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January 13, 2009

The Coming $1.7 Trillion Deficit, and How It Will Buy Us All Unicorns and Handjobs

Scary stuff.

When I supported the TARP bailout, this is what I was hoping to avoid. I see now -- not so much, not so much.

We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.

The Congressional Budget Office last week forecasted that the 2009 federal budget deficit will be about $1.2 trillion, roughly triple what it was in 2008. We should hope we are that lucky. The deficit will be that low only if Uncle Sam dies and goes to heaven.

Make no mistake, the CBO forecast is the lowest of lowball estimates. It excludes President-elect Barack Obama’s proposed stimulus package and understates the likely costs of the Iraq war, among other things. A comprehensive estimate that accounts for all “known knowns,” as Donald Rumsfeld might say, would be higher by about half a trillion dollars. If the stimulus bill passes, the deficit next year will be $1.7 trillion.


Perhaps the most disturbing comparison is this one: When President George W. Bush was first elected, total federal government spending was about $1.7 trillion. In other words, the difference between federal outlays and federal revenue this year will be bigger than the entire government was as recently as 2000.


The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 percent higher. Of course, all that happened mostly on a Republican watch.

One reason the increase is so dramatic is the mystery of compounding. Each year, Congress passed pork-laden expenditure bills, which became part of the long-run baseline the minute they became law. Each time that the federal government wasted a billion dollars, it created budget space to waste $1 billion again and again, ad infinitum.

That’s perhaps the scariest fact about next year’s budget. The skyrocketing spending of 2009 will be the CBO baseline for every year after that. It will be easy to provide health care to everyone; the budget space will be blocked out. Indeed, Congress can spend with impunity in years to come, covered by the protective shroud of the CBO baseline that this year delivers.

We can ride big government spending and trillion-dollar deficits all the way to 2017, when the Social Security trust fund itself starts running deficits.

This year may establish a government-spending black hole with gravity strong enough to suck the U.S. economy over the event horizon. Such a spending path has two possible endgames. Neither is pretty.

I defend Bush, then I read this and am reminded that, except for a few things, he was a weak president and took the path of least resistance -- most terribly of all on spending -- rather than act as a tough and vigilant steward of the nation's prosperity.

And now, as Michelle Malkin has said, Bush has "pre-socialized" the economy for Obama.

Only Nixon can go to China, and only a red-state conservative Republican can bring China to the US.

All that Crap You Just Read? Forget It. The stimulus won't be $775 billion.

Some liberals are now agitating for a two trillion dollar stimulus, above and beyond bailouts and costs of war and normal (ever-bloating) costs of government.

Two. Fucking. Trillion. Additional dollars we don't have spent on top of everything else.


Ron Paul!!! (?)

This is a Spinal Tap "But this goes to 11" moment. The actual amount of wealth the nation possesses is not some infinitely flexible quantum. Printed money represents a fraction of the wealth of the nation (which the government can seize, basically, to put tangible value behind printed paper money).

You can print up all the new money you like, but this does not actually create more wealth. It merely makes each dollar represent a smaller fraction of that pile of wealth.

So, like the amp which goes to 11, you can make up any denomination you like but you're not actually increasing output.

And once confidence in the currency is damaged enough... well. Ask interwar Germany, ask Zimbabwe. Ask a dozen Latin American countries which turned on the printing presses to "satisfy" their debts.

Predatory Lending: Of course we could just keep borrowing all this money, in the form of selling government debt. But this presupposes there are willing lenders.

China is getting nervous about our ability to repay and is less inclined to buy up more of those T-bills. They already own a lot of them. If they buy more and the US defaults, they're screwed.

And as the US demonstrates more of this confidence-undermining behavior -- talking about two trillion dollars in new spending -- any potential lenders get more and more scared about our ability to pay the debt off.

And then of course, to the extent they're willing to lend at all, they begin demanding ever-higher rates of return to justify the increased risk. The US is getting to the point where T-bills rapidly decline in safety and once we go down that spiral it is not long before they end up in junk status.

And that means even higher rates of return. Saddling future taxpayers with more and more debt. And thus actually decreasing the odds that we will ever actually pay it back, thus requiring higher rates of return, lowering still further the odds of payback, thus increasing the risk premium needed to make the bills attractive, etc., etc., etc.

At some point the rates of return a lender demands for his debt pretty much guarantee the borrower can never, ever repay.

Which is not unlike the NINJA loans banks made to credit-unworthy borrowers, which partly got us into the mess in the first place. To make these kinds of risky loans profitable, the interest rates have to go up, etc., saddling the borrower with a debt-load he probably can't repay at all.

That's when the left comes in and calls the loans they demanded "predatory lending," because the lender offers the borrower such awful terms that the borrower is pretty much sure to default.

And if China does lend the US more money, it will be on NINJA terms. "Predatory lending." And the US will go the way of all those CRA home-owners with massive mortgages far exceeding their actual income.

The US has long been able to get away with borrowing, and at fairly cheap rates, because it has been considered to be a good credit risk and had very little chance of defaulting. The piles of new borrowing the US is considering will make it almost inevitable we will default. That might actually be the plan of some proposing this.

I don't really mind the idea of sticking China with the tab for all our excesses and making our problems suddenly their problem.

But China can kind of see this coming. They're not stupid. They can see the default option becoming more attractive to the US, just as US politicians apparently begin seeing it as an attractive option.

And good luck ever selling t-bills again after a default.

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posted by Ace at 03:16 PM

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