Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That’s more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.

Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable, and our tax code is riddled with special-interest provisions that have little to do with our broader economic prosperity. Overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources.

Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035. Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations….

Read it all.

Surprisingly, the chairmen overlooked the easiest route to reducing the deficits over the next decade: scaling back the costly budget that President Obama presented earlier this year. Much of the projected doubling of the national debt between 2010 and 2020 reflects the spending and tax proposals in that budget.

The Congressional Budget Office estimates that those proposals would, if enacted, raise the 10-year budget deficit by $3.8 trillion, even after taking into account the president’s proposed $1.3 trillion of new taxes on businesses and higher-income individuals. The $5.1 trillion gross cost of the Obama proposals reflects the cost of making the Bush tax cuts permanent for individuals with incomes below $250,000, of providing additional tax cuts for low- and moderate-income individuals, and of increasing spending on domestic programs.

As President Obama considers the bipartisan commission’s proposals and plans his next budget, he should begin by removing some of the $3.8 trillion of increased deficits that he proposed earlier this year. Financial markets and policy makers around the world want to see if the administration is as serious about deficit reduction as the American public.

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Anyone wondering what President Obama will face when he arrives in South Korea on Wednesday for a global financial summit meeting need look no further than an announcement by China’s leading state-endorsed rating agency, which downgraded the United States’ credit rating on Tuesday ”” and provocatively questioned American leadership of the global economy.

The agency cited the Federal Reserve’s decision to pump more money into the United States economy and warned of Washington’s “deteriorating debt repayment capability” and “the serious defects in the United States economic development and management model,” which it predicted would lead to “fundamentally lowering the national solvency.”

In the rest of the world, the United States is still the gold standard of credit risks, and the Chinese downgrade is not expected to have much real impact. But the sharply worded attack from the country that is buying billions of dollars in American debt each month was just the latest rhetorical assault on the United States, as officials from China to Germany to Brazil suggest that Washington’s addiction to debt has greatly diminished its credibility.

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China kept up a drumbeat of criticism of U.S. easy money policies on Tuesday, warning two days before a G20 world economic summit that Washington could destabilize the global economy and inflate asset bubbles.

Nearly a week after the Federal Reserve announced it was going pump as much as $600 billion into the economy, world leaders continue to bash the plan, saying it will flood global markets with cash without doing much for the U.S. recovery.

President Barack Obama acknowledged in Jakarta that the Group of 20 rich and developing nations “still have a lot of work to do” to ensure balanced global growth.

Read it all.

It is undeniable that we are on the path to fiscal collapse. This decline will occur in two stages. First there is the decay as the swelling national debt wears away the economy’s foundations and commits more and more future income to foreign creditors. We are already in stage one.

In stage two a lethal combination of phenomena arises in quick succession: greater default risk, looming inflation, higher interest rates, declining growth, financial market instability, and an acceleration of government borrowing. They feed on each other. The economy heads on a downward spiral. Between stage one and stage two there is a tipping point. Experts know it will come, but nobody wants to predict when. (See below.) This article is about the slow economic decline of stage one. Next week part 2 will describe the hell of a full-blown fiscal collapse.

There is no question economics has failed us. The old paradigms have been made obsolete by the hard reality of the 2007-2009 financial crisis and soaring government debt. But some ideas can be salvaged from the wreckage.

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The dollar fell the most in four weeks against the currencies of six major trading partners after the Federal Reserve said it will pump more money into the U.S. financial system to spur inflation and employment.

The greenback slid versus 15 of its 16 major counterparts after the Fed said it will buy $600 billion of U.S. Treasuries through June. It pared losses after data yesterday showed payrolls grew more than forecast. The Australian and Canadian currencies reached parity with the dollar as investor appetite for higher-yielding assets rose before leaders of the Group of 20 nations discuss currency policy in Seoul next week.

“The global market dynamic is still supporting dollar weakness,” said Sacha Tihanyi, a currency strategist at Bank of Nova Scotia in Toronto, Canada’s third-largest lender. “The Federal Reserve’s statement may be favorable for the U.S. economy, but it’s unfavorable for the U.S. dollar.”

Read it all.

The Fed is essentially lending enough money to the government to fund its operations for several months, something called “monetizing the debt.” In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.

Read it all (my emphasis).

