Showing posts with label U.S. Debt. Show all posts
Showing posts with label U.S. Debt. Show all posts
Tuesday, July 12, 2011
As Talks Stall, New Debt Plan Offered
Wall Street Journal, July 13, 2011.
McConnell Breaks GOP Ranks, Says the President Should Be Given Authority to Raise the Borrowing Limit on His Own.
By CAROL E. LEE, DAMIAN PALETTA and NAFTALI BENDAVID
Negotiations over a deficit-reduction agreement spiraled downward Tuesday as the White House and congressional leaders dug in on their positions even as anxiety mounted that they could wait too long to reach a deal to avoid a government default.
Sen. McConnell, left, with Sen. Jon Kyl, blasted the president.
In one sign that top leaders worry they won't reach a deal in time, Senate Minority Leader Mitch McConnell (R., Ky.) unveiled a new proposal that would allow President Barack Obama to raise on his own the federal borrowing limit by $2.4 trillion in three installments before the end of 2012, unless two-thirds of Congress votes to block it. Because Mr. Obama would have to lift the debt ceiling, it could place any political fallout on him for doing so. But Republican conservatives protested that Mr. McConnell's plan would give up the leverage the GOP has to force the White House to approve government spending cuts in return for a debt-ceiling increase. And Mr. Obama also said Monday he would not sign any temporary debt-ceiling increase.
White House officials say the $14.29 trillion debt cap must be raised by Aug. 2 or the government will run out of cash to pay all its bills. Mr. Obama warned in an interview with CBS News that he could not guarantee that the government would be able to send checks to recipients of Social Security, military pensions and other government benefits next month without a debt-ceiling increase. "There may simply not be the money in the coffers to do it," he said.
Taken together, the developments of the last two days suggest that the collapse of the effort by Mr. Obama and House Speaker John Boehner (R., Ohio) to strike a bigger and more historic deficit-cutting deal has made the effort to negotiate a smaller agreement harder rather than easier. House Republicans met privately on Capitol Hill before their leaders went to the White House for another round of deficit-reduction negotiations with Mr. Obama and their Democratic counterparts. The resounding consensus of the members was "we've got to stand our ground" against accepting any tax increases in an agreement and to keep pushing for more than $2 trillion in deficit reduction over 10 years, said one Republican who attended.
In the Republican caucus meeting, Mr. Boehner quickly dispelled any notion that he and Mr. Obama would continue to seek a $4 trillion deal including large cuts to entitlement programs such as Social Security, Medicare and Medicaid, and an overhaul of the tax code. "It became clear that they would only do entitlement reform if it came along with tax hikes," Mr. Boehner said, according to a person in the room. "Am I angry about it? I sure as hell am. I believe we are missing a great opportunity."
Mr. McConnell's proposal to allow the president to raise the debt ceiling came after he said in a Senate speech that the country cannot solve its fiscal problems with Mr. Obama as president. "After years of discussions and months of negotiations, I have little question that as long as this president is in the Oval Office, a real solution is unattainable," he said. It was not immediately clear whether his debt-limit proposal has broader support within his party, or with the Democrats who would be needed to approve it in the Senate. Such a complex plan is unlikely to pass anytime soon. Senate Majority Leader Harry Reid (D., Nev.) said he did not want to "trash" Mr. McConnell's proposal, but said that he needs to study it.
Meanwhile, some 470 executives—including the chief executives from Alcoa Inc., DuPont, Citigroup Inc. and Procter & Gamble Co.—released a letter to the president and Congress urging them to raise the debt ceiling.
Hitting the Ceiling
See what the federal debt limit has been at year-end since 1940.
The executives warned that a government default could throw financial markets into "disarray" and "this is a risk our country must not take." The letter came after the U.S. Chamber of Commerce, National Association of Manufacturers, and Financial Services Forum have spent months in briefings with lawmakers warning about default. In some of those meetings, officials said that if the U.S. government's bond rating were downgraded from Aaa to Aa, it could shave 1% off the gross domestic product and cost at least one million jobs. "Now is the time for our political leaders to act," the executives wrote. Treasury Department officials have said the government would only be able to spend the money it brings in each day through revenue if the debt ceiling isn't increased. The government is scheduled to pay $23 billion in Social Security benefits on Aug. 3, and it is only expected to bring in $12 billion that day in tax revenue, according to the Bipartisan Policy Center.
Another emerging complication is a growing insistence by some Republicans that Congress pass a balanced-budget amendment to the Constitution before a vote to increase the debt limit. The House is expected to vote on such an amendment next week, and Senate Republicans may force a vote in their chamber as well. Democrats say a balanced-budget amendment is a political sideshow that's unlikely to pass, especially because the GOP version requires super-majorities in Congress for raising taxes or spending.
Janet Hook contributed to this article.
Write to Damian Paletta at damian.paletta@wsj.com and Naftali Bendavid at naftali.bendavid@wsj.com
McConnell Breaks GOP Ranks, Says the President Should Be Given Authority to Raise the Borrowing Limit on His Own.
By CAROL E. LEE, DAMIAN PALETTA and NAFTALI BENDAVID
Negotiations over a deficit-reduction agreement spiraled downward Tuesday as the White House and congressional leaders dug in on their positions even as anxiety mounted that they could wait too long to reach a deal to avoid a government default.
