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On Debt Ceilings, Fiscal Cliffs, And Krugman's Deficit Debacle
With all the buzz about the 'Fiscal Cliff' – that toxic combination of tax increases and spending cuts due to take hold in a few months – the subject of ongoing Federal budget deficits has fallen by the wayside. ConvergEx's Nic Colas believes that’s a temporary phenomenon, for Congress will have to hammer out agreements to raise the debt ceiling right alongside its negotiations over the 'Cliff' items. His back-of-the-envelope attempt to quantify how much a multi-year debt limit increase would run to take this burdensome legislative issue off the Congressional docket for 5, 10 or even 20 years is worrisome at best. Using the most recent Office of Management and Budget’s numbers, we get to $3.4 trillion for the 5-year runway, but this assumes a high level of incremental taxation. Against more modest expectations for government revenues (consistent with adjustments to forestall the 'Cliff'), the number could be as high as $4.5 trillion. As for the longer time horizon debt runways, think in terms of an incremental $6.5-9.5 billion for a 10 and 20 year horizon. And without significant changes to taxes and/or spending, more. Much more.
Nic Colas, ConvergEx: Jimmy Cliff, Paul Krugman, and the Federal Deficit - The Harder They Come...
This summer will mark the 40th anniversary of one of the great pop music movies of all time – the 1972 film The Harder They Come, starring Jamaican reggae artist Jimmy Cliff. The movie came with a full-length album for a soundtrack, replete with songs that have become reggae classics in the intervening four decades. It made Cliff an international star and ambassador of the genre, with songs like “Sitting in Limbo,” “You Can Get It if You Really Want It,” and the title track. The album is regularly mentioned in music industry magazines “Top Albums of All Time” lists. The success of The Harder They Come paved the way for other, now perhaps better known, acts like Bob Marley and Peter Tosh.
The year 1972 has another, less happy distinction, known only to students of U.S. economic history: it is a reasonable starting point for the modern trend of American government spending much more than it receives in receipts every single year. The Vietnam War had been tough on the Federal Budget, as had other spending programs, and 1971 and 1972 saw back-to-back deficits of $23 billion apiece. That is about $126 billion today, adjusted for inflation. Prior to this period, the only greater annual deficits had been in 1968 ($25 billion) and during World War II (an average of $43 billion annually from 1942-1945, or $570 billion today).
All the historical data is easy enough to find (click here and go to Table 1.1 http://www.whitehouse.gov/omb/budget/Historicals). Here are a few further observations:
- In the last 40 years, the U.S. Government has run a surplus just four times, from 1998 to 2001. We quote government fiscal years here, by the way, which end in September. This includes ‘On Budget’ items (Defense, Health Care, etc) and ‘Off Budget’ (Social Security, mostly).
- The aggregate amount owed from these deficits is essentially the Federal Debt of the U.S., which currently stands at $15.7 trillion.
- The average deficit over the last four years (which includes the 2012FY) is $1.3 trillion per year. For the 20 years prior to this, the average deficit was $162 billion/year. That includes the effect of the 4 years of surplus.
- While it may seem like ancient history, consider that during the period from 1945 to 1972 the U.S. ran a collective deficit of $123 billion, or just $677 billion in today’s dollars. Of the 27 years in this run, there were Federal budget surpluses in 8 of them.
Fast forward to the present day, and these deficits have morphed from history lesson to political football. The reason for this is the Federal Debt Ceiling, as we all learned in gory detail during last year’s Congressional debate on the topic. The limit on Federal debt currently stands at $16.4 trillion. We’ve included a handy table for the historically inclined reader on every past increase to the limit since 1940. There are 79 increases on the list, ranging anywhere from less than 1% (1987 was the last time) to +25% (1990 for that case). At the current pace of spending and receipts, the U.S. government will be out of debt capacity this calendar year, even if Treasury can massage outcome to push another debate into 2013.
Since the last debate was so fractious, I wondered what it would take to get an increase to Debt Limit that might last the country for 5, 10 or even 20 years. Based on the OMB Budget (see that prior link for the exact numbers) as currently presented by the White House, here are some baseline numbers:
- For 5 years: $3.4 trillion. This is the simple total of the coming five years of expected deficits from the White House budget. For reference, consider that over the last five years the debt ceiling has gone from $9.8 trillion to its current $16.4 trillion, an increase of $6.6 trillion.
