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28 January 2009

FDR Spent Too Little; Obama Has to Spend More

That's the judgement of "economists" according to the Times.
More government spending beyond the planned $825 billion economic recovery plan, economists say, is probably in the cards as well. Roosevelt is seen as the father of big-spending government, yet the judgment of history seems to be that in the 1930s he was too timid.

“The lesson from the 1930s and early 1940s is that the government has to do much more than it has done so far, both to end the financial crisis and to get us out of the recession,” said Mr. Sylla of N.Y.U. “I do think the Obama team knows this and seems prepared to act on the knowledge.”
But if we're in a crisis triggered by excessive debt - homeowner debt, negative savings, budget deficits, trade deficits around 7% of GDP - how can adding more debt help? I simply lack the imagination necessary to get my brain around that conundrum. Peter Schiff still seems to be the only one making any sense, to me at least.
Barack Obama has spoken often of sacrifice...But apart from a stirring call for volunteerism in his inaugural address, the only specific sacrifices the president has outlined thus far include lower taxes, millions of federally funded jobs, expanded corporate bailouts, and direct stimulus checks to consumers...

What he might have said was that the nations funding the majority of America's public debt -- most notably the Chinese, Japanese and the Saudis -- need to be prepared to sacrifice. They have to fund America's annual trillion-dollar deficits for the foreseeable future. These creditor nations, who already own trillions of dollars of U.S. government debt, are the only entities capable of underwriting the spending that Mr. Obama envisions and that U.S. citizens demand.

In sum, our creditors must give up all hope of accessing the principal, and may be compensated only by the paltry 2%-3% yield our bonds currently deliver.

As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.

But just because the game has lasted thus far does not mean that they will continue playing it indefinitely. Thanks to projected huge deficits, the U.S. government is severely raising the stakes. At the same time, the global economic contraction will make larger Treasury purchases by foreign central banks both economically and politically more difficult.

The root problem is...America's GDP is composed of more than 70% consumer spending. For many years, much of that spending has been a function of voracious consumer borrowing through home equity extractions (averaging more than $850 billion annually in 2005 and 2006, according to the Federal Reserve) and rapid expansion of credit card and other consumer debt. Now that credit is scarce, it is inevitable that GDP will fall.

Neither the left nor the right of the American political spectrum has shown any willingness to tolerate such a contraction. Recently, for example, Nobel Prize-winning economist Paul Krugman estimated that a 6.8% contraction in GDP will result in $2.1 trillion in "lost output," which the government should redeem through fiscal stimulation. In his view, the $775 billion announced in Mr. Obama's plan is two-thirds too small.

Although Mr. Krugman may not get all that he wishes, it is clear that Mr. Obama's opening bid will likely move north considerably before any legislation is passed. It is also clear from the political chatter that the policies most favored will be those that encourage rapid consumer spending, not lasting or sustainable economic change. So when the effects of this stimulus dissipate, the same unbalanced economy will remain -- only now with a far higher debt load. [More]

11 Comments:

Anonymous Anonymous said...

Ziel,

I cant think of a way that we wouldn't really enter a deep recession/depression if our creditors stopped lending us money. I mean really, what would we do if China, Japan, the Saudis all stopped lending us money?


Taxes would simply have to be raised..............on about everybody making over 40K a year for any of this stuff to happen unless our creditors (China, Japan, Saudi Arabia, etc.) are willing to keep buying our T-bills.


Perhpas these "economists" (read-paid partisan hacks with economic degrees) really do think we can just print more money to fund these programs and jobs for whiterpeople without much of a inflationary effect.



George Bush and the GOP leadership should be blamed for all of this. If he wasn't such a terrible president, we'd have not gotten the Obamessiah and we wouldn't have gotten McCain as a primary candidate. The neocon's figerprints in my estimation are all over our present predicament. Just think if Bush had not invaded Iraq, had taken steps to help our trade defecit, and had built a border wall and kicked the illegals out. He'd have been reasonably popular despite the fact he is an inarticulate fumbler, and we'd have a President Romney or Thompson this morning dealing with a credit problem, but over a much more sound economy to counteract it with.



I hammer this to death, but what the US REALLY has going for it are 16 carrier groups, 12,500 nukes, and the most technolgically advanced air force and satellite systems on the planet. Like Ghengis Khan, our military is comparitively strong, but the economy/culture behind it really is not.

January 28, 2009 11:53 AM  
Anonymous Anonymous said...

Ziel,

Check out this article on a babysitting co-op by Paul Krugman.

http://www.slate.com/id/1937/

I was struck by certain quotes:

"As long as the people were reliable--and these young professionals certainly were--what could go wrong?"

"Above all, the story of the co-op tells you that economic slumps are not punishments for our sins, pains that we are fated to suffer. The Capitol Hill co-op did not get into trouble because its members were bad, inefficient baby sitters;"


What if a lack of consumer confidence is due to "real" concerns? What if you found out that members of the babysitting co-op were in fact completely unreliable?

Also, check out Krugman's proposal for solving Japan's problems:

http://www.slate.com/id/1937/sidebar/42410/

Those Asians with their distaste for inflation, eh?

January 28, 2009 1:32 PM  
Blogger DiverCity said...

Krugman is such an idiot; he has to have some sort of mental defect.

I agree with Anon about what we've got going for us at the moment -- not a helluva lot, especially when we begin to have trouble paying the monstrously big costs for the over-extended military because the currency is worth but a fraction of its former self.

January 28, 2009 3:26 PM  
Blogger ziel said...

The obvious problem with the babysitting co-op story is that the scrip they use - a coupon worth one babysitting session - is indivisible. If we were to experience 90% deflation, then we could use dollar bills in place of Hamiltons and dimes in place of dollars.

The example also assumes a single self-contained economy. What if these people were a bunch of partiers borrowing baby-sitting services willy-nilly from another more prudent babysitting co-op, and found one day that not one member in their co-op had a single coupon left among them. They'd find they all had to do quite a lot of babysitting to pay all those borrowd coupons back. In fact, since the other co-op doesn't go out that much, they could be babysitting for quite a long time before any of them get to go out again. That's the analogy that fits our situation.

January 28, 2009 4:30 PM  
Blogger sarang said...

This comment has been removed by the author.

February 03, 2009 6:35 AM  
Anonymous Anonymous said...

Zeil,

Remember when I was suggesting that Islamic terrorist might turn to forrest fires as a cheap way to produce terror in the West?

http://www.theage.com.au/national/islam-group-urges-forest-fire-jihad-20080906-4b53.html?page=-1

Im being proven right, they are planning exactly that, and may already have in Australia.

February 09, 2009 12:22 PM  
Anonymous Nick said...

Given the apparent willingness of the Chinese to subsidise Western living standards by stockpiling massive trade surpluses, shouldn't we just for one final debt splurge and then default en masse?

February 09, 2009 2:28 PM  
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