US Deficit Grows to Record

[DrChinese]

US Deficit grows to over $400 BILLION in 2003, perhaps a record $500 billion in 2004! (http://msnbc.com/news/957184.asp) (That's a "b" as in "beellion")

Why, I haven't seen a budget deficit this big since Bush Sr. was in office (1992)! Remember that previous MO-RON president named Bill something or other... he was dumb enough to run SURPLUSES for most of his last term. The fiend...

I'm sure the over 1 million additional Americans unemployed since Bush Jr. took office will be happy to learn: if they win next week's Powerball jackpot, their tax bill will be substantially less! Thanks, George.

[Aoidoi]

While Bush is indeed getting on my nerves, don't you think that the collapse of the internet and tech booms had a bit to do with this? Clinton's surpluses were based on imaginary money, and now that it has vanished we're stuck with reality.

I don't know that Bush is handling this correctly (I'm not even sure if there is a "correct" way to handle it), but praising Clinton for presiding over the largest pump-and-dump scam in history and blaming Bush for it's collapse seems a tad... partisan.

What would you prefer Bush to do? What programs do you want him to cut? Or do you want him to increase taxes? If you're going to blast him for the deficit you might want to suggest how he should be improving the situation.

[Malachi151]

Originally posted by Aoidoi
While Bush is indeed getting on my nerves, don't you think that the collapse of the internet and tech booms had a bit to do with this? Clinton's surpluses were based on imaginary money, and now that it has vanished we're stuck with reality.

I don't know that Bush is handling this correctly (I'm not even sure if there is a "correct" way to handle it), but praising Clinton for presiding over the largest pump-and-dump scam in history and blaming Bush for it's collapse seems a tad... partisan.

What would you prefer Bush to do? What programs do you want him to cut? Or do you want him to increase taxes? If you're going to blast him for the deficit you might want to suggest how he should be improving the situation.

I agre Aoidio, and I hate it every time I hear people talk about this, because it avoids the real issues. Bush is wrong in his approach, but by not gettign to the roots of that the arguments presented are pure crap and meaningless.

I also predict a continued weakening of the dollar over the next 20 years which is going to make the deficit even worse.

[CapelDodger]

Does anyone know how much of the change during this administration is down to tax-cuts that the Democrats wouldn't have made (like inheritance tax) and extra spending they wouldn't have made (such as the Notional Missile Defence)?

[Ziggurat]

Originally posted by Aoidoi
While Bush is indeed getting on my nerves, don't you think that the collapse of the internet and tech booms had a bit to do with this? Clinton's surpluses were based on imaginary money, and now that it has vanished we're stuck with reality.


The exhuberence was based on imaginary money. The surplus itself was quite real, even if it wasn't going to last.


I don't know that Bush is handling this correctly (I'm not even sure if there is a "correct" way to handle it), but praising Clinton for presiding over the largest pump-and-dump scam in history and blaming Bush for it's collapse seems a tad... partisan.


Clinton was not wholy responsible for the surplus. But he didn't screw it up. He actually exercised fiscal responsibility. Spending didn't shoot way up when government revenues did. That is something to be praised.

Bush, on the other hand, has done an amazingly bad job. First he says he'll give a huge tax cut BECAUSE we have a surplus, but he lies about the nature of that tax cut (denying it goes mostly to the very wealthy). Then the surplus vanishes, he keeps the tax cut even though the original justification is gone, invents a contradictory one, and piles MORE tax cuts on top. And to make things worse, he doesn't try seriously to cut spending - it's been growing quite rapidly. At this point, our deficit woes are more the result of excessive tax cuts without corresponding spending restraints than the result of the economic downturn.


What would you prefer Bush to do? What programs do you want him to cut? Or do you want him to increase taxes? If you're going to blast him for the deficit you might want to suggest how he should be improving the situation.

I didn't want Bush to give massive tax cuts targeted primarily at the very wealthy in the first place, so I don't really think of it as "raising" taxes. Many of these cuts are set to expire (making them "temporary" decreases the initial price tag) in a while, but this is a ruse: now that they're in place, politicians can argue that repealing the expiration date is avoiding raising taxes. But at that point they just argue about the fairness of "raising" taxes, and not about the cost. It's a sleight of hand to hide the true cost when initially implemented So I would like to see some honesty out of Bush. But that's about the only thing this administration can't come up with. Bush needs to repeal most of his tax cuts if he wants to show any fiscal responsibility at all, but I don't think he actually cares about that. He seems quite willing to let his successor deal with that little problem and make the unpopular hard choices.

[Grammatron]

Originally posted by Malachi151


I also predict a continued weakening of the dollar over the next 20 years which is going to make the deficit even worse.


How do you define the dollar weakness and continuing weakness?

[Aoidoi]

Bush's insistence on tax cuts does seem problematic. I suspect he's being told that the tax cuts will stimulate the economy, but I have no idea whether that's true or not (ask 2 economists and get 3 answers, etc.). From a simple income vs. expenditure point of view it is certainly foolish.

