Doug Bandow Worries About Hypothetical Problems, Ignores Actual Ones
Cato’s Doug Bandow starts out with the observation that foreign demand for U.S. Treasuries is down:
So what will become of us all? Well, it’s pretty obvious. At this same time, household savings rates in the United States have gone way up. On one level, that’s pushing us further into recession. On another level, that’s necessary because household savings have been way too low. Still, Bandow is very concerned:
It’s difficult to accurately predict future demand. But U.S. borrowing will be truly staggering in coming years. If international demand is down, the Treasury will have to rely on American investors. Whether the domestic market can easily absorb so much debt — and particularly, to what extent federal debt offerings will crowd out private investment during what we hope will be a recovery — are questions that our spendthrift leaders have not bothered trying to answer.
These aren’t question they’ve “bothered trying to answer” because the future is inherently unpredictable and there’s no need to try to guess the answer. We have no way of knowing whether or not hypothetical future deficits will crowd out hypothetical future private investment at some hypothetical future point. But we do have a good way of telling, at any given time, whether or not this is what’s happening. You can tell because because interest rates go up. It was high interest rates that led the Clinton economic team to conclude in 1993 that it was more important to reduce the deficit, thus decreasing crowding-out, than it was to juice demand through fiscal expansion. These days you have a similar group of personnel in place but a different policy because they’re facing a different situation. Interest rates are incredibly low—nothing is being crowded out.
Meanwhile, the administration has outlined a longer-term plan to bring the deficit to sustainable levels. Those projections might prove wrong. Or that path might prove inadequate. In which case we’ll have to change policies. But there’s no reason to avoid doing what’s necessary for growth now just because in the future we might need to do something different. And it’s worth keeping in mind that a years-long recession would devastate our long-term budgetary picture anyway so it’s not as if there’s a huge short-term tradeoff.
23 Responses to “Doug Bandow Worries About Hypothetical Problems, Ignores Actual Ones”
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March 18th, 2009 at 1:17 pm
Yeah, the administration’s predictions are looking pretty accurate these day. Especially as people start to read the fine print of some of their efforts in health care, climate change and the like.
Our deficits and our balloning national debt are not going away anytime soon. The voters have recognized that…That’s why the moderates in the Democratic party are getting so nervous.
This is a house of cards.
March 18th, 2009 at 1:21 pm
RE Matthew: “These aren’t question they’ve “bothered trying to answer” because the future is inherently unpredictable and there’s no need to try to guess the answer. We have no way of knowing whether or not hypothetical future deficits will crowd out hypothetical future private investment at some hypothetical future point.”
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That’s what the Executives at AIG told federal regulators a few years back.
The US government is becoming a hedge fund.
March 18th, 2009 at 1:24 pm
Make that an UNDERCAPITALIZED Hedge Fund. Which is why the Chinese are getting antsy.
Any businessman knows that if you HAVE to borrow $6 Trillion, you should NOT borrow it mostly in short-term debt securities that come due within the year. Because your creditors can buttfuck you on interest rates when you need to refinance.
Those current low Rates? Ever heard of a “teaser loan”?
March 18th, 2009 at 1:26 pm
“Meanwhile, the administration has outlined a longer-term plan to bring the deficit to sustainable levels.”
Hahahahahahahahahahahahahahahahahahahaha……
March 18th, 2009 at 1:34 pm
The Obama-Progressive era is counting the current bubble in US Govt Securities demand to last for 4-5 years. If it doesn’t we will have hyperinlfation, an ucontrollable federal deficit and large increases in taxes.
March 18th, 2009 at 1:39 pm
It’s really amazing how the News Media is NOT reporting to the voters re the hole the US government is putting us in.
It’s one thing for someone with a salary of $60,000 per year to take out a $120,000 20-year mortgage with a fixed rate of 5 percent or so. He can cover the monthly payments and the terms are fixed and the principle is due over a long term.
But what the US Government is doing is the equivalent of that same person getting a $120,000 short term cash advance on his VISA card and then buying drinks for AIG and everybody else in the bar.
I and most people get offers with zero percent loans in the mail all the time. In the past , such offers were only made by the Mafia — now its legal for the credit card companies to go into the loan shark business. But only the US government would be stupid enough to take those loans.
