What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy ”“ zero interest rates plus quantitative easing ”“ did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect
For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.
Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.
This is an important call to wake up and come to our senses. But I’m not holding my breath to see if those in Washington pay attention. The federal deficit is completely out of control, and both Democrats and Republicans are to blame for acting in an extremely irresponsible fashion. It’s inexcusable and the danger is very real.
I’m happy to say that my conservative Republican congressman here in Virginia has proposed a very interesting remedy to this coming disaster, i.e., tie the pay of federal lawmakers to the deficit! Rep. Randy Forbes has suggested, perhaps tongue-in-cheeck since there is no way it will ever pass, that when Congress passes laws that make the deficit swell and go up, their pay goes DOWN.
What a brilliant idea!
David Handy+
“The problem with socialism,” observed Margaret Thatcher, “is that you eventually run out of other people’s money.” After decades of broadly socialist government, Greece has run out of other people’s money, and the Germans, wisely, have declined to be this year’s “other people.”
The Euro is in serious trouble, and has already dropped 15% against the dollar. If you care to play this in the markets, buy ‘EUO’ a double inverse ETF shorting the Euro. In other words, it’s an exchange traded fund whose trading strategy is intended to increase the value of the fund — net of expenses — by at least 2% for every 1% the Euro declines against the dollar. After 6 to 9 months, take your money and run.
Maybe Jesus will come soon to rescue us from ourselves.