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"Federal Debt and the Risk of a Financial Crisis" - CBO
The likes of Larry Kudlow have been pushing happy talk of late that
maybe, just maybe Congress and the Administration will act to extend the
Bush tax cuts. This line of thinking is evolving as the evidence is
mounting that a new round of economic weakness is in the offing. The
official and blue chip economic forecasts are all calling for growth to
subside a tad but to average about 3% for the balance of 2010 through
2012. That is most unlikely. Those forecasts will be coming down. And
with it will come more talk of stimulus.
While the MSM and some in D.C. are starting the push against the tax
increases it was interesting to see the CBO chime in on the topic. They
rained all over the rosy thoughts about preserving the Bush tax cuts.
They put out a paper yesterday titled, “Federal Debt and the Risk of a Financial Crisis”.
Hopefully Mr. Kudlow will read it. I’m sure a number of folks in
Washington will. They could choose to ignore this report. But at our
collective peril, according to the CBO. The following graph was released
a few weeks ago; it was used again in the July 27 report. This is what a
doomsday scenario looks like:
The dark blue dotted line is how bad things will be even if we let the
Bush tax cuts sunset. But the light blue line is the disaster that will
befall us if we don’t let them expire. We will be over 200% debt to GDP
in twenty years. This terrible chart still does not tell us how bad
things are. This information excludes the intergovernmental debt which
is every bit as “Due and Payable” as the debt held by the Chinese. When you add in the extra 4.5T of IG debt we will be north of 150% Debt/GDP before 2020.
We will never make it to 150%. We will blow up in a spectacular fashion
before we even get close to that mark. Some snippets from the CBO
report: (full report here)
Further increases in federal debt relative to the nation’s GDP almost certainly lie ahead if current policies remain in place.
Unless
policymakers restrain the growth of spending/increase revenues as a
share of GDP, budget deficits will cause debt to rise to unsupportable
levels.
A
growing level of federal debt would increase the probability of a
sudden fiscal crisis, during which investors would lose confidence and
the government would lose its ability to borrow at affordable rates.
Having
a small amount of debt outstanding gives policymakers the ability to
borrow to address significant unexpected events such as recessions,
financial crises, and wars.
The government would need to undertake some combination of three actions:
-restructuring its debt;
-pursuing inflationary monetary policy;
-adopting an austerity program of spending cuts and tax increases.
Governments
can attempt to change the terms of their existing debt—investors would
demand a large interest premium on subsequent loans for many years.
Foreign investors would face substantial losses.
Higher
inflation might appear to benefit the U.S. government. However, higher
inflation would also increase the size of future budget deficits.
I am sure that Bernanke reads these reports. I wonder if he was struck by the comment, “higher inflation might appear to benefit the U.S. government”.
He should be, that is his only policy at this point. Will he consider
the CBO warning? I doubt it. Will Congress? It depends on the November
elections.
»
- advertisements -
Let's imagine for one moment two things.
1- The Debt gets so big that the Planet Earth does not possess sufficient riches to eliminate it.
2- The constant news over decades that the Nation is in trouble has become such old news that these fantastic numbers and figures hold no meaning to a commoner like me.
One day this will all no longer matter.
So, sleep tight and sweet dreams and remember a simpler time where no one had any debt to speak of.
I dislike the austerity idea. First, everything done so far has been to line the pockets of the rich who have gamed the system. That consisted of the wholesale theft of middleclass wealth. Now the middleclass is expected to make good the resulting deficits. From a justice perspective this reeks.
Since it really is a question of truth and justice at this point, the restoration of which will also *restore confidence*, clawbacks and fines of all sorts would be the logical best way of making good the deficits.
"They" want us to "believe" in austerity. They know we're gluttons for punishment.
First Ever!!! De-Industrialization, it will be fun for everyone.
1. be a farmer/ or productive person, caveat "make sure your job cannot be arbitraged"
2. learn how to master the barter
Ten to midnight? That clock is either broken or mighty slow, pardner!