March 18th, 2009 at 1:41 pm
Meanwhile, across the aisle, just because they’re going to want capital gains tax cuts some time in the future, under totally different circumstances, is no reason not to want capital gains tax cuts right now.
March 18th, 2009 at 1:43 pm
But there’s no reason to avoid doing what’s necessary for growth now just because in the future we might need to do something different.
But but Matt isn’t this just another of your fact free assertions?
You refuse to address the central criticism of our massive deficit spending:
that we are trading a short term lessening of pain (hopefully enough to get us past the ‘10 elections) for a much longer and weaker and more difficult recovery.
Not even Obama will dispute that.
And then of course what kafka says.
March 18th, 2009 at 1:48 pm
Re DTM at 5: “So it is actually a very bad bet that demand for bonds in general will remain the same ”
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But the US government is NOT financing $Trillions in debt with long term Bonds — that’s the danger.
Most of our $6 Trillion public debt is borrowed as SHORT TERM securities — most of it 5 years or less and much of it maturing within a year.
The only one buying US government bonds is the US government itself. I.e., Bush stole $3 Trillion out of the Social Security/Medicare Trust Funds and put some 30 year IOUS back in as payment. But that finagle will fade as the baby boomers retire and the government has to start paying off those bonds (to provide benefits) rather than using the Trust Fund as a slush fund.
March 18th, 2009 at 1:52 pm
Gee, I know — let’s soak the rich!
The IRS was trying to pry open 56,000 accounts in Switzerland held by US citizens.
So how is that coming?
March 18th, 2009 at 2:02 pm
Yes he would. It isn’t just about avoiding pain in the short term. It is about avoiding the loss due to the dormancy of a large chunk of our economy. Borrowing isn’t the only way to increase debt/GDP ratio, a decreasing GDP will do it too.
I’d rather have trouble making the payments on a mansion than the same trouble making payments on a dump.
March 18th, 2009 at 2:17 pm
The scale of the problem now dwarfs 93. The deficit over the next 12 months is likely to be $2.5 trillion dollars.
Any ‘plan’ to reduce the deficit over the longer term becomes a joke when the deficit is running 5 times the record annual rate.
The relentless rise in the balance of trade deficit was entwined with foreign central bank purchases of US Treasury and Agency paper and the ability over the last 8 years of the Treasury being able to fund the growing budget deficit. For all practical purposes all those dollars spent on Chinese products came back here to fund Uncle Sam’s deficit. Thus keeping interest rates low. Thus encouraging more borrowing in a virtuous circle.
There is no simple switch to flip which will restart the old mechanism much less start a new one. A mechanism to supply the credit needed by the US in all sectors, financial, non financial and government.
The gigantic rise in the government deficit can be looked at on a systematic level as the government stepping in to borrow the money that the private sector no longer wants to or can. The ‘growth’ economy is absolutely dependent upon credit growth in the 6% to 10% rate. Even though so much old debt is now being defaulted on. Or should I say not even though but because.
There can and probably will come a point where the Treasury will not be able to borrow as much as it needs to to fullfill Congresses appetite or the financial systems need to pay off the defaulting old debt.
We are inside a worldwide financial system breakdown which is a credit market breakdown.
March 18th, 2009 at 2:25 pm
Re Njorl at 12: “I’d rather have trouble making the payments on a mansion than the same trouble making payments on a dump.”
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How can you do either chipping flint arrowheads and raising rabbits?
March 18th, 2009 at 2:48 pm
Re: JT:
I hope he would. If “short-term lessening of pain” means avoiding mass foreclosures, bankruptcies, a spike in poverty, and the other attributes of a true depression, i’d say that’s worth trading off a little against our future prosperity. It’s easy to get lost in the abstractions of economics & think of a recession as a cleansing thing. When a downturn comes it drags down a lot of blameless people with it, many of whom will never truly recover. The scars that a deep, protracted recession would leave on our economy & society would undermine our future prosperity at least as much as the additional debt we’re talking about.
And as far as having a “much longer and weaker and more difficult recovery”, the analyses i’ve seen don’t show that happening. For example, the CBO analysis of the rescue package said that the additional debt would reduce GDP 5-10 years from now by less than .2%, which is not even enough to reduce future employment at all.
