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CBO Warns U.S. Long-Term Fiscal Health In Danger

The non-partisan Congressional Budget Office has come out with a new report warning that the nation’s long-term financial health is in jeopardy. From the Washington Post’s Lori Montgomery this morning:

The nation’s long-term budget outlook has darkened considerably over the past six months, and President Obama’s plan to extend an array of tax cuts and other policies adopted during the Bush administration has the potential to “create an explosive fiscal situation,” congressional budget analysts reported yesterday.

In a new report, the Congressional Budget Office found that extending the Bush administration tax cuts, reining in the alternative minimum tax and canceling a scheduled reduction in payments to Medicare doctors would dramatically slash tax collections at a time when federal spending would be “sharply rising.” The resulting budget gap would drive the nation’s debt over 100 percent of gross domestic product by 2023, the report says, and past 200 percent of GDP by the late 2030s.

Obama has not proposed to extend all of the Bush tax cuts, which are scheduled to expire in December 2010. But he would keep all cuts benefiting the middle class — a substantial portion of the total — and has advocated additional borrowing to cover the costs of that and other policy changes analyzed by the CBO…

Democratic lawmakers generally agree, and the budget resolution they adopted earlier this year assumes that many of the Bush tax cuts will be extended and future deficits will rise. Yesterday’s CBO report highlights the cost of that trade-off.

Montgomery pointed out that even if the extra funds were collected, the situation might be little improved. She wrote:

The news is not particularly good even if the government were to collect the extra money, primarily because of the rapidly rising cost of Social Security and federal health programs for the elderly and the poor. According to the CBO, the annual gap between spending and revenue would briefly drop below 2 percent of GDP in the next decade before rising to 5.6 percent in 2035, 8.3 percent in 2050, and nearly 18 percent in 2080. But the outlook is much worse if the tax cuts and other policies are extended, the CBO found: Annual deficits would never drop below 4 percent of GDP; they would approach 15 percent by 2035 and surpass 42 percent by 2080.

Already heavily in debt, the nation would be forced to borrow ever more massive sums to keep the government afloat, the CBO warns, with the national debt nearly 200 percent of the overall economy by 2035.

Source:

“CBO Paints Dire Portrait of Long-Term Revenue, Spending”
Lori Montgomery
Washington Post, June 26, 2009

David Walker: Obama’s Tax Pledge ‘Ridiculous Promise’

“Let me tell it to you straight. The. Math. Politicians. Sell. Does. Not. Work. And if we don’t start dealing with the truth soon, this country could face dire consequences.”

-David M. Walker, Comptroller General of the United States, October 2007

Before I closed shop late last night, I stumbled on the following from Bloomberg’s Brian Faler and Nicholas Johnston:

President Barack Obama said he is “confident” that he won’t have to raise taxes on most Americans to close the budget deficit as long as the economy picks up steam.

“One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”

Obama has repeatedly said he would keep his campaign pledge to cut taxes for 95 percent of working Americans while rolling back tax breaks for households making more than $250,000 a year.

“I’m confident that we don’t have to raise taxes on ordinary working families,” he said.

Now, many will argue the U.S. President still needs to build up his “street credibility” on economic matters. It remains to be seen if President Obama, despite his vast experience in other areas, can grasp the multitude and degree of the financial difficulties at hand.

That being said, consider what someone who’s already achieved “street cred” has to say about the Obama campaign pledge to cut taxes for the “ordinary working families.”

The person I’m referring to here is David M. Walker, former Comptroller General of the United States (nation’s chief accountant), former head of the U.S. Government Accountability Office (GAO), and current President and CEO of The Peter G. Peterson Foundation.

I’ve been following Mr. Walker’s career for quite some time now. Back on June 20, 2007, I wrote:

The tremendous financial burden brought on by entitlements also frightens David Walker, who is basically the nation’s accountant-in-chief. Walker is touring the United States through the 2008 elections, and according to Bloomberg, is “talking to anybody who will listen about the fiscal black hole Washington has dug itself, the ‘demographic tsunami’ that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.” His speaking tour includes economists and budget analysts from across the political spectrum. The message they are conveying is that if the U.S government continues to conduct business as usual in the coming years, the national debt ($8.8 trillion as of today) could reach $46 trillion or more, adjusted for inflation.

