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Economist on US debt politics

Written By: - Date published: 12:00 pm, August 4th, 2011 - 34 comments
Categories: Economy, International, us politics - Tags: ,

KAL (the cartoonist for The Economist) expresses my feelings about the political process over the last couple of months in the US.

Their Washington correspondent after looking at the detail of the eventual ‘solution’ concludes with

In the end, hopes for a grand bargain that addressed entitlements, taxes and near-term economic support ran aground on the harsh reality that all these things would require bridging profound philosophical differences that have developed over decades. The odds that the next few months will yield a different outcome seem low: further brinkmanship (albeit of a less terrifying sort than seen in the past weeks) is more likely. That has become the routine way that fiscal policy gets made in America. True, stockmarkets rallied with relief that the most reckless path has been avoided. Meeting such a low standard should hardly be considered a vote of confidence in America’s fundamental fiscal and political maturity.

An earlier article “Turning Japanese: The absence of leadership in the West is frightening—and also rather familiar” pointed out that we have seen this type of political ineptitude spreading out into the real economy before – in Japan.

The world has seen this before. Two decades ago, Japan’s economic bubble popped; since then its leaders have procrastinated and postured. The years of political paralysis have done Japan more harm than the economic excesses of the 1980s. Its economy has barely grown and its regional influence has withered. As a proportion of GDP, its gross public debt is the highest in the world, twice America’s and nearly twice Italy’s. If something similar were to happen to its fellow democracies in Europe and America, the consequences would be far larger. No wonder China’s autocrats, flush with cash and an (only partly deserved) reputation for getting things done, feel as if the future is on their side.

America’s debt debate seems still more kabuki-like. Its fiscal problem is not now—it should be spending to boost recovery—but in the medium term. Its absurdly complicated tax system raises very little, and the ageing of its baby-boomers will push its vast entitlement programmes towards bankruptcy. Mr Obama set up a commission to examine this issue and until recently completely ignored its sensible conclusions. The president also stuck too long to the fiction that the deficit can be plugged by taxing the rich more: he even wasted part of a national broadcast this week bashing the wealthy, though the Democrats had already withdrawn proposals for such rises.

Yet Mr Obama and his party seem a model of fiscal statesmanship compared with their Republican opponents. Once upon a time the American right led the world when it came to rethinking government; now it is an intellectual pygmy. The House Republicans could not even get their budget sums right, so the vote had to be delayed. A desire to curb Leviathan is admirable, but the tea-partiers live in a fantasy world in which the deficit can be reduced without any tax increases: even Mr Obama’s attempts to remove loopholes in the tax code drive the zealots into paroxysms of outrage.

Quite simply the resolution of this particular crisis is just the beginning. Having myopic idiots like the tea party proponents being able to push the house republicans into unsustainable political positions does nothing to fix the structural problems in the US fiscal system. So this problem is going to keep occurring. Next up, the US congress has to pass their 2012 budget.

34 comments on “Economist on US debt politics”

  1. Draco T Bastard 1

    …does nothing to fix the structural problems in the US fiscal system.

    It’s our system too and that system is capitalism. Until we admit that capitalism doesn’t work then we will keep having the same problems.

    • lprent 1.1

      I suspect that may be a bit more long term than I was thinking about. Mostly I was looking at the resource allocation over the next 20-30 years with their aging population.

  2. Wonderful cartoon.  Love the blinkers on the Tea Party and the impending riding over the edge.  Speaks volumes …

  3. vto 3

    It seems that there is more debt in the world than there is money to repay it. How on earth did that happen?

    • Colonial Viper 3.1

      It seems that there is more debt in the world than there is money to repay it. How on earth did that happen?

      Top question.

      Because when a loan gets issued, money is created and deposited into a borrower’s bank account. That money can now be spent into circulation by the borrower.

      Immediately however interest begins to accumulate on the principal loaned. So from day 1, more money is needed to pay back that loan back than exists from the loan itself.

      Cumulatively, we now have trillions in debts which are ever increasing and insufficient money to pay them all back. The only way to create sufficient money to pay off debt as it comes due is to…you guessed it, take out more interest bearing loans.

