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Cutting The Deficit: They Won’t Because They Don’t Have To
Wolf Richter www.testosteronepit.com
The Supercommittee did what it was expected to do. There should have been a sense of urgency: outlays in fiscal 2011 rose by 4.2% to $3.6 trillion, of which a sickening 38% was paid for with borrowed money. Yet lawmakers dug in their heels. Why? They didn’t have to make painful choices. Unlike Greece or Italy, the US has a miraculous money machine that takes care of the deficits.
The idea was flawed from the outset: to cut the deficit by a small fraction—$1.2 trillion in reductions spread over ten years would amount to $120 billion a year, starting in 2013, while annual deficits are in the $1.3 trillion range. Practically a rounding error. Then came the next impossibilities.
Cut spending? It would scoop money out of the big trough that has been feeding just about everybody and everything in the US, and often enough overseas: retirees, Big Oil, museums, Solyndra, defense contractors, non-profits, government agencies, the rich, the poor, etc. And they all start screaming. A very painful situation for lawmakers, whose ears can only take so much, and whose jobs depend on doling out money.
Raise taxes? The cacophony becomes even more deafening.
Lawmakers have millions of reasons not to venture into that thorny thicket. Instead, they came up with the Supercommittee, where any efforts to deal with the deficit would die a natural death, followed by automatic spending cuts, to be modified away at a later date. This would allow political campaigns to go on unperturbed, while the rest of America goes back to square one: huge deficits and a gross national debt that will exceed $16 trillion next year and $17 trillion in 2013. In 2014, it will reach 120% of GDP, the level that Italy is struggling with today.
And there is no end in sight. The only power that could motivate Congress to deal with the deficit responsibly is the credit market. Market participants could demand higher yields or walk away from US treasuries altogether. Greece ran into that situation. It’s when the music stops playing. It’s when governments have to act.
But the Fed’s near-zero interest rate policy and aggressive monetization of debt have shielded congressional budgets from the discipline of the markets. To motivate Congress to cut the deficit, the Fed should pick up its megaphone and announce that it would refuse to buy bonds of whatever kind, come hell or high water, and that it would allow yields to be set by market forces. No more QEx. No more fancy programs to subsidize banks. When treasury yields start rising, and when funding the deficit and rolling over maturing debt get iffy, then Congress might finally deal with the deficit in a responsible manner.
The Fed will never do that. Its very existence depends on Congress. If it failed to support the budget deficits, lawmakers might no longer see any reason to keep it around. They might actually follow through on threats to repeal the Federal Reserve Act of 1913 and replace it with acts that could put the US economy back on track (or make it worse). The Fed’s lease on life is based on its ability to guarantee that budget deficits will be funded, regardless of what the consequences are on the rest of the economy and the future of America. Even presidential candidate Rick Perry has come to grips with that and has backed off his anti-Fed rhetoric.
Reducing government spending and raising taxes are politically the two hardest and most perilous things to do. The first tends to topple governments and send people into the streets, as we’ve seen in Europe; and the second tends to infuriate the rich. No one wants to get kicked off the gravy train. So we sneer at Italy's insufficient and convoluted efforts to get a handle on its out-of-control budget—yet our own lawmakers aren’t even trying.
Congress regularly hyperventilates about the Chinese yuan being undervalued. If China just allowed it to trade freely, they say, it would solve the US economic quagmire. Political posturing full of bitter ironies.... When The Truth About The US Economy Comes From China.
Wolf Richter www.testosteronepit.com
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They're just traveling to accumulate blame the can until they can't bang it any more.
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What aberration alone three years can make: in 2009, U.S. sales had biconcave to their everyman point in the endure 25 years, while sales in China were accretion exponentially.
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Good post.
Note to self, read testosteronepit, ignore ilene.
Essentially, the monetary and fiscal tricksters are getting away with it because the dollar's status as global reserve currency, esp vis a vis oil, maintains it's "value" no matter how much they print or spend. I have a feeling the Iran War is going to break this log-jam. And a lot else. So why would they even do the War? Because our Zionists don't care if the dollar collapses: Ft. Knox gold done aliyah'd to Israel.
They're just going to keep kicking the can until they can't kick it any more.
"This country is in bankruptcy, we have to deal with it, we can't remain in denial" Dr. Ron Paul, 11/20/11
12 'economic crisis deniers' on that committee
What more can be said Wolf. You've nailed that one.
There's lead in the tea and Alice is late....
Ben can print all he wants. Increasing unemployment still means less tax revenue, lower GDP (really), High inflation and higher commodities price's. All leads to riots and pissed-off average Americans. Our politicians are a snake eating it's tail. No matter what they do it will end badly. So let them print, make false promises and lie about the US numbers. Average Americans better be buying up all the PM's they can.
Money printing in theory:
Fed --> Primary Dealers --> Corporations --> US Workers Wages --> taxes back to government --> US infrastructure
Fed --> Primary Dealers --> Retail Banks --> Consumer loans for cars, education, mortgages, etc. --> profit for shareholders
Money printing in practice:
Fed --> Primary Dealers --> Corporations --> non-US infrastructure investments --> non-US workers skill development
US worker wages growing less than inflation --> less taxes to government --> budget deficit --> less US infrastructure
Same good intentions gone wrong from communism days.
There should be an amendment to the Constitution that states:
"Two years of budget deficits in a row will result in all Senators and Congressmen being forced from office indefinitely."
That would fix the problem immediately.
I agree with you but that is just one more aspect to the Constitution for the US government to ignore.
Term limits for ALL elected offices and a balanced budget amendment would do just as well. Publicly funded elections would cost less in the longer term and elected officials should not be allowed to work for Companies (Including Lobbyists) in any field related to their public office for a minimum of 5 years.
Whereas I agree with your sentiment, I think it's necessary to understand one thing: Congress doesn't give a fuck about the Constitution. They break the law all the time. Show me one part of the Constitution that they don't circumvent all day long. I believe that the only way for them to stop spending is to make it physically impossible. That is, END THE FED.
Without money printing ability, they can't engage in deficit spending. The End.
The Fed can print money but the Treasury has to borrow it it spend it. So, without the Fed - we wouldn't need to borrow at interest. Then deficits wouldn't matter.
" The Feds lease on life is based on its ability to guarantee that budget deficits will be funded,..."
Well done...the crowd roars.
Very well put. This is precisely why Germany is being so 'Unreasonable' in refusing to let the ECB fire up the printing presses. They know that the second the magic new money starts rolling out, politicians all across the Eurozone cease to have any meaningful impetus to deal with structural fiscal problems they face.
I find it amusing that commentators in the US sit back and mock the Europeans and their struggles to come to terms with the results of decades of unrestrained spending while, at the same time, their own political class doesn't even see that there is a problem because Ben has a printing press that will make all the unpleasantness disappear.
Except that it won't. It just enables problems to be pushed back into the future and grow bigger, and bigger, and bigger.
You've got that right Quintus! I couldn't agree more.
Absolutely. PLUS, in Europe, unlike the US, poiticians do still have to represent "We the people". Merkel knows that 70%+ of the German people do not support either printing OR further bailouts for the profligate Southern Europeans, so she could not get either through an election or a referendum, one of which would be required to change the Constitution, which would be necessary for the Bundesbank to allow the ECB to print. Your arguement regarding "Moral Hazard" is well taken. Except in the US?