Fear-Mongering Over the US Budget Deficit
Cross-posted at The Street Light.
Absurd news today from S&P’s credit rating analysts, who have apparently been drinking liberally from the Deficit Crisis Kool-Aid:
NEW YORK (MarketWatch) — Standard & Poor’s cut its ratings outlook on the U.S. to negative from stable on Monday, lighting a fire under Washington’s deficit-reduction debate and sending stock markets sharply lower.
The rating agency effectively gave Washington a two-year deadline to enact meaningful change, just days after House Budget Committee Chairman Paul Ryan and President Barack Obama each outlined their plans for slashing debt. S&P nonetheless kept its highest rating, AAA, on the U.S.
US debt is still rated as AAA, which effectively means that S&P’s rating analysts believe there is a zero percent chance of the US government not making payments on its debt. However, this new “ratings outlook” indicates that they now believe that there’s a reasonable chance that some time within the next two years they will change their mind, and start to believe that there’s a chance — albeit a remote one — of the US government defaulting on its debts.
For perspective, the following chart shows the OECD’s forecast for the burden of debt payments in the US and the world’s other largest developed economies. Net interest payments both this year and next year will be lower than any other major OECD country with the exception of Japan.
Update: NYT offers six more reactions here. (h/t Rebecca)
Ah, but no doubt S&P is worried about what will happen to that debt burden beyond 2012. After all, there are alarming predictions that the currently large budget deficits will continue to be unduly large after 2012, even as the economy recovers.
But deficit projections are notoriously slow to catch up with the business cycle. When the economy is doing well and deficits are small, forecasters tend to look in the rearview mirror and make very rosy projections into the future. And when the economy is doing poorly and deficits are large, forecasters also tend to project doom and gloom going forward.
So let me put up this reminder about how bad, and backward-looking, medium-term deficit forecasts can be. It shows the US government budget balance as forecast by the CBO in 1993 and 1995, and compares those forecasts with what actually happened.
I don’t want to argue that the US has no long-term deficit problems. It does. And steps will need to be taken — when the economy is in good shape — to bring revenues more in line with spending. But the current fear-mongering over the US’s budget deficit is just that: fear-mongering. And today S&P played a shameful role in it.
Not just shameful fear mongering, they also don’t have much credibility after they whored out ratings to the big banks (thus contributing to the bailouts and by extension the deficits). Barry Ritholz was excellent on this point today: http://www.ritholtz.com/blog/2011/04/why-listen-to-sp-on-us-debt/
You use a chart of debt service to GDP to make your point. US looks good to you. So does Japan. But do us a favor. Re-do the chart using the 10/20 year average for interest rates. Say 4% for < under one year and 5% for the 10 year, 6% for thirty. Those numbers would be well below any average. Plug that in and you see what S&P is worried about. We have had ZIRP and QE for more than two years. It will be reversing over the next nine months. The days of Treasury borrowing 100b a month at less than 1% are behind us, not in front. I’m not asking you to look at a doomsday situation. I’m asking you to consider what happens when things are normalized. The bills outstanding is now 1.7 T, the averave cost is 0.2%. If we normalize rates it increases debt service by $64b. That is just on the Bills. Keep in mind that more than half of the debt is less than 4 years in maturity. This will catch up quickly. But I suspect you know that.
Time to raise taxes and shut the valves to the military industry trough.
Spend a few buck on infrastructure and jail the banksters.
How about prosecuting S&P for their negligence rating CDS’ and MBS’ in ruining the economy.
What bkrasting said.
Plus, Italy is rated A+, what is it doing in the comparision?
Plus, credit analysis is not just evaluating current ratios, it also looks forward. That doesn’t look so good.
I’m for raising taxes on two ranges of income only
Range 1 (0 to $50,000 adjusted gross income) – Everybody should have skin in the game
Range 2 ($500k to $10 Million adjusted gross income) – Never $#!() where you eat
Range 3 ($50,000 to $500k adjusted gross income)-Leave these people alone
Anybody taxed any higher that are not in Ranges #1 and #2, it would be an outrage, and outright fraud.