      PS none of this is too big a deal when you have borrowed $1.00 and now need to pay back $1.10 (including principal and interest). But what If you borrowed $1T (a thousand billion dollars). And now need to find an extra $100B on top of that to pay back the interest?

      • vto 3.1.1

        Well then clearly the loan system is a fraud and the obligation to repay should be cancelled forthwith.

        Sounds like the world’s largest ponzi scheme. Which it is. Completely and utterly inequitable.

        In NZ then, Westpac, BNZ, ANZ, ASB, Heartland, SBS, Hongkong et al are operating a ponzi scheme. Everyone should mention this next time they speak to anyone at their bank. It has been kept hidden, this giant ponzi scheme, for too long.

        Keep them in the dark and feed them bullshit. The mushrooms have grown larger than the forest and now see the banking world for what it is.

        Wonder what the banker John Key has to say about it?

        • mikesh 3.1.1.1

          Interest on fiat money should be outlawed… … … clearly.

          • Colonial Viper 3.1.1.1.1

            Do I even dare say that in addition to banning interest bearing loans, and serious debt moratoria, we should look at having money which is backed by (convertible to) a commodity to stop its endless printing by central banks.

            Don’t tell Rusty Shackleford but I’m starting to think that a gold and/or silver backed dollar might be a good idea again.

            At the minimum, dollars need to be issued directly by the Government, debt free and interest free, without having to go through banks to do this with interest bearing loans.

        • Rodel 3.1.1.2

          VTO,, “Banker – John Key?”….In the words of Bill Bryson’s wife…..’ wrong word, but at least it rhymes.’

    • Policy Parrot 3.2

      Of course there is, that is purely a result of the fractional banking system. Money is actually created by issuing of debt.

      When you think of private loans for small businesses and homeowners, typically the bank has a lien against the property title, therefore if there is structural default in the ability to repay the loan, the assets can be seized.

      However, most corporate debt is through debentures, and thus unsecured. The recent economic problems relate specifically to the regulations governing how debt can be packaged, and the corresponding level of risk that it holds.

      Banks, and other financial institutions generally try to hold a near balance in assets and liabilities, in order to maximize their earnings, and in order to meet financial regulatory standards. But they can be, and frequently are caught off guard by the mass devaluations of the assets which they hold, and thus can longer meet the outstanding liabilities, that is, even if they retain sufficient cash flow.

      PONZI really isn’t that far away from describing the situation.

      • vto 3.2.1

        It seems genuinely a ponzi scheme. If the only way any loan can be repaid is by issuing further loans then that is a type of ponzi scheme. And that is the way it works. Such an evaluation would make a good post for someone to put together …..

        In addition, banks are effectively in a constant state of insolvency because they have no ability to meet their liabilities. They run on the chance that not everyone at once, or even a minority of them, will ask for their money back. That is a form of insolvency surely.

        In addition further, banks are the most highly leveraged organisations around. They have, what is it, 8-10% of their liabilities covered as ‘equity’? So they are 90% leveraged. And they have the gall to berate others for doing the same.

        I am no expert in the banking system so somebody prove me wrong before I go insane or go bush forever.

  4. queenstfarmer 4

    FTA: it should be spending to boost recovery

    But it has been, like never before in history. To quote George Will: “TARP, the stimulus, Cash for Clunkers, dollars for dishwashers, cash for caulkers, the entire range of stimulus, the Keynesian approach, which, by its own evidence, simply hasn’t worked.”

    • D13 4.1

      Those bankers dug a very very large hole!

      • mik e 4.1.1

        The Banks wouldn’t be the wouldn’t be there now if it weren’t for a bail out from us govt ironically! from Bush and Obama admins the Recession would have been a depression Geitner is the world foremost economist on the history of the Great depression. worked under both admins QSTF he did the right thing it it weren’t for Geitner and Bush we’d be buggered.Thank god bush made one right decision in his time!

