in their campaign platforms.
Some people even go as far as to say it was that book that staved off the eventual "bankruptcy 1995" because of the way it influenced politicians and policy.
And if you remember, when Bill Clinton got into office, he and the Dems passed a budget with a tax increase. That coupled with a tech boom brought the government to a budget surplus for the first time in three decades.
Of course then comes W and his crazy spending and we're back in deficit mode.
And now comes President Obama and the deficit problem is off the charts. Honestly, I truly don't understand what these guys in DC are thinking. I hear President Obama continually reminding us of how he "inherited a $450 billion budget deficit." That is absolutely true. But what's his answer to that problem? Turn it into a $1.6 trillion deficit in his first year. What?
So with a collapse in the world of finance, an enormous trade deficit, a national debt of $12 trillion and the currency looking shakier by the day, it may not be a bad time to ask if the US isn't headed toward bankruptcy - again.
The difference is, the warning signs are a lot stronger today than they were in 1991.
In 2008, the budget deficit was a staggering $459 billion. That's the one that President Obama inherited. The fiscal 2009 deficit (fiscal 09 ended at the end of September) was $1.5 trillion.
Even the most optimistic government types concede that fiscal 2010 could see a single-year deficit of $2 trillion.
This is not good.
The national debt currently is $11.9 trillion. If you consider another $2 trillion that will likely be added in fiscal 2010, national debt becomes $13.9 trillion.
Gross National Product is the total market value of all the goods and services produced by a nation during a specific period of time. Right now, in the US, GNP is running at around 14.5 trillion a year.
Now remember, these guys were freaking out and writing this stuff in 1991 when the GNP was $5.9T and the national debt was $3.8T. National debt was a mere 63.4 percent of GNP.
At the end of 2008, debt was 78.1 percent of GDP. At the end of 2009 it will be in the range of 82 percent. After 2010, depending on where GNP goes, it could reach 90 percent.
Back in 1991, when the guys who wrote "Bankruptcy 1995," they talked about what would trigger national insolvency and what would likely happen next.
They say that when national debt (right now $11.9T) surpasses 100 percent of the gross national product (right now $14.5T), the crisis begins by hyperinflation, panic, or a mixture of the two.
Here's their take, circa 1991:
Death by hyperinflation.
"One way to attempt to deal with spiraling deficits is for the US Treasury to force the Federal Reserve Bank to buy all the debt it needs to offer to pay its bills. The Treasury "monetizes" debt or, put another way, prints money, as the Federal Reserve prints dollar bills in exchange for the budget IOUs. To absorb these extra dollars, interest rates on debt are raised by the banks. This in turn causes the carrying cost of debts and the deficit to increase - a vicious cycle. So many new dollars entering the economy causes demand to increase (as those who hold the dollars are able to spend more). This in turn causes the prices of those items to increase. As trust in the currency begins to break down, consumers make sure that they spend their ever-inflated dollars immediately. This speeds up the cycle, causing interest rates and inflation rates to rise at the level of 1 percent a month, and then even more ever faster until at last the currency is seen as worthless, and the entire currency-based economic system breaks down.
Astute individuals may observe several warning signs. If the US hyperinflation were to resemble the 1980s episodes of hyperinflation of Bolivia, Argentina, and Brazil, the actual trigger for the above-described inflationary spiral would be a real estate boom followed by an actual deflation in real estate values that then begins to spread into the rest of the economy. The US might not be able to collect enough in taxes to service its debt. The Federal reserve buys that debt. Interest rates rise. Stories appear in the media as banks and economic commentators fret about the growing money supply.
OK, honestly, how prophetic are these guys? The other scenario, again, as outlined in 1991.
Death by panic.
Death by panic would occur if, instead of monetizing the debt, the US Treasury continued to sell its debt to investors.
Higher interest rates mean that those who own existing fixed rate income assets (i.e., last year's bonds) - such as pensions and insurance trusts - find those bonds decreasing in price. This is what happened in the 1970s, when US Treasury Bonds received the nickname "Certificates of Confiscation", because every year their real value became less and less. Eventually, if the cycle continues, some pension funds and insurance annuity trusts become insolvent. They default and go out of business. Those who were counting on the pension benefits or annuity checks find their income slashed.
Confronted with ever higher pension and other expenses, companies either shut down or move overseas.
Consumers withdraw money from safe institutions like FDIC insured banks and seek out higher-paying riskier income streams, such as money markets (or for that matter, junk bonds), as banks are unable to match the higher interest rates offered. This flood of cash does temporarily increase investor income, but the income then declines as too much money is chasing the same income stream (called "reaching for yield"), driving the yields on even risky income producing assets down.
Companies begin to close less profitable operations. For example, GM closes the Oldsmobile division.
As the value of the dollar plummets, foreigners buy more and more (relatively cheap for them in their local currencies) US assets, including entire US companies, sometimes just shutting them down afterward.
At the very end, Social Security and Medicare, and other government services (like infrastructure maintenance) are slashed or simply stop. The value of US Treasuries plunge in a panic as respected foreign investors, government ministers or central bankers declare that the US in insolvent and cannot pay its bills.
Hmmm. I bet that little bit about GM sounded pretty alarming, back in 1991. Little did they know.
Honestly, this is not a rhetorical question. How can we get through to these politicians that we have to start severely limiting the growth of government?
They know all of this. This is not news to them. And what are they talking about? Health care and cap and trade - huge expansions of government.
Someone help me understand. I don't get it.
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