Some of the tax cuts are certainly aimed at the wealthy... the inheritance tax cut and such in particular. I disagree with an inheritance tax on principle (it's taxing the same money at least twice, and so on), but if it's to be removed then some way to make up the difference in revenue needs to be devised. There is the issue that the wealthy pay most of the taxes so any tax cut is likely to benefit them more, and since the least wealthy pay no taxes it seems pretty clear a tax cut won't benefit them, but it seems somewhat odd that even with an issue almost impossible to dislike (tax-cuts) Bush doesn't seem to be doing so in a way that's making him popular. It's either incompetence or he's playing a different game entirely, I don't know which.

I would, as CapelDodger, like to see some good numbers on how much of the deficit is due to the tax cuts, how much is due to our military operations, and how much is due to the economic slowdown. Unfortunately, Washington D.C. doesn't seem likely to give us any good numbers on this sort of thing since it's their *ss in a sling if people figure out how they're operating. If the deficit is largely a result of the tax cuts then the issue seems pretty clear... just reinstate the taxes. If it's due to other things (and I strongly suspect most of it is) then other measures need to be taken.

Personally, I think that they could probably cut spending massively just by removing pork barrel spending, but even that would be putting people out of jobs and hurting local economies, so it's an inevitably messy situation.

Ok, enough slacking off... back to work for me. :)

[Crossbow]

Another scary element is that the extended budget projection figures assume that the two recent tax cuts will be rescinded on schedule.

But if they are not, the deficits then will substanitially break next years record due to the additional load caused by baby-boom retirees.

[Malachi151]

Originally posted by Grammatron



How do you define the dollar weakness and continuing weakness?

Lower international demand for the US dollar as the world moves away from greenbacks as the backbone of the international reserve system.

This is neither our fault or thier wrong doing, it is just simply that after WWII the US had the strongest currecny and had accumulated over half of all the gold in the world. This gold backing made the US dollar untouchable, but then Nixon cut the tie between gold and paper money making that gold essentially meaningless in terms of dollars, which was a mostly good thing but it paved the way for the move away from the dollar, and as the rest of the world has slowly recovered from WWII, which has taken about 50 years, we have at the same time come down off our WWII high. The greenback is no longer meaninful as a centerpiece of world trade, and in fact many people want to get away from it, which is partly why there is a puch for the euro.

As the US dollar loses favor and is shed is a reserve currency by every nation in the world it will lose value. As the dollar weakens it gets harder and harder to pay of debts because the interest continues to climb and the values stay steady as the dollar slides meaning that it takes more and more money to pay off the debt. As that debt becomes a greater burden the dollar will lose even more value, it could begin getting dumped in massive quantities flooding the makert with dollars and causing a major problem with the money supply and massive deflation making our debt unbearable. It can be a vicious cycle that leads to major economic problems.

The same way that gold restrained the US economy before would not serve as a crutch to hold it up, but now we have cut that line and our dollars are backed with thin air instead of gold, which makes the dollar highly succeptable to deflation. Getting off the gold standard was great in an economy of inflation and growth, but in the opposite it can be a nightmare.

[CapelDodger]

from Malachi:
I also predict a continued weakening of the dollar over the next 20 years which is going to make the deficit even worse.
One thing the US has going for it is the fact that their international debt (a separate subject, I realise, but you've brought it up) is denominated in dollars. So one way to reduce the international part of the national debt is to inflate/devalue the dollar. In fact, let it go the way of the German mark in the 20's and it can be paid off with 200 Marlboros.

from Gramatron:
How do you define the dollar weakness and continuing weakness?
Weakness means a distinct long-term decline, a tendency to take sharp drops without making sharp gains. It results in having to pay higher interest rates (to compensate for risk and exchange losses) and domestic inflation (as prices of imports rise). However, it is overall (other things being equal) good for employment and investment. (Borrow to make productive investments, then pay back later with devalued money.) If this get out of hand, of course, you get a complete breakdown and you have to re-boot. (see Argentina)

[CapelDodger]

From Malachi151:
... but then Nixon cut the tie between gold and paper money making that gold essentially meaningless in terms of dollars,
Not a primary cause, of course; why did Nixon (of the strong-money Republican tradition) do it? The reason was the Vietnam War. It was fantastically expensive, but neither Johnson nor Nixon were prepared to raise taxes to pay for such an unpopular war. So they funded it by, in effect, printing money (you have to follow a convoluted trail to discover that, but that's essentially it). The extra dollars disappeared into the world system where everybody wanted them, and weren't concerned about converting them to gold. This was the basis of the euro-dollar and petro-dollar funds that were washing around in Europe and the Middle East in the late 60's and 70's. Enough of them trickled back for conversion - "I'd like to cash this in, please" - that the bluff was called. So Nixon just changed the rules. (The Bank of England did it a long time ago.)