I added on February 26, 2008:

On February 15, David M. Walker, Comptroller General of the United States, announced his resignation as head of the U.S. Government Accountability Office (GAO). Since November 9, 1998, Walker has served as the nation’s chief accountability officer, leading the GAO in its mission to help improve the performance and accountability of the federal government for the benefit of the American people. Back on February 15, Richard Cowan wrote in Reuters that:

Walker repeatedly urged Congress to waste no time in reforming massive government programs, such as health care for the elderly, which will grow significantly as the U.S. population ages.

“The picture I will lay out for you… is not a pretty one and it’s getting worse with the passage of time,” the blunt-talking Walker told Congress more than once.

Despite those warnings, Congress and the White House have yet to begin cooperating on how to tackle the huge growth in health care and retirement benefit costs…

Yesterday, Bill Donoghue from MarketWatch had this to say about Walker’s departure:

Facing indifference on the Hill and unrealistic spending promises, Walker is resigning with five years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson, senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, has pledged an astounding startup budget for the foundation of $1 billion.

That money will attack what the foundation considers “the most substantial economic, fiscal and other sustainability challenges of our current age” — including federal entitlement programs, health care, unprecedented trade and budget deficits, low savings rates, mounting foreign debt, soaring energy consumption, an uncompetitive educational system, and the proliferation of nuclear warfare materials. Maybe Congress will listen this time.

The departing Comptroller General told Reuters:

As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO’s client — the Congress.

My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country.

MarketWatch’s Donoghue lamented:

This sounds to me like the ultimate sell signal on America…

When the nation’s best-informed watchdog resigns and few are acting on his recommendations on his “Fiscal Wake-Up Tour,” it’s time to reconsider over-optimistic domestic stock investments and look elsewhere, or bet against the U.S. market.

So, what is this dedicated public servant saying these days?

This past Monday, Mr. Walker appeared on CNBC’s “Squawk Box” and said the following about the Obama campaign pledge to cut taxes for 95 percent of working Americans:

His pledge to not raise taxes on people making less than $250,000 was totally unrealistic, especially given $1.8 trillion-plus deficits, and growing structural deficits going forward…

It was a ridiculous promise. I don’t know why he made it. Politicians are good at making these type of promises during campaigns. Anybody that passed basic math would have known that you cannot end up dealing with our structural problems in our deficits without having more revenues.

David M. Walker Interview
CNBC Video Link

Sources:

“Obama Says ‘Robust’ Growth Will Prevent Tax Increases (Update1)”
Brian Faler, Nicholas Johnston
Bloomberg, June 16, 2009

David Walker Interview
CNBC, June 15, 2009

Foreign Investors Growing Tired Of American Assets?

The month of April saw waning demand for American assets by overseas investors. From Bloomberg’s Vincent Del Giudice this morning:

International purchases of American financial assets grew more slowly in April as China, Japan and Russia pared demand for Treasuries, underscoring the danger of U.S. reliance on foreigners to finance its fiscal deficit.

Total net purchases of long-term equities, notes and bonds rose a net $11.2 billion, compared with buying of $55.4 billion in March, the Treasury said today in Washington. International holdings of Treasuries increased a net $41.9 billion, compared with the $55.3 billion gain in March. Including bills, the holdings fell a net $2.6 billion…

Including short-term securities such as stock swaps, foreigners sold a net $53.2 billion of U.S. financial assets, compared with net buying of $25 billion the previous month…

Foreign investments in U.S. agency debt slumped for the eighth time in 10 months, by $2.5 billion in April. Net purchases of American equities slowed to $4.6 billion in April from $13.2 billion the prior month. Holdings of corporate bonds tumbled a net $9.7 billion, the biggest decline since November.

