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Prudent Fiscal Policy and Political Suicide

testosteronepit's picture




 

Wolf Richter   www.testosteronepit.com

French President François Hollande cobbled together his government yesterday, appointing no less than 34 ministers (of whom 16 are ministers of state). Exactly half of them are women, for the first time in the macho French political world. During their first working session, they, including the President, gave themselves a 30% cut in pay, implementing not only item number 47 on the 60-point agenda but also Hollande’s campaign promise (Nicolas Sarkozy raised his own salary by 172% after he’d arrived in 2007, which the French never forgave him). And barely appointed Minister of Economy, Finance, and Trade, Pierre Moscovici surprised the world: “A country that indebts itself is a country that impoverishes itself,” he said and proclaimed that the government would cut the deficit because “public debt is an enemy for the country.”

Powerful words. Though they may drown in Socialist Party priorities, they have nevertheless been spoken, and they're reasonable and refreshing. What a difference from what we’re getting dished up in the America.

President Barack Obama and House Speaker John Boehner met over sandwiches yesterday to discuss what to do about the deficit, if anything, while the national debt ticked higher, passing in its inexorable manner $15.716 trillion. But instead of even worrying about it, the President and the Speaker performed a charade of election machinations and grandstanding. The Speaker demanded some cuts in social programs and excluded raising taxes. To show how serious he was, he threatened to block extending the debt ceiling, set at $16.394 trillion to be reached later this year. If he sticks to his threat, it would send the US into default once the Treasury runs out of wiggle room. And the President pushed his own proposals to increase spending on some jobs initiatives. They should have invited Ron Paul. Read.... Ron Paul Slugs At The Fed One More Time.

Ironically, and despite the wild gyrations during last year’s debt ceiling farce, gross national debt rose from the ceiling amount of $14.342 trillion to todays $15.716 trillion—a jump of $1.374 trillion in 9½ months! Outlays in fiscal 2011 rose by 4.2% to $3.6 trillion. Of that, a mind-boggling 38% was borrowed. And not long ago, gross national debt hit 100% of GDP.

Richard Nixon was the last Republican President to see gross national debt as a percent of GDP decline. Under Gerald Ford, it rose. Under Ronald Reagan, it jumped. Under George Bush père, it went up. And George W. Bush started a new era: borrowing went haywire, and the national debt began to defy gravity, rising from $5.7 trillion to a breathtaking $10.7 trillion, and adding during his last fiscal year in office the hitherto unthinkable amount of $1 trillion.

Under Democratic Presidents Jimmy Carter and Bill Clinton, debt as a percent of GDP went down. But under Barack Obama, deficits careened out of control, and national debt ballooned from $10.7 trillion to $15.7 trillion, jumping $5 trillion in three-and-a-half years—an accomplishment for which his predecessor needed eight years.

But presidents don’t control the purse. Congress does. And during these administrations, Republicans and Democrats took turns running Congress, and they all bent over backwards (most of the time), and continue to bend over backwards today, to fill the big trough that corporate America and practically everyone and his dog, here or overseas, have been feeding on.

“As long as I’m around here, I’m not going to allow a debt ceiling increase without doing something serious about the debt,” declared the Speaker defiantly. A sound bite, nothing more. Massive deficit spending has fed the economy for so long that the economy has become addicted to it. Withholding even a small amount would send tremors through the system. That’s why no one, not even the Speaker, wants to actually balance the budget. Ever. It would be political suicide. The much vaunted private sector depends on that $1.4 trillion in additional spending, and lobbyists are lining up to get their share. It’s simply too painful for a country to live within its means. The easy way forward, at least for a little while, is running up the deficits and piling on more debt.

Of course, the “fiscal cliff” is coming up at the end of the year: the Bush tax cuts will expire, automatic spending cuts are scheduled to be phased in, extended unemployment benefits will run out, and the payroll tax cut will expire. Combined, they would make a significant step towards bringing down the deficit—though the piercing screams of the tortured victims would reverberate throughout the land.

