There are certainly a lot of zeros in a trillion dollars.
The other day an accomplished CFO told me that our government could borrow an additional 20 percent of the national debt and not incur any increase in debt service over that paid in fiscal 2008. This was calculated on the extraordinary low interest rate for government bonds offered in the current market.
The problem with this reckoning is our government is becoming a sub-prime borrower. We are making teaser loans to bond buyers, which include the American public, with low interest rates up front and little discussion about the burgeoning principle that will eventually need repayment at more market-oriented fees. The only way to sensibly meet these new obligations will be to raise taxes, cut government spending, print more dollars, or some combination thereof.
I consider myself a fiscal conservative and living through the last eight years of reckless government spending has been a nightmare to watch. In spite of our government’s largess in the form of stimulus payments and entitlements, few of us consider ourselves better off than we were in 2001.
Now the new administration, rife with a highly respected economic brain trust, is hinting at a $1 trillion stimulus package to create 3 million jobs. Do the arithmetic and you’ll see that the cost of each new job exceeds $250,000. Hopefully the final price tag would include engineering and materials that would leave us with improved roads, bridges and ports. (A word to Obama’s highly respected economic brain trust: The story of the hedge fund Long Term Capital Management offers a cautionary tale of how two brilliant Nobel Laureates nearly caused a financial market meltdown. Academics must not only be theory-wise, but also street-wise.)
Obviously something needs to be done to assuage the pain and hardship of the unemployed. But are massive government programs the answer? New studies about The Great Depression have shown that the New Deal Era did not have the dramatic rehabilitative effect on the economy as once thought. Government spending and excessive taxes squelched private industry until the war effort jolted our manufacturing sector back to life. The stock market wouldn’t recover and begin trending upward until 1954.
The prospect of massive New Deal programming in the 21st century begs the question: What type of jobs does government intend to create or preserve? Manufacturing in America has been on a steady, almost unabated decline since the end of World War II. Do we prop up inefficient or outdated industries or do we embark on programs that create more technology-oriented jobs that include necessary training for displaced workers? Building or renovating infrastructure is necessary, but what happens to these workers once the programs are finished?
Big government does not operate cheaply or efficiently and both political parties tend to cater to their voting blocks. In times of crisis these programs garner universal appeal and may have short terms benefits, but often the cost or damage they create is not fully understood until decades later.
If America wants to remain a leader in the global economy, it must treat private capital fairly and enact policies that encourage investment. We need to provide enhanced tax incentives for research and development. And, given that more than 50 percent of American employees work for companies of less than 500 people, let’s avoid punitive taxes disguised as stimuli on small businesses.
International financial boundaries no longer exist; investment will flow in to countries that offer the safest and best returns. We should not eliminate our legacy steel and automotive industries, but it is clear that the country, which encourages technology, originality, and plans for the next decade instead of the next day, will achieve global economic preeminence. If we’re going to spend a trillion dollars, I hope that Washington can guarantee some bang for our bucks.
Tags: The Great Recession
January 6, 2009 at 3:29 am |
Am i wrong to think that Obama is taking this advice and a lot of the money will be going to alternative energy projects and those that have to do with new technology infrastructure?
January 6, 2009 at 3:43 am |
Levi,
One can question how well we’ve done with ethanol as alternative energy. Let’s reserve judgment until we see the extent the government will involve themselves through legislation, research and financing. As I mentioned in the blog, government is neither cost efficient nor cost conscious. Our country has a history of grand schemes gone awry. The Great Society is an example and spreading democracy through-out the world is another.
Regards,
Lou
January 6, 2009 at 1:59 pm |
Lou,
I believe that the reason that the government can borrow at so low a rate (T Bills are virtually at 0) is because there is some very large money that is happier being in T Bills than in any other investment or bank. The largest investors can’t keep their money in the bank because they’re unsure whether the bank will collapse and leave them uninsured over $250,000. T Bills on the other hand may not pay as an investment, but the return of the funds is guaranteed. Once there are any attractive investments, there will be less money chasing T Bills and therefore the goverment will have to pay more to borrow.
Richard
January 6, 2009 at 6:17 pm |
Richard,
The safety of Treasury Bonds is a great selling point for those with large amounts of capital to invest. No one seems to be giving consideration to the actual amount of debt the United States is accumulating or the potential liability down the road of repaying this debt at more market oriented interest rates. For those antiques like me, the interest rates during the Carter Administration could likely return and that would be a back breaking scenario for this country. One reputable Swiss private bank is predicting a potential bond default or a moratorium on bond redemption for the United States two years hence. This sounds extreme but we have witnessed many defaults in credit worthy countries that eventually went sour.
Everyone seems to compare the current crisis with the Great Depression. As you are a member of KWMV, we will send you a copy of The Forgotten Man with our compliments. This book takes a different look at the circumstances in 1929 has an in depth analysis of the real successes and failures of The New Deal.