[CapelDodger]

From Malachi151:
As the dollar weakens it gets harder and harder to pay of debts because the interest continues to climb
Not if you funded the debt by issuing bonds. These have a fixed interest rate. The interest rate is payed on the nominal amount of the bond, so the effective interest-rate to the holder varies with the actual price they payed for the bond - the cheaper the bond, the higher the effective interst-rate. But the bond-issuer (in this case the government) continues to pay the fixed interest on the nominal value, and re-pays the nominal value at expiry of the bond (which may be 10 or even 20 years ahead). If the currency has devalued in the meantime by, say, 20% the bond-issuer has gained that 20%.

[Ziggurat]

Originally posted by CapelDodger
From Malachi151:
"As the dollar weakens it gets harder and harder to pay of debts because the interest continues to climb"

Not if you funded the debt by issuing bonds. These have a fixed interest rate.


I think Malachi misstated the problem with a weakening dollar. If the dollar weakens (which can be a self-promoting effect if foreign investors start dumping dollar-denominated bonds), then bond investors will demand a higher interest rate to compensate. And it's that higher interest rate that will make paying off debt more difficult unless you want inflation, which isn't much fun either. If the national debt is huge, then either taxes go up to pay for it, or the government prints more money to pay for it and the public loses wealth from inflation. A strong dollar is postponing this issue (we can sell government bonds at low rates right now), and a weak dollar will hasten it.

[Grammatron]

Originally posted by Malachi151


Lower international demand for the US dollar as the world moves away from greenbacks as the backbone of the international reserve system.

This is neither our fault or thier wrong doing, it is just simply that after WWII the US had the strongest currecny and had accumulated over half of all the gold in the world. This gold backing made the US dollar untouchable, but then Nixon cut the tie between gold and paper money making that gold essentially meaningless in terms of dollars, which was a mostly good thing but it paved the way for the move away from the dollar, and as the rest of the world has slowly recovered from WWII, which has taken about 50 years, we have at the same time come down off our WWII high. The greenback is no longer meaninful as a centerpiece of world trade, and in fact many people want to get away from it, which is partly why there is a puch for the euro.

As the US dollar loses favor and is shed is a reserve currency by every nation in the world it will lose value. As the dollar weakens it gets harder and harder to pay of debts because the interest continues to climb and the values stay steady as the dollar slides meaning that it takes more and more money to pay off the debt. As that debt becomes a greater burden the dollar will lose even more value, it could begin getting dumped in massive quantities flooding the makert with dollars and causing a major problem with the money supply and massive deflation making our debt unbearable. It can be a vicious cycle that leads to major economic problems.

The same way that gold restrained the US economy before would not serve as a crutch to hold it up, but now we have cut that line and our dollars are backed with thin air instead of gold, which makes the dollar highly succeptable to deflation. Getting off the gold standard was great in an economy of inflation and growth, but in the opposite it can be a nightmare.

I think you are not keeping an eye on international currency markets. The Euro has been going down for some time now, in fact it lost almost 10% of its value against the dollar since June. Most European countries are still in recession while US appears to be coming out of it. I'm not saying that dollar will become as dominant as it once was, but I don't see any evidence that it will be progressively weakened over 20 year period, there's just no evidence of that what so ever.

[DrChinese]

Originally posted by Aoidoi
1. While Bush is indeed getting on my nerves, don't you think that the collapse of the internet and tech booms had a bit to do with this? Clinton's surpluses were based on imaginary money, and now that it has vanished we're stuck with reality.

2. I don't know that Bush is handling this correctly (I'm not even sure if there is a "correct" way to handle it), but praising Clinton for presiding over the largest pump-and-dump scam in history and blaming Bush for it's collapse seems a tad... partisan.

3. What would you prefer Bush to do? What programs do you want him to cut? Or do you want him to increase taxes? If you're going to blast him for the deficit you might want to suggest how he should be improving the situation.

1. Collapse of tech stocks has little to do with the record deficit. The Clinton surpluses were real.

2. Clinton was not responsible for any kind of pump and dump. Bush was not responsible for Enron or Worldcom, either.

3. Bush should repeal his ill-advised tax cuts. He should focus on reducing the unemployment rate. Turning surpluses into deficits to put money in the hands of multi-millionaires violates almost every generally accepted notion of federal fiscal policy.

While Bush is not single handedly responsible for every negative element in our economy, he has mucked up just about every item possible. Clinton could explain it to Bush if he would bother to ask, since Clinton used bipartisan economics to achieve his successes in that arena.

[CapelDodger]

Ziggurat:
Indeed, I didn't go into the effect on new issues when the debt rolls over.

Inflation, like many things, is fine and dandy in moderation. It takes from the money-rich (bastards) and gives to the debt-rich (mortgage holders, salt of the earth). Unfortuantely, when government put their hands into that particular cookie-jar they tend to put it in up to the elbow. For instance, paying for the Vietnam War (quite an indulgence) without collecting taxes for it.

