So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.
When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.
From CNBC:
The United States may be on course to lose its 'AAA' rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.
"The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system" and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.
This is only one man's opinion so it's obviously open to debate.
Let's look at this from a debt/GDP perspective. Right now total US debt is about $10.5 trillion while total GDP is about $14.4 trillion (or so). That makes debt/GDP roughly 72%. With the economy contracting the $14.4 trillion will remain the same. So let's increase total US debt to $11.5 trillion. That brings debt/GDP to roughly 80%. While I don't think that means loss of the AAA rating, I do think it puts upward pressure on rates making all that debt far more uncomfortable for policy makers.
5 comments:
With consumer spending fueling 70% of the GDP you really expect it not to start contracting? We are already uncomfortably close to GDP before the bailout and the recession.
So let's increase total US debt to $11.5 trillion. That brings debt/GDP to roughly 80%. While I don't think that means loss of the AAA rating, I do think it puts upward pressure on rates making all that debt far more uncomfortable for policy makers.
This is ultimately a matter of supply and demand. In spite of our large debt, US treasuries are still seen as the most stable investment in the world. So if the global economy is in the tank, demand for our securities is high which allows us to borrow at more favorable rates. All in all, this should allows us to borrow what we need to get the economy back on track. So in the short term, I don't think this is a problem.
Also, it's worth nothing that our debt ratio is lower than a number of other industrialized countries. Germany, France, Japan, and Canada all have higher debt/GDP ratios. So when comparing risk of a loan to us versus risk of a loan to other nations, we do compare pretty favorably.
However, this does create a more long term structural problem. Inevitably as the economy picks up people will dump their treasuries for higher return investments. That will increase our borrowing costs. Furthermore, we'll now have a larger chunk of annual revenue consumed with paying interest on the outstanding debt because we have more debt. This will leave less money available for paying for current needs.
I hate to disagree with a Noble Laureate but a stimulus package as was constructed earlier this year is the last thing we need. Excessive spending and debt is what got us into this situation thus it cannot be the cure. The ill advised bailouts are simply allowing those entities that should rightfully cease to exist to continue unabated. While there may be a need for their function in the economy there is no need for them as individual concerns. Their banking and investment functions can be duplicated by the Government as was done with the commercial paper markets. The viable portions of their organizations, retail brokerages, can be sold to qualified entities and their investment portions together with its toxic securities allowed to die.
The Bush debt on top of the Reagan debt was bad enough. Now in a flurry of misappropriations, misrepresentations and malfeasance the Treasury is being looted by Wall Street gangsters. The allotted debt for this is already 1.3 trillion. They'll burn through that like an AIG executive as a spa. The simultaneous borrowing for a stimulus will create the United States of Argentina. It's time to level with the American people and tell them that we're broke and broken. The Republican onslaught has done what it set out to do, drown the Government in a bathtub of debt. Tax cuts, reckless spending and Wars based on borrowed money have killed the goose. There ain't no more golden eggs. People selling their houses to one another did not create wealth only debt. It's time to face up to the truth, we're broke.
The only solution is to again speak the truth in that the Wars were an illegal creation of sick minds. The delusion of Empire cloaked in vapid self serving patriotism is the greatest threat to our National Security. Only by eschewing all that feeds this delusion can the Nation be put on a path of reconstruction. The reconstruction must be paid for by not throwing good money after bad or debt but by the levying the taxes required to pay as you go and repay what was spent. This should involve all with the steepest levies to those who reaped the greatest Governmental munificence.
Anonymous said..
good post.
"Also, it's worth nothing that our debt ratio is lower than a number of other industrialized countries. Germany, France, Japan, and Canada all have higher debt/GDP ratios. So when comparing risk of a loan to us versus risk of a loan to other nations, we do compare pretty favorably."
ideas of mass delusion,,,one of the US problems,,too many blind citizens around
I found this really interesting:
"Obama motivates D.C. to initiate new lower and middle class bailout"
Obama's Taxpayer Bailout
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