President Barack Obama steps back onto the world stage Friday, when he leaves for two economic summits in Asia after a big electoral rebuke.

But his troubles will not ease overseas.

The U.S. and nations abroad are at odds over economic policy. Among the issues, conservative governments in Britain and Germany are pressing for fiscal austerity measures in Europe that Mr. Obama’s administration is resisting implementing in the U.S.

“The rest of the world is looking more like the tea party,” which wants to rein in government spending, according to Kenneth Rogoff, a former chief economist at the International Monetary Fund.

Read it all.

The question being asked all across the world of business news is: Will QE2 be successful? Because this policy is literally economic suicide, the question becomes: Will the Federal Reserve be successful in the assisted economic suicide of the U.S. government? I find this an utterly appalling question — which highlights the intellectual bankruptcy of government policymakers and the bankers who goad them onward.

Quantitative easing is nothing more than a euphemism for printing money out of thin air. Its one-and-only purpose is to destroy the currency being printed. It is pure dilution and absolutely no different than a corporation vowing to improve its fiscal performance simply by printing a lot of new shares.

Read it all.

Is this a currency war or what?

Fast-growing nations like Thailand are trying to devalue their exchange rates to bolster their export-driven economies.

In Washington, where “strong dollar” has been the mantra for years, policy makers are taking steps that could make the already weak dollar weaker still.

European policy makers worry that a resurgent euro will threaten growth in their own backyard. And the entire world, it seems, is jawboning China to level the playing field and let its undervalued currency, the renminbi, appreciate. It is a step that Beijing, by all accounts, does not want to take.

With so many economies struggling, it suddenly seems as if it is every nation for itself in the currency markets….

Read it all.

The Obama administration backed away on Friday from a showdown with Beijing over the value of China’s currency that would have caused new frictions between the world’s only superpower and its largest creditor.

The Treasury Department delayed a much-anticipated decision on whether to label China as a currency manipulator until after the U.S. congressional elections on November 2 and a Group of 20 leaders summit in South Korea on November 11.

Read it all.

The dollar tumbled against most major currencies on Thursday, prompting warnings that the weakness of the world’s reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports.

Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro.

Read it all.

The dollar hit fresh lows against several currencies Thursday, raising pressure on global leaders to address worsening tensions among countries vying to keep their currencies weak and exports competitive.

The relentless rise of currencies from the Japanese yen to the Australian dollar is threatening to derail economic recoveries and global cooperation. In the six weeks since the Federal Reserve began discussing the prospect of further easing monetary policy, the dollar has fallen 7% against a basket of currencies.

Compounding matters are frustrations with the Chinese government’s unwillingness to allow its currency, the yuan, to significantly appreciate.

Read it all.

As the U.S. prepares to embark on a new round of Federal Reserve quantitative easing, there are plenty of reasons to doubt that it is the right course for the economy and job creation.

Here’s another: The voyage might have to be aborted ”” or at least diverted ”” soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane.

Even before the anticipated launch of the next round of Treasury purchases ”” it’s expected to be made official on Nov. 3 ”” the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged….

Read it all.

The House of Representatives by a wide margin passed legislation to penalize China’s foreign-exchange practices, sending a powerful warning to Beijing but risking a response that could harm U.S. companies and consumers.

The measure would allow, but not require, the U.S. to levy tariffs on countries that undervalue their currencies, which makes their goods cheaper relative to American products. A majority of Republicans lined up with Democrats to pass the bill on a 348-79 vote, highlighting lawmakers’ long-simmering frustration with Chinese trade practices as well as their sensitivity to the faltering U.S. economic recovery with an election looming.

The vote marks the strongest trade measure aimed at China to make it through a chamber of Congress after more than a decade of threats by lawmakers. But despite the broad support Wednesday, dim Senate prospects make it unlikely the measure would become law this year.

Read it all.

It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted and the few that remain deemed too experimental or laden with risky side effects. The patient ”” who started in critical care ”” was showing signs of improvement in the convalescent ward earlier this year, but has since deteriorated. The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence.

This is where the Great Recession has taken the world’s largest economy, to a Great Ambiguity over what lies ahead, and what can be done now. Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.

The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s.

Read it all.