[CapelDodger]

From DrChinese:
2. Clinton was not responsible for any kind of pump and dump. Bush was not responsible for Enron or Worldcom, either.
Whenever the pump phase is going ii's always down to a whole new economic reality which is not going to be like the previous booms but is going to make everybody rich veru suddenly without any work involved. When it goes wrong, the gummint should have done something about it. South Sea Bubble, Bank of France, the Namibia thing in Portugal, tulipomani, 1887, 1929, 1987 and the dot.con business. It's always the same. And there are always rationalists who are watching and trying to explain reality to people who don't want to hear your message, they want to listen to the guy over there who says he'll make them rich. No politician dare say a word, since if they advise caution and the bubble bursts they'll be blamed. When the bubble does burst the boosters start searching for some third-under-secretary at the Treasury that mentioned in passing to a journalist that he thought prices were a bit high. This, apparently, was enough to bring the unstoppable juggernaut of the New Economic Paradigm to a juddering halt.

I could weep with laughter at times.

[Aoidoi]

Originally posted by DrChinese
1. Collapse of tech stocks has little to do with the record deficit. The Clinton surpluses were real.Um, economy massively growing then "oops" and it's nearly flat for years? That rather obviously had an effect on tax revenue and projections of revenues. It's not the only thing, but if the economy was still going nuts like back then we'd probably not be having this conversation.

2. Clinton was not responsible for any kind of pump and dump. Bush was not responsible for Enron or Worldcom, either.Agreed, neither was directly involved, though both did happen under their respective watches (though no one ever seems to get prosecuted for these crimes which are far worse than some slob knocking over a bank... though I digress), but the tech bubble was largely a result of the big investment banks pulling a gigantic pump and dump scheme on... well, everyone else. This was largely responsible for the increase in tax revenue during the 90s. Just one aspect of a complex issue. :)

3. Bush should repeal his ill-advised tax cuts. Well, most everyone appears in agreement on that one. Oddly enough. :)

He should focus on reducing the unemployment rate. How? The only way I can think of off hand is increased goverment hiring, which wouldn't improve the deficit situation.

Turning surpluses into deficits to put money in the hands of multi-millionaires violates almost every generally accepted notion of federal fiscal policy. I think that was largely the basis for Reagan's Trickle Down theory. Not that I'm saying Reagan was right, but it's not like Bush is blazing his own trail here. Cutting taxes and increasing spending was viewed as a good idea by Reagan and Bush I, after all. (counter-intuitive as that may be)

While Bush is not single handedly responsible for every negative element in our economy, he has mucked up just about every item possible. Clinton could explain it to Bush if he would bother to ask, since Clinton used bipartisan economics to achieve his successes in that arena. An interesting assertion... what did Clinton due that Bush should be doing? I recall very little in the way of fiscal policy from Clinton (i.e. his fiscal policy seemed to be do whateve Greenspan says), but I can't think of any particulars. What did you have in mind?

[EvilYeti]

Hey folks, this is real simple, if you cut taxes and increase spending, you get a deficit. I don't have a problem with cutting taxes (though I think the lower income should benefit more than the wealthy) but Bush then decided he wanted to fight a very costly war.

Dubya really should take some night classes on economics at the local community college, or something.

[DrChinese]

Originally posted by Aoidoi
1. Um, economy massively growing then "oops" and it's nearly flat for years? That rather obviously had an effect on tax revenue and projections of revenues. It's not the only thing, but if the economy was still going nuts like back then we'd probably not be having this conversation.

2. [Pump and dunp] was largely responsible for the increase in tax revenue during the 90s.

3. An interesting assertion... what did Clinton due that Bush should be doing? I recall very little in the way of fiscal policy from Clinton (i.e. his fiscal policy seemed to be do whateve Greenspan says), but I can't think of any particulars. What did you have in mind?

1. If GNP levels off, all other things equal, then the surpluses Clinton generated should have continued. That hasn't happened. So it relates to changes since Bush has been in office.

2. You won't find too many who agree with that assessment. People tend to pay taxes on realized appreciation, not paper fortunes.

3. Clinton did a lot of middle of the road things that were not flashy, but produced results. He kept unemployment down, the surplus up and used a bi-partisan approach that inspired a lot of confidence on Wall Street. Robert Rubin (Republican who served as Clinton's Secretary of the Treasury) is an example, the street loved him.

Come on, Bush apologists! Where are you? Surely you can fabricate some cockamamie explanations why presidents named Bush (6.5 years so far) have sorry economic performance records (rising unemployment, record deficits), while presidents named Clinton (8 years so far) do much better (soaring stock market, surpluses). Or do you still insist it's just "coincidence"?

[Aoidoi]

Clinton did a lot of middle of the road things that were not flashy, but produced results. He kept unemployment down, the surplus up and used a bi-partisan approach that inspired a lot of confidence on Wall Street. Robert Rubin (Republican who served as Clinton's Secretary of the Treasury) is an example, the street loved him. Well, you've said how he did it (not flashy, bi-partisan) and named his Secretary of the Treasury, but you still haven't said what he did. The unemployment down and surplus up are results, not tactics, right?