Sen. McConnell, left, with Sen. Jon Kyl, blasted the president.
In one sign that top leaders worry they won't reach a deal in time, Senate Minority Leader Mitch McConnell (R., Ky.) unveiled a new proposal that would allow President Barack Obama to raise on his own the federal borrowing limit by $2.4 trillion in three installments before the end of 2012, unless two-thirds of Congress votes to block it. Because Mr. Obama would have to lift the debt ceiling, it could place any political fallout on him for doing so. But Republican conservatives protested that Mr. McConnell's plan would give up the leverage the GOP has to force the White House to approve government spending cuts in return for a debt-ceiling increase. And Mr. Obama also said Monday he would not sign any temporary debt-ceiling increase.
White House officials say the $14.29 trillion debt cap must be raised by Aug. 2 or the government will run out of cash to pay all its bills. Mr. Obama warned in an interview with CBS News that he could not guarantee that the government would be able to send checks to recipients of Social Security, military pensions and other government benefits next month without a debt-ceiling increase. "There may simply not be the money in the coffers to do it," he said.
Taken together, the developments of the last two days suggest that the collapse of the effort by Mr. Obama and House Speaker John Boehner (R., Ohio) to strike a bigger and more historic deficit-cutting deal has made the effort to negotiate a smaller agreement harder rather than easier. House Republicans met privately on Capitol Hill before their leaders went to the White House for another round of deficit-reduction negotiations with Mr. Obama and their Democratic counterparts. The resounding consensus of the members was "we've got to stand our ground" against accepting any tax increases in an agreement and to keep pushing for more than $2 trillion in deficit reduction over 10 years, said one Republican who attended.
In the Republican caucus meeting, Mr. Boehner quickly dispelled any notion that he and Mr. Obama would continue to seek a $4 trillion deal including large cuts to entitlement programs such as Social Security, Medicare and Medicaid, and an overhaul of the tax code. "It became clear that they would only do entitlement reform if it came along with tax hikes," Mr. Boehner said, according to a person in the room. "Am I angry about it? I sure as hell am. I believe we are missing a great opportunity."
Mr. McConnell's proposal to allow the president to raise the debt ceiling came after he said in a Senate speech that the country cannot solve its fiscal problems with Mr. Obama as president. "After years of discussions and months of negotiations, I have little question that as long as this president is in the Oval Office, a real solution is unattainable," he said. It was not immediately clear whether his debt-limit proposal has broader support within his party, or with the Democrats who would be needed to approve it in the Senate. Such a complex plan is unlikely to pass anytime soon. Senate Majority Leader Harry Reid (D., Nev.) said he did not want to "trash" Mr. McConnell's proposal, but said that he needs to study it.
Meanwhile, some 470 executives—including the chief executives from Alcoa Inc., DuPont, Citigroup Inc. and Procter & Gamble Co.—released a letter to the president and Congress urging them to raise the debt ceiling.
Hitting the Ceiling
See what the federal debt limit has been at year-end since 1940.
The executives warned that a government default could throw financial markets into "disarray" and "this is a risk our country must not take." The letter came after the U.S. Chamber of Commerce, National Association of Manufacturers, and Financial Services Forum have spent months in briefings with lawmakers warning about default. In some of those meetings, officials said that if the U.S. government's bond rating were downgraded from Aaa to Aa, it could shave 1% off the gross domestic product and cost at least one million jobs. "Now is the time for our political leaders to act," the executives wrote. Treasury Department officials have said the government would only be able to spend the money it brings in each day through revenue if the debt ceiling isn't increased. The government is scheduled to pay $23 billion in Social Security benefits on Aug. 3, and it is only expected to bring in $12 billion that day in tax revenue, according to the Bipartisan Policy Center.
Another emerging complication is a growing insistence by some Republicans that Congress pass a balanced-budget amendment to the Constitution before a vote to increase the debt limit. The House is expected to vote on such an amendment next week, and Senate Republicans may force a vote in their chamber as well. Democrats say a balanced-budget amendment is a political sideshow that's unlikely to pass, especially because the GOP version requires super-majorities in Congress for raising taxes or spending.
Janet Hook contributed to this article.
Write to Damian Paletta at damian.paletta@wsj.com and Naftali Bendavid at naftali.bendavid@wsj.com
Monday, June 28, 2010
The Third Depression
By PAUL KRUGMAN
The New York Times
June 27, 2010
Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.
Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.
But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.
Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.
It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.
So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
The New York Times
June 27, 2010
Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.
Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.
But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.
Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.
It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.