So, instead of embarking on real fiscal reform to get the country’s finances in order, Republicans and Democrats will engage in exciting but useless hand-to-hand combat through the elections, while the national debt ticks higher every day. Then they’ll agree on some cosmetic spending cuts, close a loophole, and remove the majority, if not all, of the fiscal cliff. To heck with deficit and debt; the reassuring rattle of the Fed’s printing press can be heard in the distance—and it will provide. Inflation and, to use John Maynard Keynes’ term, debauching the currency are easy and convenient, but they're the cowardly way of mitigating the consequences of endless budget deficits. Read.... “Confiscate, Secretly and Unobserved.”

And here is a hilarious and biting cartoon by Ben Garrison on debt, banks, and the sordid role Washington plays in it all.

 

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Sat, 05/19/2012 - 21:25 | 2444029 Gabriel420jr.
Gabriel420jr.'s picture

"The much vaunted private sector depends on that $1.4 trillion in additional spending"

Really?

I like ur writing abilities but I just have to point out a little slip you perhaps didn't pick up on.

The private sector doesn't depend on the $1.4 trillion additional spending, just the opposite. The $1.4 trillion is taken from the private sector and allocated inefficiently.

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Fri, 05/18/2012 - 11:10 | 2439858 ebworthen
ebworthen's picture

What is this "prudence" you speak of?

Wouldn't that be bad for equities and banks?

(/sarc - prudence and austerity for households, "money for nothing and your chicks for free" for bankers and politicians)

Fri, 05/18/2012 - 10:39 | 2439720 blunderdog
blunderdog's picture

Personally I wish they'd quit screwing around and just do it.   Totally lock up the gummit and let's see what happens.

It's Congress that spends money, and apparently the Republicans haven't figured out that "threatening" Obama is like putting the gun to their own heads.

Fiscal policy is not the President's job.  He's busy, anyway, what with worthless wars and gay marriage and golf and whatever else.

It could even work: set fire to the country in the summer before an election, and just maybe the voters are stupid enough to blame it all on Obama and Romney would win with a landslide.

Win WHAT might be the question at that point, but that's long-term thinking.

Fri, 05/18/2012 - 10:23 | 2439628 Augustus
Augustus's picture

The French propose a lower debt.  They also propose 75% tax rates to get there.  Because the Socialists know how to invest and spend more efficiently than any other citizens.  Perhaps is accumulated DNA damage from the nuke plants that brings on these delusions.

Fri, 05/18/2012 - 10:14 | 2439582 shargash
shargash's picture

Congress doesn't bend over backwards any more. They're bending over in the other direction.

Fri, 05/18/2012 - 10:10 | 2439561 smb12321
smb12321's picture

Boehner is boxed in, knowing that the debt ceiling must be raised yet fearful of an all-out assault by the media for any attempts to link cuts to more debt.  He will never be acceptable to ZHers because no one (outside Ron Paul) could pass their ideological purity test.  It's also why Paul (my personal hero) never  accomplished anything legislatively.  He is much more effective as an explicator of ideas and in my opinion, this is much more important.  

But alas, politics is all about compromise.  Legislative bodies that remain divided along ideological grounds are recipes for failure.  Firebrands stir the juices but when half of Congress disagrees violently with the other half you need someone willing to make a deal. To zealots this smacks of defeat but in the real world, life must go on.  We should prepare ourselves like the UK after WWII when its leaders main task was handling the great decline of a world power.

Fri, 05/18/2012 - 10:04 | 2439521 spanish inquisition
spanish inquisition's picture

As a private central bank, you want to consolidate and control. The goal is to make sure all money takes a cycle through you to get your owners their cut. Eventually the infrastructure of politician pay offs, pocketed economists and propaganda outlets creates a massive organization that produces nothing and requires more money. There is so much vig in the system that growth stagnates.

I was thinking about the greedy unions and their pensions, no one is complaining when the deal is struck. Both sides signed off on the contract and agree that in 30 years if you work x amount you will get x pension. Its based on a rate of interest and preserving buying power when you retire. It's a time capsule (outside of the control of the FED and government) and the discrepency after 30 years is that you clearly get to see the devaluation in the dollar.

Fri, 05/18/2012 - 09:40 | 2439280 PulpCutter
PulpCutter's picture

"Inflation and, to use John Maynard Keynes’s term, debauching the currency are easy and convenient, but they're the cowardly way of mitigating the consequences of endless budget deficits."