Well, kafka must not have read the budget proposal. The baseline deficit scenario laid out there (assuming continuation of pre-Obama policies) is exceedingly bleak. His budget does set out some ambitious plans – but even with all of those ambitious plans accounted for, the deficits forecast are about one-third less than the baseline (around 3% of GDP by 2019 vs. 4-5% of GDP in the baseline scenario). In other words, Obama’s programs are more than paid for. Could the projections be too optimistic or too pessimistic? Yes to both. Is there still a lot of deficit to close? Yes – i’d say his budget roadmap gets us only about 1/3 of the way to where we should be in 10 years, i.e. if the economy’s doing well in 2019 we should be running small surpluses. But are his policy initiatives the source of the problem? Quite the opposite – i think it’s remarkable that he’s set out a plan that makes a dent in so many of the biggest structural problems facing the country and still makes the debt problem better rather than worse. It’s not going to be the last word on solving the debt problem, but it’s a huge step in the right direction that strikes an intelligent balance between tackling long-ignored national challenges on the one hand, and watching the bottom line on the other.
Would we all be better off if we had entered this recession in a healthier fiscal position, i.e. running surpluses when the economy’s doing well the way we did in the late ’90s? Yes, we would. Given that we entered the recession having squandered that healthy fiscal position over the past 8 years, should we then hold off from responding to the current crisis? Only if there are signs that we’re so close to exhausting our credit-worthiness that we’d have to pay exorbitant interest rates – and the answer there is ‘no.’
Re: Don Williams, long-term treasury rates are higher than short-term, but they’re still quite low. The Treasury policy of relying more on short-term bonds than long-term was one of Bush’s practices, and for much of the past 8 years it has saved the government money; whether & at what point it makes sense to rebalance toward longer-term maturities is a technical problem i’m not equipped to answer, but there’s nothing unusual or inherently irresponsible about mixing short-term & long-term bods to finance public debt.
March 18th, 2009 at 3:03 pm
Re TW’s comment “there’s nothing unusual or inherently irresponsible about mixing short-term & long-term bods to finance public debt.”
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1) It’s not a mix — there is very little of the $6 Trillion federal debt held by the public that’s in long term bonds — most of it is in Short Term securities.
2) Having $6 Trillion in short term securities makes you very vulnerable to spikes in interest rates — in fact, you cause such spikes in the process of trying to rollover the huge debt.
3) How is the ordinary businessman going to get loans without high rates when the US government will have to constantly auction off bills and notes every year? Why should someone risk capital on businesses that produce something when they can loan to a US government with a $6 Trillions jones to service?
March 18th, 2009 at 3:12 pm
Not only is Obama and the Democratic Caucus hurting the economy by diverting $Trillions to parasitic, worthless banking enterprises –AWAY from productive busiess activities — it is further screwing the economy because the heavy government borrowing will starve those enterprises of capital in the future and the heavy taxes it will impose will be a heavy burden on those businesses. Meanwhile the parasites who survive will be using long term capital losses to evade taxes for the next decade.
The Democrats are punishing productive businesses throughout the country in order to favor some urban campaign donors. The only people who will get stimulus from the banking bailout are overpriced restauranteurs in Manhattan, the Art market and Armani.
March 18th, 2009 at 4:17 pm
I distinctly remember deficit hawks bashing Reagan and then crying throughout the 90s.
Lo and behold in 2001 we have Greenspan arguing we need tax cuts to get rid of the surplus. Because the surplus was bad, supposedly.
Looks to me like people are being disingenous. Again.
March 18th, 2009 at 4:57 pm
Does the decline in treasury purchases (not necessarily demand, since rate is not constant) by foreigners really illuminate anything?
The USG sells every bond it needs to and, recently, at very low rates.
This is not to necessarily dispute that we face hard times ahead, but this particular data set doesn’t seem to me to be on point.
March 18th, 2009 at 7:07 pm
“Doug Bandow Worries About Hypothetical Problems, Ignores Actual Ones”
Am I the only one who expected this post to be about the hypothetical problem of the earth’s temperature possibly going up by 1 degree in a hundred years?
March 19th, 2009 at 1:38 pm
Though each debt situation is different, debt settlement agencies have obtained up to 60% debt reductions from people’s creditors thanks to their legal expertise and negotiation skills. There are many regulations that protect the rights
March 26th, 2009 at 5:54 am
ROFL – thats amazing