Regards,
Lou
January 6, 2009 at 7:30 pm |
Basics in bond math. Bills less than a year in maturity, notes out to 5 years and bonds 10 years and longer are indeed at historic lows in terms of yields or cost to the treasury. The problem will grow exponentially as rates rise and as the treasury tries to borrow at the longer end of the yield curve to fund out the t-Bills coming due. Another scenario – the yield curve will invert with the bills costing the treasury more than the bonds. It has happened several times in recent history and usually forecasts an inflationary cycle. Those too occur with regularity.
Use of the funds should, as you point out, should be in Research and Development as well as some infrastructure projects but capitalism will dictate where the most reasonable all in costs are for manufacturing steel or autos or windmills.
We will need to watch carefully the wave of regulation which will begin soon some of it necessary, some of it, we hope not too limiting as to restrict creative new ideas and shifts of capital. Who knows perhaps we will become the low cost producer.
Long Term Capital was a boom phenomenon at the emergence of the black box economics where computer models were revered more often than understood. The boys of LTC convinced many wealthy individuals that they could predict changes in interest rates, currency swaps and so on. The reputations of the partners was one thing but as we have learned, at least for a moment, if you don’t understand how it works perhaps you shouldn’t put you money there. (Thank you Mr. Madof).
I wish there was a decent parallel to the current crisis. There are similarities from many eras, history is only a guide and reminder usually of whqt didn’t work. Our current crisis is probably it’s own model and we will need to learn as we go.
Savings would be prudent, hard work and creativity seldom go out of style, ability to move capital has been a mainstay. Failure and bankruptcy have their place too. Optimism and cooperation wouldn’t hurt but we shall see.
It’s a little early still, to place any bets.
January 10, 2009 at 7:57 pm |
Dear Bob,
It appears I could use some retraining as my original response to you was sent non-stop to cyberspace.
I am not a believer of unabated spending as a remedy to our problems although something needs to be done. The path we are embarking on will either prove to be brilliant or lead to an even larger financial disaster than we are in now. The concept of accumulating more debt even at the current low interest rates in exchange for inflation and debasement of the dollar hoping that a later problem could be dealt with easier makes little sense to me. I am not an economist, but I have always believed in prudence whether personally, nationally or globally.
The Long Term Capital black box has been replaced by different black boxes. The new ones under estimated the scope of the derivatives market and did not predict the default rate on sub-prime loans. I wonder if our Congress has a new black box devised by actuaries and the Congressional support staff.
As you stated, there is no decent parallel and we’re sailing in to unsheltered territory. The global reaction to our policies will become evident in time and I hope they are positive. There is no quick fix and attempting a long term remedies for our ills has never been a politically expedient path to take.
Savings, hard work and creativity do not go out of style, but are some of the programs being considered by Congress are the antithesis of those values?
We are early in the game and we have no choice but to give Obama-nomics a chance and a fair amount of time before being critical. Even the most brilliants minds cannot forecast either the immediate effect or the long term consequences of a trillion dollar stimulus package.
Best regards,
Lou
January 10, 2009 at 5:43 pm |
Nice analysis, Lou. I just finished Amity Shleas’ “The Forgotten Man,” a recent analysis of the Great Depression. Extraordinary government spending didn’t work then and I expect that Obama’s plan won’t work now. Only time will tell. Frankly, I plan to sit on the sidelines and wait this one out.
I would like you to consider the realities of what you called “the last eight years of wreckless government spending.” Yes, they were wreckless and it cost the Republicans controll of both houses of congress. Let’s not forget that they last two years of “wreckless…spending” happened with Democrats in control.
When the Republicans took over in 1994, they made all kinds of promises about cutting spending and eliminating ear-marks, but they forgot that the congress is made up of career politicians. Career politicians are incapable of curbing spending. Have you ever wondered about why congresses have such low approval ratings? This congress is in the sinlge digits…9%.
The public hates the congress, but loves their congressman. So, they routinely send the same guy back for another two or six years. Why do they love their individual congressman? The answer is pork and earmarks. So Republican and Democrat lead congresses overspend as the means to remain in office.
Some would say that Bush should have used his veto pen more often and I agree. The problem is that presidents do have some things that they would like to get accomplished and that requires coerced barter. Soon to be sworn in President Obama will learn the same thing by the spring. Thanks to the Supreme Court which ruled that the Persidential Line-item Veto was unconstitutional, the president can’t trim the fat.
I fear that in the next few years we will waste enormous amounts of tax payer money. Our national debt will soar and the critical issues like radical Islamic terrorism and a near bankrupt Social Security will be ignored.
January 10, 2009 at 7:21 pm |
Dear Joe,
I am about half way through The Forgotten Man and I recommend you read A Letter To America by Boren.
I have never been a believer in huge government programs to foster economic growth and although one can skew any statistic, the majority of economists would have a difficult time proving that these programs have any long lasting value. They are short term solutions further promulgating the insidious path of Deficit Spending. As we saw in the aftermath of The Depression, the jobs created were fleeting, provided little long term training and the government has been kept responsible for over seven decades of bad programs.
