Economics

What the United States Needs Is More Debt, Er, Credit

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If you hear people adding "record deficits" to the account of the current economic crisis, are they just being hyperbolic? Nope!

The federal budget deficit hit a new record in the just-completed 2008 budget year under the latest estimates from the Congressional Budget Office.

The record $438 billion shortfall for the budget year that ended last week is up from $162 billion posted last year. The previous record of $413 billion was posted in 2004.

CBO said Tuesday that with the economy in a slump, revenues dropped by almost 2 percent. Corporate income receipts dropped by $65 billion, or nearly 18 percent. At the same time, individual income tax revenues declined by 1.6 percent.

The deficit is virtually certain to balloon even higher next year as the government sorts out the financial crisis and taps a $700 billion Treasury fund to buy toxic mortgage-related securities.

But don't worry about it. Both or either McCain or Obama are going to slash spending. And start lots of expensive new programs. And start a few new wars. And lower taxes on most of you. And supply health care and fresh energy solutions to all. And buy everything bad, and sell everything good. And do whatever is necessary to delay by one more day any bad consequences from decades of spending beyond the government's means.

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  1. What? No pony?

  2. Actually, it’s not really a record. In realtive terms the deficits of the early Reagan years were about twice as big as a share of GDP.

  3. If you go to the Treasury site “Debt to the Penny” at http://www.treasurydirect.gov/NP/BPDLogin?application=np and query for the last year (I did 10/1/07 to 10/1/08), you get an increase in debt held by the public of $794 billion, a huge chunk of that in just the last two months. Total debt has increased $1061 billion.

    This is before the bailout and all the other factors you mention.

  4. The more you spend, the more you save!

  5. Until the logic of “govt absolutely needs must grow with GDP” is explained, I question the relevance of these “relative to GDP” measures to downplay the absurdity of government spending and debt.

  6. What I want is a Daisy Red Ryder BB gun. But they’ll say I’d probably shoot my eye out.

  7. Even worse than the credit crunch and the budget deficit is the change crunch and the hope deficit. The rich can take care of the former, but only Obama can remedy the latter.

  8. Same is happening here in Sovietic Socialist Republic of France (or was it renamed to The Social-Democratic Empire of France last year ? I can’t remember, which might be a good thing actually).

    Our public deficit has skyrocketed from 40-something billion to over 68 billion (EUR) and total interests on the outstanding debt have increased by 14%. We don’t have any reliable figure for the actual debt because of the insanely creative accounting practices of our governments, it is estimed to be anywhere within 1400 and 4600 billion euro, which corresponds to an easily calculated 140 to 460% of our GNP.

  9. America, keep spending, keep buying, keep spending keep buying. You don’t not need anything. BUY IT BUY IT NOW!!!

    The company 401k manager came into my office this past monday and explained to us that the best way to help America stay out of recession was to spend more, buy more.

    Get that loan, use that credit card. New car? Hell yeah!!! Consumerism will save us all!!!

  10. Elevator to the moon?

  11. Get that loan, use that credit card. New car? Hell yeah!!! Consumerism will save us all!!!

    I was explaining to my daughter the other day, that we need to get a credit card into the hands of her 10-year-old son so that he could rescue the economy.

  12. What are you guys worried about? The Treasury has a shitload of printing presses. The money is on its way.

  13. Debtors rejoice! Inflation will save your ass.

  14. As soon as we nationalize General motors, and cap the price of gasoline at $.75/gal, we’ll get rich selling Suburbans and Escalades. The government will turn a profit, and send us dividend checks!

    I’m going to buy a pony with my dividends!

  15. We are doomed.
    Doomed.
    DOOOMED!

    Apologies to Warren.

  16. Alright, Id like some of you smarty-pantses to tell me what I should expect in the way of consequences of this crappy-policy. Clearly Hayek was right in his prediction of fed enabled boom-bust cycles, but we dont have any representation of that view in congress. So we know we are going to continue on this spending policy, more or less, until the S hits the fan. What will that look like? When (approx) will that happen. After all if “Reagan taught us deficits dont matter” can we really expect anyone to gainsay that?

