Why Deficits Are Needed & How Austerity Is Killing Greece

I had another great conversation with with Dylan at Volitional Science Network. We talked about deficits, monetary policy, Weimar Germany, hyperinflation and what all of this means for Greece and the European Currency Union.

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Keynesianism’s Depredations and Futility in Action

Japan’s Prime Minister sounds the alarm bells:

Japan’s top government spokesman said the country’s fiscal situation is “approaching the edge of a cliff,” underscoring Prime Minister Naoto Kan’s call for a national debate on raising the 5 percent sales tax.

Kan is “expressing his deep sense of crisis and resolution about the sustainability of social security as the aging population increases under a low birth rate,” Chief Cabinet Secretary Yoshito Sengoku told reporters today in Tokyo. “The supporting fiscal conditions don’t allow for any delays, it’s finally approaching the edge of a cliff.”

Politicians don’t blow the whistle until it’s way too late. So this pretty much sounds like an open and official admission that Japan’s retirement avalanche has begun and is in full swing.

Here’s what I wrote about this a while back:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

This whole mess in Japan started over 20 Years ago!

Keep this in mind any time you hear Keynesian whackos like Paul Krugman alongside politicians in power propose more and more government spending and debt as a panacea to the US’s comparable problems. They are today laying the foundation for the depredations that are to come in 10+ years from now.

Note that Japan’s PM is proposing to raise the sales tax to cover the shortfall.

This kind of stuff is predictable. As I explained in What’s the Problem With Government Budget Deficits:

Ironically, when you look at the political stage, all you will hear in regards to “solutions” to deficits in the end, will for the most part be tax hikes. These are not solutions. They are the ultimate manifestation of the very problem at hand. They are, in fact, the precise opposite of a solution. Keep this in mind whenever you hear politicians talk about deficit solutions. Raising taxes to reduce deficits is absolutely and 100% an admission that one has completely failed to solve this deficit problem, and in fact laid the final brick that was missing in the very process of the public’s depredation via deficit spending.

Also don’t fall prey to the illusion that the newly elected Republicans in Congress will do anything meaningful to turn the tide. If anything at all, they may come up with half-assed measures to appease the public for a little while longer. But will they propose 50+% cuts in military spending, Medicare, Medicaid, or Social Security??

Just take military spending as an example:

Republicans claim to be anti-taxes, yet they gladly and openly support the wars and destruction that end up gobbling up more tax money than anything else. Democrats claim to be anti-war, yet they gladly and openly support the higher taxes that end up funding all those war expenses.

Could there be a more beautiful example for this mad and brilliant shell game called “public finances”?

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Obama’s Laughable “Spending Freeze” Proposal

The AP writes:

Obama also has proposed a three-year freeze on most domestic spending, beginning in the budget year that starts Oct. 1. Spending related to Medicare, Medicaid, Social Security and national security would be exempt.

OK, so Medicare, Medicaid, Social Security, and spending on war, killing people, dropping bombs, etc. will be exempt from this “spending freeze”. I wonder why?

Maybe a quick look at your average annual federal budget will help clear this up, I am here using the federal government’s budget for 2010:

2010-federal-budget-composition

The only category above that is not surely exempt from the “spending freeze” is “Other Discretionary Spending”, 20% of the total budget. Note that nobody talks about cutting any of that. It’s merely going to stay where it already is.

Meanwhile, on the remaining 80% we are being blatantly assured by the President, by virtue of the fact that he is exempting them from the outset, that they will in fact continue to grow moving forward.

On top of that, even out of those 20% of other discretionary spending there is certainly some of it that falls under one or the other holy cow categories, namely Military, Medicare, Medicaid, or Social Security. Thus the total subject to the freeze is rather around 12.5%

As Mish points out:

Exemptions

  • The $154 billion jobs plan pending before Congress
  • Medicare
  • Social Security
  • The $787 billion economic stimulus plan already being implemented
  • Department of Defense
  • Homeland Security
  • Veterans Administration
  • International operations.

What’s Covered

  • One eighth of the total annual budget

This is so ridiculous I don’t know how the administration is not embarrassed to death to present it. Moreover “The freeze would be measured overall and would not be applied across the board.” The freeze is only for three years.

How can anyone in the Administration expect to be taken seriously about budget deficits after presenting this ridiculous plan?

What the administration is serious about is a strategy of extend and pretend. The sheeple are upset about budget deficits, so what do they get? The president announcing a spending freeze (that is none), endorsing a “deficit reduction task force” and talking day in day out about the importance of “tacking the deficit”, while simultaneously spending $787 billion on a stimulus, pushing through another $150 billion for a “jobs plan”, and spending more than any previous administration on wars.

By the way, the deficit task force got rejected in Congress … it is pretty amazing that they can’t even agree on at least talking about deficits, so please don’t even dare to think that they will actually do anything about it, other than of course raising your taxes as they always have.

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The Solution to Deficit Reduction – A Task Force … Yay!

As a response to its rampant and unprecedented budget deficits, President Obama is doing just what we would expect from a good old fashioned and clueless politician – he endorses a task force to talk about deficit reduction until the end (!!) of the year:

President Barack Obama Saturday endorsed a bipartisan plan to name a special task force charged with coming up with a plan to curb the spiraling budget deficit, though the idea has lots of opposition from both his allies and rivals on Capitol Hill.

The bipartisan 18-member panel backed by Obama would study the issue for much of the year and — if at least half of the GOP panel members agree, a big obstacle — report a deficit reduction blueprint after the November elections that would be voted on before the new Congress convenes next year.