I've never gotten a good answer on this... what is it that a president does that is so crucial to the economy? I mean, budget and tax cuts have to figure in to it, but how? People are saying Bush's tax cuts aren't a good idea, and I have to agree given the deficit, but nobody seems to have numbers, or specifics, or much of anything. Damnit Jim, I'm an engineer, not an economist... is there any way to explain the differences of economic policy in a way that is both meaningful and not excessively complex? I don't want to go through the budget line by line, but I'd like some more info on this if anyone feels up to the task.

Just as a quick responses to the other ones (keep in mind I'm a total amateur here):
1) government agencies budgets normally increase on a yearly basis for inflation and such, right? If their budgets were planning on this and tax revenue does not increase then there's a net debt, right?

2) Did not Goldman Sachs (sp?) and the rest of wallstreet have vastly profitable years during the 90s? I'd assume they have to pay taxes on that, regardless of how many tax shelters they manage to hide money in. I assume the tech companies (before they went under) were paying taxes. While vast sums of money vanished into thin air, up until companies started filing for bankruptcy they were still paying taxes, right? I assume the govt lost a large amount of income when the market went belly up and suddenly lots of dotcom "millionaires" went broke, but up until then they would seem to have benefited from portions of it (though not the stock options, if I understand correctlly).

Anyway, anybody got an good sources on where to learn about this that don't involve the same old partisan bickering?

Edit: and cr*p, I wasted my 1000th post on this? Should have posted in G6's b-day thread... that would have at least won me some suck-up points :D

[corplinx]

Originally posted by DrChinese


1. If GNP levels off, all other things equal, then the surpluses Clinton generated should have continued.

Clinton generated? As one of the hard working tech workers who helped fuel the tech bubble that generated increased tax revenues through prosperity I resent that remark.

It wasn't Clinton's surplus, it wasn't Newt's surplus. It was our surplus.

[DrChinese]

Originally posted by corplinx


Clinton generated? As one of the hard working tech workers who helped fuel the tech bubble that generated increased tax revenues through prosperity I resent that remark.

It wasn't Clinton's surplus, it wasn't Newt's surplus. It was our surplus.

A little testy today, eh Corp? (I also am a tech worker.)

Of course it was not Clinton's personal surplus. And it is not Bush's personal deficit. I simply used the term to indicate the time span of what was going on. If you prefer to call it Newt's surpluses, that's OK with me as well.

At any rate, if Bush - and Congress, etc. - had not tinkered with the formula in place at the end of the Clinton administration, then a flat GNP would not have produced the deficits we have now. Clearly, Bush spearheaded the changes (such as tax cuts) which led to the deficit.

[CapelDodger]

From Aoidoi:
Um, economy massively growing then "oops" and it's nearly flat for years?
Didn't go down, then.

from DrChinese:
. You won't find too many who agree with that assessment. People tend to pay taxes on realized appreciation, not paper fortunes.
Actually people tend to use increased asset value to borrow money against for immediate consumption. It was a marked part of the 90's demand growth in the US and the associated increase in debt. In Britain there is the same effect when house prices rise; people re-mortgage or raise loans to "liberate the value", otherwise known as letting the sharks into your pool.

[CapelDodger]

A comment on the "pump and dump" theme:

In the 1840's and 50's in Britain there was a Railway Boom analogous to the dot.con boom. The Railways were the great new thing of the future - the "New Economic Paradigm" - and everybody wanted a bit of it. As a result all sorts of railway lines were proposed, with no economic justification, simply to provide shares to feed this market. In the end the whole thing came crashing down and lots of money was lost.

And a lot of very useful railway lines had been built. When I say the money was lost, I mean it was lost to the original owners. To the navvies and engineers that built the railways much of it was income.

It's all very well attacking the dot.con affair, but it seems a bit rude to do it over the internet that would never have grown so quickly had it not happened. OK, a lot of people lost money, but take comfort in the fact that not one of them was me.

[Malachi151]

Originally posted by CapelDodger
A comment on the "pump and dump" theme:

In the 1840's and 50's in Britain there was a Railway Boom analogous to the dot.con boom. The Railways were the great new thing of the future - the "New Economic Paradigm" - and everybody wanted a bit of it. As a result all sorts of railway lines were proposed, with no economic justification, simply to provide shares to feed this market. In the end the whole thing came crashing down and lots of money was lost.

And a lot of very useful railway lines had been built. When I say the money was lost, I mean it was lost to the original owners. To the navvies and engineers that built the railways much of it was income.

It's all very well attacking the dot.con affair, but it seems a bit rude to do it over the internet that would never have grown so quickly had it not happened. OK, a lot of people lost money, but take comfort in the fact that not one of them was me.

