Bernanke Threatens Congress (Again)


Gee, big surprise…

At about 9 percent of gross domestic product (GDP), the federal budget deficit has widened appreciably since the onset of the recent recession in December 2007. The exceptional increase in the deficit has mostly reflected the automatic cyclical response of revenues and spending to a weak economy as well as the fiscal actions taken to ease the recession and aid the recovery.

Except that the “automatic cyclical response” never went away after 2003.  Then it was compounded.  So when does it go away Ben?

Of even greater concern is that longer-run projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show the structural budget gap increasing significantly further over time. For example, under the alternative fiscal scenario developed by the Congressional Budget Office, which assumes most current policies are extended, the deficit is projected to be about 6-1/2 percent of GDP in 2020 and almost 13 percent of GDP in 2030.

Remember that the CBO said we’d have no Federal Debt in 2010 (in 1999.)  How’d that work out?  Do you think they’re just a wee bit optimistic?

One reason the debt is projected to increase so quickly is that the larger the debt outstanding, the greater the budgetary cost of making the required interest payments. This dynamic is clearly unsustainable.

Right.  This means you have to run a primary surplus to stop that dynamic from taking hold.  There is no other means to do it, and the longer you wait to do it, the worse the cutting is that has to take place to get there, because you’re starting from a larger baseline both on deficits and accumulated debt.

Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option. Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. These adjustments could take place through a careful and deliberative process that weighs priorities and gives individuals and firms adequate time to adjust to changes in government programs and tax policies. Or the needed fiscal adjustments could come as a rapid and much more painful response to a looming or actual fiscal crisis in an environment of rising interest rates, collapsing confidence and asset values, and a slowing economy. The choice is ours to make.

The choice was ours to make in 2007.  Bernanke, Paulson and others argued for more spending “now” and cuts “never.”  We now have four years into this, with three of them running deficits over 10% of GDP.  Remove that deficit and GDP contracts by at least 10%.  Fail to remove it and eventually you reach that point where the choices are made for you.

Time is running out to make the choices on our own.

The primary long-term goal for federal budget policy must be achieving fiscal sustainability. A straightforward way to define fiscal sustainability is as a situation in which the ratio of federal debt to national income is stable or moving down over the longer term. This goal can be attained by bringing spending, excluding interest payments, roughly in line with revenues, or in other words, by approximately balancing the primary budget. Given the sharp run-up in debt over the past few years, it would be reasonable to plan for a period of primary budget surpluses, which would serve eventually to bring the ratio of debt to national income back toward pre-recession levels.

My God, he said it.

That’s a first.

Fiscal sustainability is a long-run concept. Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk.

No.  The longer you wait to do it the harder it gets, and at least as importantly the more-addicted the people (and businesses) get to the “free shit” game that has been run.  When you run 12% of GDP in deficits you’re basically preventing the recognition of and adjustment that should come from an economic depression.

We’ve been doing it for three years straight.

Recently, negotiations over our long-run fiscal policies have become tied to the issue of raising the statutory limit for federal debt. I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job. Failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation.

Sorry, but I disagree.

The “FSA” (Free Shit Army) will not stop demanding their free shit, and they vote for it.  It is therefore necessary, and unavoidable, that the Legislators and Executive be willing to “fall on their political swords” to stop this cycle now, because there is no evidence that it will ever be acceptable to the people to do it “tomorrow.”

We thus are choosing between doing it now or not doing it at all.  The former is bad, the latter disastrous.

There is no choice folks.  Bernanke wants you to believe in candy-crapping unicorns that will somehow make the decisions that must be taken palatable tomorrow when they are not today.

But politics doesn’t work that way.  When you have screaming women and children on one side and screaming Seniors on the other, you either put your foot down and say “No!”, knowing full well it is likely to cost you your job, or you say “yes, we’ll deal with it tomorrow” knowing you will deal with it never.

The latter choice is disastrous because for each day we delay in consolidating the budget, reducing spending to meet revenues, we increase the total amount of economic harm the economy and the people in this nation must absorb.  The time to do this was in 2007 when we should have forced all the banks into bankruptcy and cleared the property market.  We would have had a horrific Depression but by now it would be over and Americans would be able to buy homes again, our economy would be recovering, and the big problems we have would have been addressed.

Instead we kicked the can and added more than $4.5 trillion in debt to the problem – a 40% increase in just three years from where we were in 2007.

We cannot continue on this road – not even for another month. 

The insanity must stop right now.

The Market-Ticker