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Posts Tagged ‘deficit’

Global Economic Crisis Worsens As Covid-19 Pandemic Unleashes Massive Debt Crisis – U.S. Budget Deficit Will Likely Exceed 20 Percent of GDP

April 2nd, 2020 Comments off

As the coronavirus ravages our planet, decimating economies large and small in its wake, it distinguishes itself from the 2007-09 global financial crisis in this way: it is an economic disaster brought on by a health crisis, as opposed to the GFC, where economies were harmed by a major financial crisis. However, this distinction will soon vanish, for the following reasons.

The enforced shutdown of the global economy created by the health response to the Covid-19 panic has led to massive spikes in unemployment, at a faster pace than even during the Great Depression of the 1930s, while businesses large and small are shuttered, severely constricting activity, while households are on the verge of insolvency. To prevent complete economic and societal collapse, sovereigns have launched emergency stimulus measures, at unprecedented levels of deficit spending, typically in the range of 10 to 15 % of GDP, as in the United States with Congress recently passing a 2 trillion dollar stimulus bill (representing ten percent of pre-crisis GDP).

However, with millions of workers now jobless and corporate activity at a near standstill, tax revenue from personal and corporate income, as well as capital gains, will shrink precipitously.

Before the onset of the coronavirus crisis, the U.S. economy, supposedly operating at its best level of performance, and with unemployment at a record low, was still requiring an annual budget deficit of one trillion dollars to fund federal government operating costs. Factoring everything we now know, the actual U.S. government deficit for the current fiscal year will be substantially higher than 20 %.

Should large developed economies such as the United States run annual deficits in the range of 20 percent of a shrinking GDP, notwithstanding debt monetization by the Federal Reserve and other central banks, a sovereign debt crisis of unparalleled dimensions will complement the Covid-19 pandemic in its negative impact on the global economy, and endure long after a vaccine is developed for coronavirus.

The increasingly likely sovereign debt crisis makes it more certain that the global economic crisis will not only be long-lasting, but will manifest the characteristics of an economic depression as opposed to a less virulent recession. Furthermore, long-term monetary measures a sovereign debt crisis will compel policymakers to implement will heighten the risk of severe global inflation, leading to a period of prolonged stagflation.

 

National Insolvency As Policy Response To Economic Crisis?

January 11th, 2009 Comments off

A global panic by policy makers has been in overdrive since the initial financial crisis brought the world’s credit markets to the brink of total meltdown. Staggering sums of money that boggle the human imagination are being heaved at the global crisis. With a fully-fledged global economic crisis now underway, the spigot of debt-driven cash is flowing out of governments like Niagara Falls. The most conspicuous example is the Obama stimulus package, now in preparation for rapid passage once the 44th U.S. President is sworn in. The planned American stimulus package alone may top one trillion dollars over two years. This comes on top of the $700 billion TARP program of Hank Paulson infamy, now conceded by many economists to have been a poorly conceived boondoggle.

The global public square is being told that this massive amount of money must be spent, or the world economy will fall into even worse distress. Conveniently being veiled is the inconvenient fact that these monstrously large expenditures must be made with borrowed money, as many nations, especially the United States, have treasuries that have long been laid bare by accumulated deficit spending.

Even economists who are convinced that huge amounts of deficit spending must be tolerated to salvage the global economy are aware that the “medicine” may be the harbinger of its own financial disease. Consider what Nouriel Roubini, the “prophet of doom,” told BusinessWeek in a recent interview about the U.S. stimulus spending:

“…the cost of issuing a huge amount of public debt will be trillion-dollar budget deficits this year and next, which eventually is going to have a crowding-out effect on private demand. So either we issue a huge amount of public debt to finance it, and that’s going to push up interest rates, or we print a lot of money that eventually is going to be inflationary and again damaging to the economy. We have no choice but to have an aggressive policy response, but it’s not a free lunch.”

Not a free lunch, states Roubini, a reality that policymakers are hiding from their publics. These, the very same mediocre political leaders who facilitated the global economic crisis, surrendering to the “logic” of the unregulated market place. What does “no free lunch” mean?