    Im 35, do you think I can live my life out without worry, or should I begin to build and fortify my retirement bunker?

  17. Im 35,

    You is fucked

  18. Go for the bunker but get a building permit first.

  19. Matt, i’ll bite:

    “Id like some of you smarty-pantses to tell me what I should expect in the way of consequences of this crappy-policy.”

    more debt, inflation, more orwellian can kicking of entitlement liabilities (which can’t be abrogated with inflation). This can continue until social security hits a wall, and the treasury has to borrow maybe 50% of GDP over 10 years, and long term interest rates spike, the dollar drops, and we are forced to devalue our currency by some ungodly amount and default on our debts.

    “I can live my life out without worry, or should I begin to build and fortify my retirement bunker?”

    Sure, invest in some stocks and government debt of countries with first world export based economies.

  20. I’m not going to build a bunker. I’m going to kill Matt and take his.

  21. They are adding two more digits later this year – that’s wildly pessimistic…

  22. The Treasury has a shitload of printing presses. The money is on its way.

    Yes, but they can’t afford the paper and ink. And the loans on the presses are in default

  23. Actually, it’s not really a record. In realtive terms the deficits of the early Reagan years were about twice as big as a share of GDP.

    US Federal Debt as a Percent of GDP, 1940-2007*

    My humble take is if your debt/earnings ratio is going down, you’re on the right fiscal track. If it’s going up, not so much.

    * This year is not included. It rose again.

  24. In related news, the National Debt Clock in New York has officially run out of digits.

    Jerry Lewis and Ed McMahon can stop by and paint a “1”.

  25. We’ll just print up new digits, to go with all that new money we’ll make. YAY!!

    U-S-A; U-S-A!

  26. “But don’t worry about it. Both or either McCain or Obama are going to slash spending. And start lots of expensive new programs. And start a few new wars. And lower taxes on most of you. And supply health care and fresh energy solutions to all. And buy everything bad, and sell everything good. And do whatever is necessary to delay by one more day any bad consequences from decades of spending beyond the government’s means.”

    Probably the most honest words about the candidates that I’ve read in a post here in a long time.

    So where are all the Obama defenders that are normally on here vomiting their puppy love on us?

  27. Until the logic of “govt absolutely needs must grow with GDP” is explained, I question the relevance of these “relative to GDP” measures to downplay the absurdity of government spending and debt.

    It doesn’t… however, superlative terms relative to debt should be looked at with respect to ability to pay, making the real dollar argument valid. Not arguing that government shouldn’t be growing with GDP, but the growth of GDP should affect how debt levels are looked at.

    That aside, current debt and deficit levels would, if we were an EU member, be in violation of the Stability and Growth Pact, something that no EU member can claim (violation on both aspects). With a back-of-the-envelope GDP calculation of $14.2 trillion this year (going from the IMF’s 2007 figure of $13.9 trillion), current deficit is 3.1% of GDP and debt (at an estimated $10.15 trillion) is 71.5% of GDP, a level even surpassing Germany (and surpassed in the Eurozone only by chronically profligate Belgium, Italy, and Greece).

    When the Europeans start looking like sounder fiscal stewards, you have to start wondering what the hell’s up.

  28. So where are all the Obama defenders that are normally on here vomiting their puppy love on us?

    They lift weights during lunch. Gotta stay pumped.

  29. This is all like some horrible nightmare come true. Does anyone remember the School House Rock cartoon of Tyrannasaurus Debt, complete with the Dino-representative of the Debt eating all of the buildings in D.C.?

    It’s on the loose, and all we have in the way of fighting it is Bernanke and Paulson saying “Pay no Attention to the Man behind the Curtain! I am the Great and Powerful FED!”

  30. I know earnestness is in low regard round these parts and sometimes it gets mistaken for trolling, but im serious. Epi, you post on here all the time, lets hear it, what do you think is gonna happen? Because it doesnt look like we’re gonna change?

    Do we go the way of Argentina? Does the dollar get cut as the worlds reserve currency sooner than anyone imagine? Wild inflation in America?