But……no new taxes until some spending is cut to 2008 Levels, and no sacred cows either, to prove the point (Medicare or S.S.) and Defense get cut first. Any proposed spending cuts that do not include an equal amount of spending cut from both an Entitlement and Defense should be laughed out of the room.
The military trough is filled with poor folks’ stuff already.
The rest of your ideas hurt helpless folks.
Between Ryan and the tea baggers I am looking a C-, economic future of US is bleak.
I sold my war bonds years ago, knowing what I know about the military industrial complex, I will not buy the welfare corporations’ supposed equities.
“The rest of your ideas hurt helpless folks.”
Now you have to define “hurt?” Is “hurting” being able to survive with less comforts using help from the government with the wealthy peoples tax dollars better than taxing the wealthy even more and watching the system go deeper into the abyss, and having less tax dollars to spend on the helpless with the end result of even more helpless defined as “hurting”?
People like you need to quit pushing just the tax increase, and talk serious about spending cuts other than just defense, and people like me will meet you half way and pay a little more into the system.
Yeah.. the return to “normal” interest rates will hit hard.. but also, we gotta consider the future value of the dollar that will be paying those rates, because future lenders will.
We’re not only zipping by a debt/GDP of 100%.. we got enough momentum to see 150% in just a few years.. further effecting rates.
Raising taxes (on anyone), won’t scratch the surface of this problem, and will definately hamper our only way out.. growth, and massive spending cuts.
No. I don’t care to meet you half way.
How do you see “normal” interest rates returning?
Define normal, do you mean Volcker levels (I think Volcker was a great Fed Chmn)? Those occurred as poorly timed effort to fight inflation.
I don’t think the fed can tighten now to get rates up. Do you think all that cash sitting in bank vaults with only the US G borrowing is going to hold out for higher rates?
Worry about interest rates rising when you see price levels rising. The S&P folks have the US confused with some country that is not in a liquidity trap. Or maybe their trigger is some inflationary spiral.
The Fed is to maintain employment, which they have failed at and to hold inflation under control, which is easy failing at maintaining full employment.
I don’t see any situation where the US bond rating matters until the fed runs out of options on inflation…………………
Whenever the liquidity trap ends we can worry about S&P ratings.
Inflation is always a monetary event. Who said that?
“Raising taxes (on anyone), won’t scratch the surface of this problem, and will definately hamper our only way out..”
Recycled GOP bafflegab from the early Clinton Administration. Wrong then. Wrong now.
Plus one. SS doesn’t need much in the way of fixes…Medicare is a different animal..BUT, as I have written about, there is no fix for Medicare. Medicare is only a symptom of a larger disease..the healthcare system as a whole.
Taxes need to go up…substantially. FWIW, I would be one of the ones affected, and would be paying higher taxes. I am okay with that.
The TP types need to apply some critical thought to a lot of their venom. Unfortunately most of them have no real concept of what they are talking about so it makes any informed, rational discussion almost impossible.
Normal, was in quotes for a reason. This might be un-charted territory, but rates certainly can’t go lower. So, whatever normal is these days, it’s an increase from where we are now.
Now.. how about the rate we have little control over ? The rate we’ll have to offer as our debt/GDP races past 120% … and the dollar faces the “payback”, for all of this monetization. Perhaps that’s part of what S&P are allowing for ?
You do the math.. how much per-household can we get, on top of what they’re already paying ? And assuming that you’d target the top 2%, that’s just over 2,000,000 households.. who’s income starts at ~$250,000. Heck, the bottom of the top 1% starts at ~$380,000.
So you pick the average number of ADDITIONAL tax to be found there, and multily it by 2,000,000.. see what ya come up with, compared to JUST the deficit..
I have read some of Einstein’s humanist philosophy, and I believe that you cannot solve a problem with the same mind that got into it.
Therefore, leave S&P, they helped get us here, out of it and begin to think differently.
I think 23% of GDP is not so bad as a federal tax burden, at least until the war and other debt is paid down.
JFK’s tax cuts were returning to rates before Truman and Ike paid down the war debt from WW II and Korea.
I have said it either here or somewhere else, it is time for a Truman democrat and an Eisenhower republican to fix these things.