The United States is currently broke, from a fiscal standpoint. The trillions of dollars in excess expenditures being planned by the policy makers will inevitably require massive borrowing, at a time when foreign countries whose credit markets the American authorities depend on will be doing their own stimulus deficit spending. The only way the U.S. will be able to attract foreign credit in this context is through much higher interest rates. This will kill private borrowing, stifling investment and ultimately defeating the purpose of the stimulus spending. The other alternative is to simply print the money, and produce the hyper-inflationary hell that now exists in Zimbabwe.

Virtually every serious economist agrees that massive deficit spending in the United States by both the public and private sector was the driver of the global economic crisis. Strange that the identical prescription that led to this disaster is now being advertised as the cure.

Obama’s Stimulus Program And Deficit Spending: An Alternative Response To The Economic Crisis

December 25th, 2008 Comments off
The incoming Obama administration has yet to finalize the size of its economic stimulus package. Clearly, however, it will be of vast proportions. The numbers being speculated on keep inclining upwards, most recently in the $800 billion range. When it is put into effect after Barack Obama is inaugurated as America’s 44th president, it is likely to approach one trillion dollars, a sum equal to 20 % of the entire national debt of the United States only 8 years ago, when George W. Bush became the 43rd president. With the global economic crisis raging and financial markets imploding, most politicians and economists argue that only a gargantuan infusion of deficit dollars can stimulate the American economy to the point where the recession can be arrested. The question is, are the politicians and experts correct?
No doubt, the U.S. economy is undergoing its worst crisis since the Great Depression. Many experts point to the failure of the Hoover administration after the 1929 stock market crash to inject stimulus into the economy with deficit dollars as a significant contributing factor to the aggravation of the Great Depression. Other experts, acknowledging that the New Deal of President Franklin Roosevelt did not entirely eliminate the worst ravages of the Great Depression, claim that the decision by Roosevelt in 1937 to end the pump priming and restore fiscal balance in the Federal Budget initiated a severe recession following initial recovery after 1933.

The weakness with all these arguments is that those advocating them have tried to construct an economic rescue paradigm based on 1929 and its aftermath. While some parallels between the current Global Economic Crisis and Great Depression no doubt exist, every epoch in history, including economic crises, have their own unique reality. What may or may not have worked in the Roosevelt administration’s New Deal is not necessarily analogous to the prescription required for the current economic emergency confronting the United States.

The years leading up to the collapse of the world financial system and current global economic crisis were ones of unprecedented deficit spending by the U.S. government. Under President Bush, taxes for the most affluent Americans were slashed while government spending across the board, but especially in the military sphere, skyrocketed. The result was that even before massive governmental spending was initiated, as the economic crisis became more acute, Bush’s economic policy had already in place budgetary practices in the category of major fiscal stimulus. The fact that the national debt of the United States doubled from $5 trillion to nearly $10 trillion before the onset of the global financial crisis is a reflection of that fiscal reality.

Economists rightly point to the demand destruction that is crippling the world economy. In the United States this has had a severe impact, considering that more than 70 % of America’s GDP is derived from consumer spending. Accordingly, in this time of economic crisis, the government must substitute for the downfall in retail and business activity by regenerating demand in the economy. However, replicating the fiscal and monetary indiscipline of the past 8 years will only lay the seeds for far worse financial turmoil. There is another alternative for policy makers to consider, which offers a structural as opposed to a Band-Aid cure for the global economic crisis, especially in its impact on the American economy.

If the incoming Obama administration were to reverse the massive increases in military spending undertaken by George W. Bush, several hundred billion dollars a year can be redirected from unneeded defense department allocations to the civilian economy, including funding for massive infrastructure projects. Since the staggering increases in military spending are premised on the threat posed by one enemy, a non-state actor called Al-Qaeda, a fundamental question must be answered by the incoming Obama administration: what poses the greatest risk to America’s national security- a non-state actor with a few thousand adherents, or a global economic crisis that threatens to bankrupt the United States, and destroy its economic power, which is the basis of its military power? It may very well be that redirecting hundreds of billions of dollars from expensive new weapons systems that may be unnecessary for the defense of the nation to the civilian economy will be a sounder approach to financing a major economic stimulus program than continuing to add to the indebtedness of the national economy.