“These deficits did not happen overnight, and they won’t be solved overnight,” Obama said in a statement. “The only way to solve our long-term fiscal challenge is to solve it together — Democrats and Republicans.”

This task force will have plenty of time to sit around and do nothing while the taxpayer will continue to be pillaged. In the end, all I expect them to come up with is some superficial and immaterial spending reductions (to make it look good), and massive tax increases.

The highlighted part above is actually quite funny: Over the past 100 years there have been two parties in Congress that continuously ran up government spending and deficits. In particular over the past 10 years the Republican Bush administration ran up until then never before seen deficits. Then the Democratic Obama administration picked up on that an ran up even higher deficits.

Now, the solution to the problem is supposed to be a bipartisan task force, comprised of Republicans and Democrats to solve the structural deficits brought about be Republicans and Democrats.

If one is capable of understanding the hypocrisy behind these policies, the following is of course completely predictable and unsurprising:

First, however, the plan would have to pass the Senate on Tuesday, where a vote has already been scheduled. Moderate Democrats want to attach the deficit task force plan to legislation to permit the government to continue borrowing money to pay for its operations.

Ladies and gentlemen, I give you … the Government of the United States!

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Federal Government Revises Deficit Forecasts as Expected

In February I wrote:

The president’s budget estimates tax receipts of $2.2 trillion, $2.4 trillion, $2.7 trillion, and $3 trillion for 2009, 2010, 2011, and 2012, respectively. These estimates are laughable. My projections for tax receipts, as I explained in The Coming US Tax Receipt Shortfall:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012. (…)

Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

  • $1.65 trillion for 2009
  • $1.6 trillion for 2010
  • $1.95 trillion for 2011
  • $2.2 trillion for 2012

If President Obama keeps spending like this, and really wants to cut the deficit in half by 2013, he will at one point be faced with no other choice but to raise taxes on all Americans, rich, middle class, and poor.

Half a year later, this “surprising” and “unexpected” data finally makes it to government’s own accounting office:

In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America’s founding. And it says by the next decade’s end the national debt will equal three-quarters of the entire U.S. economy.

But before President Barack Obama can do much about it, he’ll have to weather recession aftershocks including unemployment that his advisers said Tuesday is still heading for 10 percent.

Overall, White House and congressional budget analysts said in a brace of new estimates that the economy will shrink by 2.5 to 2.8 percent this year even as it begins to climb out of the recession. Those estimates reflect this year’s deeper-than-expected economic plunge.

The grim deficit news presents Obama with both immediate and longer-term challenges. The still fragile economy cannot afford deficit-fighting cures such as spending cuts or tax increases. But nervous holders of U.S. debt, particularly foreign bondholders, could demand interest rate increases that would quickly be felt in the pocketbooks of American consumers.

Amid the gloomy numbers on Tuesday, Obama signaled his satisfaction with improvements in the economy by announcing he would nominate Republican Ben Bernanke to a second term as chairman of the Federal Reserve. The announcement, welcomed on Wall Street, diverted attention from the budget news and helped neutralize any disturbance in the financial markets from the high deficit projections.

The White House Office of Management and Budget indicated that the president will have to struggle to meet his vow of cutting the deficit in half in 2013 — a promise that earlier budget projections suggested he could accomplish with ease.

“This recession was simply worse than the information that we and other forecasters had back in last fall and early this winter,” said Obama economic adviser Christina Romer.

The deficit numbers also could complicate Obama’s drive to persuade Congress to enact a major overhaul of the health care system — one that could cost $1 trillion or more over 10 years. Obama has said he doesn’t want the measure to add to the deficit, but lawmakers have been unable to agree on revenues that would cover the cost.

What’s more, the high unemployment is expected to last well into the congressional election campaign next year, turning the contests into a referendum on Obama’s economic policies.

Republicans were ready to pounce.

“The alarm bells on our nation’s fiscal condition have now become a siren,” said Senate Minority Leader Mitch McConnell of Kentucky. “If anyone had any doubts that this burden on future generations is unsustainable, they’re gone — spending, borrowing and debt are out of control.”

Even supporters of Obama’s economic policies said the long-term outlook places the federal government on an unsustainable path that will force the president and Congress to consider politically unpopular measures, including tax increases and cuts in government programs.

“The numbers today portend the biggest budget fight we’ve probably had in decades in the United States,” said Stan Collender, a former congressional budget official.

The summer analyses by the White House budget office and by the Congressional Budget Office reached similarly bleak conclusions. The CBO’s 10-year deficit figure was smaller — $7 trillion — but that is because it assumes that all tax cuts put into place in the administration of former President George W. Bush will expire on schedule by 2011. Obama’s budget baseline, however, hews to his proposal to keep the tax cuts in place for families earning less than $250,000 a year.

Both budget offices see the national debt — the accumulation of annual budget deficits — as more than doubling over the next decade. The public national debt, made up of amounts the government owes to the public, including foreign governments, stood Tuesday at a staggering $7.4 trillion. White House budget officials predicted it would reach $17.5 trillion in 2019, or 76.5 percent of the gross domestic product. That would be the highest proportion in six decades.

And of course the public debt to GDP ratio’s increase to 76% should not come as a surprise either. In fact, I would be surprised if it didn’t blow right pass that. I shall conclude with more of what I already said a while back:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

There is an easy way to be on top of such developments: Don’t listen to what the government and all its apologetics tell you. Listen to your own logic and your own reason and you won’t need to be surprised as the inevitable truth comes out sooner or later.

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