Click History for a list of changes and updates.
For many years, Democrats wanted additional programs and were willing to accept deficits as a necessary means. Republicans opposed tax increases and were willing to accept deficits as a necessary means. With relatively small debt in relation to GDP, economists did not express concern about the ongoing deficits. Whether achieved by reduced taxes or increased spending, federal deficits result in economic growth, until the money can no longer be borrowed at low interest rates. Greece is the example.
Sooner or later, the irresponsible fiscal policy takes its toll as the mounting debt becomes a burden. Interest rates rise which make the matter worse. Also sooner or later, a recession requires larger deficits to help the economy recover.
The continuation of this post discusses some of the issues and the observation that a "tipping point" occurs beyond which recovery requires drastic austerity, as is occurring today in Greece. It is too late to conclude that the "tipping point" has occurred, because a gradual recovery to maintain and improve confidence is no longer available.
Don Nordeen
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Continue reading Debt and Deficits are a Potential Disaster.
- Key Words: economy, fiscal policy, debt, deficits
Debt and Deficits are a Potential Disaster (continued)
An major resource on the subject is Comeback America Initiative, David Walker, a former U.S. Comptroller General in prior work. Mr. Walker states we need three things from politicians: truth, leadership and solutions.
Other posts on tax reform include:
- On the Agenda for Congress: Tax Reform Plus
- Capital Gains, Economy and Income Inequality
- Double Taxation on Dividends
A recent Congressional Research Report, Reducing the Budget Deficit: Policy Issues, February 15, 2012, lays out facts and challenges. Read the Conclusion on page 16 for an overview.
Fortunately, we have the opportunity to learn from the debt and deficit problems in the Eurozone, particularly, Greece, Ireland, Portugal and Italy.
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| Figure 1 — Three Financial Indicators, from The causes: A very short history of the crisis, The Economist, 2011 Nov 12 print edition |
One of the graphics provided contains the three charts on the left (Figure 1). Note the trends for Greece which ran large deficits for nearly a decade. They also had high and increasing unit labor costs. Figure 2 shows that Greece also had large debt, 165% of GDP. Obviously, the financial collapse in 2008 accelerated Greece's problems.
These and other factors resulted in a loss of confidence in Greek bonds with a precipitous increase in interest rates.
The result is that Greece is basically incapable of addressing the debt problems. Greece can no longer borrow the money to fuel the economy. Restoring confidence requires a pay down of debt, which can only be accomplished with very large budget cuts. But the budget cuts drive the economy further into recession, which would further reduce tax revenues — a vicious downward spiral. Perhaps Ireland and Portugal may have taken actions early enough to head off the precipitous increase in interest rates.
| Figure 2 — Debt, deficits and the markets, |
The same conclusion can be drawn from the change in budget balance required to reduce national debt to 60% of GDP by 2026. See Government debt: More pain to come, The Economist online, Jun 29th 2011, 15:48. The change by the US is greater than the changes required for Greece, Portugal, Ireland and Italy.
Expecting only gradual increases in the bond interest rates appear to be unrealistic. When a loss of confidence occurs, there is a "panic" sale of bonds resulting in a quick, large and compounding increase in interest rates.There does not appear to be a rational way to determine where the "tipping point" is. Some unforeseen event may trigger the accelerating loss in confidence. Therefore, prudence requires that actions be taken to reduce US debt, so that the "tipping point" does not occur.
Typically, debt and deficits are expressed in terms of GDP. Since GDP typically increases each year, expressing debt and deficit as a % of GDP may understate their significance. Both debt and deficit as a % of GDP and per capita are important. See Appendix A for some comparisons. Also see The Economist World debt comparison: The global debt clock (Our interactive overview of government debt across the planet) for more comparisons.
The precipitous change in societies is discussed by Niall Ferguson: How American Civilization Can Avoid Collapse — who writes,
"In my view, civilizations don’t rise, fall, and then gently decline, as inevitably and predictably as the four seasons or the seven ages of man. History isn’t one smooth, parabolic curve after another. Its shape is more like an exponentially steepening slope that quite suddenly drops off like a cliff."Important Posts
- On the Agenda for Congress: Tax Reform Plus
- Capital Gains, Economy and Income Inequality
- Double Taxation on Dividends
Appendix A — Comparison between GDP and per capital for comparison of debt
"CHART OF THE DAY: US per Capita Debt and GDP Growth
Monday, February 15, 2010The growth of the solid line indicates the large increase in debt per capita. The debt per capita has quadrupled between 1979 and 2009. With the very large deficits since 2009, the debt per capita is increasing.
GRAPH: This needs no comment and is worth more than a year's bubble talk on cable TV, says John Rubino at dollarcollapse.com."
CHART OF THE DAY: US per Capita Debt and GDP Growth
Penn State | Online, February 15, 2010
"Chart: 'America’s Per Capita Government Debt Worse Than Greece' 11:21 AM, Feb 23, 2012 • By DANIEL HALPER
The office of Senator Jeff Sessions, ranking member on the Senate Budget Committee, sends along this chart, showing that 'America’s Per Capita Government Debt Worse Than Greece,' as well as Ireland, Italy, France, Portugal, and Spain:"
See Debt per capita/GDP per capita ratio threatens many US States, if the Greek Domino falls for further discussion and integration with other data.
Another perspective is provided in The U.S. Debt Ceiling: A Historical Look by the Atlantic, Apr 29 2011.
- History: Changes are usually identified in the text with the date which facilitates searching by date. Edits are usually noted by add and
deletechanges. - 2012 Feb 24 — Initial Post
- Links: Debt and Deficits are a Potential Disaster at [http://curntbk.blogspot.com/2012/02/debt-and-deficits-are-potential.html]
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Copyright 2005-2012 © Donald L. Nordeen. All Rights Reserved. See Copying Posts on This Weblog.
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Copyright 2005-2012 © Donald L. Nordeen. All Rights Reserved. See Copying Posts on This Weblog.
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