    • Zorr 4.2

      It has worked in the limited frame of reference and the last person I would trust for ANY information is George Will. The reason it hasn’t fixed the problem is because stimulus to get us out of the hole doesn’t actually solve the issue that dug the hole in the first place. Corporate giants paying NIL tax, paying out massive bonuses on back of declared profits based on TARP loans… these are just some of the issues that STILL require fixing despite stimulus spending.

      It is like going to the doctor for a cold and the doctor prescribes you some medicine to help you get over it… you don’t take the medicine and end up in A&E a week later with pnuemonia claiming it was the doctors fault you didn’t take your medicine.

    • Colonial Viper 4.3

      qstf ffs get with the fraking programme

      to be a real Keynesian the US Govt should have directly employed 5M people for a 3 year duration. Would have cost them an easily manageable $450B.

      All they did in comparison was watered down BS which was never going to work in the first place.

      And guess what happens instead when State govt, Federal Govt and the Private Sector all decide to lay off more and more people, all at the same time? An economic DEATH SPIRAL

      US Private Sector Layoffs to Hit 16 Month High

      Happy days all round in the US

      http://www.reuters.com/article/2011/08/03/us-usa-economy-jobs-challenger-idUSTRE7722G120110803

      • queenstfarmer 4.3.1

        the US Govt should have directly employed 5M people for a 3 year duration

        Work for the dole eh? I’d always heard leftists argue it was more hassle than its worth,

        • Colonial Viper 4.3.1.1

          Workers in the programme would be paid US$25,000 pa i.e. a decent full time wage for a decent full time job, enough that a family could sustain itself on.

          • queenstfarmer 4.3.1.1.1

            US$25k / pa is only fractionally more than the NZ minimum wage (probably less so given it includes 4 weeks paid leave).

            If that is “a decent full time wage for a decent full time job, enough that a family could sustain itself on” in the US, is it not also in NZ?

    • Pascal's bookie 4.4

      George Will. Now there’s a reliable source. lol.

  5. The US debt is at $14 trillion – nearly 90% of their GDP – and Standard & Poors retains a AAA credit rating for our American cuzzies?!?!

    WTF?

    • Colonial Viper 5.1

      Ahem your figures are out of date.

      Because the US Govt now has to pay back all the monies they borrowed out of govt worker pension funds etc, and catch up on deferred borrowing, they have had a massive single day increase in debt ($0.24B in a single day).

      They are now at 97% debt: GDP.

      • KJT 5.1.1

        Apparently the USA could still pay back all their debt within ten years. If! they taxed their billionaires at the same rate they did in the 60’s.

        They are going to hand their whole country to China just so their wealthy do not have to lose a small proportion of their wealth.

        • Colonial Viper 5.1.1.1

          The super wealthy in the US (and elsewhere) are playing a very disturbing game.

          My take on it is that they have formed a tiny tight knit global community beween themselves (population 700,000) which has its own ‘citizenship’ requirements, and which has no loyalty remaining for the countries they were born in, live in, or the other 99.99% of humanity.

  6. Afewknowthetruth 6

    As DTC pointed out at the start, the mess most of the world is now in is a function of the system, which is based on fractional reserve banking and conversion of fossil fuels into waste.

    The cartonn is amusing, but is quite wrong. It is the money-lenders and the industrialists who are pulling the world off the cliff. Indeed, industrial civilisation is pulling the wolrd off the cliff.

    Anyone who thinks this system will continue to function for more than another few years is severely deluded.

    .

  7. Bored 7

    Read something interesting re the debt of the PIIGS and who it was to…..this article contends that the debt in Europe could be reduced by 64% if countries cross cancelled debt between each other…of course the bankers would take a hit but so what?

    https://files.me.com/anthonyjevans/674a4n and http://energybulletin.net/stories/2011-08-01/debt-and-disorder

    The whole point is that the bankers we are indebted to want bail outs so that they can carry on their miserly Shylock impersonations.

  8. Jum 8

    And what was that snippet I heard on the news about an airport? closed down and people out of work because of the tea party greedies trying to hold the debt ceiling agreement back.

