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2008 July 28 Monday
US Deficit Headed For Half Trillion Dollars

Neither political party is proposing spending cuts to bring the US government back within its means. This party can't last forever. Big deficit. But party while we can.

WASHINGTON — The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation’s fiscal condition from 2001, when Mr. Bush took office after three consecutive years of budget surpluses.

I've previously posted that Barack Obama is going to be heavily constrained from enacting new spending programs because he's going to be faced with huge fiscal problems. Baby boomers retiring, Peak Oil, and other problems come due on his watch. Hard to enact nationalized health care under these circumstances.

We could be (and probably are) headed for an even larger deficit.

The worst may be yet to come. The deficit announced by Jim Nussle, the White House budget director, does not reflect the full cost of military operations in Iraq and Afghanistan, the potential $50 billion cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline.

The new deficit numbers also do not account for any drains on the national treasury that might result from further declines in the housing market.

Are we having fun yet? I say deport the illegal aliens as a way to cut back on costs of health care, welfare, education, and other social programs. Pull out of Iraq for a $150 billion or so a year savings. Raise retirement age eligibilities.

Obama does not want to say what he's going to do about this problem. He will say that he'll spend more on health care. Of course, that increase will come on top of increases for swelling ranks of retirees getting expensive Medicare.

WASHINGTON — The projected record federal-budget deficit of $482 billion will severely limit the next president’s ability to cut taxes and pay for pet programs, yet Barack Obama and John McCain are offering few specific ways to deal with it.

The new president will take office four months into a fiscal year whose deficit is likely to shatter the current record of $413 billion, set in 2004, the White House said Monday.

McCain has pledged to balance the budget by 2013, while Obama has no timeline. Both candidates pledge to keep most taxes low while revamping the country’s healthcare system and strengthening its military.

Suppose the East Asians decide to stop buying US Treasury bonds and opt instead to let their currencies rise against the dollar. The deficit could become ridiculously high as US federal, state, and local governments would then have to pay far higher interest rates for the money they borrow.

Share |      By Randall Parker at 2008 July 28 11:42 PM  Economics Government Costs


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Comments
lowly said at July 29, 2008 1:52 AM:

Invest accordingly, is all I can say.

Dragon Horse said at July 29, 2008 4:02 AM:

East Asians will not do what you suggest because they need to export to the U.S. and be competitive...if our economy is bad higher prices on their goods won't help them. China's market is not developed enough to take most of China's products and especially not Japan's high end stuff (yet...maybe in 15-20 years if China can ever learn what "economy of scale is" and deal with cross-province competitive advantage, but that is another issue having to do with the fact China's central government is a lot weaker than people in the West think it is, in all the bad ways).

East Asian currency appreciation will not help them with gas prices, all the dominated in dollars and a lot of other primary goods that most of those nations need (none of them have significant natural resources), especially in China, this will cause even higher inflation than now and likely cause the economy to contract...that is a CCP nightmare. Their call to legitimacy is economic growth, they are right now barely employing everyone (especially in rural areas)...if the economy takes a downturn for a year or two...a serious downturn two things might happen. A war on Japan or someone else (Vietnam or Philippines over the South China Sea Islands or something or Taiwan), staged by the CCP to drum up nationalism to take the people's mind off of the failings. Just maybe some young strapping Chinese man from a semi-rural town will start rallying the poor and agitating (just like in most Chinese revolutions for the last 1500 years, including Mao's communist revolution).