  31. Don’t you understand that in Republican supply-side economics, debts don’t matter?

  32. Until the logic of “govt absolutely needs must grow with GDP” is explained, I question the relevance of these “relative to GDP” measures to downplay the absurdity of government spending and debt.

    Well, if one is going to call shenanigans (which I do) on those who were all ‘largest DOW drop in history’ last week, then one should also say that ‘largest deficits in history’ also requires perspective and context.

    To wit, ‘The largest deficits in history’ would be more properly attributed to the WW2 era, because of their relationship to both the GDP, and the size of the total budget, right?

  33. “””And do whatever is necessary to delay by one more day any bad consequences from decades of spending beyond the government’s means.”””

    Living beyond one’s means has become the foundation of the American economy, in the government and citiznery. It should be a no-brainer that stopping the bad behavior will result in economic colapse. We must continue to spend or we are dooooommmed.

    “”””Until the logic of “govt absolutely needs must grow with GDP” is explained, I question the relevance of these “relative to GDP” measures to downplay the absurdity of government spending and debt.”””

    I question the relevance to the GDP in general. It’s not like it represents available money for the government to spend, or collect in the future. The appropriate metric would be revenue vs. expenses and debt vs future revenue. But that would show that the US is finacially weak. What politician wants to do that?

  34. Yes, but they can’t afford the paper and ink. And the loans on the presses are in default

    No problemo, they can just get a loan from the Chinese! Problem solved!

    Epi, you post on here all the time, lets hear it, what do you think is gonna happen?

    First–I am the farthest thing from an expert in the economy, which is why I tend to stay out of the technical side of these debates.

    But, what I think will happen is that the FED will do anything necessary to postpone the inevitable pain that must come from this. We will limp along, borrowing and inflating and bailing constantly, and it might keep us afloat for a while. But at some point, the piper must be paid. And honestly, I don’t have a crystal ball and I don’t know what form and level that shitstorm will take.

  35. Do we go the way of Argentina? Does the dollar get cut as the worlds reserve currency sooner than anyone imagine? Wild inflation in America?

    I’m obviously not Epi, but none of those are out of the realm of possibility. However, our economy is much larger and more diversified than Argentina’s, so the ups and down might not be as wild. Bottom line, I think we’re venturing into uncharted territory.

  36. Matt, at 35 you’re probably too young to remember “stagflation” under Nixon or the “misery index” under Carter. But you can look forward to serious inflation (6 to 9 percent per year sustained for a decade or so); limited employment opportunities; a social security system in complete chaos; etc; etc; etc.

    Enjoy, it’s my cohort’s gift to you.

  37. Does the dollar get cut as the worlds reserve currency sooner than anyone imagine?

    Right now, there is a flight to, not away from, the dollar. I’m sure once the Dali Bama takes office, the world’s love for the US will manifest itself in any undying devotion to the US dollar as the Currency of Hope and Change, so I’m not expecting any changes on this front.

  38. If you hear people adding “record deficits” to the account of the current economic crisis, are they just being hyperbolic? Nope!

    “Can We Shut the F Up About the ‘Biggest One-Day Loss in History’ on the Dow Already?”

    Two different authors, true. But I would contend similar editorial positions.

  39. Note:
    Not a fan of the deficit.

  40. Matt,

    I’m only going to try to predict the future if you pay me a lot of money if I’m right!

  41. “They are adding two more digits later this year – that’s wildly pessimistic…”

    Yeah, but it’s way cheaper than to add just one now and the next one sometime next year…

  42. The GDP figure is pretty much useless unless you are a bureaucrat or politician trying to spend other people’s money.

  43. “the Dali Bama”

    Lmao! So made of win.

  44. What? No pony?

    The pony was delicious!

  45. “Rich people eat the garbage parts of an animal.”

  46. NoNoNo!!!

    You guy seriously don’t get it. Making light of the situation will NOT help you SPEND MORE.

    Alright, Nation, buckle down, and spend up! You do love America, don’t you? Don’t you!?!?!?! Get out your credit cards and save the world!

  47. “Id like some of you smarty-pantses to tell me what I should expect in the way of consequences of this crappy-policy.”

