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July 11, 2006

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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.

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.

$5.8 trillion.

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.")

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.

china wouldn't have to fire a single shot

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.

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