So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
Wednesday, June 16, 2010
China's US govt debt holdings hit 2010 high: Treasury
Agence France-Presse, 6/15/2010
China's holdings of US debt climbed to the highest level this year, the US Treasury said Tuesday even as Beijing stepped up attacks on the United States for its burgeoning debt. The cash-rich Chinese government raised its US Treasury bond holdings to 900.2 billion dollars in April, its highest level since November 2009, while posting the second consecutive monthly rise, according to a report on international capital flows. China remained far ahead as the top foreign debt holder, followed by Japan, which held 795.5 billion dollars in April, and third-placed Britain at 239.3 billion dollars, according to the figures. The monthly gain in April and the previous month came after six straight months in which China appeared to reduce its Treasury holdings, or keep them flat. While that triggered concerns Beijing was diversifying away from US bonds, some analysts said Beijing was secretly buying bonds via third countries to mask its importance as a creditor -- a role which had attracted considerable scrutiny. Globally there has been an influx of investments in recent months into US Treasury bonds -- a channel used by the government to borrow from the public to finance its burgeoning deficit -- amid the mounting European debt crisis. The crisis, which sent the euro to four-year lows, also deterred China and several other countries with massive foreign reserves from diversifying away from US bonds and other long-term US securities, analysts said. "Threats of reserve diversification over the last two years by China and Russia have ended since the breakout of the European sovereign debt crisis and the euro's (sharp) decline against the US dollar," said analyst Michael Woolfolk of Bank of New York Mellon. The data Tuesday indicated that China remains "a steadfast buyer" of Treasuries, averaging 10.3 billion dollars per month in 2009 and 8.2 billion dollars per month for the first four months of 2010, he said. China, the world's largest holder of foreign-exchange reserves, has been constantly criticizing Washington for its snowballing debt levels, fearing that Beijing's investment in US government bonds could turn sour if a debt crisis overwhelms America. Analysts cited the latest criticism from the Chinese national pension fund chief last week, saying it had also helped the euro recover against the greenback, including on Tuesday. "The Euro was bought up quite aggressively on comments from the head of the Chinese pension Fund that the euro will survive the crisis and that he was more concerned about their US debt holdings," said Tony Darvall of Easy Forex. The latest Treasury data showed that net foreign purchases of US securities rose in April but at a slower pace than record-setting March levels. Net long-term foreign purchases fell to 83 billion dollars from 140.5 billion dollars in March. "Despite falling from their record-high March level, net long-term capital inflows to the United States remained solid," said Gregory Daco, US economist at IHS Global Insight. "Foreign investors' confidence in the US recovery was illustrated by the increased holdings of all three largest foreign holders of US Treasuries: China, Japan, and the UK," he said.
China's holdings of US debt climbed to the highest level this year, the US Treasury said Tuesday even as Beijing stepped up attacks on the United States for its burgeoning debt. The cash-rich Chinese government raised its US Treasury bond holdings to 900.2 billion dollars in April, its highest level since November 2009, while posting the second consecutive monthly rise, according to a report on international capital flows. China remained far ahead as the top foreign debt holder, followed by Japan, which held 795.5 billion dollars in April, and third-placed Britain at 239.3 billion dollars, according to the figures. The monthly gain in April and the previous month came after six straight months in which China appeared to reduce its Treasury holdings, or keep them flat. While that triggered concerns Beijing was diversifying away from US bonds, some analysts said Beijing was secretly buying bonds via third countries to mask its importance as a creditor -- a role which had attracted considerable scrutiny. Globally there has been an influx of investments in recent months into US Treasury bonds -- a channel used by the government to borrow from the public to finance its burgeoning deficit -- amid the mounting European debt crisis. The crisis, which sent the euro to four-year lows, also deterred China and several other countries with massive foreign reserves from diversifying away from US bonds and other long-term US securities, analysts said. "Threats of reserve diversification over the last two years by China and Russia have ended since the breakout of the European sovereign debt crisis and the euro's (sharp) decline against the US dollar," said analyst Michael Woolfolk of Bank of New York Mellon. The data Tuesday indicated that China remains "a steadfast buyer" of Treasuries, averaging 10.3 billion dollars per month in 2009 and 8.2 billion dollars per month for the first four months of 2010, he said. China, the world's largest holder of foreign-exchange reserves, has been constantly criticizing Washington for its snowballing debt levels, fearing that Beijing's investment in US government bonds could turn sour if a debt crisis overwhelms America. Analysts cited the latest criticism from the Chinese national pension fund chief last week, saying it had also helped the euro recover against the greenback, including on Tuesday. "The Euro was bought up quite aggressively on comments from the head of the Chinese pension Fund that the euro will survive the crisis and that he was more concerned about their US debt holdings," said Tony Darvall of Easy Forex. The latest Treasury data showed that net foreign purchases of US securities rose in April but at a slower pace than record-setting March levels. Net long-term foreign purchases fell to 83 billion dollars from 140.5 billion dollars in March. "Despite falling from their record-high March level, net long-term capital inflows to the United States remained solid," said Gregory Daco, US economist at IHS Global Insight. "Foreign investors' confidence in the US recovery was illustrated by the increased holdings of all three largest foreign holders of US Treasuries: China, Japan, and the UK," he said.
Thursday, June 10, 2010
Debt Spreading 'Like a Cancer': Black Swan Author
The economic situation today is drastically worse than a couple years ago, and
the euro is doomed as a concept, Nassim Taleb, professor and author of the
bestselling book "The Black Swan," told CNBC on Thursday.