  9. ChrisH 9

    “feel future is on their side” (Economist)?

    In the face of the once-more-revealed weakness and division of liberal parliaments beholden to various paymasters, try Tomorrow Belongs to Me.

    PS this is written to warn, not celebrate.

    • Jum 9.1

      ChrisH

      ‘Tomorrow Belongs to Me’ – from Cabaret I gather? It makes the hairs stand up on the back of my neck whenever I hear that.

  10. First of all I have nothing with the “tea” party or the rabid Ron Paul league. My preference for American politicians goes to the likes of Cynthia McKinney and Kuchinich (even though I think he was suckered in by the Obama camp for a while)
    The only thing you can say for Ron Paul himself is that he has been consistent in his voting record and has been in politics for his principles and is a tenacious pitbull when it concerns the Federal Reserve but here’s my 2 cents on the economical situation we are finding ourselves in.

    First of all the US government is spending trillions of dollars on 6 wars bankrupting the US. All the jobs have been and still are exported to China leaving the population of the US without jobs and income.

    The banksters have a stranglehold on the government and are sucking whatever is left out of the US population without repercussions and the US population is waking up to the bail out scams of the offshore financial terrorist bankers.
    Stop the wars, invest in research and development in alternative energy harvesting, start rebuilding the infra structure and tax the super rich and you’ll find that the global economy has a chance of recovering.

    • Colonial Viper 10.1

      Senator Bernie Sanders (Vermont) is on to it

      I still like Anthony Weiner as well…despite his ahem…Twitter impulse control issues.

  11. Jenny 11

    “Given the choice between a Republican and someone who acts like a Republican, people will vote for the real Republican all the time,”

    Harry Truman.

    If the thirty-third president was right, then Barack Obama just did himself and his party a world of hurt.

    John Nichols at ‘The Nation’, asks where are the bold political leaders of the past.

    …….instead of bold action—borrowing a page from Ronald Reagan to demand a straight up-or-down vote on raising the debt ceiling; borrowing a page from Franklin Roosevelt to pledge to use the authority afforded him by the Constitution to defend the full faith and credit of the United States—the president engaged in inside-the-Beltway bargaining of the most dysfunctional sort.

    …….Congressional Progressive Caucus co-chair Raul Grijalva says Obama and his negotiators have bent too far to the extremists. Like many progressives, Grijalva favored the straight up-or-down vote on debt ceiling. “Had that vote failed,” he argued, “the president should have exercised his Fourteenth Amendment responsibilities and ended this manufactured crisis.”
    Grijalva is expected to join members of the Congressional Progressive Caucus and the Congressional Black Caucusat a Monday press conference, where they will call on Obama to sidestep Congress and raise the debt limit by invoking the Fourteenth Amendment.

    Obama has, so far, rejected this option.

    ……Grijalva objected, in particular, to the lack of shared sacrifice in the deal.

    “This deal does not even attempt to strike a balance between more cuts for the working people of America and a fairer contribution from millionaires and corporations. The very wealthy will continue to receive taxpayer handouts, and corporations will keep their expensive federal giveaways. Meanwhile, millions of families unfairly lose more in this deal than they have already lost. I will not be a part of it,” the Arizona congressman explained. “Republicans have succeeded in imposing their vision of a country without real economic hope. Their message has no public appeal, and Democrats have had every opportunity to stand firm in the face of their irrational demands. Progressives have been rallying support for the successful government programs that have meant health and economic security to generations of our people. Today we, and everyone we have worked to speak for and fight for, were thrown under the bus. We have made our bottom line clear for months: a final deal must strike a balance between cuts and revenue, and must not put all the burden on the working people of this country. This deal fails those tests and many more.”

    But Grijalva’s gripe was not merely a moral or economic one.

    It was political, as well.

    “The Democratic Party, no less than the Republican Party, is at a very serious crossroads at this moment. For decades Democrats have stood for a capable, meaningful government—a government that works for the people, not just the powerful, and that represents everyone fairly and equally. This deal weakens the Democratic Party as badly as it weakens the country,” explained Grijalva.

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