How GW took care of the Deficit

[tabs]

He let the value of the Dollar fall....that means every foreigner who holds Dollars just took a hit, and did his bit in helping pay for the deficit.

[hardflex]

"every foreigner who holds Dollars just took a hit" as well as everyone who gets paid in dollars, or who buys oil in dollars, or who buys anything imported. None of us here, i'm sure.....

Wouldn't you say this amounts to a gigantic back door tax increase on all Americans?

And how exactly does this cut the deficit? we're still spending 400 billion in cheaper dollars more than we take in. Maybe you were talking about the National Debt (money we already owe)instead?

[s_wilwerding]

I'm wondering what GW should have done to strengthen the dollar? Maybe he should have jacked interest rates way up a year ago and then let the housing market and consumer spending (about the only two things propping up the economy at the time) tank. That seems like a better solution.

[jyl]

The President does not influence short-term interest rates. Those are set by the Fed.

Starting in 2001, Greenspan drove short term interest rates to record low levels, until real short-term interest rates were actually negative (i.e. short-term rate - inflation rate < 0). This was a huge economic stimulus. For the past few years, credit has been extremely easy to obtain - it practically doesn't matter what sort of credit record an individual has, or what credit rating a corporation has, whether a subprime borrower or a junk bond issuer, everyone can get plenty of credit at the lowest interest rates since the 1950s. Hence the housing market has boomed (bubbled?), consumers have continued to spend (on credit), and the economy went into a mild recession, instead of a more severe recession.

What the President has influence over is taxation, federal government spending, and thus the budget deficit. In 2000, newly-elected Bush began pushing his tax cut program, on the grounds that the federal budget surplus should be returned to the taxpayer. By 2001, it was clear that there was no longer a federal budget surplus. Bush changed arguments, and started pushing his tax cut as fiscal stimulus to pull the economy out of recession.

Thus federal taxes were significantly cut, on ordinary income, on dividends, on corporate profits, and so on. These tax cuts helped keep the recession short and mild, by propping up consumer spending and boosting corporate cash balances.

Bush also presided over a large increase in federal government spending, via the Iraq war and the war on terrorism (lots of new spending) and also via other federal spending (very little reduction fo existing spending). This also helped keep the recession short and mild, by pumping federal spending into the economy.

So fast-forward to 2005. We have an economy that experienced a mild recession, and now is experiencing a very weak recovery. Job growth is very weak for this stage of an economic expansion, and continues to lag population growth. Wages are weak, with the average hourly wage actually declining. The stock market is struggling (basically just churning) and the bond market is anticipating weak economic growth going forward.

Why such a weak economic recovery? The actions taken by the Fed and the Administration had the short-term benefit of softening the impact of the recession, but they have the long-term cost of putting the country in a bad structural position. The economy has become addicted to record-low interest rates, leaving the Fed in a Catch-22. It can raise short-term rates to normal levels, at the cost of choking off the housing boom/bubble and credit-dependent consumer spending, and potentially sending the economy into another very weak period or a full-blown recession. Or it can leave short-term rates where they are (zero or negative real rates), at the cost of having no ability to cut rates during the next period of economic weakness (rate cuts are like bullets, and right now the Fed's gun is nearly empty). On the fiscal side, the combination of tax cuts and unrestrained spending has created a huge structural budget deficit, leaving the Administration in another Catch-22. It can slash spending and raise taxes, which has major political costs. Or it can let the budget deficit remain huge, growing, and permanent, which hurts economic growth, pressures the US dollar, and eventually causes the interest burden to crowd out other spending.

If you want an analogy, the economy needed to take some yucky medicine back in 2000/01. Choke off credit/deficit spending, rebuild savings, fully deflate the Bubble. Instead, we just papered over the problem. We took only a little bit of medicine, got tons of candy, and replaced one bubble by another. So five years later, this economy isn't bed-ridden but it isn't healthy either. It is limping along with a fever and a cough, and at severe risk of a relapse.

[tabs]

It was corporate America that introduced low interest rates...GM and it's ZERO % Financing right after 911.

I postulate that 911 almost brought the house down..thats how bad I think it was...soin light of that idea, what the Fed and Administration did was fully justifiable...sure they lied...but to tell the truth would have blown the lid right off an allready scared public.

Right now Corporate spending is starting to out weigh consumer spending...JYL I think you facts are right, but conclusions are a bit askew...or outdated.

deficit + deficit + deficit = National Debt...

[jyl]

tabs, the jury is out on whether the pickup in corporate spending will outweigh the slowdown in consumer spending. I certainly hope so, given what I do for a living. IBM's miss last week isn't a good thing to see.

[Jims5543]

This is why I paid my Mortgage off and OWN everthing I have outright.

If it comes down to it I could get by on $500 a month if need be. I predicted that in 2 years from the election the economy will be mush.

I see a big recession right around the corner. I own my own business that depends on good interest rates to keep busy. I remember in the late 80's my old boss predicting the recession and warning all of his employees to tighten up their home budgets. I sold a "toy" car and simplified my life and did well as my hours and pay was cut through the "Reganomics Fallout" of the late 80's Early 90's.

I have made the same suggestion to my employees now. I told them that in 2 years (now 18 months) to have their financial affairs in order and prepare for a huge slow down in the economy. I am almost ready 6 more months and I am prepared to flip burgers for a living if I have to.