During the last eight years I have seen little difference between the political parties. Fiscal conservatives no longer exist except in the memory of a few Republicans. As we attempt to spend our way out of our problems, most of them caused by spending too much, we are, in my humble opinion, embarking on a path that will be difficult to reverse. Government does not produce anything and the premise of spending on temporary solutions is monumental stupidity. As we all have learned, there is nothing more permanent than a temporary government program.
I expect a large dose of euphoria after the trillion dollar relief package gets through Congress, but reality will eventually set in. Wall Street, the foreign exchange market and the interest rate curve will tell us how the rest of the world views our economic policies.
Regards,
Lou
January 10, 2009 at 7:47 pm |
Lou:
An excellent blog!
Here are some scary numbers.
One of the few accurate financial figures published by the US government is the US national debt. The debt for any specific day can be obtained from the US Treasury website.
According to US Treasury Department numbers the national debt stood at 5.727 trillion on 19 January 2001-the beginning of the Bush 8 year term in office As of 2 January 2009 the debt stood at 10.627 trillion-an increase of 4.9 trillion since the beginning of the Bush terms in office. (Almost double)
Since the US Gov operates on a cash basis we can calculate the real average annual deficit for the Bush years based on these borrowings: 4.9 trillion/8 years =annual average deficit of 612 billion.
Now the really scary stuff.
If we project that this average annual deficit of 612 billion (Probably too low) continues for the next 50 years and we assume that the government cost of borrowing averages 8% (Probably too low) and we assume that this amount plus the additional compounded interest must be borrowed each year we arrive at a national debt of 406 trillion dollars at the end of 50 years. This figure does not include accrued interest on the existing debt of 10.627 trillion.
Just the interest on 406 trillion exceeds the entire current GDP by a factor of more than two. So if present trends continue, long before the end of anything close to this 50 year projection, the US dollar will become worthless.
Jim Cole
January 11, 2009 at 10:25 pm |
Dear Jim,
Those a very frightening numbers. A variety of experts disagree about the events causing The Great Depression but there is agreement that deflation and credit restrictions exacerbated the situation. No economic circumstance is exact but based on historic parallels the incoming administration obviously has decided to encourage inflation, hopefully find the means to loosen credit and deal with the consequences further down the road.
No one can claim with a degree of certainty if this will not work nor can anyone guess on the long term effect on America. The diminution of the dollar in foreign markets, a return of excessive inflation and higher interest rates seem acceptable if it averts a near term catastrophe.
I have thought for a long time that both political parties only looked at solving problems to a time line that achieved near term objectives and accordingly managed to keep themselves in office.
The President-elect has the brightest academics guiding his fiscal policies. They are certainly smarter than me, but I wonder how they see the situation evolving at the end of Obama’s first presidential term. No one seems to be predicting the future.
No one can image an economic collapse as experienced during the Weimar Republic or that exists today in Zimbabwe. On the other hand, every crisis is caused by the introduction of unexpected events and people’s failure to prepare for them.
I am patient, optimistic and at the same time defensive.
Best regards,
Lou
January 27, 2009 at 9:27 pm |
We have been told that FDR saved country and brought us out of the great depression. In fact, it was was good ole Uncle Adolph and Mr. Tojo that got that job done. Recent books and articles, one of which was published by one of Mr. Obama’s top aids, says that the government programs actually did more to keep us in recession than to bring us out and that Federal Reserve policy had more impact on the economy.
If we are going to make investmnts that will achieve certain goals that will make us better as a nation, then I could support them. But the current bill is laden with all the pork that 435 politicians and their repective lobbiests can come up with. Obama said he didn’t want any pork in this bill and that he didn’t want lobbiest influencing the decisions of his administration. Well I have this observation: $1 trillion will attract a lot of pigs and a lot of lobbiests. I gues I’m being redundant.
January 28, 2009 at 4:47 pm |
Dear Mr. Wenke,
It seems more research and analysis has revealed that many of the New Deal programs were not only ineffective but damaging to a more rapid recovery. Unfortunately, the mind set from that era has given many people the pretense that government can cure everything, or worse, it has given government the authority to affect continual new cures.
Government can influence markets but they cannot force markets to react in any particular fashion over a period of time. We have seen this through the failure of price controls, the mandate for producing ethanol and more recently the attempt to unlock credit.
In the global marketplace antiqued domestic programs are less likely to be effective.
We have had decades failed social programs and it seems we are attempting to revive our economy by simply pouring more money in to areas that have historically proven to be ineffectual. It seems most of the trillion dollars will be appropriated not for investment but for rewards to many failed enterprises. I expect we’ll get an initial boost in our economy for a short period of time, but no one seems to be able to accurately forecast the greater consequences a little further down the road.
Regards,
Lou