June 17, 2009

The deficit, debt and a poor understanding of the past

Are you one of the freaks out there worried about the horrible Federal debt and the amount of paper being shoved out into the market? The recent runup in interest rates has been related to a few things...

1) Speculation that the US debt rating will be cut because of (wait for it) a possibility that the US will default (just FYI, there is zero chance that will happen)

2) Speculation that buyers will eventually dry up and no one will be left to purchase the debt.

Notice that both of these issues are based on speculation, not reality. The first issue is just patently ridiculous. The second assumes that there is enough debt issued by other countries for investors to put their money in and that those investors will shun US debt in favor of debt issued by other countries. Which is silly since collectively, there isn't enough fixed income issuance globally right now to soak up all the available cash. Period. Which is why the Treasury auctions have continued to be oversubscribed (more buyers than securities available)... and will continue to be oversubscribed.

Other part of this is that the overall fixed income market, globally, has shrunk pretty dramatically. While the amount of excess capital being generated has slowed due to the global slowdown, it has not disappeared. Which means it's looking for a place to be invested at exactly the same time that there are fewer investments available. That, my friends, leaves Treasury debt in a very strong position. Krugman has more (and a lovely chart) describing the decline and how government borrowing hasn't made up the gap. Which leads me to this piece by Reich about fearmongering regarding the debt...

Odd that it would return right now, when the economy is still mired in the worst depression since the Great one. After all, consumers are still deep in debt and incapable of buying. Unemployment continues to soar. Businesses still are not purchasing or investing, for lack of customers. Exports are still dead, because much of the global economy continues to shrink. So the purchaser of last resort -- the government -- has to create larger deficits if the economy is to get anywhere near full capacity, and start to grow again. ...

Even odder that the Debt Scare rears its frightening head just as the President’s stimulus is moving into high gear with more spending on infrastructure. Every expert who has looked closely at the nation’s crumbling infrastructure knows how badly it suffers from decades of deferred maintenance -- bridges collapsing, water pipes bursting, sewers backed up, highways impassable, public transit in disrepair. The stimulus, along with the President’s long-term budget, also focus on the nation’s schools, as well as America’s capacity to reduce emissions of greenhouse gases. These public investments are as important to the nation’s future as are private investments.

Or, to put it plainly, we're in a period in the economic cycle when you are supposed to lard up with debt. Normally, you'd spend accumulated savings at a time like this but we can't do that because of Republicans who spent us into oblivion over the last eight years. All we have left is to borrow and there's more than enough capacity for us to do so. The awesome thing about this is that, unlike Reagan's massive debt accumulation, we're actually spending the money on things that will help the economy grow. Democrats are making some crucial investments in the infrastructure of this country that will make possible dramatic economic expansion which will grow the economy far in excess of our debt/GDP.

But there are some people, we'll call them uninformed, who just don't get it. Take this asshat at the Weekly Standard.

But Obama may have a broader ambition. He wants to be Ronald Reagan in reverse. Running up the debt, creating a host of new budgetary commitments and enlarging the government's role in the economy will take generations to unwind. And the engines of bigger government also require fuel in the form of taxes.

Reagan did the opposite. He cut taxes to make government expansion harder. Obama is transposing Reagan. He is growing government to make future tax cuts more difficult.

Wait a second... Obama is running up debt to DO something, Reagan ran up debt and did, well, nothing other than cut taxes which did free up capital since tax rates in the early 80's were pretty far on the right hand side of the Laffer Curve (he also bought some cool military shit which provided a short boost to weapons manufacturing jobs).

Obama, on the other hand, faces tax rates on the far left hand side of the curve and his deficits will actually provide longer term growth. In point of fact, the Democrats CAN raise taxes from here without causing ANY damage to economic growth prospects because rates are so far to the left of the prime spot that the impact is actually positive given that higher taxes means less government debt issuance and capital being returned to debt holders. It also means that speculative money will be pulled out of the economy forcing investors to make smarter long term decisions which always grow the economy MORE than speculation.

The rest of the piece in the Standard is really very silly. You should take a moment to read it if you are in the mood for fact-free opinion thoroughly devoid of any basis in reality. The scariest thing about what conservatives know are the things that just aren't so, to paraphrase Twain.

A few years from now, probably before the 2012 cycle, we'll be out of this mini-depression, the economy will be growing at an aggressive rate and federal surpluses will either be a reality or a reality in the near future. THEN we can worry about paying off the debt. Depending on that election, we may actually get to do that for a while until the country gets fat and happy again... and they decide to elect another compassionate conservative.

Posted by mcblogger at June 17, 2009 11:55 AM

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