- For 10 years $6.5 trillion. The end point (2017FY) of the OMB budget shows an annual deficit of $612 billion. Assuming that this is a constant figure and Congress is fine with a (relatively) small deficit like this, we multiplied it by 5 and added it to the $3.4 trillion explicitly modeled for the first five years.
- For 20 years: $12.6 trillion. Same assumptions here. Ten more years at $612 billion, added to the first ten years.
- A lot of money, yes, but remember that we’re talking future dollars here. A dollar in the 2022, ten years hence, is presumably worth less than a dollar today if inflation is greater than zero.
Here’s the rub, however: the expectations in the OMB Budget as presented on its website are highly optimistic on tax and withholding receipts because they assume that the “Fiscal Cliff” of higher tax rates and lower spending kick in with full force in 2013. Just one number to make the point here: OMB’s deficit numbers assume that tax/withholding receipts increase from $2.5 trillion this year to $3.9 trillion in 2017. Compounded growth rate: 9.3%, meaning no recession in the next five years and a pretty much straight shot higher for employment.
So what are the “Real numbers?”
The Congressional Budget Office just took a stab at those calculations in a recent report (http://www.cbo.gov/sites/default/files/cbofiles/attachments/06-21-Long-T...). Their “Alternative Fiscal Scenario” – essentially a realistic “Keep things as they are” projection – shows debt increasing by approximately double the current base, adjusted for inflation. That would put the 20 year debt limit amount at closer to $24 billion, assuming 2 percent inflation.
This is where the “Fiscal Cliff” debate that Congress must have before the end of 2012 dovetails with the debt ceiling debate, and I would argue that forcing lawmakers to vote on a 10-20 year horizon would actually help the process along. The CBO and OMB have some decent models for what the world looks like under the current order of things, as well as under some pretty drastic changes. If you just consider a one-off increase to the debt ceiling and some kick-the-can solutions to the Fiscal Cliff, you’ll never really address the whole picture. That’s where Congress is heading, but it doesn’t have to be.
I also cannot help but think about Paul Krugman as I stare at these numbers. His recent book, End this Depression Now, proposes that “A quick, strong recovery is just one step away, if our leaders can find the intellectual clarity and political will to end this depression now.” This “One step” is deficit spending that is orders of magnitude greater than anything spent already. Honestly, I have no idea if he really believes any of this, since it is politically impossible. He’s a smart man, and he clearly knows this. And he’s got a Nobel, yes, but so did the guys at Long Term Capital. Still, I bet this modest proposal would meet with his approval, and maybe even Paul Ryan (R- WI), the fiscally conservative Congressman. Let’s have the whole debate, using the real long term numbers, and let the chips fall where they may.
And, lastly, the whole conversation of how the U.S, will square the circle of the debt ceiling/Fiscal Cliff debate brings me back to Jimmy Cliff and the track “Too Many Rivers to Cross” from The Harder They Come:
Many rivers to cross
But I can’t seem to find my way over.
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slapped by the grammar police? Oh please.
Went by a Walmart today, there was practically nothing on the shelves. What is going on?
Import problem. The USD is being replaced by the diversification out of USD and the shipping industry is having difficulty getting paid.
beginning of the month food stamps rush
yep, even major food and retail is now a State-aided 'market' and moves to the rythm of socialism
what does Govt subsidy in markets lead to? ...food inflation anyone???
here's ya some 72', bitchez!
http://www.youtube.com/watch?v=Y0Y_XRiJsCI&feature=related
great article, TD.
okay, since banzai won't show, here we go...
http://www.youtube.com/watch?v=Nnpil_pRUiw&feature=related
happy birthday, janus! -- http://www.youtube.com/watch?v=Vo_KgXwHxkE
and, ZHealots, you're welcome for the best writing in a gereration...posted here, at the Great Omega -- all for you, and all for free.
and before i get going, i should thank Tyler; without whom you would've never known janus -- for he would have found an inferior medium/repository for his awesomeness...and i miss agrotera, to whom i owe a special debt of gratitude.