Nassim Taleb"We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base," Taleb said. "Banks balance sheets are just as bad as they were" two years ago when the crisis began and "the quality of the risks hasn't improved," he added. The root of the crisis over the past couple of years wasn't recession, but debt, which has spread "like a cancer," according to Taleb, who is now relived that public attention has shifted to debt, instead of growth. The world needs to prepare itself for austerity, he warned. "We need to slash debt. Unfortunately, that's the only solution," Taleb said. Other analysts warned about austerity programs spreading from the euro zone to the US where the growth in debt will become unsustainable over the longer term. Obama administration's efforts to pull the US out of recession haven't succeeded, according to Taleb. "It's not that they make mistakes, it's that they almost get nothing right." Moreover, a second major stimulus package may be futile, he warned. "Obama promised us 8 percent unemployment through stimulus. It hasn't worked." There are significantly more liabilities in the US than in other countries around the world, he said. "Don't give a junkie more drugs, don't give a debt junkie more debt." Investors should avoid Treasurys and other bonds and place their money in instruments that will hedge them against looming inflation. Commodities are one place where a bull market may form over the coming years, as people try to protect their cash from price rises, famous investor Jim Rogers told CNBC earlier Thursday.
The "Black Swan" metaphor is used to describe those rare, unexpected but consequential events that people cannot predict because they view the world through a sort of tunnel vision - as something structured, ordinary, and comprehensible. "I want to live in a society that is robust to adverse events. We don't live in that world," Taleb said. "A bridge that's very poorly constructed will eventually break. A white swan for the butcher is a black swan for the turkey," he added. The "Black Swan" reference has become ubiquitous within popular and business culture over the past couple of years.
As recently as Wednesday, a top authority on oil reservoir management and upstream technology called the BP [BP-LN 365.50 -26.05 (-6.65%)] oil spill in the Gulf of Mexico a "Black Swan" event that, however catastrophic, has the potential to improve drilling practices in particular and the industry in general. Taleb expressed reservations about the future of BP, given the catastrophic fall in its market capitalization since the oil spill on April 20th. He suggested that incentives in corporate culture are inherently flawed. "Size is bad for companies," he said. "We shouldn't give a manager of a nuclear plant an incentive bonus. People are given bonuses to hide risk, to cut corners. The same thing happens with every large corporation. It permeates the entire economic system."
Bernanke Puzzled by Gold Rally
The Wall Street Journal
June 9, 2010
Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices. The 30% rally from a year ago, on top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the U.S. Gold is seen by many investors as a hedge against inflation risk. In this case, it might instead be a risk against risk broadly. Mr. Bernanke notes that the inflation signal isn’t confirmed by movements in other asset classes. Yields on Treasury bonds tend to rise when investors worry about inflation, but those yields have been falling recently.
Inflation expectations as measured in Treasury Inflation Protected Securities (TIPS) markets remain low. And other commodity prices are falling. Gold is breaking records, but copper prices are down 17% so far this year. “I don’t fully understand movements in the gold price,” Mr. Bernanke admitted. But he suggested it might be another example of investors fleeing risky assets and flocking to assets that are perceived as less risky, not only Treasury bonds, but also ones like gold.
June 9, 2010
Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices. The 30% rally from a year ago, on top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the U.S. Gold is seen by many investors as a hedge against inflation risk. In this case, it might instead be a risk against risk broadly. Mr. Bernanke notes that the inflation signal isn’t confirmed by movements in other asset classes. Yields on Treasury bonds tend to rise when investors worry about inflation, but those yields have been falling recently.
Inflation expectations as measured in Treasury Inflation Protected Securities (TIPS) markets remain low. And other commodity prices are falling. Gold is breaking records, but copper prices are down 17% so far this year. “I don’t fully understand movements in the gold price,” Mr. Bernanke admitted. But he suggested it might be another example of investors fleeing risky assets and flocking to assets that are perceived as less risky, not only Treasury bonds, but also ones like gold.Monday, June 7, 2010
U.S.’s $13 Trillion Debt Poised to Overtake GDP
By Garfield Reynolds and Wes Goodman
June 4 (Bloomberg) -- President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.” The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades. “Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.” Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.” Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s. “The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury,” Boston-based Fuss said. “Do you really want to buy the debt of the biggest issuer?”
To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
June 4 (Bloomberg) -- President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.” The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades. “Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.” Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.” Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s. “The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury,” Boston-based Fuss said. “Do you really want to buy the debt of the biggest issuer?”
To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
Sunday, November 22, 2009
Mayors Sound Alarm Over Drop in City Revenues
The Wall Street Journal
November 19, 2009
By CONOR DOUGHERTY
WASHINGTON -- Mayors from four U.S. cities said they are facing a once-in-a-generation fiscal crisis and that federal stimulus funds have, so far, been largely unhelpful in helping them balance budgets hit by steep drops in nearly every source of municipal revenue. The comments, from mayors of Philadelphia, San Jose, Calif; Mesa, Ariz., and Bowling Green, Ky., at a panel discussion sponsored by the Brookings Institution and the National League of Cities, underscore how the recession for local government is far from over. Mesa's mayor, Scott Smith, said the steep drops in sales-tax revenue, the city's primary source of money, are "changing our reality."