Greenspan seems to think the Bush cuts need to expire.
“I think 23% of GDP is not so bad as a federal tax burden, at least until the war and other debt is paid down.”
I’m gonna guess how much of an increase that is… ~4% ?
If so, what is 4% of $14T ? .. about 1/2 a trillion ? less than 1/3 the current deficit.
And remember that GDP is a moving target when you add $500B to the tax burden. Whether you agree or not.. I’m gonna say that taking $500B out of the private sector will stifle GDP , hence lowering that $500B… an odd strategy when growth is our only hope.
Thinking economics is good. But you have to put that in the context of what is going on. A political reality test. Headline inflation is rising at 6% the past half year. That will contine right through June. Bernanke has to back off. Yes, he thinks that core is more important than headline. But when gas hits $5 by 7/4 his phone will ring off the hook.
The bulk of S&P’s analysis is taken up with repeatedly citing what it sees as next-to-no chance that Washington will do anything significant on deficit reduction this year or next.
“The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term challenges will persist until at least after the national elections in 2012,” said the credit rating outfit.
But the S&P outlook is a warning to the White House that financial markets have noticed that this President seems to have decided that his path to re-election lies in demonizing his opponents rather than seeing to the nation’s fiscal well-being.
As Alan Greenspan just said, ALL of the Bush Tax Cuts need to expire, not just the ones on the top 2 percent.
I find myself strangely troubled by the fact that I agree with him….almost…a little…..dirty.
“Ah, but no doubt S&P is worried about what will happen to that debt burden beyond 2012.”
Maybe they are aware that there might be enough crazy people in Congress to force the US to default.
The S&P should have been shut down as part of a criminal conspiracy if there was any interest in seeing justice done regarding the late unpleasantness. The degree of brazenness in this is simply staggering.
The top 1% makes more than 20% of all income, so there is plenty of money there. These folks are way far from tapped out. Besides, high taxes encourage economic growth. If the rates go back to 90%, we’ll see broad income increases across the board. That and the higher rates will quickly balance the deficit.
Doesn’t S&P triple A positive mean that it contains no more than 95% unsecured liar’s loans, or is that triple A neutral?
What you would see with marginal rates set that high would be a surge in overseas investments. You know…where the production is being sourced now.
Ah yes, the sacred “2008” levels of recent GOP talking points. Things were so much better then, sigh.
Headline inflation, varies too wildly, no one calls it headline when it goes negative, it is forgotten then.
Already happening see Thoma this AM.
Check DeLong this AM on the S&P stuff.
If the client’s money is green they’ll rate it super duper ultra pasteurized extra virgin blue ribbon.
Okay.. but still near 1/3 of just the deficit. So even if we do that,, and even if we can come up with $500,000,000,000 in cuts (unlikey when just 10% of that starts the ideological war).. we’re still in hundreds of billions of deficit.. and even THIS assumes that the economy will just keep humming along.
THAT’s how deep this problem is, and why S&P is justifiably worried.
Kinda creepy to think of taxation as a tool to “tap out” anyone.
ANYway.. .even marginal rates at 90% will only dent the deficit (it’s that large) .. there are only 2 million households that would end up paying it… and that’s assuming that any money gained via those rates won’t end up being spent .. and the HUGE assumption, is that that level of taxation won’t pull the plug on whatever recovery that might be happening.
Been gone a few days, and I see nothing has changed. The Libs after a great deal of angst over Obama’s performance, is now continuing the denial of how bad the debt/deficit is becoming. Do the math!!!!!!
Once done, tell us how to correct. My own solution: let the debt ceiling lapse. Filter the good from the bad spending that will happen naturally from that lack of action. Cut accordingly. Tax to make up the political difference.
Finally, eliminate the Income Tax. Create a VAT, Sales, Flat, any other simplified tax system that the politicians can not use (or at best have to restart that process) as payoffs to their cronies.
US and German 10-year rates are just about the same right now. Real rates in Germany are higher, but not by much. So if the US is prone to pay a higher interest ratio in “normal” times, so is Germany.