it's time that i let you all peek behind the curtain; tis time to draw back the veil and reveal a bit of 'the plan':
some may noddle-scratch over an obvious enigma: to wit, why does janus neglect specific persons in his skewerings? why, pray tell, doth janus forefit the pleasure of pulverizing these platitude-spoutin pricks? well, it's like this, "for we battle not against flesh and blood; but against spirits and principalities which are in high places." moreover, krugman, like almost every other american journalist lacks something(s) -- let's call it talent...or maybe we should call it intellect; possibly even wit. yes, krugman is a witless dullard. i have no pity for him; nor do i care to waste my most valuable time addressing him. he's a shill; and, to be fair, that's not such a bad thing -- what makes krugman (et al) so miserably pathetic is that i find him wanting. yup, janus has put him in the balance, and the scales swung so swift-like against him that you'd have thought gravity itself held a grudge. what i mean to say is, krugman -- you're a weak-minded wittle bitch, and janus aims to shred those pink polka-dotted panties you're momma made you wear. and, woe betide ya, janus WILL menace your masters.
without further ado, here's the schedule (and i will not elaborate):
markets, academia, organized religion, democracy, society -- in that order.
so, speakin of peakin -- oops, i mean 'peeking'...what does janus intend to do next (i mean, after the fall of the bernaksters)?
http://www.youtube.com/watch?v=if-UzXIQ5vw
worthless cunts in alabama, I SWEAR BY HEAVEN ABOVE AND THE EARTH BELOW -- YOU WILL RUE THE DAY YOU FUCKED WITH JANUS. you and your children (and their children) will PAY. janus is goin old testament, bitcheZ!
http://www.youtube.com/watch?v=UJgVEnbwguk
janus has decided: if you worthless fuck-faced wastrals are 'christian' then janus is anything but...i am your enemy -- I WILL WRECK YOU ALL. an absolute desolation. i can't wait/ i can't wait!
you see, world, janus only wanted to hide in the woods for his entire life...just his books and children and animals and wife. you wouldn't leave me alone to this most humble end, would you? make no mistake; understand what i'm telling you...but, please, underestimate me...whatever the case, you cannot stop me -- janus has breeched the crysalis; he is born anew, and he's got his evil-eye aimed square at Y-O-U.
http://www.youtube.com/watch?v=GGDQOECShw8&feature=relmfu
as to the subject of janus and whether or not he's 'crazy'; well, quite right...if americana is 'sane' then i'm crazy as a bath-salt smokin face-eater. and, what's more, i'm hungry.
i will also say this to other creative-types -- come to boston. this city has done all it can to roll out the red carpet for us. it is VERY accomodating; insofar as bloomberg's war against tobbacco will cost his city ALL truly great artists. creative-types smoke...deal with it, bitchez -- it's our prozac. menino's a great mayor, BTW.
http://www.youtube.com/watch?v=GRhWvAKNoXI
let me also share with you another Truth...namely, that janus (and some others here at ZH) is being read by many of the world's most powerful and influential. this is as it should be. they have a sense of janus; but they have no clue how crafty he is. and to you, masters of the universe, i should say: i have not come to destroy you, but to save you from your feckless selves.
your new world order was half-baked...i will show you a bettah way.
http://www.youtube.com/watch?v=WhcZuzVsb9k&feature=relmfu
do you, do you understand/
the people that we are?/
did you find your fears?,
janus (the american -- http://www.youtube.com/watch?v=Iww-l4UtygE
{thank you, portugal the man, for comin along at just the right time for ole janus}
+1 for Portugal. The Man
janus,
I am glad that you have found a spiritual home in Boston. Stay close to our homeland. It will never fail. Never, whatever our troubles. This is our land, our people, our money, our way. The Republic. Our country tis of thee. We make it so.
couldn't agree more, neighbor.
janus had options when it was time to flee: had connections in hawaii, LA, NY, s. america, chicago and of course southern big-cities. new england (boston) was, at first, the function of practical considerations -- it is in the best position in oh-so many regards...and the imbeciles think otherwise. anyway, i've since fallen deeply in love with this place.
never before have i loved a city/region so. janus LOVES you BOSTON. and, what's more, he will NEVER forget your hospitality.
God bless ya, Yankees!
janus is, and always will be, a southerner (can't help it) -- but he is no longer a stranger. people 'get' janus up here; and i am so fucking grateful.
http://www.youtube.com/watch?v=-VShpcqd3zE
look away, look away, look away,
janus
I hate deterministic economic theory voodoo bullsh*t.