"We treat this financial crisis as something we're not going to get out of," said Mr. Smith, whose city has about 500,000 citizens and is in the Phoenix metropolitan area. Even as economists declare the recession over, local revenues continue to fall. That's because the lion's share of their receipts -- sales, income and property taxes -- are connected to the job market and real-estate prices. Jobs and real-estate prices are expected to lag the broader economic recovery, reducing city revenues for months or years after the technical end of the recession.
"This is unknown for our generation," said Chris Hoene, director of the center for research and innovation at the National League of Cities. Mr. Hoene said it was likely to be 18 to 24 months before local government revenues resume growing. The mayors said deep budget gaps have forced them to make cuts to basic services including police and fire protection, that the financial crisis has turned cities and states against each other and that fiscal strains emphasize the need for money-saving changes to pension and health benefits in the heavily unionized public sector. "Change has to come and this moment of crisis is going to force it," said Michael Nutter, mayor of Philadelphia. While federal stimulus funds have helped states close budget gaps and preserved jobs for many state and school-board employees, the mayors said federal money hasn't done much to ease their day-to-day budget problems. "The stimulus is going to special things," said Chuck Reed, mayor of San Jose. Beyond budget and services cuts, the mayors discussed new ways to raise revenue at a time when incomes are stagnant and the national unemployment rate is at 10.2%. Philadelphia, for instance, has temporarily increased its sales tax while Mesa has levied a property tax for the first time.
Write to Conor Dougherty at conor.dougherty@wsj.com
November 19, 2009
By CONOR DOUGHERTY
WASHINGTON -- Mayors from four U.S. cities said they are facing a once-in-a-generation fiscal crisis and that federal stimulus funds have, so far, been largely unhelpful in helping them balance budgets hit by steep drops in nearly every source of municipal revenue. The comments, from mayors of Philadelphia, San Jose, Calif; Mesa, Ariz., and Bowling Green, Ky., at a panel discussion sponsored by the Brookings Institution and the National League of Cities, underscore how the recession for local government is far from over. Mesa's mayor, Scott Smith, said the steep drops in sales-tax revenue, the city's primary source of money, are "changing our reality."
"We treat this financial crisis as something we're not going to get out of," said Mr. Smith, whose city has about 500,000 citizens and is in the Phoenix metropolitan area. Even as economists declare the recession over, local revenues continue to fall. That's because the lion's share of their receipts -- sales, income and property taxes -- are connected to the job market and real-estate prices. Jobs and real-estate prices are expected to lag the broader economic recovery, reducing city revenues for months or years after the technical end of the recession.
"This is unknown for our generation," said Chris Hoene, director of the center for research and innovation at the National League of Cities. Mr. Hoene said it was likely to be 18 to 24 months before local government revenues resume growing. The mayors said deep budget gaps have forced them to make cuts to basic services including police and fire protection, that the financial crisis has turned cities and states against each other and that fiscal strains emphasize the need for money-saving changes to pension and health benefits in the heavily unionized public sector. "Change has to come and this moment of crisis is going to force it," said Michael Nutter, mayor of Philadelphia. While federal stimulus funds have helped states close budget gaps and preserved jobs for many state and school-board employees, the mayors said federal money hasn't done much to ease their day-to-day budget problems. "The stimulus is going to special things," said Chuck Reed, mayor of San Jose. Beyond budget and services cuts, the mayors discussed new ways to raise revenue at a time when incomes are stagnant and the national unemployment rate is at 10.2%. Philadelphia, for instance, has temporarily increased its sales tax while Mesa has levied a property tax for the first time.
Write to Conor Dougherty at conor.dougherty@wsj.com
Payback Time: Wave of Debt Payments Facing U.S. Government
By EDMUND L. ANDREWS
The New York Times
November 23, 2009
WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true. But that happy situation, aided by ultralow interest rates, may not last much longer. Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed. Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages. With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher. In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan. The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means. The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.
Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode. The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”
So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt. The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent. “All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.” The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government. “What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.” The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money. On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages. Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China. The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March. Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels. The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates. Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education. But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year. The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead. To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt. Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service. This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead. “Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4. “Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”
The New York Times
November 23, 2009
WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true. But that happy situation, aided by ultralow interest rates, may not last much longer. Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed. Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages. With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher. In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan. The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means. The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.
Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode. The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”
So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt. The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent. “All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.” The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government. “What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.” The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money. On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages. Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China. The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March. Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels. The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates. Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education. But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year. The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead. To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt. Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service. This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead. “Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4. “Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”
Thursday, August 13, 2009
Federal deficit higher in July, $1.27T this year
Record federal deficit climbs higher, $180.7 billion in July, $1.27 trillion so far this year
By Martin Crutsinger, AP Economics Writer
On Wednesday August 12, 2009, 3:07 pm EDT
WASHINGTON (AP) -- The federal deficit climbed higher into record territory in July, hitting $1.27 trillion with two months remaining in the budget year. The Treasury Department said Wednesday that the July deficit totaled $180.7 billion, slightly more than the $177.5 billion economists had expected. The Obama administration is projecting that when the current budget year ends on Sept. 30, the imbalance will total $1.84 trillion, more than four times last year's record-high. The soaring deficits have raised worries among foreign owners of U.S. Treasury securities including the Chinese, the largest holder of such debt. Massive amounts of government spending to combat the recession and stabilize the U.S. financial system have pushed the deficit higher. The cost of wars in Iraq and Afghanistan, along with depleted government tax revenues, also are major factors. The July deficit reflected government spending of $332.2 billion, a record amount for any month and up from outlays of $263.3 billion in July 2008. Of that increase, about $25 billion reflected the fact that Aug. 1 was a Saturday this year, requiring many government benefit checks to be sent out earlier and counted as spending in July. Government receipts totaled $151.5 billion, down 5.6 percent from a year ago. It marked the 15th consecutive month that government receipts have been lower than the same month in the prior year, illustrating how deep the recession has cut into tax receipts. Through the first 10 months of the budget year, receipts total $1.74 trillion, down 16.9 percent from the same period in 2008. Outlays totaled $3 trillion over the past 10 months, up 21.1 percent from the same period in 2008. The resulting deficit of $1.27 trillion compares to an imbalance of $388.6 billion during the year-ago period. The deficit for all of 2008 was $454.8 billion, the current record holder in dollar terms. President Barack Obama's economic team sought to reassure the Chinese during high-level talks last month that the administration is committed to reducing the deficits once the current economic and financial crises have been resolved. So far, interest rates have remained low as the Federal Reserve has kept the federal funds rate, a key short-term interest rate at a record low near zero in an effort to jump-start the economy. At the end of a two-day meeting Wednesday, Fed officials repeated their view that the weak economy was likely to "to warrant exceptionally low levels of the federal funds rate for an extended period." The concern, however, is that rates could begin rising despite the Fed's efforts if foreigners suddenly lose confidence in the government's ability to manage its debt burden. In bond markets, prices fell Wednesday after a fairly weak auction of $23 billion in 10-year Treasury notes. The Treasury Department is auctioning a record $75 billion in debt this week. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.75 percent from 3.70 percent ahead of the auction results and 3.67 percent late Tuesday. Bond prices jumped Tuesday as stocks fell. Investors will track demand because a drop in buyers could force the government to increase its payout. The resulting rise in rates would raise borrowing costs for the government as well as consumers and businesses, and could end up slowing the economy. The total public debt now stands at $11.6 trillion. Interest payments on the debt cost $452 billion last year, the largest federal spending category after Medicare-Medicaid, Social Security and defense.
By Martin Crutsinger, AP Economics Writer
On Wednesday August 12, 2009, 3:07 pm EDT
WASHINGTON (AP) -- The federal deficit climbed higher into record territory in July, hitting $1.27 trillion with two months remaining in the budget year. The Treasury Department said Wednesday that the July deficit totaled $180.7 billion, slightly more than the $177.5 billion economists had expected. The Obama administration is projecting that when the current budget year ends on Sept. 30, the imbalance will total $1.84 trillion, more than four times last year's record-high. The soaring deficits have raised worries among foreign owners of U.S. Treasury securities including the Chinese, the largest holder of such debt. Massive amounts of government spending to combat the recession and stabilize the U.S. financial system have pushed the deficit higher. The cost of wars in Iraq and Afghanistan, along with depleted government tax revenues, also are major factors. The July deficit reflected government spending of $332.2 billion, a record amount for any month and up from outlays of $263.3 billion in July 2008. Of that increase, about $25 billion reflected the fact that Aug. 1 was a Saturday this year, requiring many government benefit checks to be sent out earlier and counted as spending in July. Government receipts totaled $151.5 billion, down 5.6 percent from a year ago. It marked the 15th consecutive month that government receipts have been lower than the same month in the prior year, illustrating how deep the recession has cut into tax receipts. Through the first 10 months of the budget year, receipts total $1.74 trillion, down 16.9 percent from the same period in 2008. Outlays totaled $3 trillion over the past 10 months, up 21.1 percent from the same period in 2008. The resulting deficit of $1.27 trillion compares to an imbalance of $388.6 billion during the year-ago period. The deficit for all of 2008 was $454.8 billion, the current record holder in dollar terms. President Barack Obama's economic team sought to reassure the Chinese during high-level talks last month that the administration is committed to reducing the deficits once the current economic and financial crises have been resolved. So far, interest rates have remained low as the Federal Reserve has kept the federal funds rate, a key short-term interest rate at a record low near zero in an effort to jump-start the economy. At the end of a two-day meeting Wednesday, Fed officials repeated their view that the weak economy was likely to "to warrant exceptionally low levels of the federal funds rate for an extended period." The concern, however, is that rates could begin rising despite the Fed's efforts if foreigners suddenly lose confidence in the government's ability to manage its debt burden. In bond markets, prices fell Wednesday after a fairly weak auction of $23 billion in 10-year Treasury notes. The Treasury Department is auctioning a record $75 billion in debt this week. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.75 percent from 3.70 percent ahead of the auction results and 3.67 percent late Tuesday. Bond prices jumped Tuesday as stocks fell. Investors will track demand because a drop in buyers could force the government to increase its payout. The resulting rise in rates would raise borrowing costs for the government as well as consumers and businesses, and could end up slowing the economy. The total public debt now stands at $11.6 trillion. Interest payments on the debt cost $452 billion last year, the largest federal spending category after Medicare-Medicaid, Social Security and defense.
