More Voodoo Economics

By Mimikatz

This morning President Bush was on TV trumpeting that this year's budget deficit would be an estimated $296 billion, down $22 billion (or a whopping  7%) from last year's $318 billion shortfall.  Bush touted this as a victory, because his budget office had earlier forecast a budget shortfall of $423 billion for this fiscal year, a game known in both the financial and politcal worlds as lowballing the estimates in order to makle the actual numbers look better than they really are.

Bush inherited a budget surplus of $284 billion from his predecessor.   In 2000 he promised that by 2006 we would have a surplus of $516 billion.   But his tax cuts and war spending soon sent us into deficit, and the deficit reached an all-time high of $413 billion in 2003.  His budget forecasters projected a deficit for 2004 of $512 billion .  Bush then promised to cut the deficit in half by the end of his term, by January 2009.  Cut it from the $512 projection, that is, to $256 billion.  Now he claims he's almost there, three years early.  Leaving aside that doing better than an artificial projection is deceptive in itself, Bush's stress on the deficit obscures the real problem, which is the cumulative National Debt, now $8.4 trillion.   This is the result of piling deficit upon deficit for the past 5 years.  When Bush's first budget took effect, the cumulative (inherited) debt was $5.8 billion.  It has grown some 45% already during Bush's term.  (The surplus that Clinton ran at the end of his term just meant we weren't adding to the deficit that year; it didn't mean that we really has a surplus as the term is commonly understood.)  This debt, owed substantially to foreigners, will have to be repaid or refinanced, and the interest costs will be a drag on the economy for years..

Moreover, the budget picture looks better this year only because revenues have increased.  But the increased revenues are largely from higher corporate tax payments (due to high corporate profits) and income tax payments by the wealthy, reflecting that the gains as we came out of the last recession have entirely gone to business and the wealthiest taxpayers, not to struggling workers and their families.  In projecting that increased revenues will continue for the remainder of his term, Bush is making the same mistake Grey Davis made in California, when state income tax payments skyrocketed in 1999 and 2000 because of stock market gains and the exercise of options.  More likely, we are heading into a slowdown of undetermined magnitude in the second half of this year, which will depress tax receipts next year.  If that is the case, the deficit will rise again next year, and liekly to the end of Bush's term.

But with economics as with everything else, Bush knows what he knows, and facts (especially the fact that the cumulative debt will almost certainly double on his watch) are only for sissies.

Comments

[Mimikatz]

The estimable group OMB Watch explains further:

Beneath the increased tax revenue, however, is a frightening reality: the ever-widening gap between the very rich and the rest of us. (snip)

Not only have corporate profits skyrocketed, but so have capital gains, which typically result when upper income earners liquidate large assets. Even as the upper end of the income scale prospers, average wages for workers have failed even to keep pace with inflation, lagging more than 1 percent behind inflation over the last year, further adding to growing income disparity in our society.

Not quite what you'd like to be running on, if you're an incumbent of the "governing" party. If the Dems can't make hay out of stem cells, the growing deficit AND growing income inequality, we are in real trouble.

[knut wicksell]

The thing about economic events is that, short of a catastrophic stock market crash, everything happens about as fast as grass grows, which means no one sees it as it is happening before their eyes. The deficit is a catastrophe. In 2010/12, it will dominate the Congressional agenda and -- you heard it here first -- the question will be whether to renege on the Social Security liability to boomer seniors.

[Libby Sosume]

$5.8 trillion.

[TCinLA]

As I said to a Rightie who was whining about the "military threat" of China:

"China won't have to fight a war with us, thanks to your President. All they'll have to do is convert their dollar reserves to Euros and call in the old debt."

And THAT is exactly how these "Republican patriots" have made America stronger. They have put our future in the hands of people who may do not have the same "permanent interests" we do (as Prince Metternich said at the Congress of Vienna in 1815, "Nations have no permanent friends or permanent enemies, only permanent interests.")

[Mimikatz]

Right, Libby. $5.8 trillion deficit when Bush's first budget took effect. My growth percentage was correct, however, and would lead you to the correct figure, as 8.4 trillion divided by 1.45 equals about 5.8 trillion. Billions, trillions, whatever. It is real money, however.

is a slow process, but it has recently been pointed out that the notion that a frog can be boiled by slowly raising the heat is just that--a myth. Like the frog, people know that things aren't getting better, not for most people.

[marblex]

china wouldn't have to fire a single shot

[shargash]

China doesn't have to get mad at us. They just have to need the cash, say to buy oil to keep their economy (and military) functioning.

IMO, the Chinese (and Japanese) are already sweating bullets about the US debt. They have a huge amount of it. They can't "call it in", since the bonds haven't matured. But they can try to sell them in the bond market.

They can't do that in a meaningful way, however, because dumping their bonds will drive down the value of the dollar, reducing the value of the bonds they haven't sold yet. China has already started, late last year, to do what they can, which is to slowly convert their US debt to Euros. Whether that is what is responsible for the fall of the dollar earlier this year is debatable. However, what is not really debatable is what would happen if anyone started to sell off large amounts of US debt.

What makes this especially dangerous is the complete lack of controls on international markets. Once someone, anyone, starts to convert significant amounts of US debt, anyone who does not convert will be left holding the bag. This is the classic free-market panic. Once the selling starts, the last person holding US debt is the big loser.

The Chinese and Japanese know this full well, which is why they are sweating. It is a catch-22 for them. If they hold their dollars, they risk watching their holdings slowly eaten away by dollar devaluation (almost a foregone conclusion because of the US deficit & debt). On the other hand, doing anything about it risks triggering a panic.

This situation could go on indefinitely. However, I don't think it can go much past 2010. The US debt first exploded during the Reagan years. In those days (starting in 1981), it was funded with 30-year notes. Thus, the Reagan debt will need to be refinanced starting in 2011. Bush has chosen to finance his debt with shorter-term notes, typically 10-year notes. Those 10-year notes will start coming due in 2011.

Staring in 2011, we'll have to refinance the entire Reagan debt, plus the entire Bush debt, at the same time that tax cuts coupled with increased social welfare payments will make it almost invitable that we'll be running a deficit in 2011 that will also need to be financed.

That is a triple whammy I'm not sure our economy can handle. Personally, I'm hoping for a crash sooner than then, so we have more time to deal with our current problems.