Debt Limit to Rise to $8.18 Trillion
Tax Cut, Spending Caps Are Rejected
By Jonathan Weisman
Washington Post Staff Writer
Friday, November 19, 2004; Page A06
The strict rules that once limited tax cuts and entitlement spending increases lapsed two years ago. Limits on spending lost their teeth. This year, Congress failed to pass a budget altogether.
Last night, with the federal government warning that it was on the verge of defaulting on its debts, the House rejected efforts to reimpose restrictions on tax cuts and spending, then joined the Senate to raise the federal debt limit by $800 billion, to $8.18 trillion.
The collapse of statutory restraints on the growing budget deficit has alarmed Wall Street, befuddled the Treasury Department and elicited calls for a rethinking of the way the government handles its authority to tax its citizens and spend those proceeds.
"The fact is, very little [budgetary restraint] is left in any real form or substance," said Robert D. Reischauer, a former director of the Congressional Budget Office, now president of the Urban Institute.
With last night's passage of the debt ceiling increase, the government's borrowing limit has climbed by $2.23 trillion since President Bush took office: by $450 billion in 2002, by a record $984 billion in 2003 and by $800 billion this year. Just the increase in the debt ceiling over the past three years is nearly 2 1/2 times the entire federal debt accumulated between 1776 and 1980.
A recession, a sluggish economy and five tax cuts in four years -- coupled with soaring defense spending on wars in Iraq and Afghanistan and rising domestic spending -- have turned record surpluses that Bush inherited into a record deficit of $413 billion in the past fiscal year.
Economists and budget hawks fear that rising deficits are contributing to the steadily declining value of the dollar, which will increase consumer costs, and that those deficits eventually will drive up interest rates and slow the economy.
As the national debt continues to mount, Washington is having difficulty keeping up. In August, Treasury Secretary John W. Snow implored Congress to raise the debt limit to ensure that the Treasury could continue to borrow the money it needed to finance government operations and pay benefits such as Social Security. But with an election looming, lawmakers declined to act.
Last month, the government crashed into the debt ceiling, and the Treasury began borrowing from a civil service retirement fund. On Monday, the Treasury announced it had postponed an auction of short-term Treasury bonds because it was prohibited from borrowing the money. Yesterday, amid continuing uncertainty about Congress's intentions, the agency delayed revealing how many government securities it plans to sell next week. Treasury again warned that the government could default on its debt as soon as today if Congress did not act.
The House convened yesterday morning for a short debate on raising the debt ceiling, then promptly recessed to allow members to attend the opening of Bill Clinton's presidential library in Little Rock. Lawmakers reconvened last night to reject a Democratic motion to reimpose "pay as you go" budgetary rules that would force any increase in entitlement spending or cut in taxes to be funded by equal spending cuts or revenue raisers. Lawmakers later raised the debt ceiling.
Much of the drama amounted to "The Perils of Pauline," Reischauer said, with little real doubt that the damsel in distress on the railroad tracks would be rescued just before the train barreled down upon her.
On Wall Street, however, Congress's lackadaisical response raised eyebrows.
"There's generally a denial that the government would allow itself to default, but some of us are getting a little nervous," said David Wyss, chief economist at Standard & Poor's, the bond rating company, as he watched the House recess yesterday morning without a vote.
By passing such a huge increase in the debt limit, with no strings attached, Congress has effectively given the Bush administration a blank check to continue running large deficits, said Stephen S. Roach, chief economist at Morgan Stanley. "An open-ended license for this kind of fiscal irresponsibility is a recipe for disaster," he said.
Republicans and Democrats in Congress agree that the budget process is badly broken.
Sen. Judd Gregg (R-N.H.), who will chair the Budget Committee next year, said the measure of his success will be "putting in place a very definitive budget with strong enforcement mechanisms on the discretionary and entitlement [spending] side."
Beyond such vows, there is little consensus about what to do, said G. William Hoagland, the top budget aide to Senate Majority Leader Bill Frist (R-Tenn.). The deterioration of tough budgeting has been a slow and steady process. In the 1980s, the size of the annual budget deficit was limited, with rules to force automatic cuts if that ceiling was breached. In the 1990s, similar enforcement mechanisms tried to keep Congress from exceeding annual spending limits and from cutting taxes in such a way that increased the budget deficit. Those rules have now lapsed.
Hoagland said some effort will be made next year to strengthen the authority of the budget committees, possibly by bolstering their membership with party leaders and other committee chairmen. The committees could also be granted the power to usurp other committees' authority if they are not complying with the annual budget blueprint.
But congressional leaders thus far have shown little appetite to rein in deficits through such authority. This year, under White House pressure, House and Senate Republicans simply opted against adopting a 2005 blueprint for tax and spending policy, rather than accede to the wishes of Senate Republican moderates to reimpose pay-as-you-go rules.