Nonsense.  When you're in a post-credit-bubble liquidity trap, govt stimulus is not inflationary.  One needs to separate out objective fact (what is the best way to get out of this mess), from emotion and slogans. 

We've been told that "inflationary crackup within 18 months" for years now.  OK, where is it?  We've been told that the dollar will meltdown - yet the USD is currently at 81.40.  YOU NEED TO LOOK AT THE DATA OBJECTIVELY. 

A generation of recent college grads is unable to put their energy to work, and grow their new skills in the real world, because there are no jobs.  US employment grew 7%, from 1939 to 1941, in the manufacturing boom before WWII.  Japan's post-tsunami economy just checked in with a 4% growth rate.  Even Obama's stimulus stopped the downturn, and returned us to weak growth (just the facts, much as you might not like them) - but $785 billion was too small to do much in a $16 trillion dollar/year American economy.  We can fix the economy in a very short time.

Worried about the deficit?  America exited WWII with a substantially larger deficit than we have today - then the economy tripled, in real terms, and reduced that deficit promptly.  Conversely, how does one pay back a deficit, when GDP is dropping?  (A question the Greeks, Spanish, Irish, etc. are asking themselves, right now.)

Fri, 05/18/2012 - 09:59 | 2439482 ATM
ATM's picture

You leave out one very important variable - demographics.

We are not growing populations. Not growing consumption, not growing savings, not growing anything. We are old, indebted and we don't have rising energy production at absurdly cheap prices. The ponzi can work with rising numbers of workers, savers and cheaper inputs.

It is a much different world you intend to print into. Yes the world is trying to de-leverage and governments around the globe are desperately trying to print to stop the deflation. But is the stopping of deflation really not an nflation in and of itself? IF PRICES ARE NOT ALLOWED TO FIND THEIR TRUE LEVEL WHAT DO YOU CALL THAT ARTIFICIAL ACTION?

It's inflation in my book, and eventually it will meet the textbook definition which I feel is inadequate. Prices will end up rising on just about everything. Things that people have to have will sky rocket and things they we don't won't.

The relative dollar value you mentioned is meaningless because it's relative. A much better measuring stick of the true value of paper currencies is against the non-paper currency gold. In that regard we can see that all major fiat currencies are losing purchasing power - a true measure of inflation.

Fri, 05/18/2012 - 12:42 | 2440229 PulpCutter
PulpCutter's picture

"The ponzi can (only) work with rising numbers of workers, savers and cheaper inputs." 

What is the rationale for your assumption?  In fact, the opposite may apply, since the elderly are less likely to voluntarily spend an additional dollar, and more likely to squirrel some of it away for a rainy day. 

The central definition of a post-credit-bubble burst is that everyone tends to save to a greater degree, and be more reluctant to go into debt.  Demand falls. The elderly are less likely spend, so there's even less danger that stimulus would be inflationary.

This is just Minsky - and it's what's actually happened in the past few years, contrary to what many predicted.  Yes, there are times when stimulus would be inflationary - absolutely!  But a post credit-bubble liquidity trap isn't one of them.

Fri, 05/18/2012 - 10:15 | 2439586 smb12321
smb12321's picture

The writer does have a point.  After decades of crying wolf, why should folks believe the naysayers now.  But demographics are the key (thanks) especially in an economy driven by consumer spending.   This explains the rapid demise of Europe - fewer and fewer births (and workers) vs greater numbers of retirees using State services.

The dollar is rising (and will continue to rise) because it is the universal default currency and safe haven.  Only when it becomes apparent to the man on the street that we are doomed by debt with the dollar be affected. 

Fri, 05/18/2012 - 08:34 | 2439084 Sean7k
Sean7k's picture

Love your stuff Wolf, but this is a puff piece.

Yes, the world is drowning in debt. Yes, no one will do anything about it. Yes, the people love the largess as they are not asked to pay the full bill. Yes, the corporations are feeding at the trough.

Now, as the government is never going to change legal tender laws, might I make a suggestion:

People need to start entering all contracts in something other than FDR's. We need to provide and find people willing to exchange in metals, goods and services using a minimum of currency to complete all transactions. We need a black market revolution. 

