Posts Tagged ‘deficit spending’

Biden Administration Faced With Looming Sovereign Debt Trap

December 13th, 2020 Comments off

In the 2-year period between 2008 and 2010 something peculiar happened to the U.S. Federal Budget. In 2008 the Federal Government in the United States spent $253 billion on interest  incurred by the national debt, representing  8.5 % of all federal outlays. Over the next two years federal budget deficits skyrocketed due to stimulus  and other fiscal programs undertaken in the wake of the Global Financial Crisis. Obviously, massive deficit spending  greatly increased the national debt. However, instead of the expected increase in annual interest payments, the amount allocated for debt interest payments by the Federal Government actually declined to $196 billion, representing  only 5.7% of the Federal budget, a sharp decline from only two years previously.

How was this seemingly impossible mathematical trick accomplished? The answer is surreal in its simplicity. The Federal Reserve, by monetizing the debt and exercising other monetary levers at  its disposals, sharply reduced interest rates across the board. In the case of short term interest rates, they were in some cases reduced to virtually zero ; in essence, free money.  It is only for that reason that interest paid on the national debt plunged while the overall debt ballooned due to continuous  and massive deficit spending.

Will the incoming Biden administration be so lucky? Unlikely. After massive deficit spending in President Trump’s final year in office, primarily due to a Coronavirus relief bill  that increased borrowing by more than $2 trillion dollars on top of the already large structural deficit, a President Biden is set to add a new and even larger Covid stimulus  relief package during his first year in office. So clearly, the national debt will continue to grow at a rapid rate.

What about interest rates? If it could, the Fed would keep interest rates at zero almost forever. But it  can’t. On the horizon are warning signs of high inflation. In the period after the Global Financial Crisis low inflation enabled central banks worldwide to prime the pump and run the printing presses. This time there is decoupling of major trading relationships: U.S. and China; U.K. and Eurozone. As  supply chains fragment, costs will be driven  upwards. Furthermore, there exist geopolitical tensions that threaten to drive up commodity prices, should they worsen. Political instability within  the United States itself creates elevated risks, which in turn stimulate inflationary pressures.

Any meaningful uptick in the  rate of inflation will compel central banks, including the Federal Reserve, to begin raising interest  rates. Once that happens, the massive deficit spending of the Biden administration that is now projected will unleash a sovereign debt trap, condemning the American and other economies, large and small, to stagflation, meaning higher inflation and a highly depressed economy. The handwriting is on the wall. In a worst case scenario, the U.S. government will default on its national debt, with seismic repercussions. Alternatively, the Biden administration could attempt to reduce the national debt through hyperinflation, which will  induce it s own calamitous impact on the nation’s social stability.

Sheldon Filger-blogger for

Global Economic Crisis Reaches A Dangerous Turning Point

March 1st, 2009 Comments off
As the emerging macroeconomic data on the evolving Global Economic Crisis continues to grow ever more dire, the major economic actors are fast approaching a point of no return. A synchronized global recession is clearly underway, manifesting all the characteristics of a developing worldwide economic depression. Unless policy makers adopt decisive, properly conceived and coordinated responses, a point of no return will be passed. Thus far, however, the major political figures on the world stage do not give much reason to be optimistic about the future of our globalized economy. Historians may look back on this period, the first months of 2009, as the turning point that sent the whole world into an irreversible, dramatic and enduring economic depression.

There are apparent to me several signposts that clearly point to a downward spiral of accelerating velocity. One of these signposts involves the worsening statistics chronicling the effects of the Global Economic Crisis. Japan’s Q4 of 2008 growth figures show GDP contraction of 12.7%, with every indication that this measure of economic deconstruction will grow even more dire in Q1 of 2009. We already have figures indicating that in January, Japan’s exports declined by almost half from a year ago.

America’s tottering economy is receding so severely, the statisticians cannot keep track of the staggering rates of decline. The Commerce Department had to revise the Q4 of 2008 GDP figures from negative 3.8% to more than 6% GDP contraction. Unemployment numbers are swelling at an alarming rate, while the public and private debt ratios are entering into astrophysical red shift territory, so rapid is their spread from any realistic possibility of fully servicing them.

Beyond the fiscal doomsday being portrayed by the macroeconomic data, there is the looming banking apocalypse that is now gripping almost every economy on the globe, major and minor. In both the U.S. and U.K., almost the entire banking sector is insolvent, being kept on life support by massive infusions of government IOUs that are being backed by what amounts to an intergenerational commitment from the taxpayers. The banks of the European Union have on their balance sheets, according to a leaked secret European Commission document, $24 trillion of toxic assets. Iceland is already bankrupt, with Eastern Europe about to follow down the path of national insolvency.

All the dire news I just chronicled cannot be viewed in isolation, but must be seen as a devastating continuum, in which the negative news emerging from one economy impacts another, creating a destructive chain reaction that is close to achieving the point of irreversible criticality. And with the global economic order about to undergo nuclear fission, the policy makers are reacting in thoughtless panic and hysteria, stampeding into a rush of Keynesian irrational excess. Despite the fact that unsustainable debt was a principal driver of the Global Economic Crisis, the sovereigns of the world are replicating the worst habits of the consumer and private sector. Staggering levels of deficit spending are being enacted into policies, unmindful of the inability of the global financial world to absorb and sustain such stratospheric levels of unfunded spending. Neither are the policy makers cognizant of the inconvenient fact that with so many economic actors swamping the global credit markets to fund levels of deficit spending that defy the human imagination, it is inevitable that interest rates will rise to crippling levels, choking off private capital. In their frantic efforts to rescue the global economy and bailout irresponsible financial institutions and ineptly run conglomerates at any price, the politicians are planting the seeds of a bitter harvest for all.

The world is facing the equivalent of a world war, with the Global Economic Crisis playing the role of the Axis. It is humanity’s misfortune that instead of Winston Churchill or Franklin Roosevelt to lead and inspire us, we are left with the likes of Timothy Geithner and Nicholas Sarkozy. It may be our fate to be led down the path of economic perdition, with the highway to hell being paved with mediocrity and ineptitude.



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.