Saturday, 18 October 2008

Cry for me, Argentina

I've stated before in a number of posts that deficit and public debt reduction needs to become a major priority. Neither the Obama nor the McCain campaigns has this problem in their sights. The Obama tax plan is on balance better-funded, but it has far greater spending commitments, even before the revised EESA (which cuts at least $ 110 billion in revenue over 10 years) and Obama's latest $ 60 billion economic stimulus plan.

The numbers are becoming amazing, both in absolute terms and as a share of GDP. Remember that they do not include:

- State budget deficits

- Unfunded liabilities for social security, medicare and medicaid, at a time when the retirement of the baby boomer generation is creating a demographic bulge of retirees and senior citizens.

Lori Montgomery and Den Eggen report in today's Washington Post that the current surge in spending may push the annual deficit towards $ 1 trillion (Spending Surge Pushing Deficit Toward $1 Trillion).

Sarah Hernandez reports in Bloomberg that next year's deficit is already projected at above $ 500 billion, without taking into account EESA disbursements or new economic stimulus packages. (U.S. Debt May Grow $1 Trillion on Rescue, Barclays' Pond Says)

David Walker, former Comptroller General, issued a warning in a CNN commentary that according to his calculations, US public debt was on the order of $ 53 trillion is all unfunded liabilities are taken into account. (Commentary: America's $53 trillion debt problem)

My own post, back on 22 June ("Yes we can", or "No, we can't afford it") looks at some of the spending promises before EESA and the new stimulus packages were announced.

I can understand that in the last stages of a Presidential campaign, no self-respecting Presidential candidate is going to start promising tax increases and spending cuts across the board, on a scale necessary to reduce the debt. But unless the United States implements spending cuts (or revenue increases) on the order of at least $ 350 - 500 billion per year and allocate these towards debt reduction and re-funding Social Security, Medicaid and Medicare, the US will enter a debt spiral from which it will not easily exit.

Barack Obama has promised in the past to partially fund his spending plans through ending the War in Iraq. This campaign is costing about $ 10 billion a month, or $ 120 billion a year. This is mainly spent on combat operations deployment for 150,000 troops and support staff (not including contractors). Given the commitment to increase troops in Afghanistan, re-build depeleted military assets, and keep a "residual" force in Iraq (which I estimate would have to number between 35,000 - 40,000 troops), I don't see how more than $30 billion per year can be "saved" under optimal circumstances. That's a long way from funding either Obama's new spending promises (healthcare, infrastructure, middle class tax cuts, etc.) and debt reduction.

We should therefore not be surprised if many of the promises made during this campaign cannot be funded. If they are funded - through deficit spending - we should then not be surprised to see a far worse macroeconomic situation in 2010-2011. The dollar will plummet; the Fed will have to increase interest rates to fund debt instruments; economic growth will slow, and the US economy will start looking like Argentina's in the mid-1990s.

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