Coup d’etat in America » New Jersey CFO

President Obama has officially begun the era of bigger big government by proposing to go on a multitrillion dollar borrowing spree that risks doing to the “full faith and credit of the United States” what excessive borrowing during the housing bubble did to private credit.

Under his budget plan for America’s future, spending will average 23.7% of GDP for at least a decade (a whopping 20% higher than in 2000-08).

Near-record deficits increasing at record rates will push the public debt of the U.S. beyond the economy’s plausible capacity to pay — 70% of GDP by 2012, heading quickly to 82% of GDP in 2019 and on pace to be astronomically higher soon thereafter.

The Avalanche

American families over the last year have already lost 8% of their net worth — in part as a result of inept government meddling, past and present. For many of the same reasons, they are also buried under a mountain of mortgages and private-sector debts gone bad. On top of that, if the president has his way, they will soon be hit with more than a 100% increase in public debt (from $8 trillion this year to $17.3 trillion in 2019).

Furthermore, the Treasury (and taxpayers) will soon have to begin repaying to Social Security more than $5 trillion in payroll tax revenues that the government had taken from the trust fund and spent for earmarks and other purposes.

Even without the Obama surge in debt — and taxes to pay it off — taxpayers face the prospect of 60% to 70% income-tax rates in the future to pay for $48 trillion in unfunded liabilities under existing entitlement programs. Now the president plans to burden the economy’s limited taxpaying capacity with a universal health care entitlement.

Foreigners purchased two-thirds of the Treasury debt sold during 2004-08 — and now own 50% of U.S. public debt.

Scholars at the Peterson Institute for International Economics warn that the “net foreign debt” position of the U.S. is becoming unsustainable.

Even if the bond rating of Treasury obligations is not formally downgraded for risk, foreign investors may start to resist buying more U.S. debt and, if the situation gets worse, may start withdrawing from the U.S. economy the trillions of dollars of capital they have already lent us. Then what?

The current level of private saving in the U.S. is grossly insufficient to make up the shortfall. In fact, Washington is doing nearly everything possible to prevent Americans from adding to their savings.

In theory, the U.S. government can always pay its debts by increasing taxes, but the problem with taxes — and ultimately with big-spending government — is that tax increases harm the economy disproportionately and quickly reduce the economy’s taxpaying capacity.

Before she became the chairman of the president’s Council of Economic Advisors, Christina Romer demonstrated in a research paper prepared for the National Science Foundation in 2007 that it costs the private-sector economy $4 ($1 of tax and nearly $3 of economic damage) to provide the government with $1 to spend.

In a research paper published by the National Bureau of Economic Research in 2006, former CEA Chairman Martin Feldstein concluded that the private-sector cost of an additional dollar of income-tax revenues for the government is $2.50 ($1 of tax and $1.50 of economic damage).

Paying off Obama’s 10-year string of deficits that add up to $9.3 trillion with income tax increases of $9.3 trillion over 10 years would cost the private sector $23 trillion (Feldstein) to $37 trillion (Romer).

In effect, American families would over time lose an amount greater than an entire year of GDP — a blow far more severe than the damage being done to them by the current recession.

Dubious Direction

It is irresponsible stewardship for Obama and Congress to go on a borrowing spree that puts America in the same unsustainable position as an overstretched boomer with too much debt and too little income and whose only option is to refinance at higher costs just to pay the interest.

The responsible alternative is for Washington to spend less — a lot less. Otherwise, the next Washington-created bubble to burst may be the full faith and credit of the United States.

Christian and Robbins are, respectively, the executive director and the chief economist of the Center for Strategic Tax Reform (cstr.org) in Washington, D.C.

Obama’s Plan For a Debt-Ridden Future – E. Christian & G. Robbins, IBD

ILLITERACY IN HIGH PLACES

by Paul Craig Roberts

If a person lives long enough, he can watch everyone forget everything they learned.

Everyone includes Federal Reserve Chairmen, economists, Bank of America “strategists,” and even Bloomberg.com.

Federal Reserve Chairman Ben Bernanke thinks he can hold down US long-term interest rates by purchasing mortgage bonds and US Treasuries. Sixty years ago the Federal Reserve understood that this was an impossible feat. After an acrimonious public dispute with the US Treasury, in 1951 the Federal Reserve forced an “Accord” on the government that eliminated the Fed’s obligation to monetize Treasury debt in order to hold down long term interest rates.