    It’s all neatly described in a compact novel by J. Neil Schulman titled “Alongside night”. Brace for hyper-inflation, seizing of precious metals, secret prisons and black markets.

  48. “I ate garbage yesterday, and it didn’t cost me $300!”

  49. Wild inflation is likely in the cards for us sometime down the road. Right now the word of the day is deflation. That’s right boys and girls, deflation. It’s here, it’s queer, get used to it.

  50. MY NEWSPAPER COLUMN ON THE CRISIS:

    “I’m With Stupid” T-Shirts: Only $700 billion!

    OK, OK, OK, let me see if I have this straight.
    Some kid in urban Detroit will have his front door battered down by a SWAT team and sent off to 10 sweaty years in the cooler, getting beaten to within an inch of his life for refusing to play the role of prom queen for the cons in C block, all for selling $30 worth of powder to an undercover informant, while politicians and rich white guys with degrees in finance from Drake will be rewarded with $700 billion of our money for running mortgage firms, banks and insurance companies into the ground and throwing sand into the gears of capitalism while flushing our futures down the commode along with the martinis they had for lunch?
    Hmmm. Let’s see. … Carry the three. … Add a little 40-weight oil, a dash of crushed basil. …
    Yep, sounds fair.
    Speaking of commodes, it’s hard to look at the news these days and not think that we’re all just clinging desperately to the rim while the swirling toilet water is tugging at our pants.
    But let’s take a good, close look at the current situation, and see if that’s true.
    Q: Jamie, what is the cause of this yucky-poopity that I’ve been reading about?
    A: Well, a lot of people who couldn’t afford a used cardboard box got big, fat home loans, even though they had no collateral or savings, a credit score of 0.371 and stated income of $6,142 from their parttime job huffing model glue.
    Q: Why did the banks give them loans if they’re such a credit risk?
    A: Well, thanks to secondary markets and inflated home prices, the banks, pressured by the government to give anyone above room temperature and with a functioning spleen a home loan, could then turn around and sell them to Darrel’s House of Mutual Funds and Country-Style Fatback.
    Q: Where do Freddie Mac and Fannie Mae come into this?
    A: Fred and Fannie are jerks. Get this. They’re over for drinks the other night, right, and Fred has the audacity to tell me – ME – that I made inappropriate comments at the company party. Then Fannie, she’s all half loaded, and she launches into me too. So I’m just standing there, right? Taking it all while they’re ganging up on me. Then I shot them.
    Q: Is that story some sort of metaphor for two giant government-backed mortgage institutions?
    A: Meta-what for whozits?
    Q: So what are our beloved Congressional bottom-feeders doing about this?
    A: Looking for some loose change in the cushions of the Lincoln Bedroom sofa. If that doesn’t work, they’ll just print out $700 billion, call it a day and get back to kicking defenseless animals.
    Q: The government can just create $700 billion out of thin air?
    A: The government can do anything, you na?ve unnamed Q, including create a deficit so big that not even light can escape it.
    Q: So you’re telling me that the government is thinking about bailing out stupid people, moronic politicians and corrupt businessmen, without looking into the root causes of this whole disaster?
    A: Of course not! By which I mean yes.
    Q: Why? Why does this need to be done?
    A: Click, click, click. ? Errrrrrrr . ? Gurglglglglglglg. … Sniff. Burp. ? Doink, bonk, glug, itch.
    Q: Are you there? Hello?
    A: Huh? Oh, sorry. I was just checking my retirement account balance.
    Q: How’s it doing?
    A: I’ll probably have just enough money to buy a shotgun, some rope, a fifth of Stoli and two days’ worth of weenies.
    Q: Sounds like a fun weekend. But back to the topic at hand. Doesn’t this send the wrong message, if the government bails out irresponsible and corrupt people and their stupidificationhood?
    A: You know, it’s that kind of attitude that ensures that you’ll never have a future in politics.
    Q: Will you, Jamie Kelly, be receiving any of the benefits of this unprecedented, massive govern-ment bailout?
    A: No. Unless the bailout includes the years 2002-2007, all the words I can’t take back, my decision to become a journalist and that one January night in college.
    Q: What happened that cold, cold night up on the roof of that house?
    A: Oh, nothing. I came down, mostly voluntarily.
    Q: So, is there anything that I, a typical, peace-loving Missoulian, can do to ensure my economic health in these troubled times?
    A: Let me think about that. No.
    Q: Should I sell everything, invest it all in American gold eagle coins and plutonium rods, stock up on assault rifles, buy a year’s worth of dried goods and hole myself up in an underground bunker with a charismatic religious figure who talks to Jesus through an empty can of pork and beans?
    A: Not if I get there first.

