Posted by
Michael Avari on Monday, October 19, 2009 6:27:04 PM
The financial press and economists are starting to raise their voices about the deficit and the debt that is burdening our country and threatening our future. Amid the news that the dollar hit a 14 month low last week, concerns abound about how government is spending our money; money earned in the form of taxes, and money not yet earned but pledged to those who lend to us so that we can spend more than we earn.
The low dollar and high deficits are cognate for two reasons. First, the Fed had to print money to increase liquidity in answer to credit markets drying up; a policy that has failed, incidentally, because, as any small business or home buyer will tell us, credit is still tight. The central bank also has to print money to finance the national debt. The resulting oversupply of dollars devalues the currency.
Second, as overseas investors weigh the risk of investing in the U.S. against other countries, they prefer to place bets in lower risk, higher return markets. Part of that risk calculus is the cost of doing business in this country—wages, taxes, insurance, property taxes—and part comes from political and fiscal risk. When the U.S. runs high debt, investors are leery of future taxes and fees to service the debt. Thus money—and jobs—flow away from the US, putting downward pressure on the dollar. The combination of a low dollar and high money supply eventually fuels inflation. A sound fiscal policy, prudent control of debt, and a business-friendly environment will be reflected, therefore, in a stronger dollar while tempering the risk of inflation.
In an Op-Ed piece in The Wall Street Journal, economist Judy Shelton observed “the projected federal debt will continue to equal or exceed our nation's entire annual economic output through 2019 … The U.S. is thus slated to enter the ranks of those countries—Zimbabwe, Japan, Lebanon, Singapore, Jamaica, Italy—with the highest government debt-to-GDP ratio”. Zimbabwe? And if the US were a European country, it would be denied membership into the European Union because “countries wishing to adopt the euro must first limit government debt to 60% of GDP” 1.
David Wessel observed in the Journal that we have overcome these problems before although, “When the economy began climbing out of the deep recession of the early 1980s, federal debt -- the sum of every annual budget deficit* -- amounted to less than 30% of the nation's GDP”2. With debt now at 90% of GDP, we in much deeper this time.
The Financial Times reported “The US budget deficit hit a record $1,400bn in the last fiscal year as the government tried to spend its way out of recession, slightly less than expected but still more than three times that of 2008.” This one year deficit, fully 10% of GDP, is a result of “Government spending [rising] 18.2 per cent from 2008, in part because of Tarp and the $787bn fiscal stimulus package.”3
So how is that stimulus working out for us? According to the government’s web site, Recovery.gov, we have created—get ready—a grand total of 30,383 jobs4. With less than two-tenths of 1% of the 15 million unemployed in this country allegedly getting jobs through the “stimulus” the administration insists the program is a success. "Thanks largely to the Recovery Act, alongside an aggressive financial stabilization plan and a program to keep responsible homeowners in their homes, we have walked a substantial distance back from the economic abyss and are on the path toward economic recovery," wrote Larry Summers5.
Substantial? Recovery.gov, reports only $2 billion of the stimulus has been distributed in contracts. This amounts to roughly $66,000 spent for each of those jobs created. Further, the site reports “jobs saved/created” ranges from 5.93 in Rhode Island to 4693.05 in Colorado. It is unclear how The White House thinks it “saved” a job let alone measuring salvation with accuracy to the second decimal.
Against this backdrop of run away deficits, the Senate Finance Committe passed one of the largest tax increases in history under the guise of “health care reform” at a cost of over $829 billion. In a canard, the Congressional Budget Office claims the bill, which no one has seen because Congress refuses to post it in this age of transparent government, will not increase the deficit; but the CBO's estimate is based on fuzzy accounting replete with unsubstantiated assumptions. Move aside Zimbabwe and Jamaica, Congress just can't say "no".
Sen. Olympia Snowe of Maine, the sole Republican to vote for the bill, said she wanted to be part of history. She did not elaborate whether she was thinking about the Hindenburg or the Titanic.
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* [less payments made, plus accumulated unpaid interest – MA]
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[1] “The Message of Dollar Disdain”, 13 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB10001424052748704107204574470961505506386.html
[2] “Deficit Dilemma: How to Dig Out?” 15 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB125554787267585505.html
[3] “US budget deficit hit a record $1,400bn”, 17 Oct. 2009, Financial Times, http://www.ft.com/cms/s/0/92624ee8-baa2-11de-9dd7-00144feab49a.html
[4] Recovery.gov: Track the Money, http://www.recovery.gov/Pages/home.aspx
[5] “Summers to GOP's Boehner: Recovery Act Is Working”, 12 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB125534918141780117.html