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May 13, 2009

Prophet of Doom: Social Security is Hemorrhaging Red, T-Bills Won't Sell, America's Bond Rating May Be Cut

Obama's policies are poisoning the economy even faster than expected.

The basics of all the problems are, of course, that Obama is spending far, far more than he is taking in. And he will of course raise taxes, but that will only be a partial fix, because raising taxes never "pays off" the way the left wishes it would: Yes, everyone pays a higher percentage of their income to the government, but less income is generated, because higher taxes means that work is less rewarded. And, therefore, people do less of it.

The left is bewitched by the curious notion that people will work, and risk, and save, and invest just as hard for other people, and for the government, as they will on their own behalves.

Of course they won't. Time is money, and time cannot be taxed. (Yet.) Start clawing 50-60% or even more of every marginal dollar someone makes and they might just decide to not earn that marginal dollar, and instead take their "income" in the form of untaxed free time, free of work, free of risk, free of stress.

Let's take a look at the rubble and dust laying around Obama's feet:

Moody's issues a warning that the US may lose its AAA rating. Which means bonds are not considered as safe as they once were, and therefore must generate greater income to justify the increased risk of default. So we had been paying pretty low rates of returns on T-bills; now we'll have to pay more.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

Plus we're issuing debt like no one's business. So already there was a glut of the stuff; and now it's even riskier. We have to pay higher interest rates on more debt.

Not only will the deficits increase, the cost of deficits will increase, and eventually the debt service will become the biggest part of the federal budget — unless Washington massively increases taxes to close the gap.

So we can all look forward to Obama having increasing trouble selling debt to cover his massive spending, and therefore needing to increase the deficit even more (by offering higher rates of returns on his debt).

Look forward to? Whoops, no, it's already happening.

For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is? That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.

The answer from the right has been a nervous (perhaps hopeful) 2-3 years. The answer from the left, and professional Democratic wonks, is some unspecified time in the future. Probably, there will be a Republican in charge. Markets hate Republicans.

But last Thursday, the Treasury auction was . . . well, descriptions vary from "weak" to "horrible". This raises the unpleasant possibility that markets are, as my business school professors insisted, "forward looking".

Looking forward to this:

Ahhhh... remember the halcyon days of Bush's "runaway deficits"? We didn't know how good we'd had it.

I desperately want to copy all of McArdle's post, but I can't, so click.

It's unclear to me that the new projection showing Social Security going bust four years earlier than last projected is truly Obama's "fault." Maybe it is, but at the moment I have to imagine this is a problem he didn't really create, given that he has not changed Social Security payouts or tax rates.

Unless someone smarter than me can point out how it is his fault, of course.

But whether it's his fault or not, it's a fact, and one he blithely ignores. Even as the evidence grows that the nation simply can't afford its previous obligations, Obama is spending like a drunken sailor, heaping new and huge obligations upon the government, and fresh drains upon our rapidly-depleting revenues and reserves.

At some point, there will have to be either cuts in Social Security payments or increases in Social Security taxes. That's simply the way it is -- that's the math. If the increased-taxes option is chosen (or predominates -- it can of course be mixed with somewhat lower payouts), that's already imposing a big new cost on the working citizens, known to Obama as "revenue-creation units."

Hitting them with another big tax hike to cover his enormous new spending in general revenues will push them to the brink. They'll work less and also spend less, hitting the economy with a labor-strike double-whammy.

I had thought that Obama's speech where he reluctantly and sadly tells the middle class he might have to kinda break his campaign pledge and raise their taxes -- which will surely be hailed as "The Greatest Speech on Increasing Income and Payroll Taxes Since Lincoln's Gettysburg Budget Reconciliation Speech" -- would be put off, coincidentally enough, to just after Obama's second inauguration. But now, with his ability to borrow until that point now threatened, he may have to make it sooner.

Which of course raises the Big Question which no one in the media will ask him. He will explain, sadly, that Bush's recession and "runaway deficits" were/are much worse than he thought, and therefore he cannot both honor his promises to spend like the wind and his promise not to increase taxes on the middle class. (Actually the middle and upper middle class and lower upper class too, as he promised that no one making under $250,000 per year would see an additional "dime" in taxes.) And therefore, with greatest reluctance, you understand, he'll have to raise taxes.

And he'll say he has a mandate for that, because that's what the people voted for.

But they didn't. They voted, to the extent they voted for any specific plan, for the idea that Obama would spend more, but based on the predicate that he would not under any circumstances raise taxes on anyone except the top 5%. He had a mandate for A, but only if Not B. Well, if that "but only if" part of it fails, he has no mandate any longer for A, either.

The public gave him to mandate to spend, so long as he could do so without raising taxes; if he wants to spend and raise the middle class' taxes, he'll need an actual mandate for that proposition, won't he? As in: Put your spending plans on hold, and run for reelection on the platform of raising taxes to the hilt. And see if America votes for that Hope and Change.

There is some possibility that Obama will, thankfully, but his personal political fortunes ahead of his principles and begin to reverse himself on these matters.

But I doubt it. He's a True Believer, and his base is the furtherest left of any president's since... well, anyone's, really. He will gamble and gamble that this will all somehow work out for him.

Huge new spending for universal health care, and of course huge new taxes to pay for it. Huge new taxes on energy -- which is basically the same as taxing the air, as we all use it, for everything, in any endeavor.

This won't work for him. The math says so. Obama's sonorous voice and diamond-cut moobs can't charm the numbers into changing basic arithmetic principles.

He'll lose that gamble, and so will America.

And sure, Republicans will sweep into power... but they'll be taking over a fragile country on the edge of depression and hyperinflation, if not already experiencing such.

Vicious Cycle: The vicious cycle of economic doom has various currents, each of which reinforces and speeds the others.

1. Debt becomes much more expensive in times of stress and risk...

2. Dissuading people from taking risks and opening new businesses...

3. And making it more likely those which do will fail, as they have to clear more money just to keep afloat...

4. While taxes are raised to keep pace with declining revenues (less income) and increasing payouts (more food stamps and unemployment benefits)...

5 Which makes work and risk even more unappealing....

6. Which even further reduces revenues, and we therefore go back to..

1., all over again: Debt becomes even more expensive, and the cycle repeats, this time more forcefully.

How do you break the cycle? Well, pre-Obama, the consensus seemed to be that you interrupt or short-circuit one or more of the deadly feedbacks to keep the economic hurricane from forming, or make it dissipate once formed.

Like: Clinton increased taxes, but kept spending fairly low, which improved the nation's balance sheet a great deal, thus making debt pretty inexpensive, and also freeing up lots of money from soaking up federal debt, channeling it instead towards private investment -- short circuiting the cycle.

Or: Reagan and Bush cut taxes, even while spending went up. Thus putting more money into people's pockets, and growing the economy that way.

Obama seems to have a brilliant new idea, however: Rather than attacking and defeating one or more of the circuits causing the vicious cycle to spin faster and faster, he'll reinforce and enhance each and every circuit in the deadly cycle. Taxes too high? Raise 'em higher. Debt to expensive? Make it even more expensive.

This will stop the speeding cycle by... um... creating... I don't know, a hurricane of such massive and unprecedented force it... um... tears itself apart and blows itself up through its sheer destructive power?

I dunno. Gibbsy will have to explain it to us.

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posted by Ace at 03:59 PM

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