No...Asia needs us and we need them...no one will rock the boat...not right now. In 15 years...well...all bets are off, depending on China. At this point I'm still not convinced China will not hit an artificial economic ceiling of their own making. China has serious structural problems in their finance markets...there will likely be no collapses as China has too many reserves, but their might be a serious stall or contraction, because the reforms that need to be made are critical to CCP maintaining significant power...I don't see any serious movies (since Deng Xiaoping) to change any of this...and since Conservatives have taken over after Tienanmen...well you can guess...like conservatives everywhere they are more concerned with paranoid collapse (of the current power structure) and maximizing their current benefit in the existing system (just as Machiavelli warned us a few centuries ago). For more on that read:

www.amazon.com/Chinas-Trapped-Transition-Developmental-Autocracy/dp/0674021959

This is part of what I did my "affirmative action" grad thesis on...oh wait...in the state my grad school was in there was no AA. LOL

Stephen said at July 29, 2008 5:47 AM:

Dragon, I don't see China as expansionist (it certainly hasn't been over the last thousand years), so I don't see it picking random wars to increase nationalistic sentiment. Also, I think the lack of centralisation and the consequent independence of the provinces makes any war difficult. Finally, the revolutionary urge is pretty much burnt out, and at the moment all the Chinese people are interested in is making money. They're not interested in war.

Stephen said at July 29, 2008 5:55 AM:

As for the US economy, I don't see any sign that the US citizenry are ready for tough medicine (after-all, they are 'exceptional'), so there's no way they'd vote for a presidential candidate prescribing it.

The rest of the world will likely force the issue before the US citizenry vote for it. The first sign will be trans-national commercial contracts being priced in Euros (eg oil). Demand for US dollars will really begin to slide and it will be devalued accordingly. Then the Euro will become the reserve currency. Then all the chickens come home to roost for the US.

Dragon Horse said at July 29, 2008 6:15 AM:

Stephen:

I wasn't really talking about "expansion" but now that you mention it, there is a likely scenarios...if you consider the invasion of Taiwan expansive. I question if China can hold the island, but that's another story. Tibet, according to my mind, was not expansionism as it was already a nominal part of China for centuries (on and off) but others disagree.

I think if Taiwan declared independence and the CCP didn't act after years of hyping up it up an integral part of the motherland what do you think would happen?

The CCP has already lost face over Taiwan twice to the U.S. (and China always manages to squeeze Japan into the mix somehow). You are right that China has not been an expansionist power (well the Han Chinese have not, the Manchu and Mongold Yuan were)...pretty much China just occupied areas for defensive purposes after the Tang Dynasty or so...but think you should underestimate the power of nationalism and conflict does not have to be "expansionist"..>China didn't invade Vietnam to "expand" they did it to "teach a lesson", it had nothing to do with "revolution" either.


In any case, my point is that East Asia will not call in American debt the way Randall said, it would seriously hurt them, likely more than it would hurt us.

Randall Parker said at July 29, 2008 5:57 PM:

Dragon Horse,

China can take moves that fall far short of calling in American debt. They can just slow their accumulation of it. They are already letting their currency rise.

Me, Myself and I said at July 29, 2008 6:51 PM:

However, it seems that this guy does not agree with Dragon Horse:

China’s Economic Rise—Fact and Fiction

Dragon Horse said at July 29, 2008 7:20 PM:

Randall:

I agree, but as I said, doing this is not in their benefit as they are still pretty heavily dependent on our market and on the dollar. I would also agree it is better for the U.S. not to be in this position, but the right wing fear of Chinese destroying America economically before the "Yellow Horde" reconstitutes and comes to take over, etc is overblown paranoia.


Me Myself and I:

There are many schools of thoughts on this. I can find 5 more folks who agree with this guy you sited and I can find 5 who disagree.

I mentioned one of them already, and he is widely respected and also works at a major think tank. What does this mean?

My take is that China can accomplish what Dr. Keidel suggest, but it has not happened yet, his first two findings are:

• Potential stumbling blocks to sustained Chinese growth—export concerns, domestic economic instability, inequality and poverty, pollution, social unrest, or even corruption and slow political reform—are unlikely to undermine China’s long-term success.

• China’s financial system, rather than a shortcoming that compromises growth potential, is one of the strengths of what the report calls “China’s money-making machine,” in part because of its ability to support the financing of infrastructure and other public investments necessary for sustained rapid growth.