This year, the U.S. public debt is projected to reach 62 percent of the economy””up from 40 percent in 2008 and nearly double the historical average, according to recent Congressional Budget Office (CBO) estimates. The financial crisis and recession drove much of this debt swing, yet larger problems loom in the future.

By 2030, the CBO projects that debt will more than double to 146 percent of GDP.[1] The only good news, if it can be called that, is that the U.S. is not alone. Two recent studies by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) highlight the significance of the global debt challenge and stress the need for governments to aim higher than short-term deficit reductions. For the U.S., one of the most poorly positioned countries, addressing the long-term debt challenge must include prompt reform of Social Security, Medicare, and Medicaid.

Read it all.

Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with ”“ the IMF analysis is fascinating.

Its cross-country Fiscal Monitor is not easy reading and is a VERY big pdf (17mb), so I’ve collected a few of the key points. The idea behind the document is to set out how much different countries around the world need to cut their deficits by in the next few years, and the bottom line is it’s going to be big and hard (ie 8.7pc of GDP in deficit cuts around the world, which works out at, gulp, about $4 trillion).

But the really interesting stuff is the detail, and what leaps out again and again is how much of a hill the US has to climb. Exhibit a is the fact that under the Obama administration’s current fiscal plans, the national debt in the US (on a gross basis) will climb to above 100pc of GDP by 2015 ”“ a far steeper increase than almost any other country.

Read it all and look carefully at the graphs.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”

Read it all.

Premier Wen Jiabao aimed sharp words at Washington on Sunday, ceding little ground on China’s currency policy and suggesting that U.S. efforts to boost its exports by weakening the dollar amounted to “a kind of trade protectionism.”

In his once-yearly news conference, Mr. Wen blamed the recent deterioration in what he called China’s most important foreign relationship on U.S. weapons sales to Taiwan and President Barack Obama’s meeting with Tibetan spiritual leader the Dalai Lama.

“These moves have violated China’s territorial integrity,” Mr. Wen said. “The responsibility does not lie with the Chinese side but with the United States.” Mr. Wen said a good China-U.S. relationship “makes both sides winners while a confrontational one makes both sides losers.”

Because Mr. Wen comments so rarely in public, his annual press conferences have a magnified importance. This year’s comments were a rare opportunity to hear candidly, and in unusual depth, a Chinese leader’s perspective on the U.S.

Read it all.

Premier Wen Jiabao aimed sharp words at Washington on Sunday, ceding little ground on China’s currency policy and suggesting that U.S. efforts to boost its exports by weakening the dollar amounted to “a kind of trade protectionism.”

In his once-yearly news conference, Mr. Wen blamed the recent deterioration in what he called China’s most important foreign relationship on U.S. weapons sales to Taiwan and President Barack Obama’s meeting with Tibetan spiritual leader the Dalai Lama.

“These moves have violated China’s territorial integrity,” Mr. Wen said. “The responsibility does not lie with the Chinese side but with the United States.” Mr. Wen said a good China-U.S. relationship “makes both sides winners while a confrontational one makes both sides losers.”

Because Mr. Wen comments so rarely in public, his annual press conferences have a magnified importance. This year’s comments were a rare opportunity to hear candidly, and in unusual depth, a Chinese leader’s perspective on the U.S.

Read it all.

China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy.

Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a “special” policy to weather the financial crisis.

“This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.”

Read it all.

Don’t get confused by the size of the numbers at stake. Pay attention to the ratio of cumulative debt to the size of the national economy. That will tell you how easily we can manage the debt.

The debt-to-GDP ratio right now is close to 53%””still in the manageable zone. But after the boomers hit retirement, it will soar. One of the most telling figures in the president’s budget document is the Congressional Budget Office’s projection that by 2020 the debt-to-GDP ratio will be 77%, assuming no entitlement reforms. That’s bad news. The ratio is moving in the wrong direction. At some point, the dollar could tank and interest rates explode.

—Robert Reich in today’s Wall Street Journal

Mr Zhu noted that investors are increasingly borrowing the cheap US dollar, and investing the borrowed funds in emerging markets, where interest rates are higher, and therefore generating a better return than saving in the dollars.

This phenomenon called carry trade in the US dollar is a “massive issue today,” said Mr Zhu.

“It’s bigger than the Japanese yen carry trade 12 years ago,” he said.