China, the largest holder of U.S. Treasury securities, cut back their holdings to $763.5 billion in April from $767.9 billion in March. Japan, the second largest holder of Treasuries, reduced theirs to $685.9 billion from $686.7 billion a month earlier. China’s holdings of Treasuries represent about 10% of America’s publicly-held debt.

Bloomberg’s Del Giudice noted:

Waning demand for Treasuries may exacerbate a jump in yields that threatens to make it harder for the U.S. to pull out of its deepest recession in at least half a century. Yields on benchmark 10-year notes have climbed more than 1 percentage point since mid-March, contributing to an increase in mortgage rates that’s counteracting Fed efforts to aid the housing market.

Source:

“International Demand for U.S. Assets Slowed in April (Update3)”
Vincent Del Giudice
Bloomberg, June 15, 2009

Personal Wealth Declines By $1.3 Trillion In First Quarter

In case you hadn’t already heard…

From Associated Press economics writer Jeannine Aversa yesterday:

The brute force of the recession earlier this year turned back the clock on Americans’ personal wealth to 2004 and wiped out a staggering $1.3 trillion as home values shrank and investments withered.

Net worth, or the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards, declined 2.6 percent in the first three months of the year, the Federal Reserve said Thursday…

While the first quarter was ugly, the hit to Americans’ net worth was worse late last year. In the October-December period, it fell a record 8.6 percent, according to revised figures. That was the largest drop on record dating to 1951.

If Americans continue to spend — no guarantee — Fed Chairman Ben Bernanke and other economists say they think the recession will end late this year. But if shoppers hunker down and cut spending again, that could delay any recovery. Late last year, Americans cut spending at the fastest rate in 28 years.

Some economists believe thrift may be the norm for a while. Aversa added:

Even if things improve, such a dramatic evaporation of wealth will probably make Americans more thrifty down the road, said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com.

“The bulk of consumers alive today have not experienced declines in wealth like this,” Hoyt said. “They are already turning thrifty, and it will stay that way beyond the short term. This has been a significant learning experience.”

Should this be the case, it would not bode well for the U.S. economy, where it is suggested consumer spending accounts for 70% of the nation’s economic activity.

Source:

“1st quarter wiped out $1.3 trillion for Americans”
Jeannine Aversa
Associated Press, June 11, 2009

Chinese Students Laugh At Treasury Secretary’s Remarks

“Geithner: China Confident in U.S. Policy Steps”

-Washington Post, June 2

“Treasurys up as Geithner, China inspire confidence”

-MarketWatch, June 2

“Geithner’s China Visit Seen Adding Fuel to ‘Great Comeback’ of U.S. Economy”

-Supply & Demand Chain Executive Magazine website, June 2

From the looks of these headlines this morning, it appears that U.S. Treasury Secretary Timothy Geithner is having a lot of success in bolstering Chinese confidence in U.S. assets during his visit to the People’s Republic of China.

Yet, I wonder if this is not just one more instance where “the devil is in the details.”

From the Washington Post’s Ariana Eunjung Cha this morning:

Geithner’s remarks stand in sharp contrast to the commentary in China’s official propaganda papers.

An editorial in the English-language China Daily said it will be “regrettable if [Geithner] underestimates and shuts his ears to voices from China’s civil society,” noting that there are worries that “Washington’s mushrooming deficit, generated by massive government borrowing to fuel its economic recovery plan . . . will undermine both the dollar and U.S. bonds.”

The Global Times, which is affiliated with the Communist Party, said an online poll found that 87 percent of respondents believe China’s dollar-assets are unsafe. The paper concluded, “Ordinary Chinese people are discontent with the declining value of China’s huge foreign exchange reserves denominated in U.S. dollars.”

And the Economic Information Daily, which is part of the official New China News Agency and affiliated with the State Council, in a headline demanded to know of Geithner: “How do you propose implementing fiscal discipline? How will you maintain the stability of the dollar after the crisis?”