The "Bush" tax cuts. Now they were very interesting. Kind of a doughnut, big tax cuts on the low and high ends, while in the upper middle, the AMT was still the flat tax King. To add injury to the insult the marginal rates climbing out of no tax land were about twice the marginal rates of the top 10 percent.
Anyone paying the AMT has been saying "what tax cut" while some psyche warfare has people who don't pay any tax complain about "high" tax rates.
Japan is already at debt 1.9x of GDP. These rules of thumb of how much the debt to GDP ratio can it assume certain yield curves. In a deflationary environment nominal yields can go to zero no?
WANTED !
A 250K+ a year earner fed up to pay taxes at the pre-Bush rate.
I will pay your tax bill in full in exchange for your salary.
Call 1-800 SWAPSAL
Guaranteed by a fully legal contract. Will even swap you back...but only if I get fed up and disincentivized to spring out of bed in the morning meself.
Great post! But I think "The most important chart of the centrury" pretty much tells us we are screwed. I love this site and I love all of the posts and responses. I wasn't aware of all of this until about 10 months ago, pity. Keep it up all you, this is information and not INFOtainment.
Since when does the CBO ever get anything right? In fact, the well supported Hauser's Law says that tax increases will not increase total revenues as a % of GDP, and may reduce them because they reduce GDP growth.
Exactly, I have read many comments from the other side on how back in Eisenhower's day the top tax rate was 90%, so how can you argue about letting the Bush tax cuts at what...38% or so, expire.
Come on people. Do you really think that anyone making north of 250K really ever paid 90% to uncle sam? Some professional or small business person, would roll out of bed every day, bust their hump, clear 250K after expenses and write a check to the Feds for 225,000....leaving them with 25,000? It never happened.
The marginal rate is meaningless. If policy does not encourage economic activity, net tax receipts will be less, whatever the tax rate is. So stop with the endless social engineering already.
We will never make it to 150%. We will blow up in a spectacular fashion before we even get close to that mark.
A rational prediction; but it is made in irrational times. Anything goes now as in Cole's time . . .
Either infowars has gone mainstream or Drudge has gone conspiracy
drudge headline linking to infowars - and based on Bruce's article perhaps we are all going infowars
From infowars via Drudge
2017: 'The Year America Dissolved'...
It is the goal of the enemy to control both side of the war.
Kudlow's trying to turn pessimism into hope. He calls it Hopium. A delirious drug that focuses on the one single data point that day - no matter how arcane - that can argue for those "mustard seeds".
Like the article, just two thoughts: (1) it's already too late - either we go to austerity and crash the economy, or print more/spend more and eventually crash the economy, we've gotten past the point-of-no-returnl; and (2) it does not matter what happens in November. The Republicans love our Afgan war and spent just as much as the Democrats. Bush started all of the bailouts, and I don't think he would have done any different.
I don't think there will be any political will to have the CBO score keeping any of the tax cuts. I'm not even sure we will make it that far...
I like turning pessimism into hope. Unfortunately Larry is a dork and if he has a brain (or ever had a brain) then he does not show it and instead has shown himself to be a poster child toad for those who actually have money (meaning not Larry). Larry appears to be a hopeless wannabee that all the cool and rich kids kicked and laughed at (and he knows it).
I always enjoy your posts Bruce.
I hate to be a spelling nazi but
does that graph say "enclude"?
My 23 year old assistant.. named Stella is responsible for the graphics department. Beautiful, but can't spell for shit.
b
Why don't you hire that un-employed teacher in dire straits you talked about.
I wish there was a Stella. I am responsible for all errors. And I can't spell for shit.
As for the teacher, still unemployed. I will let you know how it works out.
Don't worry Bruce, I never worried about the spelling, which is important, but the message is most important part of any conversation.