Monday, March 23, 2009
Soon there may be nobody left to lend to America
Times Online, March 22, 2009
Irwin Stelzer
Anyone who thought Ben Bernanke and his Federal Reserve Board colleagues were out of ammunition received a rude, or pleasant, shock last week. Rude, if you worry that a few extra trillions sloshing around the economy might one day trigger a wave of inflation; pleasant, if you worry that the economy is sinking fast, and the Obama administration and Congress haven’t a clue what to do about it. The Fed plans to buy $300 billion of Treasury IOUs in the next six months (more to come if needed), pour $1.45 trillion into the mortgage market, and keep interest rates close to zero for “an extended period”. There’s more in the Fed’s “do whatever it takes” arsenal if these steps don’t bring interest rates down so people can borrow more cheaply to buy houses, cars and other durable goods. But so far, so good: interest rates on 30-year mortgages fell below 5%. Whether that will encourage enough creditworthy borrowers to sop up the huge inventory of unsold homes, much less trigger new construction, is difficult to predict. But the dollar dropped like a stone. Earlier, Chinese premier Wen Jiabao said he was “a little bit worried” that America might cheapen its currency and pay back the $1.2 trillion it owes in depreciated dollars. Now that the Fed has moved, he must be a lot worried.
The Fed’s decision to pump trillions into the money markets comes on top of President Barack Obama’s proposal to drive the federal deficit to 12% of GDP by borrowing trillions to fund a few stimulus projects, universal healthcare, a green energy system and a host of other programmes on his wish list. Obama’s assurance that America will never default on its debt hasn’t completely soothed the markets: The Wall Street Journal reports that it now costs seven times as much to buy insurance against an American government default as it did only a year ago. Besides, America can always inflate its way out of its obligations. Not to worry, says the president. The economy will soon be growing at an annual rate of about 4%. Along with the tax increases to be imposed on the top 2% of earners, billions from the sale of carbon-pollution permits and reductions in age-related entitlements, the growth will drive the deficit down to 3% of GDP in 2013. Unfortunately, 2% of earners can’t or won’t carry the entire burden, the carbon-permit programme might not produce the predicted revenues after Democratic congressmen from coal-producing states chop away at it, and Congress has told the president that any proposal to reduce the huge entitlement payments due the ageing baby-boomers will be DOA – dead on arrival.
Where China’s Wen sees problems, Paul Paulson (no relation to former Treasury secretary Hank) sees opportunity. Paulson, you will recall, is the hedge-fund manager who made $10 billion in 2007 betting that the subprime mortgage market would implode. The day before Bernanke’s announcement, Paulson made another wager. He shelled out $1.28 billion for a stake in the gold-mining company AngloGold Ashanti. He is betting that by debasing their currencies, governments will trigger inflation that will cause a flight from paper currencies to gold. Within 24 hours of Paulson’s bet, it paid off, thanks to the Fed: the price of gold jumped 7%, one of the many commodities to experience large increases. So here is where we are at. The combination of the Fed’s surprise attack on the credit markets and the president’s decision to borrow-and-spend will give the economy a lift. My own guess, and that of many economists with whom I have spoken, is that by the middle of next year, if not sooner, the economy will start growing again at a decent rate. At that point, Bernanke will have to decide whether to start pulling money out of the system by selling off some of the assets on his swollen balance sheet, and the Obama administration will have to decide how to bring down the fiscal deficit. Bernanke is keenly aware that during the Great Depression the Fed tightened the money supply prematurely, nipping a nascent recovery in the bud. So he is likely to stall.
Meanwhile, there is little prospect that Congress will do what is necessary to bring spending and borrowing down to levels that do not trigger inflation. Politicians just don’t worry as much about inflation as about catering to their multiple constituencies. So the Treasury will have more trillions in IOUs to peddle. But its best customers just might be unenthusiastic about adding significantly to their holdings. Wen already owns trillions in Treasury bills that are depreciating in value. Besides, China’s mounting needs for infrastructure and an improved safety net will sop up funds once used to buy American securities. Japan, another large customer, is now running a current-account deficit, and so it won’t have as many dollars to recycle. Nor will Middle East buyers, no longer receiving a flood of dollars from $140-a-barrel oil. Little wonder that Larry Lindsey, former economic adviser to President George W Bush, says he “cannot figure out what combination of foreign buyers is going to acquire . . . [the] debt” that Obama’s plans will generate. Which leaves Americans and the Fed as customers. Even if they save more, domestic consumers can’t absorb all the Treasury bonds that will be on offer. And if the Fed keeps buying, it will pour fuel on the inflationary fires.
I have never before doubted the resilience of the American economy – its ability to survive inevitable downturns after periods of excess, and to weather the burdens heaped on it by politicians. Obama, however, has me shaken, perhaps because I am not stirred by his rhetoric.