There is the mechanism of Fed policy, but there is also the reality of market conditions. Low borrowing rates are a function of poor economic performance, cautious investors and the like, and thos conditions obtain across all the countries in the graph, not just the US.
MG knows way more than Kash. You should believe MG because MG writes really dismissiive stuff that lacks substance. You should believe MG because he adopts a pose of havind inside knowledge about what real decision makers (whoever they may be) think.
MG claiming to know what “people who matter” think may be the funniest thing I’ve read this week.
The discussions with conservatives about taxes always end the same way. Any time an adult mentions that taxes should be *part* of the solution to the deficit, the strawman bleet of conservatives is that increasing taxes alone can’t solve the problem. Of course, nobody said that raising taxes alone was a solution, but in the conservative mind it is either no tax increases or tax increases with no budget cuts.
Any serious discussion of the deficit requires an ackowledgement that tax increases are part of the picture. Those who deny this are simply unserious.
Thanks for the candor, CoRev. If you wonder why you have zero credibility here, this post serves as an excellent reason.
KH, is there a point in that bluster?
Candor: freedom from prejudice or malice : fairness
unreserved, honest, or sincere expression : forthrightness
Joel, do you really understand your comment? Doubtful.
Done the math, yet? Also, doubtful
I wouldn’t say, “unserious”.. and it’s not really ideological either.
The “help” that tax increases would net, is relatively small, compared to the spending cuts needed.
It can be ideological, if you class-warfare-name-call someone who believes that taxation is already MUCH too high…..
(not sure how the lib-favorite “strawman” fits in there)(I’m sure “circular-reasoning, and tilting at wind mills are next)
…. and that cutting taxes is actually what’s needed. I mean, who gets to decide what ideal taxation might be ? .. if there IS such a thing. I’d say taxation that hovers around the counter-productive range, is taxation that’s more about extracting every, possible penny first, for re-distributio, and then trying grow government to fit, and not hesitate to spend well BEYOND it all (debt now greater than 100% GDP)..
You see ? Our problem is a government that has grown to more than FIVE times what it was in 1960 (cost per household adjusted for inflation). It’s way past time to reverse that trend.. dramatically… and dramtically cut taxes, too. As noted; tax policy desinged to “tap out” a taxpayer, is a tax policy by a government that’s out of control.
The current, liberal counter to math they don’t like, is to get personal, and lob insults…
RWTY, the liberal disappointment is palpable. They blame their current leader, but they realize they have been wrong and that they are running out of other peoples’ money is worse for them.
I’ll take liberals and leftists serious when the majority of them start saying that ALL of the Bush tax cuts need to be rescinded. But few are willing to say that.
If you don’t see a point, well there is none blinder than he who will not see.
Tell you what, why don’t you come back when you have a point to make, an honest, no-spin, point that is more than just the world as distorted by CoRev.
I know enough to not listen to people who start off their little blog main posts with ignorant titles, pretending that they know more than the financial market experts and analysts.
I know enough to ignore the hillbilly commentary of people like kharris who never add anything of merit to blog discussions at Angry Bear.
I know that kharris doesn’t know a helluva lot about anything related to commercial business, global financial markets, or international trade sourcing.
That much I do know.
More brilliant commentary from Joel the Scientist…
“Running out of other people’s money“, might be a cliche’ .. but it’s mathematic reality.
No matter how liberal you might be; no matter how much you want the government to do for you.. it cannot be more than the private sector is able, and willing to support. I’d say that our federal government passed that line decades ago.. and now.. YUP ..we’re out of other people’s money..
“The current, liberal counter to math they don’t like, is to get personal, and lob insults.”
NO….that has always been the tactic, the difference now is they have to actually take some responsibility for the guy they insisted would be the “Best Prez Eva.”
Being part of the left has always been the easy route, since 1992 they have been given a free pass, and it was all about attacking the right. Now after they have been exposed a little, and were forced to use their own ideas, which are failing quite miserably, they want it both ways. They want to bitch about it, and they want to not have to take responsiblity for thier leadership…It’s Pathetic!
