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Wednesday, August 17, 2005


are deficits the problem?

the economist discusses the recent downward revision of the 2005 federal budget deficit.

As they run up the national charge account, legislators can at least take comfort that the latest round of downward revisions to forecasts seems to cast further doubt on the “twin-deficit hypothesis”, which argues that Mr Bush’s spendthrift ways are driving up the current-account deficit and putting the country in danger of a catastrophic revaluation of the dollar. Trade deficits have continued to soar even as budget deficits have come down, which tends to support a theory advanced by Ben Bernanke, the chairman of Mr Bush’s Council of Economic Advisers. He has suggested that a global savings glut is flooding America with cheap money, and that the government deficits may in large part have been mopping up surplus capital that would otherwise have been borrowed by America’s already debt-ridden consumers.

But even Mr Bernanke has stressed that deficit-reduction should still be a priority. “Not catastrophic” seems a poor guideline for fiscal policy, government or personal. For now, however, it appears to suit America’s politicians and consumers just fine.
max sawicky see fit to cut a little more sharply to the quick.

Whatever happens to the 2005 or 2006 deficit is not even a sideshow. It's a flea circus. The U.S. economy is facing two giant imbalances: the projected gap between tax revenues and Federal spending, and the current, growing gap between what the U.S. buys and what it sells to the rest of the world. The measure of our political system's vacuity, fed by a brainless commercial media, is the inability to put these issues on the table. When forced by a crisis to do so, the remedies will likely by short-sighted, panicked, and stupid.
in discussing bernanke, brad delong highlights the same two points.

1) Bush administration fiscal policy is way out of balance in the long run, and this is a very serious problem: if the government doesn't balance its budget (in the sense of keeping real debt growing no faster than real GDP), then the market will balance the budget for it in ways that nobody will like.

2) Bush administration international economic policy is way out of balance as well: the administration should be doing much more than it is doing--i.e., nothing--to try to minimize the size of the financial crisis should foreigners suddenly decide to dump their dollar assets on a large scale.
this potential for crisis is something i've written about before, and sawicky hits it on the head.

Whatever its merits, the elimination of the public debt that was in sight in 2000 has been dashed. But how bad off are we? I think the liberal case for hysteria weakens every day. ... There is no deficit or debt crisis. The terminology of "crisis" implies hanging by a thread that can snap at any time. Or skirting the edge of a cliff. That is not our problem. There is no plausible fiscal event I can think of that could precipitate a blow-up.

... It looks to me that economic meltdowns will come from popping bubbles, commodity price shocks, volatile capital flows, and world politics. Not the next tax cut. Deficits may make us more vulnerable to crises, but they are not the fundamental cause, and tenable reductions in deficits are not central to the most important economic risks facing the world.

The more salient analytical framework is international political economy. A run on the dollar, for instance, creates a whole new interesting situation where the budget does come into play, along with other things. If it happens, it will be quite a party. I have no idea whether or when it will happen, nor how to prevent it. There may not be any way. Just fasten your seatbelts and pass the rosary beads. I am pretty sure there is no political way to raise the issue either.
it's unfortunate that this situation of mounting imbalances comes with a ready-made crisis generator a monstrous consumer debt bubble built on personal irresponsibility, which can offer a spark for the very run on the dollar mentioned above -- but there it is.


The dollar has rallied a bit this month b/c the rest of the world is fearful of a dollar free-fall and the loss of exports, but the general picture for the dollar is quite glum, I agree.

In fact, I have never taken my money out of dollar denominated securities, but am thinking about getting some puts on dollars and calls on euros in the near future.

Anyway, the, ahem, funny thing is how the government is pretty much saying "We want a strong dollar" (b/c it has to for the sake of the world... would you want to be told by a company that you had invested in they were purposely devaluing your securities?!) and simultaneously saying "We want a weak dollar" (to improve exports, forgetting that the manufacturing base in America has been dead for a full decade now).

The so called prosperity seen in the U.S. in the mid-late 90's was pretty much due to Greenspan encouraging debt spending, which first manifested itself in a stock bubble, and now is in a housing/mortgage bubble. Income hasnt appreciated in Illinois in real terms basically since 1997. Yet housing values are up way beyond inflation. Clearly the only explanation is that no new value has been created, rather what has happened is that credit has been flowing. That credit from home "ownership" is then spent. All borrowed money.

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For a different viewpoint:

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