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Fiddling While the United States Burns

Posted by Larry Doyle on April 8, 2011 7:45 AM |

Ben Bernanke’s grand economic experiment of quantitative easing is nothing more than a policy of implementing negative real interest rates. That policy may provide support to puff the markets but it also promotes a very real transfer of wealth and income. The simple fact is quantitative easing and negative real interest rates as a formal monetary policy are neither practical nor sustainable over the long haul.

What do I view as a very real and dangerous consequence of Bernanke’s policy? I am of the strong opinion that Bernanke has created a facade behind which many in Washington and around the country continue to “fiddle while the United States burns.” We evidence this fiddling reality in the midst of the petulant and pathetic budget debate ongoing in Washington. While our leaders nitpick over pennies in order to ‘keep the lights on’, the destructive structural deficit our nation faces casts a very long shadow across our nation’s entire landscape. I firmly believe that many politicians have little true appreciation for that reality.¬†

Who spells out this reality and can define just how long and dark a shadow the deficit casts? I welcome introducing readers to Dr. Brian Taylor, President and Chief Economist of Global Financial Data, who wrote Paying Off Government Debt: Two Centuries of Global Experience. I commend Taylor for his providing an historical and global perspective on this issue while writing in layman’s terms. Let’s navigate.

Taylor addresses the impact of structural deficits by highlighting that,

A structural deficit that is used to pay for services or transfer income, unlike capital investment, does not add to the net wealth of society, and implies higher taxes or lower government services in the future to offset the accumulated structural deficits.

A structural deficit implies structural adjustments in the future; however, it may be difficult to generate the future surpluses needed to pay off this debt for demographic reasons. An aging population implies both a higher recipient to taxpayer ratio, and higher health care costs for the elderly. Calculations of the implied cost of the entitlement programs the government has promised in the future, such as Social Security, Medicare, Medicaid and other programs, predict large increases in these costs in the future without large reductions in the promised benefits. Any attempt to run surpluses to pay back the debt will require large increases in taxes.

Increasing taxes in and of themselves will not solve our structural problem. We need to simultaneously restrain spending and reform/restructure our massive entitlement programs. If our nation does not aggressively address this structural deficit now, the global markets and global investors will address it for us. How so? What is the greatest risk if we do not address this problem? The increased cost associated with higher interest rates as Taylor so poignantly addresses,

Higher interest rates can spark a financial crisis that forces the government to reform, especially if the debts were created because of rising secular social costs. War debts are more likely to face inflationary default than rising social costs because the war debts are a one-time non-recurring cost. Since social expenditures largely redistribute income, governments cannot inflate their way out of these costs, but must eventually reform. For this reason, eventually the entitlement problem, which is the basis of the current rising deficits, must be fixed. The only question, whether this problem is taken care of now or the government waits until a financial crisis forces the government to reform, is fiscal ineptitude.

Fiscal ineptitude? Yes, we have plenty of that in Washington. Fiscal ineptitude is the equivalent of “fiddling while the United States burns.”

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Steve

    Are dickering and fiddling synonymous?

    Dickering on Budget Goes Down to the Wire

    It was the third time in two days that Mr. Obama had brought the top negotiators to the White House. The two parties have been struggling to work out spending cuts of between $33 billion and $40 billion for the current fiscal year, which ends Sept. 30.

  • In this complex gestalt of economic choices certain distinctions are necessary. Though quantitative easing is prone to find its way to slippery slopes, there are times when such action is unavoidable; but, as you suggest, it is unsuitable as a structural vehicle; at best, it is a stop-gap measure. On the other hand, war debts are not a “one time non-recurring” set of costs; we are still paying costs associated with WWII, to say nothing of the ongoing and escalating tsunami of costs associated with 2-1/2 current wars, for which a separate off balance sheets have been created for the sake of political expediency. We are also suffering a serious lack of revenue under the specious banner of taxes-as-ultimate-evil. The Fed’s current interest rate policies are punishing large segments of our society (those who are least able to deal with the austerity (savers, retirees, pensioners) in what appears to be a vain attempt to create jobs, promote too big to fail (oblivious to the moral hazard) and to prop-up bank reserves at a time when those reserves appear to be reasonably stable. Those discount rates are hurting the larger economy as well, even as the DOW creeps upward. As to “entitlements”: This entire subject has fallen under a very dark political cloud, and one has to wonder if the arguments put forth by those who warn of an economic apocalypse are in reality fashioning a case for further negative wealth distribution to the least productive segments of the economy. And no where in this argument is a unbiased discussion of globalization, our new temple of confusing and confused assumptions.

    Obviously this is no place to go into detail on these and so many other elements of structural concern. We need to step away from the dogmas we’ve created over the past decade and go for a fresh and painful reassessment of our priorities and the nagging realities of what it takes to create balance and sustainable growth.

  • divvytrader

    watching these jokers pompously parade before the cameras today with Reid $38 billion in cuts bid and Boehner at $40 billion in cuts offered ….all vs $1.6 trillion in deficit …. is the worst former of kabuki theater ever attempted .

    Ryan must be watching this charade knowing all his work in that budget proposal will never see the light of day

  • MG

    shut it down

  • whoisjohngalt

    Stagflation is officially here. QE2, ethanol subsidies (lead to higher food prices) & no Gulf of Mexico oil drilling have finally overwhelmed loss of real estate values & reduced wages–which are deflationary.

    Even Dr. Pangloss thinks this is the worst of all possible worlds. Sad, don’t retire when there is stagflation.

  • coe

    The structural deficit we are facing is years in the making – and not at all simply driven by really is the child of entitlement programs run amok, of sacred cows and political self-interests, of the bloated pandering to the education, social services, and defense lobbies – and it clearly exists at the local, state and federal levels..there is no simple answers – but, in order to reverse the course of future pain, I believe we need better leadership, courage, and wisdom – as well as a practical approach to starting from square one..having served as a budget officer for a number of years for a large public school system, I can tell you in absolute honesty that there were so many dollars sloshing around that could have been cut, it was almost comical..yet try to exact those cuts, and the unions and special interest groups screamed bloody murder..pretty simple calculus don’t you think – increase revenues and/or cut expenses..if revenues cannot organically grow because the economy is wallowing in a recession, then the only path left is to raise taxes..and if that is politically unpalatable, well..let’s go to the other side of the ledger – rethink the expense equation…don’t let the vapor trail of zeroes fog the exercise – there is plenty of room to cut tens, even hundreds of millions/billions..I know it, everyone knows it – so just do it!

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