That Big Fat Budget Deficit. Yawn. Chang W. Lee/The New York Times The National Debt Clock in Midtown Manhattan was put up as a political message in the 1980's. It was turned off in 2000 as the government ran surpluses, and restarted in 2002. DEMOCRATS grouse that President Bush has recklessly frittered away the surpluses of the 1990's. Foreign finance ministers plan to express their alarm about America's Brobdingnagian budget deficit at a Group of 7 meeting in Boca Raton, Fla., this weekend. Even a growing number of Republicans argue that Mr. Bush needs to stop making excuses and cut government spending. So what is the reaction from the bond market vigilantes, those disciplinarians who bid up interest rates whenever past deficits started looming? Yawn. Since Mr. Bush released his budget proposal on Monday, forecasting a $521 billion shortfall for the current fiscal year, the interest rate on 10-year Treasury notes has actually fallen slightly, closing on Friday at 4.08 percent. Since August, when the deficit estimate was $475 billion, the rate has dropped from about 4.4 percent. The bond market, it seems, has stopped worrying and learned to love the deficit. The question, of course, is whether everybody else can relax, too. There are some basic economic reasons for low rates, like an influx of foreign capital and the unevenness of the American economy, that have little to do with the deficit. But there also appear to be psychological reasons. Many economists say the bond vigilantes' muted reaction is both a symbol and a cause of the misplaced calm about the deficits, at least outside the Washington hothouse. Most people old enough to vote or make investments can remember the 1980's, another time when the federal government spent more money than it had. Few people can think of any lasting harm those debts caused. So it may come as no surprise that only 2 percent of Americans named the deficit as the main issue they would like to hear candidates discuss in the 2004 presidential election, according to a recent New York Times/CBS News poll. "Under Reagan in the 80's, I remember headlines day after day saying we were leveraging our children's future," said Lundy R. Wright, a managing director and top bond trader at Morgan Stanley. "But in good times, we got back to surpluses. I think the lesson is, you can borrow when times aren't so good and cyclical factors will help get you out of it." N. Gregory Mankiw, chairman of Mr. Bush's Council of Economic Advisers, added: "It's very clear the bond market still has a lot of confidence in the U.S. economy. People basically trust the U.S. to do the right thing. People do not expect the deficits to persist." Perhaps they won't. The economy could indeed outgrow these deficits over the next decade. In fact, the Congressional Budget Office, a nonpartisan research arm of Congress, is forecasting that surpluses will return in 2014. But many economists also say the rapid fiscal swings of the last 20 years have created a false sense of security about deficits. That serenity may have been reinforced by a series of accounting decisions in Mr. Bush's new budget that mask the deficit's true size, according to budget analysts. THE absence of concern is all the more alarming now, given the enormous shortfalls in Social Security and Medicare that await in coming decades, economists say. "If the 80's deficit had gone away on its own, that would be one thing," said Benjamin M. Friedman, a Harvard economics professor. He noted that the long economic expansion of the 1980's did not bring down the national debt. Only after the first President Bush raised taxes, President Clinton raised them further and the Republican Congress of the mid-90's reduced spending growth did the deficit vanish. "And the people who took those tough actions didn't necessarily get rewarded for them," Mr. Friedman said. Before the first President Bush broke his "read my lips" vow and increased taxes, the Republicans had won three consecutive presidential elections; they have not won the popular vote since. The controversial 1993 federal budget, meanwhile, contributed to the Democrats' loss of control of the House of Representatives, which they had held since 1955. Those political costs do tend to stick in people's minds, and they have made a budget reckoning all but unthinkable during an election year. Barring truly spectacular and surprising economic growth in coming years, though, the reckoning is likely to come eventually, even if there is little hint of it in today's bond market.
Overnight Liquidity Update-February 9, 2004 NEW OFFERINGS REACH $8.8 BILLION, BUT COULD DROP TO $5 BILLION BEFORE REBOUNDING. U.S. EQUITY FUND INFLOWS SLUMP TO $2.2 BILLION, LOWEST LEVEL IN FOUR WEEKS. Liquidity deteriorated during this past week as stocks ended up having basically treaded water. The TrimTabs market capitalization fell below the $15.5 trillion mark, dropping 0.6% to $15.46 trillion. The estimated net change in the trading float of shares (L1) turned heavily bearish, surging $6.6 billion. This gain in L1 was the largest increase in nearly three months and well above the $2.2 billion average weekly increase over the past four weeks. For the first time this year the new offering calendar, at $8.8 billion, was big enough to impact stock prices. However, as the calendar subsided at weekâs end, the market rebounded. The calendar might be slow this week. The near term future of this market depends upon how big the new offering calendar can get. More fruits of the new corporate finance hiresâ labor should find their way into the stock market over the coming weeks, boosting new offerings to more than $1.75 billion daily. When that outflow is sustained, the bubble will surely burst. Inflows into U.S. equity funds decreased substantially to an estimated $2.2 billion, slumping below $4 billion weekly for the first time in four weeks.
More to the point, GDP makes for a politically attractive but economically irrelevant denominator. How much is government borrowing relative to the funds available for borrowing? The relevant denominator is total saving and not total output. FRED shows the current annual rate of gross saving to be $1,574 billion. And the government is borrowing just under 20 percent of it enitre article here http://www.mises.org/fullarticle.asp?control=1158&id=65
will history repeat itself? http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=30221
You speak of the debt bubble and tremendous amount of debt on the books of consumers and households . . . Yet, you do not recognize the ASSET side of the consumer's balance sheet either, which has obviously grown substantially as well.
The asset side of the consumerâs balance sheet has grown to the extent that it has through increasing the debt burden rather than through savings, and there lies the problem. Eventually asset prices will have to come back to earth due to the fact that we cannot grow debt levels at this rate forever. When that happens the debt burden will become horrendous because it does not diminish, unless of course through bankruptcy or high inflation, which really only serves to compound the problems in the future. This is Greenspanâs worst nightmare, and itâs what heâs been so desperately trying to avoid these past few years. I donât think he will make it because the damage that he has done to the US economy throughout his term has been too extensive. But hey, Iâm still long and have shifted the bulk of my assets out of the US, and thatâs all that matters for now.
Greenspan's testimony today further confirms the "sell the dollar, borrow short-term and purchase long Treasuries" strategy that has been in place for quite some time. As long as individuals and corporations are able to refinance and "re-liquify" their balance sheets, the beat goes on . . .
I'm firmly in Waggie's camp on this one but the world is a weird place , I can see how opposing points of view are easily equally valid. I annoy myself with observations like: will Europe's entrenched socialism be an equal or greater burden on their econs than our deficit spending and consumer debt is on ours? Can the Japanese banks go completely straight without sinking an entire generation of postal savers? Can any of them stop supporting our paper as we are the worlds consumate consumers and if we stop they die, i.e., we have them by the short hairs? Are the major auto cos. wrong in their research to decide to build $150k - $500k cars? If natural inflation is accepted in consumer products and land, why not in P.E. ratios. etc,etc,etc.
To adapt what Churchill said about democracy: Capitalism is the worst economic system except for all the rest. The amazing thing is that over the last 50 years with all the problems you've outlined above and more, we have still managed to create more wealth than all previous history combined...doncha just love compounding effects? To wit, middle class consumers (~90% of Europe and USA) live better today than royalty did 200 years ago. BTW, I think that the real problems facing Europe and Japan are not the ones above but demographics. Japan in 2005 will actually see its population shrink in absolute terms. Italy would be similar except for immigration. Good thing India, China and Brazil have decided to join the developed world!