[turbo6bar]

Nice synopsis, jyl. I don't think anyone can predict where we're heading in the next 1-3 years. At times it looks like the stock market is about to make a run. Other times, it looks like bonds are going to run up the hill. Then, we have others who say RE will continue its pace.

Like Jims5543, I'm paying down debts. My focus is cash flow with the least hassle and debt.

[CRH911S]

So are we looking at a customary downward blip or a gradual sustained downward trend?

It's just a coincidence this is being discussed, while at the same time the GWB II and his administration is canvasing the country attempting to gain support for ss personal accounts. I agree with private accounts are the future of ss. However, can you imagine several million inexperienced investors freaking out and selling all at once. What affect would this have on the market?

[jyl]

Here's an excerpt from a recent essay by Paul Volcker, former chairman of the Fed and the man who whipped inflation -

"There is a wide area of agreement among establishment economists about a textbook pretty picture: China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand. . . .

. . . But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?

The answer is no. So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s – a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions."

Here's the full essay http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html

[jyl]

Personally, I'd love to see SS private accounts, because it means more money to be managed in the market and probably more employment in my industry.

Whether they are a good thing for the country, who cares? :-)

Seriously, I think if they were cost-free then they would be a good idea, but when you include the costs (huge federal borrowing to cover the resultant gap in conventional SS funding) I've not sure. It is a complicated issue and I'm still trying to figure it out.

[widebody911]

Originally posted by jyl
Personally, I'd love to see SS private accounts

While private accounts are the most contentious issue of SS 'reform', I still don't know much about how they would work. One side claims there would be a huge windfall for the Wall Street types (which seems to make sense) there are also information pieces out there that say the Wall Street guys wouldn't make anything at all.

One thing does appear to be certain: private accounts would not fix SS, because the actual problem is there are not enough new recruits at the bottom of the Ponzi scheme to feed those at the top. I view SS as more of an extension of the income tax.

I think a simple way to handle the private accounts issue would be a massive bump in the IRA contribution limit. Instead of sucking 15% of my check to the dubious SS system, perhaps let me put that 15% up to $90k in an IRA, or an account like an IRA.

[gaijindabe]

Wide, you are on to something here....

[tabs]

Originally posted by widebody911


I think a simple way to handle the private accounts issue would be a massive bump in the IRA contribution limit. Instead of sucking 15% of my check to the dubious SS system, perhaps let me put that 15% up to $90k in an IRA, or an account like an IRA.

Bingo Wide....U got the idea...now for the Dummys out there who don't know and don't care about investing....it could/would be like ordering Chinese...One from column A and one from Column B...Obviously there need to be guidelines and safeguards to protect the stupid....

[dd74]

I'm for privatizing SS. I really do stand behind Bush on this one. I don't think this system has worked well since its inception. Besides, I'll never see any of the money that's been circuitously wrenched from my hands by someone else's ineptness to work a little harder.

[Superman]

Originally posted by dd74
I'm for privatizing SS. I really do stand behind Bush on this one. I don't think this system has worked well since its inception. Besides, I'll never see any of the money that's been circuitously wrenched from my hands by someone else's ineptness to work a little harder.

Don't know how so many people can be convinced of this in light of the fact that, even if we did nothing about SS, the fund would not have solvency issues until something like 2055.

Fact is, we're using "privatization" for two reasons. First, because this would allow Wall Street to get their grubby little hands on our SS money and gubmint is hated by everyone now anyway (sure, that's real patriotic).....plus it covers up the real reason why SS needs to be saved. I think you all know that Congress has been raping that fund for years. So, rather than pay it back, we're looking into a new pyramid scheme. When are we going to insist that Congress handle our money responsibly? it seems to me that's the real problem.

But then, our entire economic strategy right now is focused entirely on covering up the issues and pretending.

[dd74]

Originally posted by Superman
Don't know how so many people can be convinced of this in light of the fact that, even if we did nothing about SS, the fund would not have solvency issues until something like 2055.

Fact is, we're using "privatization" for two reasons. First, because this would allow Wall Street to get their grubby little hands on our SS money and gubmint is hated by everyone now anyway (sure, that's real patriotic).....plus it covers up the real reason why SS needs to be saved. I think you all know that Congress has been raping that fund for years. So, rather than pay it back, we're looking into a new pyramid scheme. When are we going to insist that Congress handle our money responsibly? it seems to me that's the real problem.

But then, our entire economic strategy right now is focused entirely on covering up the issues and pretending.

That's all fine and good, but when I first found SS being taken out of my paycheck, I knew I'd never see that money again - whether it was or was not being taken by Congress. Besides, if Congress can't handle it responsibly now, can you truly trust them to handle it responsibly in the future?

The way I look at GW's plan now is sort of a "well at least it's something..."

[widebody911]

Myself, I'm leery of what 'privatizing' would really mean. I'm very suspicious of the Wall Street types (no offence, John) and what they're expecting to get out of this whole deal.

As I stated previously, one could accomplish the stated goal of "privatization" with the stroke of a pen by changing the "$3000" to "$XX,XXX" in the IRA rules. Somehow I don't think this does not accomplish what the WS guys really want, or what GWB really wants.

[jyl]

Originally posted by widebody911
Myself, I'm leery of what 'privatizing' would really mean. I'm very suspicious of the Wall Street types (no offence, John) and what they're expecting to get out of this whole deal.

Well, a 928 would be nice . . .

[bryanthompson]

I trust the guys on wall street more than the ones forcing me to be in a failing program.