However, if the United States were to tighten its lax monetary policy, making borrowing more costly, funds could then flow out just as suddenly from emerging markets, back into the US market.

This could cause a collapse in emerging markets’ currencies, and spark a repeat of the 1997-1998 Asian financial crisis.

Read it all.

David Walker, chief executive officer at Peter G Peterson Foundation and former U.S. Comptroller, talks with Bloomberg’s Carol Massar and Matt Miller about the U.S. financial crisis.

Watch it all.

Major procedural reforms will be needed as well. One essential step is the implementation of “pay-as-you-go” rules, which require that all increases in spending or tax cuts be financed by savings elsewhere in the budget. The statutory creation of a “fiscal future commission”””modeled on the Defense Base Closure and Realignment Commission, a federal body whose recommendations are subject to an up-or-down vote in Congress””could represent a major breakthrough. It might even be time to reconsider passing a balanced-budget amendment to the US Constitution, a provision that exists in nearly all US states and is now being pursued in a somewhat analogous form by the European Union. Whatever the specific policy approach, the underlying objective should be to create a system that will achieve a balanced budget over the course of the economic cycle.

A responsible fiscal policy would permit the Federal Reserve to run a relatively easy monetary policy, which would hold down interest rates and prevent overvaluation of the dollar. If the Obama administration is looking for a historical model, it should aim to replicate the Clinton-Greenspan policy of the late 1990s (a mix of budget surpluses and low interest rates) rather than the Reagan-Volcker policy of the early 1980s (a mix of large deficits and high interest rates).

Read it all.

Call it the fractal geometry of fiscal crisis. If you fly across the Atlantic on a clear day, you can look down and see the same phenomenon but on four entirely different scales. At one extreme there is tiny Iceland. Then there is little Ireland, followed by medium-size Britain. They’re all a good deal smaller than the mighty United States. But in each case the economic crisis has taken the same form: a massive banking crisis, followed by an equally massive fiscal crisis as the government stepped in to bail out the private financial system.

Size matters, of course. For the smaller countries, the financial losses arising from this crisis are a great deal larger in relation to their gross domestic product than they are for the United States. Yet the stakes are higher in the American case. In the great scheme of things””let’s be frank””it does not matter much if Iceland teeters on the brink of fiscal collapse, or Ireland, for that matter. The locals suffer, but the world goes on much as usual.

But if the United States succumbs to a fiscal crisis, as an increasing number of economic experts fear it may, then the entire balance of global economic power could shift. Military experts talk as if the president’s decision about whether to send an additional 40,000 troops to Afghanistan is a make-or-break moment. In reality, his indecision about the deficit could matter much more for the country’s long-term national security. Call the United States what you like””superpower, hegemon, or empire””but its ability to manage its finances is closely tied to its ability to remain the predominant global military power. Here’s why….

A very important piece–make sure you read it all.

“You can’t stop a train that’s being fueled by cheap money,” as the Federal Reserve keeps its target interest rate near zero, said Mike Farr, president of the portfolio-management firm Farr, Miller & Washington. “We still have a day of reckoning ahead, but that day is being delayed for now.”

—From this morning’s Wall Street Journal

A sudden crisis is unlikely. Other rich countries with far bigger debts relative to the size of their economies, from Italy to Japan, have soldiered on without hitting a wall. Stable politics, transparent laws and economic dominance give America unequalled credibility with lenders. For all the anxiety the declining dollar drew from China this week (see article), it has no serious rival as the world’s reserve currency. America has sensibly used this fiscal freedom to enact an aggressive stimulus programme. This should be maintained for as long as it is needed.

Yet ignoring the future is also costly. The problem is not the deficits in the next couple of years, but in the years that follow. Uncertainty over how taxes may be raised to shrink deficits may already be weighing on business confidence. Worries about inflation or default could start to push up interest rates. Eventually, private investment will be crowded out.

Barack Obama and Congress can pre-empt such corrosive uncertainty with a plan to reduce the deficit now. Far from requiring immediate spending cuts or tax increases, a credible plan would reassure markets and allow an orderly exit from fiscal stimulus. The Federal Reserve provides a model: it does not plan to tighten monetary policy in the near future, but has signalled its willingness to do so when inflation threatens.

Read it carefully and read it all.

The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Read it all.