Fri, 05/18/2012 - 09:50 | 2439391 ATM
ATM's picture

The black market revolution will happen all on it's own.

The currency will cese to be relevant because of it's destruction by the very government that issues it. We don't need to start a new method, we only need prepare for the eventuality. 

Fri, 05/18/2012 - 07:20 | 2438896 Zero Govt
Zero Govt's picture

".. Hollande cobbled together his government yesterday, appointing no less than 34 ministers  ..half of them are women, for the first time in the macho French political world."

and it won't make one jot of difference

politics is the the 'skill' of ingratiation and spending other peoples money. Your sex doesn't make any difference to this most rotten of all processes

Fri, 05/18/2012 - 09:38 | 2439317 spanish inquisition
spanish inquisition's picture

..half of them are women, for the first time in the macho French political world

DSK is jealous and mad, because that was his idea. He always wanted a harem.

Fri, 05/18/2012 - 10:37 | 2439700 Zero Govt
Zero Govt's picture

...a harem like Berlusconi in Italy and who is to say bright yound Italian models don't make far better decision-makers than the tragic 'professional' politicians we suffer judging by the colossal mess we're in

Fri, 05/18/2012 - 08:20 | 2439034 EscapeKey
EscapeKey's picture

Well, my experience is that the other sex is excellent at spending other peoples money.

Fri, 05/18/2012 - 06:08 | 2438826 falak pema
falak pema's picture

It is interesting to note that democrat presidents in the past reduced debt; not the scions of repub party. Something that is often conveniently forgotten. Nixon reduced the debt by scaling down both great society and war effort relative to GDP increase; unless my memory fails me, please correct me on this. 

On France : the budget spending in 2102 is based on 1.7 % GDP growth. If it is 0.7%, which is optimistic on currrent Q1 performance, it will make a big hole in fiscal generation in 2012. So the government will EITHER have to compensate by raising further taxes or by cutting government spending to the tune of 25 billion Euros either way. As usual, the campaign platform is OBSOLETE as of day one in REALITY. Back to the drawing board, and this is before the Euro shit storm hits the country...That is what Moscovici is preparing the country to understand...when he said what he said...fiscal cliff ahead. But that is an issue that will have to be faced after the June Parliament elections in France. When we know if the real left-right parliamentary power balance allows Hollande to charter his OWN course. 

Fri, 05/18/2012 - 10:48 | 2439749 Umh
Umh's picture

Sad to say, but Nixon was a Republican.

Fri, 05/18/2012 - 01:32 | 2438633 skepticCarl
skepticCarl's picture

Even more to blame than the usual Demo and Repub politicians is the short-sighted American Electorate, who continually puts the same crooks in charge. Third party, or unconventional candidates such as Ron Paul, get no significant support, because the American voter wants to bet only on a potential winning horse, hoping that somehow he/she will benefit immediately.  Who can wait two, four, or eight years for a third party to gain enough strength to be a contender?

Fri, 05/18/2012 - 09:57 | 2439453 smb12321
smb12321's picture

It's called the Californikation of America - reelect the same folks who got you into this mess in the first place.

Fri, 05/18/2012 - 01:15 | 2438609 Bansters-in-my-...
Bansters-in-my- feces's picture

War don't come cheap.

Fucking war mongers.

Fri, 05/18/2012 - 01:09 | 2438599 RockyRacoon
RockyRacoon's picture

Looks like it's time to restock the popcorn.

Fri, 05/18/2012 - 00:15 | 2438484 engineertheeconomy
engineertheeconomy's picture

DEATH PENALTY FOR ALL BANKERS

Fri, 05/18/2012 - 09:58 | 2439476 smb12321
smb12321's picture

Stop quoting Lenin!  I presume you mean "banksters" instead of "bankers" and I trust you are not serious about State capital punishment for economic misdeeds. 

Thu, 05/17/2012 - 23:37 | 2438399 JeffB
JeffB's picture

Great article as always!

 

Thu, 05/17/2012 - 23:16 | 2438353 world_debt_slave
world_debt_slave's picture

put up or shut-up

Fri, 05/18/2012 - 01:10 | 2438604 RockyRacoon
RockyRacoon's picture

I'd settle for the latter.

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