We are at the edge of a cliff. These economic academic lunatics are destroying the market, miss-pricing everything more so their beloved monetized bonds soon-to-be worthless debt pile.
The market is dying.
The economist most responsible for our current actions is Milton Friedman. His ideas of handing money over to the banks as fast as it can be printed is doomed to failure.
I agree. University of Chicago is a travesty with their hedge fund associated endowment funds and connections to the 'monetary' base i.e The Fed.
They + the Keynes bizarre theory infiltrated the free markets and have corrupted every aspect of market pricing. We see it now.
Economics (sans Austrian) is probably the last science that follows deterministic theory that was killed off 50yrs ago.
Not sure why you want to conflate this Friedman tragedy playing out with Keynes.
monetarist + interventionist = a total disaster
but hey, i am just a dirty trader.
chump,
Do me a favour: kick their ass all over the trading floor ;-)
Any chance I can get.
Stimulati,
You don't understand, do you. The fictional reserve bank system is failing before your very eyes, yet you argue over the name of it, silly pet of politics.
Quoting Pangloss the Economist:
"The enormous riches which this rascal had stolen were sunk beside him in the sea, and nothing was saved but a single sheep. —You see, said Candide to Martin, crime is punished sometimes; this scoundrel of a Dutch merchant has met the fate he deserved. —Yes, said Martin; but did the passengers aboard his ship have to perish too? God punished the scoundrel, the devil drowned the others."
--Voltaire, Candide
Thank you TD for this place where worn out Socialists can delude themselves that they are still relevant while they get the opportunity to interact with some healthier minds ! Monedas 1929 Did you hear about that South Korean who defected to the North in 1980....his wife and two daughters got 25 years in the Norko gulag and he beat it back to South Korea in 1981 ! Socialist Father Of The Year ! He's now 70 and looks like he's eaten well for the last 30 years ! He misses his wife and daughters ! Monedas is an admirer of Milton Friedman....Stimulatey !
How can "socialists" be controlling and ruining the world economy at the same time "socialists" are irrelevant.
Truth is, Keynesianism hasn't really been applied in this country in about 40 years. Not long before median income and the middle class began its long stagnation. Keynes has become largely irrelevant. And its a shame because it could get us out of this mess that Greenspan / Friedman have hoisted upon us.
Stimulati,
Keynes was an aggressive sodomite, well paid by his Rothschild masters who paid for Marx and inspired the 20th century's killing machine: Lenin, Stalin, Mussolini, Hitler, Pol Pot, Mao.
The problem with your sort is that you admire fine words like Crookman's, and expect others to pay for your failed social experiment with their blood and money, not yours.
You are 'educated fools' and 'useful idiots', said Lenin who like you, your Crookman and globalist central bank cartel wish to enslave all for your own freak clique.
Lol, I finally figured out what the hell you are talking about when you say Crookman. Oh yea, of the easy offense to the ad hominem attack.
btw, some of my best friends have been aggressive sodomites. I'm not sure how that applies to fiscal policy though.
Just toying with you, pet, while waiting for markets to open. Markets for money, not your sort of weird flesh market. That's the problem with your sort: you treat people and money like a game that you don't have to pay for.
Crookman so deserves your sort to defend his failed ways; proof of his eCONomics. Read that last word again, as it seems to take you a long time to comprehend, much like Crookman.
Well, ne, Zero Hedge has been around a long time now. Your comment is accurate and it gets a greenie from me. But it's not a new thought and it doesn't seem to get you more than than my green.
So what should those of us not in the freak clique do?
The guy who writes, "Keynes was an aggressive sodomite, well paid by his Rothschild masters who paid for Marx and inspired the 20th century's killing machine: Lenin, Stalin, Mussolini, Hitler, Pol Pot, Mao." is NOT in the freak clique?
I'm going to have to get my freak on
Stimulati, by name and nature...like your failed eCONomic theory and politics :-)
Vic,
Buy gold, silver, land, and stay close to home, wherever that is, in my opinion. But I'm from New England, so that suits my nature, and I lived decades abroad, so I am disinclined to acquiesce to the pleas of useless politicians and central banksters who are the ruin of our world with their unregulated otc derivatives equal to ten times global gdp, the casino of failed gambling.
irrelevant? Nope ... ignored... yes.
