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Rogoff: America’s Endless Budget Battle

Posted by Larry Doyle on October 1, 2013 8:59 AM |

With the shutdown of our government overnight, the proverbial lights in Washington have significantly dimmed and the finger pointing begins in a fashion that seems all too similar to a junior high school lunchroom.

Yet while Uncle Sam is not open for business today, our nation faces another enormous issue right around the corner as well, that is, the debt ceiling.

Some may think the costs of shutting down our government and playing chicken with the debt ceiling are not significant given that our overall level of interest rates remain low. But why is that? Because the Fed is purchasing upwards of 90% of net new debt issuance

That is a problem, folks, a huge problem. And why so? Because when other creditors choose not to purchase our debt due to the ongoing fiscal malfeasance and dysfunction in Washington, where do you think rates are ultimately headed?  I will give you two hints: which way is up and how high is high?

Esteemed economist Kenneth Rogoff takes a wider angled view of this impending disaster in writing today at Project Syndicate,

Perhaps investors are becoming inured to the United States’ annual debt-ceiling debacle, now playing out for the third year in a row. But, as the short-term antics become more routine, the risks of long-term dysfunction become more apparent – a point underscored by the shutdown of the federal government.

Increasingly, the battle over the US government’s debt ceiling reflects a deeper constitutional power struggle between the president and Congress. This struggle, if left unresolved, could profoundly weaken the government’s ability to make significant economic decisions in the future.

Of course, a breakdown in political civility would hardly make the US unique; all too many countries suffer some degree of political dysfunction. It would take some doing to match (or exceed) Italy’s record of governmental paralysis. But if Congress continues to hijack US economic policy, it bodes ill for the economy’s otherwise bright long-term prospects.

At least for now, the rest of the world has seemingly unbounded confidence – reflected in very low borrowing rates – in America’s capacity to put its house (of representatives) in order. No one can imagine that a country with so many unique economic advantages would risk such a damaging self-inflicted wound as default would cause.

But this time could be different. Obama needs to force his Republican opponents to blink, and there is no guarantee that they will. In the past, it was Obama who blinked, knowing that even if a catastrophic debt default was largely caused by congressional Republicans, he would likely absorb some of the blame in the next election. Now that re-election is behind him, Obama could be inclined to take more risks, with an eye toward securing his economic legacy.

What will that legacy be? Despite the federal government’s destructive impulses, the US economy is showing great resilience and looks set to become stronger. Of course, Obama would love to see this trend continue, as would almost everyone else. Unfortunately, a US debt default, even a technical one, would have unforeseeable consequences that could threaten the recovery.

Consider what happened when the Federal Reserve misplayed its hand with premature talk of “tapering” its long-term asset purchases. After months of market volatility, combined with a reassessment of the politics and the economic fundamentals, the Fed backed down. But serious damage was done, especially in emerging economies. If the mere suggestion of monetary tightening roils international markets to such an extent, what would a US debt default do to the global economy?

The privilege of issuing the global reserve currency confers enormous advantages on the US, lowering not just the interest rates that the US government pays, but reducing all interest rates that Americans pay. Most calculations show that the advantage to the US is in excess of $100 billion per year.

Even if the dollar long remains king, it will not always be such a powerful monarch. But an unforced debt default now could dramatically accelerate the process, costing Americans hundreds of billions of dollars in higher interest payments on public and private debt over the coming decades.

Yes, the US should worry about its soaring public debt – and about the rising pension and health-care costs that are fueling it. Despite baseless politically motivated claims to the contrary, the academic research still overwhelmingly suggests that very high debt is a drag on long-term growth.

Of course, Americans should worry just as much about the quality of education and infrastructure – not to mention the natural environment – that they are leaving to future generations. But, above all, they need to leave a legacy of civil political decision-making.

That essential feature of effective government is now at risk.

Where are our real statesmen when we need them?

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no 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.

 

  • Peter Scannell

    “Despite the federal government’s destructive impulses, the US economy is showing great resilience and looks set to become stronger. Of course, Obama would love to see this trend continue, as would almost everyone else”.

    Sabotage anyone? Whoa!

  • Earl

    Hi Larry,

    In general, there’s enough blame to go around on both sides of the aisle, but Barak O’Bama and Harry Reid are two of the biggest mean-spirited obstructionists I’ve ever seen disguising themselves as concerned leaders of our nation! Not many there on Capital Hill neither choose to believe nor remember that they work for us!

    Thanks for letting me vent.

  • Jim

    Quite the coincidence that a govt shut occurs the same day O-CARE is rolled out in critical condition.

    This country is quickly becoming a 3rd world nation.

    What a bunch of idiots.

  • Bill

    The big betrayal of individual liberties is still game on from the two crime families. While our benevolent, caring government markets socialized medicine as a benefit, it’s in fact an additional TAX.

    Few know the historical implementation of Social Security was ‘marketed’ (forced upon) the people as a “trust fund” when, in fact, all forced participation taxes went into a general revenue fund. SS proved to be a big lie & Obamacare is just building on the same fraud. Republicans just let it go by, preferring to dawdle on the mechanics of the heist.

    What benefit is ever available without an opt-out feature? None, that’s why it’s a tax, and collectible by force, collectible by the IRS and channeled to the FRB.

    Isn’t also peculiar that none of the ‘leading’ economic trolls have brought this up? Do they not know, or just dumbed-down like the rest?

    This may be another ‘DUH’ moment for Americans.






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