President Truman and Treasury Secretary John Snyder wanted to protect World War II bond purchasers by preventing any rise in interest rates, which would mean a decline in the price of the bonds.

The Fed understood that monetizing the debt to hold down interest rates meant loss of control over the money supply. The policy of suppressing interest rates could only work until the financial markets anticipated rising inflation and bid down the bond prices. If the Fed responded by buying more Treasuries, the money supply and inflation would rise faster.

Since Fed Chairman Bernanke announced his plan to purchase $1 trillion in mortgage and Treasury bonds in order to help the housing market with low interest rates, interest rates have risen. When will the Fed remember that printing money does not lower long-term interest rates?

According to Bloomberg (June 3), Bank of America strategists are recommending that investors buy Fannie Mae bonds because the rise in interest rates means the Fed will ramp up its purchases in order to prevent rising interest rates from adversely impacting the struggling housing market. When will financial gurus remember that printing money does not lower interest rates?

Treasury Secretary Geithner is another economic incompetent. He told China that he stood for a “strong dollar,” but that China should let its currency appreciate relative to the dollar, which, of course, would mean a weaker dollar. He simultaneously told China that their investments in US Treasury bonds were safe.

His Chinese university audience, being economically literate, laughed at Geithner. It apparently did not dawn on the US Treasury Secretary that if Chinese money is rising in value relative to the US dollar, the value of Chinese investments in dollar-denominated US Treasury bonds is falling.

Congressional Democrats are proving themselves to be as stupid as the Republicans. According to the Associated Press, the Democrats have reached agreement to appropriate another $100 billion to continue the wars in Iraq and Afghanistan through the end of the year. What are the Democrats thinking? The federal budget for this year is already 50% in the red. Why add another $100 billion to the red ink, which has to be monetized, thus causing inflation, higher interest rates, and a weaker dollar.

The red ink that Washington is generating is a far greater threat to Americans than any foreign “enemies.”

The hubris is extraordinary. A bankrupt government that has to send its Treasury Secretary begging to China thinks it can spend limitless amounts in a futile effort to control the culture, mores, and political system of distant Afghanistan.

With the economy floundering, Wall Street in disgrace, and American capitalism facing its most serious ideological challenge in one, two, or three generations (you can take your pick), it’s a good moment to remember Lenin. While the bearded Bolshevik’s grasp of economics was never the best and his stock picks remain a mystery, he would have grasped the politics of our present situation all too well. The old butcher would not have found anything especially surprising about the rise of Barack Obama, the nature of his supporters, or the evolution of his policies. He would have simply asked his usual question: Kto/kogo (“Who/whom”). The answer would tell him almost everything he needed to know. Lenin regarded politics as binary–a zero sum game with winners, losers, and nothing in between. For him it was a bare-knuckled brawl that ultimately could be reduced to that single brutal question: who was on top and who was not. Who was giving orders to whom. Hope and Change, nyet so much.

Of course, it would be foolish to deny the role that things like idealism, sanctimony, fashion, hysteria, exhaustion, restlessness, changing demographics, Hurricane Katrina, an unpopular war, George W. Bush, and mounting economic alarm played in shaping last November’s Democratic triumph. Nevertheless if we peer through the smug, self-congratulatory smog that enveloped the Obama campaign, the outlines of a harder-edged narrative can be discerned, a narrative that bolsters the idea that Lenin’s cynical maxim has held up better than the state he created.

So, who in 2008 was Who, and who Whom?

Millionaires’ Brawl:A Power Struggle – Andrew Stuttaford, Weekly Standard

This recession is now the worst since at least 1958, which is as far back as the index of coincident indicators stretches back.

The Conference Board reported today that the index, which is intended to measure how the economy is doing on an overall basis, slipped a little in April. The decline was smaller than in previous months, and two of the four indicators edged up, which could be taken as a sign that the economy is at least getting worse at a slower pace.

As I noted last month, the index was nearing the 5.6 percent decline that it experienced in the 1973-1975 recession. Now it is down 5.7 percent.

One way to put that into perspective is that the decline so far in this recession is more than the maximum falls combined in the two previous recessions, in the early 1990s and then in 2001.

“..the decline so far in this recession is more than the maximum falls combined in the two previous receptions, in the early 1990s and then in 2001.” (Floyd Norris)