Most economists today are about getting a great job at a bank or a think tank. All those fresh water fucks are sucking on the tit of power and saying what their masters want. I'll take my Keynesianism hard truths thank you.
Thank you TD for this place where worn out Socialists can delude themselves that they are still relevant while they get the opportunity to interact with some healthier minds !
Good stuff but let's not paint anyone here with too broad of a brush. Yourself included.
I've seen you riffing on how since now everything is left-of-center there is no right-wing thinking anymore (or something like that). Apologies in advance if I didn't fully get the comedy tour.
You often have good stuff to say. We don't live in times that value your ideas or mine. So we gotta figure out a way to live out our days, no?
I hear ya ! I enjoy hearing people trying to defend Keynes ! This is a great time to be a senior citizen and watch the world go by ! I am one content, economic porch monkey, as long as I don't get my tail caught under the rocking chair ! Monedas 1929 Comedy Jihad Rocking Chair Satan
Krugman does a good job ......selling books.
says the dude who almost never misses a chance to link to his own EW charts every chance he gets...
OT ... but certainly profoundly interrelated to this topic:
--
Here it finally comes, what I said a few weeks back was steadily approaching, now they have begun the propaganda campaign to canvas it openly and garner populist support of the chattering-class in the global media ... the BBC will, as always, beat the drum and flood the global airwaves for the clear and pressing need for another humanitarian war against a terrible ruthless despot.
It's what the US and NATO have been edging toward for 18 months, and tried arduously to bring about via arming and materially supporting the spread of so much internal militia bloodshed and false-flag operations, that they can again run this cynical and false line of the "desperate need for humanitarian intervention", i.e. a military intervention ... but for the children!!!
"Operation: Bombers For the Kiddies", is about to become the next major topic of CFR inspired global media 'conversation' for a few weeks, as we wind things up to fever pitch for another ever popular precision-guided bombardment. In Rome they only had bread 'n circuses with a few gladiators for good measure.
But it's all been a bold-face pretext for a UNILATERAL de-fanging and bombardment of Syria's military and destruction of its cities, and pounding the Damascus administration and vital institutions, to make the country as weak, desperate and therefore as politically malleable as possible, to set up a genuine terrorist-lead puppet supplicant, within Damascus, in preparation for the upcoming bombardment of Iran.
ie. securing the left flank so the right flank can move in from Diego Garcia, to open a new front.
Unilateral because they realise they will never get a no-fly-zone (we-bomb-you-zone) through the UN SC now that the other permanent-members are fully awake.
This is exactly the type of faked ploy Hitler conjured as a shallow pretext to bombard and invade Poland, that kicked-off WWII in Europe.
And what is the UN doing? The organisation supposedly and solely-based around the concept of, "Never Again!", of never again allowing this sort of unilateral situation to develop into more and deadly wars?
Well, it's a funny thing, that. The UN is in fact actively assisting and providing media propaganda cover for those who are actually doing it, and now proposing implicitly to unilaterally bomb and invade yet another country. And fairly soon they'll be getting very explicit about this, and the UN will lose every last remaining shred of its already dubious credibility, as a global moderator.
Truly Hitler and Goebbels would be damn impressed by the current crop of fascist invaders, and their snake-in-the-grass tactics to get us to the threshold of yet another horrendous war.
But what's Russia and China going to do, seeing this concocted from afar? And what about the numerous very heavily armed anti-Israeli militias, within the immediate area? Will they just stay out of a western attack on Syria? Dream on.
This can and will escalate in many ways, if Washington and European capitals engage in unilateral aggressive military actions, not least of all a fantastically damaging long-lasting war with Iran, that will escalate way beyond normative comprehensions, very soon after.
Washington, London, Paris and Jerusalem are all pushing as hard as they can to kick off a gigantic and long-lasting war in the middle east that will dwarf anything we've seen there so far. And let's face it, we've seen some pretty big ones over the past 70 years, right? Well, bigger than all those, combined.
SO, now we'll get a P5 + 1 (+ Germany) meeting in Moscow, and let's remember, Russia is insisting Iran MUST be a part of this discussion or there is no point to it, while the US, France and UK are avidly resisting the suggestiion (after all they want to bomb it), so that's going to be P5 + 2 ... maybe ... as this may be a complete show-stopper for diplomacy.