In a word, we are - f$*$$$
Yep, afraid that raising taxes on the only ones making any headway in this economy is the only way the next Congress can justify further spending increases to save the economy and war fundings into perpetuity. The people in the Congressional tax bracket and below can breath easy... until Congress exempts themselves from paying taxes that is...
Lol ... they have already exempted themselves from social security and medicare and have their own super-retirement program on the back of the people who actually work.
That is not enough ... they feel compelled to take bribes and exempt themselves from insider trading.
What a bunch of schmucks. (JMHO)
You mean like they did with Obamacare?
Financial Blogging at its finest! Dylan R..
Obama and his fellow travelers will never extend the Bush tax cuts. Aside from the "social justice" inherent in taxing the crap out of everything and anything they actually believe that there is no limit to the additional tax revenue that can be had by ratcheting tax rates upward. If you make $250k a year you're supposed to spring out of bed in the morning and rush to work just the same whether your tax rate is 10% or 90%. Unbelievable.
When the VAT comes I think the government will be surprised by how many otherwise productive people will be incentivized to do without, barter/cheat or make their own stuff out of spite.
Reread slowly the post...very slowly. Because you are spitting out the same Republican mantra crap of Larry Kudlow.
You have no options...means NO OPTIONS!
Your 90% tax rate is crap...and you know it.
And if at your 250K you do not feel compelled to spring out of bed at the pre-Bush tax rate...is a free country. Stay in bed.
But keeping GW tax crap in place will RUIN the whole enchilada just to keep some moron like you incentivized to spring out for 250K $...well join the ranks of the unemployed at 12k a year if you have no incentives...or take your stuff to Costa Rica and have fun.
Vaya con Dios...
There are always options. Government is way bigger and much more pervasive on all levels than it needs to be. Chopping it down to a more reasonable size never seems to be on the table in any serious way though and even Reagan couldn't stop the government from growing substantially. Now we're in the fast lane headed toward Trotskyist bureaucratic collectivism for Krissakes.
Yeah, I know a 90% Fed income tax rate isn't quite in the cards just now, I was describing scenarios at extreme ends of the spectrum to illustrate the point that there is a well-supported school of thought that higher tax rates always produce higher tax revenues - and they don't. Exile On Main Street. Check it out. Also, American businesses not hiring because they aren't sure which combination of Obama's fantasy league healthcare/income/cap-and-trade/VAT tax picks they will be facing up against next year - check that out too.
I guarantee you that incentivizing Americans who are capable of producing $250k worth of goods/services/labor per annum to stay in bed or flee to Central America is not in this country's or Obama's best interests. Really.
"Homespun" wisdom
One thinks of Gandhi and the movement for India to reject imports of textiles mfr'ed in Britain.
You were strangely quiet when Reagan was taxing the crap out of everything. Why is that?
Why is that?
Hmmm, still complaining about Ron? Maybe things were a lot better for more people back then? Certainly the Porkbusters movement complained loudly about Bush and the spendthrift Repub Congress.
But for the last 2 years of the Bush Admin (Dems running both halves of Congress) and the first 2 years of the Obama Admin, the Dems have fired up the afterburners and pushed the economy double speed in the wrong direction.
You didn't notice?
Not that we can expect improvement if the Repubs get back in. Best outcome would seem to be gridlock at this point.
"Best outcome would seem to be gridlock"
ding ding ding... gridlock till 2012 would be perfect.
duplicate post
If we can create an economy out of barter then I am all for it... and if the barter economy gives us full employment I am doubly for it ... and if the employement in the barter economy allows the government to feel that they no longer need to carry the debt load and to employ untold masses then we have arrived at nirvana.
In other words if it is good, then it is good regardless of what the current policies say.
Thanks for reporting on this Bruce. Or as CNBC claims, blogging on this. :>)
For those who missed Bruce's (small) link above, here is the report link again.
http://cboblog.cbo.gov/wp-content/uploads/2010/07/07-27_Debt_FiscalCrisis_Brief.pdf