Why do you suppose the Post reporter pointed out The Global Times was affiliated with the Communists? To discredit their statement?

Think this might be a case of “the pot calling the kettle black,” considering America’s socialist, and some would argue increasingly fascist, leanings these days?

Other publications also expressed doubts over Geithner’s success. From Peter Ford of The Christian Science Monitor this morning:

US Treasury Secretary Timothy Geithner said Tuesday he had found “a lot of confidence” in the US economy among Chinese leaders he met on his two-day visit here. In other circles, however, skepticism was widespread.

When Mr. Geithner told a student audience Monday that Chinese assets invested in Treasury bonds were “very safe,” his intended reassurance drew loud and dubious laughter.

A survey of 23 top Chinese economists, published in the daily Global Times on the eve of his arrival, found that 17 feared that Beijing’s huge dollar holdings put China in “a very dangerous position.”

More Communist propaganda, I suppose.

Ford added such views also existed outside the political and academic sphere. From the piece:

Ordinary citizens, however, appear to have little sympathy for such arguments, to judge by comments on Internet chat rooms.

“It’s a big joke that China’s money will disappear with nothing to be gained, and the beneficiary still says that the money is safe,” wrote one Internaut from Hebei Province on Sina.com, a popular Internet portal.

“Don’t trust Uncle Sam,” warned another. “Why do they enjoy the pleasures and we pay the bill?”

I suspect this situation might not continue for much longer.

Sources:

“Geithner: China Confident in U.S. Policy Steps”
Ariana Eunjung Cha
Washington Post, June 2, 2009

“Treasurys up as Geithner, China inspire confidence”
Deborah Levine
MarketWatch, June 2, 2009

“Geithner’s China Visit Seen Adding Fuel to ‘Great Comeback’ of U.S. Economy”
Supply & Demand Chain Executive Magazine, June 2, 2009

“Geithner visit: Chinese economists skeptical of US strength”
Peter Ford
The Christian Science Monitor, June 2, 2009

Nouriel Roubini Warns Of ‘Perfect Storm’ In 2010

There once was a time when former Clinton administration Treasury Department director Nouriel Roubini was seen as a “madman” by the global financial community for his predictions of an economic tsunami. The New York Times’ Stephem Mihm wrote back on August 15, 2008:

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

“Dr. Doom,” as he is sometimes called by the media, turned out to be correct in his assertions.

Fast forward to May 28, 2009. Reuters’ Marie-France Han wrote:

Nouriel Roubini, the famously glum economist who predicted the financial crisis, said that while the recession in the United States may well be over at the end of the year, another dip was still possible next year.

“I still expect that economic growth in the U.S. is going to be negative through Q4, and that we’ll see positive growth in Q1,” Roubini told Reuters in an interview on the sidelines of the Seoul Digital Forum.

“The U.S. recession is going to be U-shaped, lasting roughly 24 months,” he added.

“Compared to the current consensus that says we are practically at the end of the recession … my view is: no, it’s going to last another six to nine months before it’s over.”

According to Han, the chairman of Roubini Global Economics LLC also warned of the potential for a “perfect storm” down the road. From the piece:

Roubini stood by a recent article in which he mentioned the possibility of a “perfect storm” in 2010.

“There is even a risk of a double dip, a W-shaped recession at the end of next year,” he said, a combination of rising oil prices, rising public debt and increases in real interest rates, rising concerns about inflation and the expiration of a number of tax cuts in the United States.

Last week, Dr. Roubini talked about this “perfect storm” in a piece he wrote for Forbes. From their website on May 21:

We cannot rule out a double-dip W-shaped recession, with the wings of a tentative recovery of growth in 2010 at risk of being clipped toward the end of that year or in 2011. This will result from a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies, as concerns rise about medium-term fiscal sustainability and the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures.