Don't forget Black Firday when some pumpers hyped gold prices and then began selling off their gold as the prices when up, then Grant unloaded a bunch of US gold onto the market to foil the plan of the pumpers and then the market crashed and there was a huge depression, yet the two guys that had created the entire scam got out of it as ultra wealthy millionairs and died with massive fortunes.

[shanek]

Originally posted by Aoidoi
While Bush is indeed getting on my nerves, don't you think that the collapse of the internet and tech booms had a bit to do with this?

What do stock prices have to do with the government spending more than it takes in?

Anyone who thinks that the War on Terrorism isn't the main contributing factor here is just plain fooling themselves.

Clinton's surpluses were based on imaginary money, and now that it has vanished we're stuck with reality.

I don't know that Bush is handling this correctly (I'm not even sure if there is a "correct" way to handle it), but praising Clinton for presiding over the largest pump-and-dump scam in history and blaming Bush for it's collapse seems a tad... partisan.

You are correct in both of these paragraphs.

What would you prefer Bush to do? What programs do you want him to cut?

Speaking personally: Anything not authorized by the Constitution. That would take care of 90% of the budget.

[shanek]

Originally posted by Ziggurat
The exhuberence was based on imaginary money. The surplus itself was quite real, even if it wasn't going to last.

The surplus was real only if you do like Congress did and pull Social Security money into the general budget. Without SS, they were still running a deficit.

[shanek]

Originally posted by CapelDodger
However, it is overall (other things being equal) good for employment and investment. (Borrow to make productive investments, then pay back later with devalued money.)

Except that that isn't how it works. Banks charge interest on money, and the interest rate figures in the rate of inflation. That's why loans were so hard to get in the late '70s; the intense inflation rate made banks loan money at over 15% interest and people didn't want to borrow.

If this get out of hand, of course, you get a complete breakdown and you have to re-boot. (see Argentina)

Argentina's problem was largely due to the government printing more money and incurring more debts to pay for thier programs. They then tried to hide it by making it look like a legitimate debt, and not government-sponsored counterfieting, but that just doesn't work. The Argentinian peso plummeted and they spun into hyperinflation.

Our government does the exact same thing. And although our economy is so strong it's been able to withstand it so far, sooner or later the same thing is going to happen to us unless something changes.

[shanek]

Originally posted by CapelDodger
Not if you funded the debt by issuing bonds. These have a fixed interest rate.

You can get loans with fixed interest rates, too, but the problem with those is that the interest rate is already figured to cover inflation, and they try to overshoot it a bit so they'll make money even in a worse case, so you're usually better off in the long run with a variable interest rate.

The problem with government bonds is that the government just prints more money to pay them off, and so they actually contribute to the inflation problem.

[DrChinese]

Originally posted by shanek

The problem with government bonds is that the government just prints more money to pay them off, and so they actually contribute to the inflation problem.

So you agree, I presume, that record deficits are bad for the US economy?

[shanek]

Originally posted by DrChinese
So you agree, I presume, that record deficits are bad for the US economy?

Absolutely!

[CapelDodger]

(edited to include everything after a slip of the finger)
From shanek:
Banks charge interest on money, and the interest rate figures in the rate of inflation.
No it doesn't.

[CapelDodger]

From shanek:
the intense inflation rate made banks loan money at over 15% interest and people didn't want to borrow.
The real interest rate is the relevant factor. Real interest rates are the nominal rate minus the inflation rate. Banks are obviously keen on positive real interest rates, borrowers on negative ones. Whether inflation is 2% or 22%, real interest rates of 2% are still just that. Banks have no interest in pricing their services - provision of credit - out of the reach of their market; real interest rates are determined by supply and demand (and you'd surely approve of that).

[CapelDodger]

From shanek:
The problem with government bonds is that the government just prints more money to pay them off, and so they actually contribute to the inflation problem.
The vast majority of government bonds are rolled over by the issuing of new bonds.

[shanek]

Originally posted by CapelDodger
The real interest rate is the relevant factor. Real interest rates are the nominal rate minus the inflation rate.

But what the banks found in the '70s is that the market responds to the nominal interest rate more than it does the real one. They had trouble convincing people to take out the loans at 15% interest even after explaining that 10% of it was due to inflation. This is one reason inflation has a negative effect on economic growth.

Banks have no interest in pricing their services - provision of credit - out of the reach of their market;

Of course they don't. But high inflation rates leave them with little alternative. Again, borrowers tend to respond more to nominal rates than they do to real rates.

[CapelDodger]

from shanek:
You can get loans with fixed interest rates, too, but the problem with those is that the interest rate is already figured to cover inflation, and they try to overshoot it a bit so they'll make money even in a worse case, so you're usually better off in the long run with a variable interest rate.
Consider: if that were the case, why does anybody raise money on long-term bonds? They've been doing it for a long time, so they've had a chance to learn better.

