Tag Archives: China

The U.S. Debt Bubble Will Make Sub-Prime Mortgages Look Like a Picnic

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Can you say "sea of red ink"?

From Rep. Paul Ryan's budget proposal - click to enlarge

Just how bad is the U.S. debt problem? Jim Manzi spells it out at The Corner:

… we are sitting on the mother of all bubbles. Many, probably most, Americans anticipate a stream of consumption that will be provided for them into old age by the government (i.e., other taxpayers). Unfortunately, most American taxpayers do not anticipate the kind of enormous increase in taxes that would be required to pay for this stream of benefits. One or both of these expectations will not be met. Americans as a whole are simply less wealthy, in the most useful sense of rationally anticipatable future material consumption, than they think they are. And the size of this disconnect is vastly greater than, for example, the size of the housing-price bubble that just popped.

…the combination of the debt we have just put on our balance sheet, plus the deficits that are scheduled to be created by these programs over the next 10 to 20 years, means that we need to confront this problem soon. We have increased public debt from about 40 percent of GDP in 2005 to about 70 percent of GDP by the end of this year; and we are projected to exceed the historical peak debt of about 100 percent of GDP (achieved at the close of World War II) within the next 15 years; thereupon we enter uncharted territory.

The borrowing capacity of the U.S. government is vast, but it is not limitless. At some point that nobody can predict, we will not be able to borrow enough to continue spending n the manner that current law assumes without extremely large negative effects. This is the way the bubble will very likely pop, if we let it come to that: a funding crisis for the U.S. government.  This is very unlikely in 2011, or 2012 or 2013; but over 20 years, we are playing with fire. In essence, we don’t need to care that much about the projections for 2080, because long, long before that, we’re going hit the wall, unless we somehow address the problem.

The GOP budget proposal makes clear that “the last Congress” — you know, the one dominated by Democrats — was responsible for the pork-laden stimulus bill.

At a time when the free-market foundations of the American economy were in desperate need of restoration and repair, the last Congress took actions that further undermined them. The President and his party’s leaders embarked on a stimulus spending spree that added hundreds of billions of dollars to the debt, yet failed to deliver on its promises to create jobs. Acute economic hardship was exploited to enact unprecedented expansions of government power.

This did not sit well with the American people. Citizens stood up and demanded that their leaders reacquaint themselves with America’s founding ideals of liberty, limited government, and equality under the rule of law.

“Porkulus” was so extreme that it failed to attract a single Republican vote in the House, and only three in the Senate — the two liberal ladies from Maine and Arlen Specter, who soon switched parties on his way toward losing the Democratic primary in a bid to salvage his job.  But the Republican budget document doesn’t let the GOP off the hook:

In recent years, both political parties have squandered the public’s trust. The American people ended a unified Republican majority in 2006, just as they ended a unified Democratic majority last fall. Americans reject leaders who focus on the pursuit of power at the expense of principle. They reject empty promises from a government that cannot live within its means. They deserve the truth about the nation’s fiscal and economic challenges. They deserve – and demand – honest leaders willing to stand for solutions.

The GOP has a lot of profligate spending to answer for, but at least the party now is putting forth a serious plan, albeit one that will not survive President Obama’s veto power.  The question is whether we can get Obama voted out of office before our Chinese creditors cut off the flow of money.

In Search of A Thoughtful Liberal Economist

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Dean Baker

A Facebook friend whose opinions I respect, and who is more liberal than me, pointed me in the direction of a blog by Dean Baker [link may work for signed-in Facebook members only], saying Baker is “a fine, clear-thinking economist, [and] he’s also an uncannily good press critic.”

Sounds great — I’ve been looking for a source for regular commentary from a left-leaning economist, to balance out the right-leaning observations of my classmate Greg Mankiw.   But I’m afraid I’m still looking.

Baker’s credentials are impeccable — not as lofty as Mankiw’s, but there’s no shame in being more peccable than Greg.  (Or do I mean “less peccable?”)  But where Mankiw consistently treats opposing viewpoints with respect, Baker indulges in the common blogger habit of treating opposing viewpoints with contempt.

Let’s take a look at a few of Baker’s recent posts (emphasis added):

Has God Been Talking to the Washington Post?

In its article covering President Obama’s speech on the budget yesterday the Washington Post told readers that:

“Obama acknowledged that the debt must be tackled faster than he has previously proposed.”

It is only possible to “acknowledge” something which is true. The Post obviously believes it is true that “the debt must be tackled faster than he has previously proposed,” but that does not make it so. This is the Post’s opinion. A real newspaper would have reported that President Obama “said that the debt must be tackled faster than he has previously proposed.” It would not have implied that its view of the world is the unquestioned reality, especially in a front page news story.

Tendentious nonsense.  If the Post is not “a real newspaper,” then no such animal exists, and the paper’s use of the word “acknowledge” is eminently defensible.  To be fair, Baker goes on to make some thoughtful observations, which you can read for yourself if interested.

OK, let’s try another sample, this one quoted in its entirety:

Dana Milbank Missed the Health Care Reform Act
This is the only thing that readers can infer from his reference to President Obama’s “refusal to propose a viable solution” to the debt problem. In fact, the Congressional Budget Office projects that the health care bill approved by Congress last year will trim tens of trillions of dollars off the long-term deficit. One can only conclude that Milbank wasn’t aware of the bill in making this accusation.

Tendentious drivel (a category that is one tick worse than tendentious nonsense).  Readers certainly could infer that Milbank doesn’t believe the CBO estimates, which were promptly rejected by a former director of… um… the Congressional Budget Office.  They could infer that Milbank — knowing that two federal district court judges already have declared the individual mandate unconstitutional — has skipped ahead to the part of the story where the U.S. Supreme Court overturns Obamacare altogether, thereby rendering it not “viable”.

But wait… Baker’s blog is called “Beat the Press,” and press criticism is his schtick.  OK, let’s look at the post that inspired my Facebook friend to praise Baker in the first place.

Misrepresenting the Policy Debate on China: Is the NYT Covering Up for Obama

The NYT discussed the agenda of an upcoming meeting of G-20 finance ministers. It focused on efforts to pressure China to raise the value of its currency.

This discussion implied that the United States must depend on its ability to pressure China to change its currency policy. In fact, the United States does not have to rely on China changing its policy, it can force a change with unilateral action.

Specifically, just as China sets an official exchange rate of the yuan against the dollar that is below the market value of the yuan, the U.S. could set an exchange rate of the dollar against the yuan that is equal to the market value of the yuan.

Tendentious drivel on stilts.  Yes, it’s technically correct that the U.S. could move the exchange rate unilaterally — thereby touching off a currency war.  The first rule of warfare is that the enemy gets a vote, too.  And China is by far America’s biggest creditor, holding more than $2 trillion in US Treasury securities. There is nothing to keep China from selling, say, half of its holdings… thereby dramatically driving down the value of US Treasury securities. That would make the subprime mortgage crisis look like a hiccup.

Baker apparently has opined that this is a “non-threat.”  I’ll look for that article next time I get a chance, but in the meantime it’s simply sophistry for Baker to pretend that the Chinese would have no recourse.  Another Facebooker provided links to Paul Krugman, but there I draw the line.  Krugman may have the biggest peccability factor in all of economics, but life is too short to waste part of it reading Krugman.