I think I’ll have that stiff drink now…

Sources:

“Dr. Doom”
Stephem Mihm
New York Times, August 15, 2008

“Roubini says U.S. economy may dip again next year”
Marie-France Han
Reuters, May 28, 2009

“Don’t Believe The Optimists”
Nouriel Roubini
Forbes, May 21, 2009

Boom2Bust Turns Two Years Old

Memorial Day Weekend 2007. Sure seems like yesterday….

Friday, May 25, 2007.

The Dow Jones Industrial Average closed out the week at 13,507.28. The S&P 500 index finished up at 1,515.73.

The median house price is $222,700, according to the National Association of Realtors.

Family net worth is at an all-time high of $64.36 trillion for the quarter.

The number of unemployed persons is 6.8 million and the unemployment rate is 4.5 percent.

Total public debt outstanding in the United States is $8.8 trillion.

Talk of the “Goldilocks economy” rules the day, and Washington and Wall Street are in “don’t worry, be happy” mode.

Federal Reserve chairman Ben Bernanke doesn’t believe the nation will slip into a recession, and he rejects the notion raised by his predecessor, Alan Greenspan, that the economy’s expansion could be in danger of fizzling out…

The Fed chief testified on Capitol Hill amid growing concerns that problems with risky mortgages and a painful housing slump could send the economy into a tailspin. Greenspan recently said there’s a one-in-three possibility of a recession this year.

But Bernanke — while acknowledging there are risks — told Congress’s Joint Economic Committee that the Fed does not see such negative forces pushing the economy into a recession.

“I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end,” Bernanke said. “I don’t think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long.”

-Associated Press, March 29, 2007

…a new SUV in every McMansion’s garage

Fast forward to today…

The Dow Jones Industrial Average closed at 8,473.49. The S&P 500 index finished up at 910.33.

The median house price in the first quarter of 2009 is now $169,000, according to the National Association of Realtors.

Banks and businesses worldwide have lost $1.47 trillion in write-downs and credit losses in the past 22 months stemming from the collapse of the subprime-mortgage market.

Household net worth dropped a record 9 percent in the fourth quarter of 2008, pushing total net worth down to $51.48 trillion. It was the sixth straight quarterly decline from the peak of $64.4 trillion in the second quarter of 2007. Also, the drop in net worth in the fourth quarter of 2008 was the largest drop in dollar terms on record, going back to 1951, when the U.S. government began keeping quarterly records. The 9 percent drop was also the largest drop as a percentage change on record.

In April (the last month data is available for), the number of unemployed Americans reached 13.7 million persons and the unemployment rate was 8.9 percent. According to the Bureau of Labor Statistics, 5.7 million jobs have been lost since the recession began in December 2007.

The total public debt outstanding in the United States is now $11.3 trillion. Furthermore, as Bloomberg’s Mark Pittman and Bob Ivry pointed out on March 31:

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Goldilocks made a fine meal for the bears.

But I’m convinced our fuzzy friends still want more.

Thank you all for reading and contributing comments to Boom2Bust.com, and for inspiring me to post about some of the financial research I come across on a daily basis.

Personally, I think that while we may get out of this recession soon enough, I fear all the additional obligations accrued since 2007 will only have made the house of cards that is the U.S. financial system weaker, thereby setting ourselves up for more pain when the eventual crash comes.

You can only kick the can down the road for so long before you have to call it a day.

Year three, here we come!

Christopher E. Hill
Editor

Signs Of The Time, Part 45

The following just reinforces something I learned a long time ago. People will say and do anything when they’re desperate. From Andrew Strickler on the Newsday.com website this past Tuesday:

Suffolk officers searching a suspected bank robber in Dix Hills Tuesday found on him a wad of cash, a loaded gun and something more unexpected: a police badge.

Just minutes after a man wearing a disguise walked out of a Huntington Station bank carrying money from a robbery, three officers stopped a vehicle fitting the description of the robber’s and searched the driver, Thomas Feeney, 47, police said.

Feeney, of Smithtown, was calm and cooperative as officers searched him, finding a loaded gun in his waistband and loose bills in his pocket they said came from the robbery, police said.