Joel thanks you for the candor. You quote definitions for candor to Joel which in no way contradict what Joel wrote, then ask him if he understood what he wrote. Which leads me to ask, CoRev, do you understand your comment? Reads like a non-sequitor.
As to the implication that liberals are somehow a class that CoRev can identify (or his new sidekick, woodUleaveNow) and so comment on with any precision, well, it seems not. Liberal (whom CoRev tries to further denigrate as “Libs” – an excellent brand of local candy, by the way) is to CoRev more or less like “socialist” is to the Faux News people – a term intended to smear those whom he wishes to hush. Having demonstrated that he couldn’t tell a liberal from a luddite, CoRev then goes on to pretend he can read minds, and knows how sad, very sad, they all are.
Which brings us back to Joel. Yeah, it is easy to see why someone as low as CoRev doesn’t get much respect.
Well that’s too bad, because without compromise your gonna cuts only, and no tax increase.
You might want to take a look at GDP (without Government Spending), Revenue, and Spending to help you figure out why the 2008 level of spending is being brought up.
“Taxes need to go up…substantially”
Why? It doesn’t fix the problem. You can’t raise taxes high enough to get the kind of money we need at this level spending. Your more likely to make the situation wrose not better by “soaking the rich”
“Unfortunately most of them have no real concept of what they are talking about”
If your pushing a tax increase only, to solve the deficit problem, then you are pusjing a non-solution, how exactly is that rational?
Yeah..that’s pertinent.. sarcasm and personal attacks.. no time for pesky math, hu ?
“The TP types need to apply some critical thought to a lot of their venom.”
Complaining that government is too big, and taxes too high, is venemous ?
Where does accusing Conservatives of wanting to kill off the old and poor (from the halls of Congrss no less), fit on the venom-scale ?
MG — tell me how you know what kharris knows.
From the nature of his comments I suspects he knows a lot more about the nature of international finance, the US credit markets and international economics than you do.
We know it too! You have done a great job of providing information here, and I find your opinion and analysis is typically fair and reasonable. I typically review your comments, and I have never come across anything that is out-of-bounds.
They are just trying to discredit you, because you are throwing wrenches in thier dream world machine…..you don’t fit into the leftist agenda driven mold, so you must be demonized. I deal with it everyday. The point being, I appreciate your comments here, don’t let them drive you away!
I never once stated that tax increasesare the ONLY solution. I never stated that. I think we need some moderate, sensible cuts, and better fiscal policy. Allow the Bush cuts to expire would be a start, although I think that likely, taxes need to go higher still. And not just for the top 2%, for EVERYONE.
Meh, there is a limit “headline” inflation can go. I doubt 6% continues nor 5 dollar gas. Your trying to hard.
What dream world? The one you created for yourself. MG is mumbling. People like you represent the ignorance of the weak minded and inferior.
and more brillant commentary by MG. Your a joke MG, a american hating joke. You prescribe anti-american policies and strive for plutocratic dictatorship.
Best thing for all little rentiers like you: death. A bullet right between the numbers. Leech pig.
“..pretending that they know more than the financial market experts and analysts.”MG
Market experts and analysts, you say. The same experts described in this Bloomberg article from 2007?
“CDO Boom Masks Subprime Losses, Abetted by S&P, Moody’s, Fitch”
Just a brief highlight from the article wich is long and informative. Have yuou forgotten that S&P is a wholly owned subsidiary of McGraw Hill? Why would anyone suppose that a private corporation would produce an analysis of anything in an unbiased manner?
“Investors snapped up the $340.7 million CDO, a collection of securities backed by bonds, mortgages and other loans, within days of the Dec. 12, 2000, offering. The CDO buyers had assurances of its quality from the three leading credit rating companies –Standard & Poor’s, Moody’s Investors Service and Fitch Group Inc. Each had blessed most of the CDO with the highest rating, AAA or Aaa.
Investment-grade ratings on 95 percent of the securities in the CDO gave no hint of what was in the debt package — or that it might collapse. It was loaded with risky debt, from junk bonds to subprime home loans. During the next six years, the CDO plummeted as defaults mounted in its underlying securities. By the end of 2006, losses totaled about $125 million.”