If the money you're raising will be invested in something liquid - other tradable paper, foreign currency or tradable commodities - then short-term money is probably appropriate. In that case the investment can be liquidated and the loan paid off if interest rates rise too high to make the loan worthwhile. However, short-term money is usually more expensive than medium or long-term money, so unless your investment is particularly risky longer-term finance is better.

Banks charge less for longer-term money since it reduces a bank's risks, and interest rates are highly sensitive to risk. All investment institutions make their judgments as to future inflation, as do large-scale borrowers. An institution that takes a gloomy view reduces its risk but is likely to be undercut by other institutions. Competition sets interest rates.

[shanek]

Originally posted by CapelDodger
The vast majority of government bonds are rolled over by the issuing of new bonds.

Which just delays the problem.

[shanek]

Originally posted by CapelDodger
Consider: if that were the case, why does anybody raise money on long-term bonds?

Notice I said "usually." There is certainly a place for bonds and other fixed-interest returns in a long-term portfolio. But I was mostly referring to loans anyway.

[Underemployed]

quote:
--------------------------------------------------------------------------------
Originally posted by CapelDodger

The vast majority of government bonds are rolled over by the issuing of new bonds.
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And makes bond-issuing no better than a pyramid scam.

[CapelDodger]

From shanek:
Which just delays the problem.
As long as national debt doesn't rise faster than GDP over the long-term there isn't a problem. And government paper plays a vital role in pension fund investments (or should, since these should not be risk-taking institutions.)

The "golden rule" of government spending is that current expenditure (keeping the system going, wages, the military) should not exceed income over the "business cycle". Borrowing should only be applied to productive investment - transport infrastructure, improving schools, better health facilities - that will support the increase in GDP that will, in turn, pay off the debt. A good example of that is the huge US road-building program after WW2, which was financed by borrowing and made an enormous contribution to the rapid GDP growth of the 50's and 60's (the days before the monetarists got out of the asylum).

When you're borrowing money to pay current expenditure you're in long-term trouble. That's like a company borrowing to pay the wages; it an only go on so long. As evidenced by the dot.con era. Is this administration following the Golden Rule? And Notional Missile Defence is not a productive investment.

[subgenius]

We're doomed as doomed can be.
But then I always look on the bright side of things.

[shanek]

Originally posted by CapelDodger
As long as national debt doesn't rise faster than GDP over the long-term there isn't a problem.

As I've explained numerous times on this forum, GDP doesn't have one single frelling thing to do with how much of a deficit you can get away with running.

Borrowing should only be applied to productive investment - transport infrastructure, improving schools, better health facilities - that will support the increase in GDP that will, in turn, pay off the debt.

Government takes 48% of the National Income in taxes, yet government spending comprises only 20% of GDP. Now tell me that's supporting the increase of GDP! They're effectively taking money out of the system!

[CapelDodger]

From shanek:
As I've explained numerous times on this forum, GDP doesn't have one single frelling thing to do with how much of a deficit you can get away with running.
The higher the GDP the higher the taxes collected at a given tax rate. If investment, financed by borrowing, contributes to an increase in GDP that is greater than the interest rate paid then greater overall prosperity is the result.

The limitation to the deficit is that Golden Rule - over the business cycle, current spending should be covered by revenues. Productive capital spending can be financed by debt.

[shanek]

Originally posted by CapelDodger
The higher the GDP the higher the taxes collected at a given tax rate.

Yes, but that affects revenues, not deficits.

If investment, financed by borrowing, contributes to an increase in GDP that is greater than the interest rate paid then greater overall prosperity is the result.

Except that government "investing" does not lead to an increase in GDP, since the government doesn't really invest the money it borrows.

The limitation to the deficit is that Golden Rule - over the business cycle, current spending should be covered by revenues.

If you're saying that a deficit during a brief period of low revenues is justified if it's offset by a period of high revenues as tied to the business cycle and thus pays off the debt, then I agree. But how does that in any way resemble what the government is doing now?

[CapelDodger]

From shanek:
Except that government "investing" does not lead to an increase in GDP, since the government doesn't really invest the money it borrows.
I refer you to the example I previously gave: the US Freeway System or Inter-State network or whatever it's called that was built after WW2. That is productive capital investment. Spending on education is also productive investment.
If you're saying that a deficit during a brief period of low revenues is justified if it's offset by a period of high revenues as tied to the business cycle and thus pays off the debt, then I agree. But how does that in any way resemble what the government is doing now?
It doesn't. I've merely being pointing out the errors in your posts lest others go away with the wrong impression.

[shanek]

Originally posted by CapelDodger
I refer you to the example I previously gave: the US Freeway System or Inter-State network or whatever it's called that was built after WW2. That is productive capital investment. Spending on education is also productive investment.

But again, all of that coimprises only 20% of GDP, whereas they take 48% of the National Income in taxes. So it's hardly a Return on Investment.

[Dancing David]

So when the democrats run deficits, it's evil communism in thje name of government intervention. When Republicans run deficits its because the GDP is rising and we can afford it.