Fortunately, even some liberal Democrats are suffering from “bailout fatigue”. More important, Bernanke has so far shown a sure touch in managing monetary policy, and might head off a bout of inflation by shrinking the money supply when the economy is no longer too cold, has not yet gotten too hot, and is in just the right condition for such a move. If so, Goldilocks might just have a new life.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute. stelzer@aol.com
Irwin Stelzer
Anyone who thought Ben Bernanke and his Federal Reserve Board colleagues were out of ammunition received a rude, or pleasant, shock last week. Rude, if you worry that a few extra trillions sloshing around the economy might one day trigger a wave of inflation; pleasant, if you worry that the economy is sinking fast, and the Obama administration and Congress haven’t a clue what to do about it. The Fed plans to buy $300 billion of Treasury IOUs in the next six months (more to come if needed), pour $1.45 trillion into the mortgage market, and keep interest rates close to zero for “an extended period”. There’s more in the Fed’s “do whatever it takes” arsenal if these steps don’t bring interest rates down so people can borrow more cheaply to buy houses, cars and other durable goods. But so far, so good: interest rates on 30-year mortgages fell below 5%. Whether that will encourage enough creditworthy borrowers to sop up the huge inventory of unsold homes, much less trigger new construction, is difficult to predict. But the dollar dropped like a stone. Earlier, Chinese premier Wen Jiabao said he was “a little bit worried” that America might cheapen its currency and pay back the $1.2 trillion it owes in depreciated dollars. Now that the Fed has moved, he must be a lot worried.
The Fed’s decision to pump trillions into the money markets comes on top of President Barack Obama’s proposal to drive the federal deficit to 12% of GDP by borrowing trillions to fund a few stimulus projects, universal healthcare, a green energy system and a host of other programmes on his wish list. Obama’s assurance that America will never default on its debt hasn’t completely soothed the markets: The Wall Street Journal reports that it now costs seven times as much to buy insurance against an American government default as it did only a year ago. Besides, America can always inflate its way out of its obligations. Not to worry, says the president. The economy will soon be growing at an annual rate of about 4%. Along with the tax increases to be imposed on the top 2% of earners, billions from the sale of carbon-pollution permits and reductions in age-related entitlements, the growth will drive the deficit down to 3% of GDP in 2013. Unfortunately, 2% of earners can’t or won’t carry the entire burden, the carbon-permit programme might not produce the predicted revenues after Democratic congressmen from coal-producing states chop away at it, and Congress has told the president that any proposal to reduce the huge entitlement payments due the ageing baby-boomers will be DOA – dead on arrival.
Where China’s Wen sees problems, Paul Paulson (no relation to former Treasury secretary Hank) sees opportunity. Paulson, you will recall, is the hedge-fund manager who made $10 billion in 2007 betting that the subprime mortgage market would implode. The day before Bernanke’s announcement, Paulson made another wager. He shelled out $1.28 billion for a stake in the gold-mining company AngloGold Ashanti. He is betting that by debasing their currencies, governments will trigger inflation that will cause a flight from paper currencies to gold. Within 24 hours of Paulson’s bet, it paid off, thanks to the Fed: the price of gold jumped 7%, one of the many commodities to experience large increases. So here is where we are at. The combination of the Fed’s surprise attack on the credit markets and the president’s decision to borrow-and-spend will give the economy a lift. My own guess, and that of many economists with whom I have spoken, is that by the middle of next year, if not sooner, the economy will start growing again at a decent rate. At that point, Bernanke will have to decide whether to start pulling money out of the system by selling off some of the assets on his swollen balance sheet, and the Obama administration will have to decide how to bring down the fiscal deficit. Bernanke is keenly aware that during the Great Depression the Fed tightened the money supply prematurely, nipping a nascent recovery in the bud. So he is likely to stall.
Meanwhile, there is little prospect that Congress will do what is necessary to bring spending and borrowing down to levels that do not trigger inflation. Politicians just don’t worry as much about inflation as about catering to their multiple constituencies. So the Treasury will have more trillions in IOUs to peddle. But its best customers just might be unenthusiastic about adding significantly to their holdings. Wen already owns trillions in Treasury bills that are depreciating in value. Besides, China’s mounting needs for infrastructure and an improved safety net will sop up funds once used to buy American securities. Japan, another large customer, is now running a current-account deficit, and so it won’t have as many dollars to recycle. Nor will Middle East buyers, no longer receiving a flood of dollars from $140-a-barrel oil. Little wonder that Larry Lindsey, former economic adviser to President George W Bush, says he “cannot figure out what combination of foreign buyers is going to acquire . . . [the] debt” that Obama’s plans will generate. Which leaves Americans and the Fed as customers. Even if they save more, domestic consumers can’t absorb all the Treasury bonds that will be on offer. And if the Fed keeps buying, it will pour fuel on the inflationary fires.
I have never before doubted the resilience of the American economy – its ability to survive inevitable downturns after periods of excess, and to weather the burdens heaped on it by politicians. Obama, however, has me shaken, perhaps because I am not stirred by his rhetoric.
Fortunately, even some liberal Democrats are suffering from “bailout fatigue”. More important, Bernanke has so far shown a sure touch in managing monetary policy, and might head off a bout of inflation by shrinking the money supply when the economy is no longer too cold, has not yet gotten too hot, and is in just the right condition for such a move. If so, Goldilocks might just have a new life.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute. stelzer@aol.com
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