He says "unlikely" meaning that they have not been resolved but he doesn't see them as a problem in the future. See where this is going? Dr. Pei (who I quoted above) contends China has the potential to accomplish what Mr. Keidel states is likely. I agree with Dr. Keidel that it is also likely. The concern is that the evidence for this occurring remains to be seen. There are transparency problems in China, especially in what province cadre report to the central governments...especially where SOEs (State Owned Enterprises) are concerned, there are serious problems with capital allocation to domestic business, there are serious banking infrastructure issues that have a lot to do with corruption of party insiders who use it as a rent seeking system...actually "rent selling system". China is not using competitive advantage spread throughout their provinces, they replicate industries in various provinces that don't need to be. China also has limited trade between provinces. Prices are heavily controlled in energy and food markets which could make them subject to shocks (unlikely due to their reserves, but it really depends on how long a crisis could last). China is heavily dependent on FDI, which is not always a good thing because although it employs people it often causes "inflation" in domestic capital cost when local business can obtain capital (which usually only comes with a 5-7% bribe), China is far more dependent on FDI and for its size, far more dependent on an external market than Japan or South Korea at the same stage of development. Can you name a Chinese band name besides Lenovo? I can go on and on...can you guess what I do for a living yet?

If I had to bet a significant amount of money I think China will resolve these issues in a timely manner, but that is not written in stone. I don't expect China to collapses (unlike that moron Gordan Chang) but I do think stagnation for an extended period is possible unless there are some major changes in the pipe, I have not seen that. The stuff Zhu Rongji did was largely reactionary and ineffective. In fact some of it was costly, but it did make investors "feel good", which can't be underrated.

So take Dr. Keidel with a grain of salt. If you listen to Dr. David Shambaugh at Elliot School (George Washington U.) he will tell you the EU is triangulating with China to form an alliance against the United States. LOL He has been saying this for years...I'm not sure who takes him seriously but he manages to get published. Moral of the story...all academic research is not equally valid even when supposedly legitimate sources.

Okay child, run along and play now, class is over. :-)

Stephen said at July 29, 2008 9:58 PM:

Getting back to the US economy, I read an article some time ago (sorry, no link) where the author described the US was an exporter of dollars which were bought by the rest of the world to underwrite international commerce. He then went on to say that the US was exporting poor quality dollars compared to other producers, and consequently demand for the US dollar had dropped as the rest of the world looked for better quality money - such as the money currently being produced in Europe.

Kinda made sense in a 'turn it on its head' kind of way.

Me, Myself and I said at July 30, 2008 7:45 AM:


Okay child, run along and play now, class is over. :-)

I can see that all that unperceived affirmative action that Dragon Horse has received over the years has made him very condescending.

Sadsack said at July 30, 2008 8:35 AM:

"I can see that all that unperceived affirmative action that Dragon Horse has received over the years has made him very condescending."

He's just an insecure little negro. Nothing more. He can't help himself when it comes to including Affirmative Action, racism, blaming whites for everything, etc...no matter what the argument. Funny, but also kind of sad really. He also needs to get a hobby other than the internet.

Stephen said at July 30, 2008 5:53 PM:

Oh pls, Me and Sadsack, Dragon's sentence ends with a smiley which is a hint that you should take it in a manner other than it sounds. I'm sure no offence was intended, it was merely a self-deprecating reference about the academic 'feel' of his long post.

Oh, Sadsack, I find your comment offensive to an extent that is incapable of being remedied by any number of smiley faces.

Steve Johnson said at July 30, 2008 6:13 PM:

"Moral of the story...all academic research is not equally valid even when supposedly legitimate sources."

Are you sure you don't mean "not all academic research is equally valid..."? Yes, they look similar but they mean very different things. When someone makes this mistake it leads me to believe that the person cannot create a valid argument.


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