Funny how it is now okay to run a deficit because there is a born again Xian in the White House.

The irony is that it was the Elder Bushe's strong fiscal policy that led to the Clinton prosperity.

[CapelDodger]

From shanek:
But again, all of that coimprises only 20% of GDP, whereas they take 48% of the National Income in taxes. So it's hardly a Return on Investment.
Non-productive spending is such things as the military (10% of US GDP or thereabouts?), NASA, farm subsidies, diplomatic services, the Office of the President, moving granite blocks, a whole bunch of odds and ends.

[CapelDodger]

from Dancing David:
The irony is that it was the Elder Bushe's strong fiscal policy that led to the Clinton prosperity.
And bust his "read my lips" pedge that cut his legs off before his second term. Ain't life a bitch?

[DrChinese]

Originally posted by CapelDodger

And bust his "read my lips" pedge that cut his legs off before his second term. Ain't life a bitch?

A. So Bush Sr. raised taxes, causing right-wing Republicans to vote Democratic?

Versus the other perspective:

B. Bush Sr. ignored the economy while unemployment rose, causing middle of the road voters to swing to the Democratic ticket?

Revisionist history: A or B?

[shanek]

Originally posted by Dancing David
So when the democrats run deficits, it's evil communism in thje name of government intervention. When Republicans run deficits its because the GDP is rising and we can afford it.

Yes, and you'll notice the GDP isn't rising any faster now than it was in the early Clinton years when they were moaning about the deficit. In fact, it was rising much more sharply back then.

[shanek]

Originally posted by CapelDodger
Non-productive spending is such things as the military

Not necessarily; there are some forms of military spending that make it into GDP. But mostly, you're right.

NASA,

True now that most businesses and even the military are turning to private companies like Loral and Lockheed-Martin for most of their space needs.

farm subsidies,

Always a terrible idea. Why do so many "conservatives" support it?

But the majority of the budget covers boondoggles that benefit only a (politically-connected) few.

[DrChinese]

From Newsweek article The Brainteaser of Deficit Math (http://www.msnbc.com/news/959467.asp):

"But I’ve been back at work for more than a week now. So I read the whole report instead of just the summary. By law, the budget office has to assume that existing laws expire as planned, and that no new programs are added or subtracted. But this report includes numbers that you can use to adjust for political reality. Which I did. First, I counted the $2.4 trillion Social Security surplus, which the Treasury uses to offset its cash shortfall. Then I figured that the last three years of tax cuts will become permanent; that Congress will pass a Medicare prescription-drug package and will also stop the dreaded alternative minimum tax from hitting 30 million taxpayers. These changes add $3.6 trillion to the deficit. So by the time you’re done, the total projected deficit is more than five times the aforementioned $1.4 trillion. Call it $7.4 trillion. And I’m being generous, assuming we spend nothing in Iraq starting Oct. 1, 2005."

Thanks again George (and our cooperating Congress).

[crocodile deathroll]

One thing I know for sure is that if the deficit continues to grow and the situation in Iraq is unchanged costing the US taxpayer a billion dolllars a week then in 14 months time Bush will be kicked out of office so hard, he we need a spacesuit.

CDR.

[CapelDodger]

From DrChinese:
Revisionist history: A or B?
Everybody gets elected by swing voters. What Bush couldn't do when running for his second term was promise tax cuts, which is a policy that has, I think, a history of bringing in swing voters.

As an aside, the rate of unemployment is not, to my mind, as important as the rate at which it is changing. The unemployed quickly disappear over the horizon, but when people you know (people just like you) are becoming unemployed around you it concentrates the mind. I don't think unemployment was rising when Bush ran for his second term.

[DrChinese]

Originally posted by CapelDodger
From DrChinese:

Everybody gets elected by swing voters. What Bush couldn't do when running for his second term was promise tax cuts, which is a policy that has, I think, a history of bringing in swing voters.

As an aside, the rate of unemployment is not, to my mind, as important as the rate at which it is changing. The unemployed quickly disappear over the horizon, but when people you know (people just like you) are becoming unemployed around you it concentrates the mind. I don't think unemployment was rising when Bush ran for his second term.

A lot of revisionism here. Bush did not use tax cut promises to reach out to swing voters. Clinton did use the high unemployment rate to reach out to swing voters. We know who won that battle.

[Grammatron]

[CapelDodger]

From DrChinese:
A lot of revisionism here. Bush did not use tax cut promises to reach out to swing voters. Clinton did use the high unemployment rate to reach out to swing voters. We know who won that battle.
Post hoc ergo propter hoc? Bush certainly used tax as part of his first campaign. Low taxes are thought to play well by Republicans, and I agree. In his second run Bush was unable to raise the tax question and so couldn't run the sort of campaign he would have wished. It was the economy, of course, but Bush had lost credibility on that subject. Was it the fear of unemployment that influenced the swing voters? Or an expectation of greater prosperity with Clinton for people with jobs? It's not open-and-shut.