Thursday, October 28, 2010

What It Means

The U.S. Federal Budget Deficit is, by definition, enormously stimulative.  All deficit spending is stimulus spending.  Period.  Ergo, cutting deficit spending, or balancing a budget that has been in sustained structural deficit will be enormously contractionary (sp?).

There is nothing to be done about that.  When, not IF but WHEN, the budgets are balanced - either via political cooperation OR the international bond market's boycotting future Treasury auctions - the U.S economy will go through a recession that will likely make the 2008-2010 period feel like a prom date.

The question is this: Will this be forced upon us in a less than orderly way by the bond market or will we manage the process.  There ain't no more to it than that.

If the new Libertarian/Republicans coming into the House and Senate are serious about managing this process they must take the issue to the mat immediately.  If they do not, the opportunity will pass and the international bond market will "do it to it" at some time in the years ahead... if they do take the opportunity... we are looking at U3 unemployment of 15% given all of the federal, state, and local government layoffs with U6 approaching 30%.  Talk about a rock and a hard place for politicians.

There is some good news... that unemployment situation would not last long - people will do what they have to do - the U.S.$ would strengthen considerably and interest rates would stay very low, and Oil prices would moderate somewhat.

One way or another, the $1 TRILLION+ budget deficits (stimulus) we've been having will have to be taken down.  Pick your poison.


bureaucrat said...

I'll only go along with the government personnel layoffs if they are relating to all the other spending that you would have to reduce, and so you'd need fewer workers. As I've mentioned a hundred times, salary and benefits for Federal workers (and likely also state workers) are not much in terms of spending compared to where all the REAL money is spent. It's not even in the top ten programs of Federal spending, where 90%+ of the money goes. And the states aren't a heck of a lot different. But, to placate the crowds and give them someone to blame, I don't doubt the American public would cut off their nose to spite their face, and hang a few Feds out to dry. Hope it won't come to that.

PioneerPreppy said...


Since pension crisis figures run in the billions and billions even for smallish cities I don't think I can place much merit in the "are not much compared" department. Especially a 90% statement.

"But, to placate the crowds and give them someone to blame, I don't doubt the American public would cut off their nose to spite their face, and hang a few Feds out to dry."

The progressive's have been doing that since the 1960's. It's called affirmative action just replace Fed with white male. Guess it is some other groups turn now.

bureaucrat said...

The Senate Special Committee on Aging published a report recently on how to plug the Social Security gap. Their suggestions ...

1) The whole $5.3 trillion gap over the next 75 years could be filled if payroll taxes were increased 1.1% to 7.3% for both employees and employers.

2) If ALL wages were taxed for SS, not just those under $106,800, that would fill the gap too.

3) 75% of the shortfall could be wiped out by reducing cost of living increases 1% every year.

4) Abot 25% could be saved by bumping "full benefits" from age 67 to 68.

And that's just for Social Security, folks. Imagine what we could save in Medicare with: single payer care (economies of scale and getting everyone to at least see a nurse practitioner), reducing paying for unneeded care for people about to die anyway, and review bills for 30 days (like my agency does) instead of paying them immediately like Medicare does now, allowing all kinds of "storefront doctors" to rob the system blind. We lose $60 billion a year from that crap alone.

Greg T. Jeffers said...


I know you have mentioned it 100 times, believe me. SO does everybody else.

I might have been conservative with my U3 Unemployment estimate - it could make it to 20%. There is a risk that the credit system cannot be restarted for quite some time in this environment... that doesn't mean its not the best thing, given the options, to do.

An animal will chew its limb off to escape from a trap. We might have to chew and arm off... to prevent the Intl. Bond market from taking and axe to all of our limbs.

bureaucrat said...

But there is no evidence that people worldwide have stopped buying U.S. securities. My multimillion retirement (pension, 401k) will be parked in a LOT of Treasuries. :) Perhaps the Fed is buying a lot of them, but so what? It isn't translating into inflation .. thus far.

Further, if Charles Hugh Smith ( is correct, average people are fleeing the stock market (your people managed make everyone think Wall Street is corrupt now), the only ones buying and selling stock are the computers -- back and forth, and people will have to put their money somewhere. Government bonds? So far, yes ...

Dextred1 said...

Is it possible that a balanced budget (with corresponding fixes to programs) would make up the difference of the loss of stimuli from spending? The dollar would strengthen making commodities cheaper and most important confidence might just return a little.

Dextred1 said...

So a 22 yr girl murdered her son because he cried while she was playing farmville. WTF?

Crybaby said...

John Boehner's suggestion is to raise the retirement age to 70 and have a "mean's-test" benefit, meaning if you have substantial income or assets in your retirement you won't qualify for social security, even if you have paid into the system all your life. Well, in my opinion, that is probably a good idea, but that is more along the lines of what a socialist would say, not a Republican. But they don't believe in raising taxes, ever, on anyone under any circumstances, and that is just not realistic today. Just google search on John Boehner social security and read his quotes.
As far as the bond market is concerned, the TIC flows show that the market for US treasuries is still deep and liquid despite the budget deficit,and, in fact, the Chinese increased their holdings of US bonds last month. Maybe they know something we don't. But yes, the US is going to have to implement an austerity budget at some point in the future, which will likely be painful and politically unpopular. the real problem is the infighting between the parties. The Republicans hate Obama so much they will try to block anything he does just out of spite. But, on the other hand,maybe a bond auction failure is just the right thing to give American politicians a kick in the pants.

Greg T. Jeffers said...

Is that what Boehner has to say?

He just lost my support.

Any politician that does not grasp the moral hazard and slippery slope in that approach will not have my support in any way whatsoever.

Anything else?

As far as the TIC data... of course the market is "deep and liquid"! Lol!! The Fed is buying the freakin' Treasury paper! HEHEHE HAHAHAHA! Now that was funny....

Crybaby... This will be a non-linear event.

Crybaby said...

FOREIGN buyers actually increased their purchases and holdings of US treasuries last month, particularly the Chinese and Japanese. I think the Chinese may see that we are approaching a low point in the dollar, just as they saw a low point in the Euro when it was 1.18 to the buck. But it all depends on what the Fed says next week. My guess is that they will implement less QE than the market expects, as they are playing a dangerous game and running the risk that oil is going to spike up over $100 again

bureaucrat said...

For those of you wondering about just how rich the rich are getting in America ...

Tax them .. HARD!

Greg T. Jeffers said...


BY mathematical NECESSITY foreign purchase of Treasury paper MUST rise if U.S. savings does not increase AND the trade and budget deficit continues to increase... every trade has two sides! (Well, unless the Martians lend us the money)

BTW... I know that I can Google stuff about Bonner... it was you that cast the aspersions... I merely asked for the source material for your claims.

Anonymous said...

Jeffers, Boner's move calling for means testing for SS is a strategic move to kill it. Since inception, SS has paid everyone so that it would not lose support of the rich. Divide and conquer.
For all the people who want a 'balanced budget', that would mean no Fed Treasury bond market going forward. That is a change that would certainly make things interesting.
Why not go biblical and get rid of all borrowing and lending? PAYGO for everyone all the time. That would shut down Wall Street and the banks.
And as far a worries about the Chinese and the US bond market. I suspect they will keep buying until everyone decides that the yuan will replace the dollar as the world reserve currency. That may be a while.
Rational Liberal