What? You were oblivious to all this going on under the surface? well, you better snap out of it fast.
Either there will be a settlement in Moscow, some real geo-political horse-trading and mutual respect and agreement, or it's going to land us in a regional strategic war--well, regional at first--quite probably global thereafter.
--
--
And this is what the US and NATO have been edging towards for 18 months, and tried arduously to bring about via arming and materially supporting the spread of so much internal bloodshed that they can again run this cynical line of humanitarian intervention, i.e. military intervention for the children, as pretext for a de-fanging bombardment of Syria's military, it's Govt and its institutions, to set up a terrorist lead puppet, in preparation for the bombardment of Iran.
I've said it before and I'll say it again, Hillary Clinton and Barrack Obama are nothing less than war-pigs, pure war criminals in the here and now, and it's beyond time the US military stood up, and in very blunt terms, refused to recognise their orders.
"I was just following orders", is not a survivable excuse for following the orders of war criminals.
A couple of false-flags attributed to Syria/Iran would be so helpful right about now.
"We'll all remember San Francisco. I remember when I designed and built that big bridge there, years ago, before I ran for the White House. This is Bush's Fault, but I'll make those Iranian and Syrian dogs pay, even if I have to eat them!"
Krugman the Potato with a beard is talking again about making more french fries from each potato by slicing them smaller?
For someone to get so deep within their own thinking that they believe their thinking about thinking is thiking is frightening.
maybe he was thinking about 'alien' spuds...
its time to suck it up, be a man, and balance the budget boys. No more of this pansy ass wringing our hands and spending money we dont have like some foolish suburban housewife that needs endless retail therapy and cant park her car in the garage cause of all the shit she's collected.
“A quick, strong recovery is just one step away...."
Really ? And WTF is going to be the source of it ?
30 buck/barrel oil ? Nah....
Tons of new manufacturing jobs (here) ?
Kinda doubt it......
Lot more debt ? .....Yeah.....that's it....
God save us from fucking idiots.....
Krugman... [is] a smart man... And he’s got a Nobel, yes, but so did the guys at Long Term Capital.
Exactly! "Book smart" and "common sense" are two different things.
How is your PhD in economics coming along? Have you read the book? He makes a great argument and backs up his ideas. I'm happy to have you pull his wings off by showing where his arguments are based on poor data or mistaken conclutions. But you and most of the commentors on this site think your homespun wisdom is somehow the same as strong economic reasoning.
The Depression is the most studies and best understood economic even in history. And he does a fantastic job of showing how the current situation has strong similarities. He does a very job job of showing how the American situation is differnt from the European one. He shows how Austerity by a country that controlls its own currency is not working - UK.
His biggest call for spending is to restore the cuts made at the state level which makes perfect sence.
Best of all and most importantly he says this is a science not a morality tale. Any and all who want to argue the facts are welcome.
The Great Depression was caused by the Fed. Just like the present Global Depression is caused by global central banks. Krugman is a central bank apologist AKA a fraud protecting the world's biggest fraud.
And when the Fed talks about what they did wrong they talk about not stimulating the economy.
BTW 'The Pricing of Options and Corporate Liabilities' which got them the Nobel was fucking brillant. US Laws lets them take on all that risk was fucking stupid.
And there lies the whole American problem. Lots of smart people and not enough restraint. You all bitch about the Nanny State... brother if any one needed a nanny it is you people. With a decent nanny curbing your ... lets call it enthuiasum... you could be a great nation.
Brooklyn smart beats MIT smart.
The key problem with Krugmanomics is that it defies common sense. The current empirical data for the "multplier" shows that for every $1 borrowed we get 40 cents worth of GDP growth. Assuming that tax revenues are about 20% of GDP, independent tax rates, we need a GDP of $20 trillion to generate $4 trillion in tax revenues to balance the budget. That means we need to grow the GDP by $6 trillion, which means we need to borrow another $15 trillion. (This assumes that the cost of carry of the additional $15 trillion is zero - i.e. it will be bought by the Fed).
Krugman's argument makes about as much sense as borrowing $100,000 to renovate your house so that it will increase in value by $40,000.