The officers also discovered a badge and card identifying him as a retired New York City police sergeant, police said.

Feeney later told detectives that he was on the force 12 years, but took early retirement in 1994 because of knee injures and a heart condition, police said.

His motive for the robbery: mounting debt, police said.

“He said he’d been out so long that he doesn’t get much money in disability anymore,” said Det. Sgt. Robert Doyle of the Major Case Investigations Unit.

“He’s run up tremendous credit card debt, and due to that fact, he had nowhere to turn to, so he decided to rob the bank,” Doyle said.

Not cool

Source:

“Cops: Suspected bank robber a retired NYPD officer”
Andrew Strickler
Newsday.com, May 19, 2009

U.S. Risks Losing Triple A Credit Rating

When the former chief accountant of the United States warns that the nation’s credit rating is at risk, Americans might want to listen to what he has to say. David Walker, chief executive of the Peter G. Peterson Foundation and former Comptroller General of the United States, wrote in the Financial Times (UK) this past Tuesday:

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

Walker warned that the nation’s credit rating could be downgraded with the help of two developments. He wrote:

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.

On the topic of health care reform, Walker noted:

There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.

Walker concluded that a new government commission is needed to help get the nation’s finances back on track— or else. From the piece:

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

Source:

“America’s triple A rating is at risk”
David L. Walker
Financial Times (UK), May 12, 2009

Quote For The Week

Recently, legendary investor Jim Rogers was interviewed by Jamal Nassar of the Yemen Times. When asked about the U.S. House of Representatives voting 233 to 193 the other week in support of a $3.4 trillion budget outline, Rogers replied:

It’s not good for America it’s not good for the world. It’s not going to work, they are spending a lot of money on making projects work rather than building long term competitiveness of America. America does not have that kind of money, they are going to have to borrow it, print it or tax it, none of which will be good for the American economy in the long run or for the world.

So no, this is just making the situation worse rather than better, many of the Asian countries starting to spend money, but many of them have big reserves which they’ve built up for a rainy day, and now it’s rainy so they are starting to spend their reserve, many of them are spending it in wise ways to be good for the long term competitiveness of the nation. America is not.

Suspicion Grows Over China Dumping U.S. Assets

On Tuesday, a Federal Reserve official downplayed talk of China dumping its U.S. assets. Reuters’ Kevin Plumberg wrote yesterday:

Dallas Federal Reserve President Richard Fisher said on Tuesday China would not do anything to harm U.S. interests such as dumping Treasuries, adding that solid capital returns support the dollar’s attractiveness.

Fisher, who was headed to Beijing, soundly rejected the view that China can decouple economically from developed countries such as the United States and described the relationship between the two powerhouses as “symbiotic.”

“China cannot succeed if the U.S. does not succeed,” he said after a speech sponsored by the Asia Society, noting that while China owns a lot of U.S. Treasuries its economy is still dependent on U.S. consumer spending.

Recent comments from Chinese public officials have suggested Beijing is uncomfortable with the Fed’s rapid expansion of its balance sheet. Last month, Premier Wen Jiabao said he was worried about the country’s holdings of some 70 percent of the $2 trillion in foreign reserves and asked for a guarantee of safety for Chinese assets.

While the Fed might be unconcerned about China’s intentions, the U.S. military doesn’t appear to be so sure. FOX Business’ Rebecca Diamond reported Monday that for the first time ever, the Pentagon played a war game that focused on economic warfare. And, one of their key findings involved China selling off American dollars and Treasuries…

FOX Business Video Link

Source:

“Fed’s Fisher says China won’t harm U.S. interests”
Kevin Plumberg
Reuters, April 14, 2009

U.S. Farmers Wary Of Recession

Here’s the latest on how American farmers are holding up during the global economic downturn, courtesy of AP business writer Josh Funk today:

The U.S. Department of Agriculture predicts that farm income will fall some 20 percent, or $18.1 billion, to $71.2 billion this year. The lessons of the 1980s farm crisis — when farmers learned the dangers of assuming too much debt when times are good — are about to be tested.