    Jamie Kelly writes a monthly column for the Entertainer. Reach him at 523-5254 or at jkelly@missoulian.com.

  51. A-ha! Once again the sandwich-heavy portfolio pays off for the hungry investor!

  52. Jamie–You’re column made no sense to me. It had not one obscenity laced sentence in it.

    I just can’t read you’re stuff when you don’t work blue.

  53. Don’t see the Dow post’s relevance. I can see some complicated chain of reasoning, though all of its seems to implicitly involve the idea that the fed govt has or should have ready access to the entire nation’s production, by which “relative to GDP” has some sidewise relevance to the notion of what we’ll consider largest deficit, but here’s the thing: we overspent by more dollars this year than any other year in our history. That’s why the AP story referred to a “record deficit,” and I think they were right to do so. (If someone can show an INFLATION-ADJUSTED bigger deficit spending year, please do…that has more relevance than GDP adjustment.)

  54. Jamie, nice.

    “We all want to be filthy stinking rich.”

    “Trust me. Two out of three doesn’t cut it.”

  55. Gee, I remember when having a budget with total *expenditures* of $438 billion would have been considered alarming.

  56. at 35 you’re probably too young to remember “stagflation” under Nixon or the “misery index” under Carter. But you can look forward to serious inflation (6 to 9 percent per year sustained for a decade or so); limited employment opportunities; a social security system in complete chaos; etc; etc; etc.

    If you’re relatively young and are in the early years of a long term mortgage, lock in your interest rate now! I cannot emphasize this enough.

    These rates are absurdly and artifically low, and sooner or later they are going to start going up. Probably way up.

  57. Hmmmm. So we borrowed $438 billion and paid $451,154,049,950.63 in interest on the National debt. I wonder how long that’s been going on.

    At least we paid some of the interest out of current income.

  58. No worries.
    I’m investing in AAA-rated Washington D.C. Motherfuckers?.
    They’re the One Sure Thing?!
    They’ll keep the cockroaches company in the end times.

  59. (If someone can show an INFLATION-ADJUSTED bigger deficit spending year, please do…that has more relevance than GDP adjustment.)

    This graph has the debt in 2003 dollars. As an approximation, the first derviative of the graph is the deficit. The steepest upslope is the years around 1945. Unfortunately, the excel sheet link looks to be broken, so I don’t have dollar amounts.

    And I contend it’s neither nominal nor real dollar amount, nor size of GDP. It’s the relationship of the deficit to the overall budget that matters to put its ‘size’ in perspective. Getting a mortgage to buy 500K house with an income of 100K is not a problem; getting a mortgage to buy a 300K house with an income of 30K is.

  60. If you’re relatively young and are in the early years of a long term mortgage, lock in your interest rate now!

    Not young, but I have about 27 years left on a 5 7/8ths fixed mortgage. The bank will realize negative interest pretty soon.

  61. I’m tired of hearing how overleveraged bozos need to be bailed out of their poor decision-making lest the whole economy crumble.

    I’ll believe there’s a credit crunch when I can get a 7% yield on AAA-rated corporate bonds.

  62. “Now that we’ve declared the leaf as legal tender, we’ve all become immensely rich! Of course, to keep inflation down, we had to burn down all of the forests.”
    (From Hitchhiker’s Guide to the Galaxy)

  63. It hit hard. But should we be surprised. Didn’t we all see signs of it coming for long time?

    Thanks for great article, especially like the title?


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