First, let's assume that the Obama estimate of the deficit is only slightly off and after he and his boys thrash about with a few more spasms of spending, we've only got a deficit of $1800B. Who is going to be the lender that gives us this cash?
First, let's turn to the rest of the world. They love Treasuries, right? Well, they can love them to the point where they sleep with them like a security blanket, but they're not going to be able to buy very many because their reserves aren't growing at all. In fact, it looks like they'll be able to loan us only about $200B.
Next we have Social Security. In the ultimate Ponzi scheme, your Social Security taxes fund the program and then the excess flows into the hands of Congress where it is spent on important things like subsidies to beekeepers and PBS. Social Security normally buys over $100B worth of Treasuries. This year, due to the loss of revenue because of unemployment, the surplus will only be about $18B. Not much help there.
Lastly, let's assume we all become thrifty and we save our money. The US economy generates about $13T. If we go wild and save 5% of our income, we're looking at saving $650B. Let's assume that in a wave of patriotic fervor, we put it all into Treasury bonds. Here's where that leaves us.
Deficit ($1800B)
less foreign central bank investments ($200B)
less Social Security surplus ($18B)
less domestic savings ($650B)
= unfunded portion of the deficit = $932B.
We are going to have to print about a trillion dollars to feed the Federal government. 7% of our economy will come from money that is simply created out of thin air. With a little thought, I'm sure you can see how this is a pretty conservative estimate. A few more bailouts, a cash injection here or there to a struggling company, state and local bonds and stocks getting some of those savings investments and you're looking at an even bigger print run at the Fed.
China, India and Brazil, all strong up-and-comers, have said they would like to see something other than the Dollar used as the currency of the world. China in particular warned the Obama Administration twice, once before the Stimuloid Porkgasm™ was passed and once before he unveiled his mind-boggling budget. They asked him to reign in spending. After he flipped them off with acts of Herculean profligacy, they're moving to stop using Dollars in their international transactions.
The result is best summed up in a comment from econoblogger Gregor.
If an emerging market was printing money to fund inward flow shortfalls, a Sudden Stop would soon follow.If you don't believe this, ask yourself how many Zimbabwean bonds you bought last year. They were offering pretty attractive rates, you know.
The notion that the USD is the reserve currency of the world is a much less fixed/structural reality than many people realize.
3 comments:
tx for doing the math. I am going to start collecting these estimates, from around the web. cheers.
Gregor
"where it is spent on important things like subsidies to beekeepers and PBS."
Overall, your argument is good, but this sort of thing just undermines it. If you look at an actual Federal budget breakdown, these items aren't even a drop in the bucket. Even canning the entire much-maligned Department of Agriculture only saves $27 billion. Which is a lot considered by itself, but only about 1% of the total Federal budget.
If you want to actually cut the Federal budget, there's only a few areas where you can do more than nibble at the problem: Defense, Social Security, Medicare/Medicaid, Unemployment/Welfare, and paying down the debt to reduce interest payments. This sniping at "pork" projects may feel good, and it is objectively good policy to minimize the pork, but they really, really aren't the majority of the problem.
Tim, I know that sniping at these little things is silly, but it's so much fun!
Post a Comment