“People that took on a lot of debt — these are the ones I think are going to be in some trouble,” said Iowa State University economics professor Mike Duffy.

So far, it seems the U.S. farming industry hasn’t suffered too badly from the economic slowdown. From the piece:

“The strong farm economy has been a partial insulation from the effects of the recession,” Federal Reserve economist Jason Henderson said.

The Midwest and Plains states also missed most of the housing-related problems in the economy over the past year because home values didn’t boom or bust. And area economists have said rural bankers tended to be more cautious when lending, and were unlikely to invest in the risky mortgage-backed securities that have hurt several major investment banks…

Henderson, who monitors the rural economy within the 10th Federal Reserve District, predicts farm-dependent regions will see slower economic growth in 2009 because farm profit margins will be thinner. He said it’s hard to forecast how much of a hit agriculture might take over the next year because there are big questions about how the recession is affecting demand for commodities, food and exports.

Funk also brought up the topic of farmland values, which I last talked about in early March. He wrote:

Farmland values had soared as countries such as India and China bought more corn and soybeans and the ethanol industry expanded rapidly. Both those economic forces have shifted dramatically in the past year, and now values are in decline.

Source:

“Weak crop prices end feast in farm states”
Josh Funk
Associated Press, April 9, 2009

One Recession, Two Recession…

Good news. A non-profit global business organization is predicting that the current recession will end later this year. Bad news is, it’s also saying there’s the potential for another one to emerge in 2010. From Reuters tonight:

Although the U.S. economy is expected return to growth later this year, there is a danger of a second recession if monetary easing and a weak dollar leads to increased inflation expectations, a report said on Wednesday.

Massive stimulus spending and moves by the Federal Reserve to fuel economic activity is expected to jump-start the anemic U.S. economy in the last quarter of this year after it contracted 6.3 percent in fourth quarter of 2008.

But the Fed’s moves to boost the economy by slashing interest rates and buying up billions in government debt could have undesired consequences, The Conference Board, a private research group, said in the report.

“If the United States experiences a too-rapid recovery, there may be a risk of another recession in 2010,” said Bart van Ark, vice president and chief economist of The Conference Board.

“It may fuel expectations for a return to inflation, adding to the uncertainty concerning the pattern and path of economic recovery,” he said.

The U.S. economy has the potential for a “double-dip” recession, van Ark noted, similar to 1980 and 1982, as commodity prices rise on the back of a falling dollar and monetary easing.

He added, however, that the likelihood of this scenario taking place is small as deflation risks are great, while government stimulus spending should stem further economic decline and ease the flow of job losses.

Others would disagree with the assumption the U.S. economy will grow later in the year. Just last week, National Bureau of Economic Research President Emeritus and Harvard economist Martin Feldstein predicted the recession will last into 2010. From Reuters’ Jason Subler and Shengnan Zhang on March 24:

The recession in the United States will stretch well into next year, probably raising the need for another fiscal stimulus package at least as large as the first one, prominent economist Martin Feldstein said on Tuesday.

Feldstein, a Harvard University professor who is a member of President Barack Obama’s Economic Recovery Advisory Board, told Reuters that the stimulus would offset only a relatively small piece of the likely fall in spending, exports and construction.

“I’m afraid that the economy will continue to slide down well into next year,” Feldstein, a former head of the National Bureau of Economic Research, said in an interview in Beijing where he was attending a conference.

“I don’t know when it will end, but the forecasts that it’ll end later this year I think are too optimistic,” he said of the recession.

Sources:

“U.S. seen facing danger of 2nd recession next year”
Reuters, April 1, 2009

“U.S. recession to last into 2010: Feldstein”
Jason Subler, Shengnan Zhang
Reuters, March 24, 2009

Related Post

From our sister blog Investorazzi.com this morning:

“George Soros: ‘Brace For Slower Economic Growth’”

In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”