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Sometimes,
the experts I monitor on a regular basis are cranking out good content on all
cylinders. Today, it is Edward Harrison at Credit Writedowns. Not
only have I featured one of his post's at When Giants Fall -- see "Not a Time for Indifference" --
but I've also highlighted another one below, entitled "America's Fiscal Train Wreck"
(published at his own site and at Naked Capitalism),
which details a growing recognition that deficits -- at least those which
aren't linked to a long range reduction plan -- do matter.
As you
all know, Yves has been swamped writing her book, a work we all await with
anticipation. So I have stepped into the breach to add my voice to hers on
this site from time to time. This week I will also try to help pick up the
slack for Leo as he is off stuffing his face and sunning in Greece (lucky
devil). So I want use this opportunity to thank you all for your comments and
suggestions since I started guest posting here. I hope you have enjoyed my
contribution.
Below
is a blurb I just wrote over at my own site. I wanted to run it by you here
in order to motivate a discussion about the trade-off between short-term
deficit spending and longer-term plans for deficit reduction. There has been
a lot of talk about how reckless the U.S. has become with the deficit
ballooning to unheard of proportions in the trillions. About this time last
year I thought Bill Gross was crazy when he was
already talking about trillion dollar deficits. But, he was quite prescient.
Here’s
the question: can the U.S. run up a huge deficit now as long as it shows a
credible plan to reduce it over the long-term? I have suggested that
healthcare (and social security) be a main target of that longer-term deficit
reduction plan. But, is this a trade-off that can actually work? Your
comments are appreciated.
Here
is the original post. Enjoy. (Note: I filed this post under the categories
Health care and Banana Republic.)
I
think a technical recovery will happen in the Q4 to Q1 timeframe. But this
recovery is likely to be weak, if it happens at all. Downside risk remains.
Unfortunately, the Obama administration has fired all its bullets, spending
huge political capital bailing out the big banks and putting together a weak stimulus package we all knew was
going to fail.
Now,
Joe Biden is trying to save face, talking as if recovery is guaranteed and no further stimulus is necessary. Yet,
on the eve of the G-8 summit, it takes Gordon Brown to remind us that the Great Depression II meme is still at
play. If the United States wants to keep deflationary forces at bay, it will
need to support the economy with fiscal stimulus.
The
problem is the U.S. government budget deficit. In April, in a post called
“The Cult of Zero Imbalances,” Marshall
Auerback made the case for stimulus, aware of the downside risks for the
dollar and bond prices because of that deficit. Yes, there are risks for
America associated with deficit-inducing stimulus in the short-term,
but they can be mitigated if the Obama Administration actually showed a lan to reduce the longer-term deficit. But,
as David Leonhardt has argued, Obama’s team has no deficit reduction plan whatsoever.
So now
we must contemplate America’s fiscal train wreck; and that is exactly
what Richard Berner at Morgan Stanley is doing. Here is an excerpt of his
research note published today.
America's
long-awaited fiscal train wreck is now underway. Depending on policy actions
taken now and over the next few years, federal deficits will likely average
as much as 6% of GDP through 2019, contributing to a jump in debt held by the
public to as high as 82% of GDP by then - a doubling over the next decade.
Worse, barring aggressive policy actions, deficits and debt will rise even
more sharply thereafter as entitlement spending accelerates relative to GDP.
Keeping entitlement promises would require unsustainable borrowing, taxes or
both, severely testing the credibility of our policies and hurting our
long-term ability to finance investment and sustain growth. And soaring debt
will force up real interest rates, reducing capital and productivity and
boosting debt service. Not only will those factors steadily lower our
standard of living, but they will imperil economic and financial stability.
Later
in his missive, Berner, rightly admits that economists warning about deficit
spending in America have been singing this tune for quite some time. And, as
with the boy who cried wolf, no one believes them any longer. No less than
former U.S. Vice President Dick Cheney said “deficits don’t matter.”
Well,
they do matter. Eventually, the day of reckoning will come. Berner puts it
this way.
Some
are concerned that our reckless fiscal policy will trigger a downgrade of the
US sovereign debt rating, making the financing of our burgeoning deficits
more difficult. While worries that the US will default on its debt are
illogical, global investors and officials are concerned about the credibility
and the sustainability of our fiscal policies. So am I. They fear that we
will adopt policies that will undermine the dollar and the domestic value of
dollar-denominated assets through a combination of risk premiums and
inflation. I worry about that too, although such policies probably would be
accidental rather than deliberate. As a result, interest rates may have to rise
significantly to compensate investors, including reserve portfolio managers
and sovereign wealth funds, for such dangers. While the dollar will for now
retain its reserve-currency status, such concerns put it at risk.
Definitely
read his piece which is linked below. He does an excellent job of
demonstrating that healthcare is a large part of the problem and sounding the
alarm for fixing it once and for all.
Michael
J. Panzner
Editor, Financialarmageddon.com
Also
by Michael J. Panzner
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the
author of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.
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