[quote][i]Originally posted by jets5ever[/i]@Nov 22 2004, 03:30 PM
[b] Section - I replied earlier today, right around when the board crashed...so it must not have taken. Believe me, the GOP is not fiscally conservative...and it enrages me.... [/b][/quote]
Krugman: Economic Crisis a Question of When, Not If
Mon Nov 22, 2004 02:22 PM ET
By Pedro Nicolaci da Costa
NEW YORK (Reuters) - The economic policies of President Bush have set the country on a dangerous course that will likely end in crisis, Princeton economics professor Paul Krugman told Reuters in an interview.
Krugman, who may be best known for his opinion column in The New York Times, said he was concerned that Bush's electoral victory over Sen. John Kerry earlier this month would only reinforce the administration's unwillingness to listen to dissenting opinions.
That, in turn, could spell serious trouble for the U.S. economy, which under Bush's first term was plagued by soaring deficits, waning investor confidence and anemic job creation.
"This is a group of people who don't believe that any of the rules really apply," said Krugman. "They are utterly irresponsible."
Krugman is currently taking some time off from journalism to write and promote the second installment of his latest project -- economics textbooks aimed at making the science more accessible to college students.
In the meantime, however, he worries the Bush administration's fiscal policies are going to push the world's largest economy into a rut.
The most immediate worry for Krugman is that Bush will simultaneously push through more tax cuts and try to privatize social security, ignoring a chorus of economic thinkers who caution against such measures.
"If you go back and you look at the sources of the blow-up of Argentine debt during the 1990s, one little-appreciated thing is that social security privatization was a important source of that expansion of debt," said Krugman.
In 2001, Argentina finally defaulted on an estimated $100 billion in debt, the largest such event in modern economic history.
"So if you ask the question do we look like Argentina, the answer is a whole lot more than anyone is quite willing to admit at this point. We've become a banana republic."
Crisis might take many forms, he said, but one key concern is the prospect that Asian central banks may lose their appetite for U.S. government debt, which has so far allowed the United States to finance its twin deficits.
A deeper plunge in the already battered U.S. dollar is another possible route to crisis, the professor said.
The absence of any mention of currencies in a communique from the Group of 20 rich and emerging market countries this past weekend only reinforced investors' perception that the United States, while saying it promotes a strong dollar, is willing to let its currency slide further.
"The break can come either from the Reserve Bank of China deciding it has enough dollars, thank you, or from private investors saying 'I'm going to take a speculative bet on a dollar plunge,' which then ends up being a self-fulfilling prophecy," Krugman opined. "Both scenarios are pretty unnerving."
In the longer-term, Bush's version of social security reform, which Krugman says would relegate pensions for the elderly to the whims of volatile financial markets, could have wide-ranging implications for future generations.
The only bright spot in having Bush in power for another four years, said Krugman, is that further economic mismanagement might trigger some sort of popular outcry.
"I do believe at some point there is going to be a popular tidal wave against what has happened," concluded Krugman. "In the meantime, you keep banging on the drum, you keep telling the truth.
"And then eventually we have the great demonstrations, which I think are important to let the government know that many Americans are not happy with what is happening," he said.
Section - do a google search under "Krugman Truth Squad." Then, read "Basic Economics" and "Applied Economics" by Thomas Sowell. If you do these two things perspicaciously, you won't ever have to waste your time listening to Krugman again....
Economic `Armageddon' predicted
By Brett Arends/ On State Street
Tuesday, November 23, 2004
Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.
But you should hear what he's saying in private.
Roach met select groups of fund managers downtown last week, including a group at Fidelity.
His prediction: America has no better than a 10 percent chance of avoiding economic ``armageddon.''
Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, ``it struck me how extreme he was - much more, it seemed to me, than in public.''
Roach sees a 30 percent chance of a slump soon and a 60 percent chance that ``we'll muddle through for a while and delay the eventual armageddon.''
The chance we'll get through OK: one in 10. Maybe.
In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants.
The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.
Less a case of ``Armageddon,'' maybe, than of a ``Perfect Storm.''
Roach marshalled alarming facts to support his argument.
To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day.
That is an amazing 80 percent of the entire world's net savings.
Meanwhile, he notes that household debt is at record levels.
Twenty years ago the total debt of U.S. households was equal to half the size of the economy.
Today the figure is 85 percent.
Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes.
Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet.
You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas.
Roach's analysis isn't entirely new. But recent events give it extra force.
The dollar is hitting fresh lows against currencies from the yen to the euro.
Its parachute failed to open over the weekend, when a meeting of the world's top finance ministers produced no promise of concerted intervention.
It has farther to fall, especially against Asian currencies, analysts agree.
The Fed chairman was drawn to warn on the dollar, and interest rates, on Friday.
Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a ``spectacular wave of bankruptcies'' is possible.
Smart people downtown agree with much of the analysis. It is undeniable that America is living in a ``debt bubble'' of record proportions.
But they argue there may be an alternative scenario to Roach's. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms.
Inflation of 7 percent a year halves ``real'' values in a decade.
It may be the only way out of the trap.
Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates.
You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent.