> US deficit zooming to half-trillion as Bush leaves

> Clinton left a  $236 Billion SURPLUS !!

> By ANDREW TAYLOR, Associated Press Writer 1 minute ago
>
> Monday's figures capped a remarkable deterioration in the United States' 
> budgetary health under Bush's time in office.
>
> The government's budget deficit will surge past a half-trillion dollars 
> next year, according to gloomy new estimates, a record flood of red ink 
> that promises to force the winner of the presidential race to dramatically 
> alter his economic agenda.
>
> The deficit will hit $482 billion in the 2009 budget year that will be 
> inherited by Democrat Barack Obama or Republican John McCain, the White 
> House estimated Monday. That figure is sure to rise after adding the tens 
> of billions of dollars in additional Iraq war funding it doesn't include, 
> and the total could be higher yet if the economy fails to recover as the 
> administration predicts.
>
> The result: the biggest deficit ever in terms of dollars, though several 
> were higher in the 1980s and early 1990s as a percentage of the overall 
> economy.
>
> Neither campaign is backing off campaign promises - McCain to cut taxes 
> and Obama to expand health and education programs - in light of the 
> bleaker new figures.
>
> "We can't afford not to invest in some major initiatives such as health 
> and energy and more tax cuts," said Obama economic adviser Jason Furman.
>
> But Democrats controlling Congress suggest that may have to change once 
> President Bush's successor takes office.
>
> "Whoever becomes the next president will have a very, very sobering first 
> week in office," said Senate Budget Committee Chairman Kent Conrad, D-N.D.
>
> McCain promises to renew the full roster of Bush tax cuts enacted in 2001 
> and 2003 and add many more for businesses and upper income people who pay 
> the alternative minimum tax. The Bush tax cuts expire at the end of 2010 
> and renewing them would soon cost well over $200 billion a year. 
> Eliminating the alternative minimum at the same time would cost almost as 
> much.
>
> Obama would repeal tax cuts on wealthier taxpayers and investors but would 
> leave most of the Bush tax cuts in place while seeking additional cuts for 
> senior citizens, the middle class and the working poor. And he also wants 
> lots of new spending for health care, education and many other federal 
> programs.
>
> "There's a total disconnect between today's report and what we're hearing 
> on the campaign trail," said Robert Bixby of the Concord Coalition budget 
> watchdog group.
>
> The deficit situation confronting the next president is reminiscent of 
> that which Bill Clinton faced in 1993. Under Wall Street pressure, Clinton 
> abandoned promises of tax cuts and pushed a tax-heavy deficit reduction 
> plan through a Democratic Congress.
>
> The administration said the deficit was being driven to an all-time high 
> by the sagging economy and the stimulus payments being made to 130 million 
> households in an effort to keep the country from falling into a deep 
> recession. But the numbers could go even higher if the economy performs 
> worse than the White House predicts.
>
> The budget office predicts the economy will grow at a rate of 1.6 percent 
> this year and will rebound to a 2.2 percent growth rate next year. That's 
> a half point higher than predicted by the widely cited "blue chip" 
> consensus of business economists. The administration also sees inflation 
> averaging 3.8 percent this year, but easing to 2.3 percent next year - 
> better than the 3 percent seen by the blue chip panel.
>
> "The nation's economy has continued to expand and remains fundamentally 
> resilient," said the budget office report.
>
> A $482 billion deficit would easily surpass the record deficit of $413 
> billion set in 2004. The White House in February had forecast that next 
> year's deficit would be $407 billion.
>
> The deficit numbers for 2008 and 2009 represent about 3 percent of the 
> size of the economy, which is the measure seen as most relevant by 
> economists. By that measure, the 2008 and 2009 deficits would be smaller 
> than the deficits of the 1980s and early 1990s that led Congress and 
> earlier administrations to cobble together politically painful 
> deficit-reduction packages.
>
> Still, the new figures are so eye-popping in dollar terms that they may 
> restrain the appetite of the next president to add to the deficit with 
> expensive spending programs or new tax cuts. In fact, pressure may build 
> to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled, 
> with Congress also feeling pressure to curb spending growth.
>
> The administration actually underestimates the deficit since it leaves out 
> about $80 billion in war costs. In a break from tradition - and in 
> violation of new mandates from Congress - the White House did not include 
> its full estimate of war costs.
>
> Obama's campaign used the new numbers to assail McCain for embracing 
> Bush's tax cuts. As for Obama's plans, campaign adviser Furman said the 
> candidate would cut wasteful spending, close corporate loopholes and roll 
> back the Bush tax cuts on upper brackets while still promising to make 
> "health care affordable and putting a middle class tax cut in the pocket 
> of 95 percent of workers and their families."
>
> Monday's figures capped a remarkable deterioration in the United States' 
> budgetary health under Bush's time in office.
>
> He inherited a budget seen as producing endless huge surpluses after four 
> straight years in positive territory. That stretch of surpluses 
> represented a period when the country's finances had been bolstered by a 
> 10-year period of uninterrupted economic growth, the longest expansion in 
> U.S. history.
>
> In his first year in office, helped by projections of continuing 
> surpluses, Bush drove through a 10-year, $1.35 trillion package of tax 
> cuts.
>
> However, faulty estimates, a recession in March 2001 and government 
> spending to fight the war on terrorism contributed to pushing the deficit 
> to a record in dollar terms in 2004.
>
> =================
>
>
>
> The Bush Budget Deficit Death Spiral
> by Robert Freeman
>  Lenders talk about a "debtor's death spiral." It occurs when borrowers 
> get so far in over their heads they begin borrowing money just to cover 
> the interest payments on past borrowings. The borrowers have to do this to 
> keep the lending flowing but they can no longer plausibly pay down the 
> principal. As new debt compounds on old, bankruptcy becomes imminent. 
> Further lending is foolhardy. Foreclosure is only a matter of time.
>
> The U.S. is starting to look like it is entering just such a death spiral. 
> It is foretold not simply by the large and growing deficits, nor by the 
> fact that their carrying costs will rise quickly as interest rates rise. 
> Rather, it is the fact that these trends are becoming irreversible, a 
> structural part of the U.S. economy.
>
> When the ultimate collapse will occur, whether it comes with a bang or a 
> whimper, how it will be triggered, and how severe it will be are as yet 
> unknown. But as Herbert Stein, Chairman of the Council of Economic 
> Advisers under Richard Nixon was fond of saying, "Things that can't go on 
> forever, don't."
>
> The first signs of impending trouble are the exploding budget deficits 
> themselves. They began, of course, under the parlous economic stewardship 
> of Ronald Reagan. Reagan cut the marginal tax rate on the wealthiest of 
> Americans from 70% to 38%. He promised it would spur an orgy of investment 
> and rocket the economy to new levels of production and prosperity. 
> Instead, his "supply side economics" did the exact opposite. It produced 
> the deepest recession since the Great Depression.
>
> Output fell 2.2% in 1982 while budget deficits soared. When Reagan took 
> office in 1981, the national debt stood at $995 billion. Twelve years 
> later, by the end of George H.W. Bush's presidency, it had exploded to $4 
> trillion. Reagan was a "B" grade movie actor and a doddering, probably 
> clinically senile president, but he was a sheer genius at rewarding his 
> friends by saddling other people with debts.
>
> Bill Clinton reversed Reagan's course, raising taxes on the wealthy, and 
> lowering them for the working and middle classes. This produced the 
> longest sustained economic expansion in American history. Importantly, it 
> also produced budgetary surpluses allowing the government to begin paying 
> down the crippling debt begun under Reagan. In 2000, Clinton's last year, 
> the surplus amounted to $236 billion. The forecast ten year surplus stood 
> at $5.6 trillion. It was the last black ink America would see for decades, 
> perhaps forever.
>
> George W. Bush immediately reversed Clinton's policy in order to revive 
> Reagan's, once again showering an embarrassment of riches on the already 
> most embarrassingly rich, his "base" as he calls them. He ladled out some 
> $630 billion in tax cuts to the top 1% of income earners. In true 
> Republican fashion, they returned the favor by investing over $200 million 
> to ensure Bush's re-election. Do the math. A $630 billion return on a $200 
> million investment: $3,160 for $1. I'll give you $3,160. All I ask is that 
> you give me $1 back so I can keep the goodness flowing. Do we have a deal? 
> Republicans know return on investment.
>
> But the cost to the public has been a return to the exploding deficits of 
> the Reagan years. Bush blew through Clinton's surplus in his first year. 
> The 2004 deficit reached $415 billion, a record. Still, its real size is 
> masked by the fact that Bush has shifted $150 billion from the Social 
> Security trust fund in order to make the shortfall look smaller. It's like 
> pretending you're richer when you move money from one pocket to another. 
> Both sums have to be repaid, so the real amount borrowed is the $415 
> billion "nominal" deficit plus the $150 billion from Social Security or 
> $565 billion.
>
> This shell game with federal trust funds taints all official forecasts 
> about Bush's deficits going forward. For example, the Congressional Budget 
> Office estimates Bush's cumulative ten year deficit at $2.3 trillion, to 
> be sure, a breathtaking shortfall from the $5.6 trillion surplus he 
> inherited from Clinton. But as with the yearly number, this one ignores 
> the trust fund sleight of hand, an omission of some $2.4 trillion. When 
> this is added back in, Bush's ten year deficit leaps to $4.7 trillion, 
> $10.3 trillion short of Clinton's number.
>
> But even that number is understated because the CBO forecasts are based on 
> current law. Bush's tax cuts have not yet been made permanent. If Bush is 
> re-elected and the cuts are made permanent, that would add another $3.2 
> trillion to the shortfall. It was not too long ago that a $3.2 trillion 
> increment to anything would have made sober people's noses bleed but such 
> figures are mere accounting details to the Big Thinkers in the White 
> House, especially since it will not be their constituents who are paying 
> it back.
>
> Add it all together-the "nominal" deficit, the stealth siphoning from 
> Social Security, and the permanent effects of Bush's tax cuts-and the 10 
> year deficit explodes to a mind-boggling $7.9 trillion. Within ten years, 
> the government will owe more than $15 trillion. And this, at precisely the 
> time the government needs fiscal solvency to begin paying the Baby Boomers 
> their Social Security.
>
> This run-up in debt represents the most rapid, predatory looting of public 
> wealth in the history of the world. The interest costs alone will consume 
> the government and, soon, the entire economy. In fiscal 2004, interest 
> costs came to $321 billion against a deficit of $415 billion. So three 
> quarters of all the current year borrowing is spent paying interest on 
> past borrowing. This is the most immediate symptom of the deficit death 
> spiral.
>
> And the situation will only get worse when interest rates rise, as they 
> must. The U.S. has enjoyed an unprecedented period of low rates, the 
> lowest in 50 years. The only direction they can go is up. And they will 
> rise quickly once foreigners, who are more and more the buyers of U.S. 
> debt, become saturated with dollars and begin to eschew additional 
> lending.
>
> This is effectively what happened in the early 1970s when the Arab oil 
> sheikdoms realized that Nixon had decoupled the dollar from gold 
> redemption but was still paying for oil in dollars-essentially paper. The 
> sheiks tripled the price of oil in 1973 and again in 1978. The OPEC "oil 
> shocks" wrought havoc on the American economy, putting a death to the 
> halcyon days of post-World War II economic growth. Today's oil at $50 a 
> barrel is the modern day enactment of the same implicit disdain for 
> dollars.
>
> The Japanese did the same thing in 1987. For years they had funded 
> Reagan's massive supply side budget deficits but had been made fools as 
> the dollar was losing 15% a year in value, more than wiping out the 5% 
> return they were receiving on their treasuries. They wisely stopped buying 
> in October 1987, precipitating the greatest one-day U.S. stock market 
> collapse since the Great Depression.
>
> The "dollar overhang" problem caused by Bush's record budget deficits is 
> compounded by record U.S. trade deficits. Every month, the U.S. economy 
> buys some $50 billion more from the world than it sells, in the act 
> flooding the world with private dollars. These are on top of the public 
> dollars from the budget deficits. The total trade deficit for 2004 will 
> amount to some $680 billion. As recently as 1992, the amount was only $34 
> billion, a twenty fold increase in just over 10 years, another sign of the 
> spiral.
>
> These "twin deficits"-trade and budget-combine to well over $1 trillion a 
> year of borrowing. Their effect is to bury the world's economy in dollar 
> debts, dollars that increasingly buy less and less. As mentioned above, no 
> one knows when the world will say, "enough." Japan holds a reported $1 
> trillion supply of dollars, China, more than half a trillion. Both have 
> bought dollars-in effect loaning equivalent sums to the U.S.-in order to 
> keep the value of their own currencies low and therefore make their own 
> goods cheaper in American markets.
>
> The Bush administration claims that both countries will continue to buy 
> dollars so that their own currencies will not rise. But the danger is that 
> once one major player declares it doesn't want any more dollars there will 
> be a rush for the exits. Demand for dollars, and with it, the dollar's 
> price, will plummet. The last player holding dollars will be stuck with 
> the bag, a multi-trillion dollar stash of dollar holdings that are worth 
> only a fraction of what they were just a month before.
>
> In other words, there are structural incentives biasing the descent toward 
> chaos rather than order. Already, the dollar is down 19% over the past 
> year, an eerie harkening of the Japanese experience of the late eighties. 
> Its decline is being cagily "managed" by the U.S. Treasury which has 
> muscled foreign central banks into picking up the slack since private 
> foreign buyers have begun to refuse further dollar purchases. Foreign 
> central banks now hold some 40% of total U.S. government debt.
>
> The only way the U.S. government can prevent a stampede is to raise 
> interest rates-the return for holding dollars. And Alan Greenspan has 
> begun this process. But this, of course, increases the carrying costs of 
> the national debt. As if a $7 trillion national debt funded at 4% isn't 
> bad enough, envision a $15 trillion debt at 10%. Instead of $300 billion a 
> year in interest costs, think of $1.5 trillion. Instead of interest 
> amounting to 3% of GDP, imagine the carnage as it approaches 10%.
>
> The higher rates will put a knife in the heart of an already tenuous 
> recovery, undermining the only process by which payoff might ever be 
> accomplished. It will suck all of the oxygen out of the economy. 
> Economists call this the "crowding out effect" when lending to the 
> government gets priority over private lending. After all, government has 
> the power to tax in order to fulfill its obligations whereas private 
> borrowers do not.
>
> But the market rations shortages by raising prices-interest rates-forcing 
> private borrowers to pay ever more for scarce capital. In this way, 
> markets for private debt mirror markets for public debt. Investment, the 
> foundation of future growth, will be savaged. New roads, hospitals, 
> factories, schools and research will be sacrificed to escalating interest 
> rates borne of stratospheric debt.
>
> This occurred during the deficit-burdened 1980's when investment grew at 
> an annual rate of only 2.5% versus 6.9% in the surplus-graced 1990's. And 
> not surprisingly, productivity suffered as well. It grew at a meager 1.4% 
> per year during the 1980's but almost 50% faster, 2.0%, during the 1990's.
>
> This is the perverse, inescapable cycle-the death spiral-that comes part 
> and parcel with too much debt. Its relentlessly rising carrying costs 
> steadily erode the possibility of getting out from underneath it. Higher 
> debt loads lead to higher interest rates, which lead to lower investment 
> which leads to slower growth and, ultimately, diminished prosperity. And 
> it develops a runaway, recycling dynamic all its own.
>
> Finally, it is not only the high absolute levels of debt, nor their rapid 
> expansion, nor even the imminence of much higher interest rates that 
> consign the U.S. to the certain oblivion of a deficit death spiral. It is 
> that this toxic combination of circumstances has become structural, 
> irreversible, locked into the very nature of government economic policy. 
> It is like a driver hurtling down a cul de sac and gluing his foot to the 
> accelerator.
>
> The very purpose of the Reagan supply side tax cuts was to funnel more of 
> the nation's wealth to those already wealthy. This is what David Stockman, 
> Reagan's Budget Director, meant when he called them a "Trojan Horse." And 
> they did their job wonderfully.
>
> In 1980, the top 20% of income earners captured 43.7% of all national 
> income. By 1992, at the end of the first Bush administration, their share 
> had risen to 46.9%. Today it is over 49%. Meanwhile, the lowest four 
> fifths of all income earners have seen their share of national income 
> decline. The lowest quintile's share has shrunk from 4.2% to 3.5%. The 
> second lowest quintile has fallen from 10.2% to 8.8%. The middle quintile 
> has seen its share fall from 16.8% to 14.8%. And the second highest 
> quintile has suffered a decline from 25.0 to 23.3%. It is empirically the 
> case that the rich are getting richer while everyone else is getting 
> poorer.
>
> The problem this holds for national economic management is that the rich 
> consume a much lower percentage of their income than do those who are not 
> rich. How many cars can you drive at one time, anyway? The rich are also 
> the most likely to spend what money they do on foreign luxury goods, take 
> foreign vacations, make investments in foreign countries, or just let the 
> money sit in the bank.
>
> The poor, working, and middle classes, on the other hand, spend virtually 
> everything they earn. The car needs new tires, the kids need new shoes, 
> the washing machine needs fixing, they're two months behind on the rent 
> and three months behind on the credit cards. In all of these ways, income 
> shifted through the tax code to middle and lower quintile earners is 
> quickly spent while income shifted to the wealthy is not. This is not 
> class warfare. It is Economics 101.
>
> It is personal consumption-spending-that generates 67% of GDP. If more of 
> the nation's income goes to those who do not consume its output, while 
> those who do consume it have less and less income, a structural shortfall 
> emerges where there is simply not enough purchasing power to sustain GDP. 
> GDP will ratchet steadily downward in mirror image to the rate at which 
> national income is transferred upward.
>
> The only recourse is for the government to step in to pump up demand. This 
> is the role the deficits play in sustaining GDP. This is why deficits 
> exploded under Reagan, Bush I, and Bush II, all of whom cut taxes on the 
> rich, but declined under Clinton who raised them. Rising public deficits 
> are necessary-in fact, indispensable-to sustaining GDP because so much of 
> the nation's wealth has been transferred from those who, as a matter of 
> necessity, spend it to those who, as a matter of taste, do not.
>
> Supply side economics (and that includes Bush's ill-disguised variant) 
> rests on the repeatedly disproved faith that investment and prosperity are 
> caused by giving ever more of the nation's wealth to the already wealthy. 
> As long as this lunacy continues to drive tax policy, the government will 
> keep expanding federal deficits. Eventually, possibly soon, this will 
> cause a collapse of the dollar that can only be reversed by raising 
> interest rates. But that will explode the carrying costs on the by-then 
> mammoth debts, vitiating private sector investment. And that will kill all 
> future prospects of meaningful growth.
>
> This is the essence of the Bush budget deficit death spiral. To be sure, 
> the debts are an unequalled bonanza for those few who lend the money, for 
> they get to do so at ever-higher rates of interest. But it is a death 
> sentence for all the rest of the economy.
>
>

Fascinating report, but one sentence bothers me and I quote:
"Today's oil at $50 a barrel is the modern day enactment of the same 
implicit disdain for dollars".

The words "Today's oil" bothers me. "Today" is when? Whose oil price is 
$50 a barrel? Or does that word "Today" refer to a different period of time?

But this report is a damning indictment against that moron GW Bush. It 
may well be his death knell (at least, we can hope it will)!

> 
>> By ANDREW TAYLOR, Associated Press Writer 1 minute ago
>>
>> Monday's figures capped a remarkable deterioration in the United States' 
>> budgetary health under Bush's time in office.
>>
>> The government's budget deficit will surge past a half-trillion dollars 
>> next year, according to gloomy new estimates, a record flood of red ink 
>> that promises to force the winner of the presidential race to dramatically 
>> alter his economic agenda.
>>
>> The deficit will hit $482 billion in the 2009 budget year that will be 
>> inherited by Democrat Barack Obama or Republican John McCain, the White 
>> House estimated Monday. That figure is sure to rise after adding the tens 
>> of billions of dollars in additional Iraq war funding it doesn't include, 
>> and the total could be higher yet if the economy fails to recover as the 
>> administration predicts.
>>
>> The result: the biggest deficit ever in terms of dollars, though several 
>> were higher in the 1980s and early 1990s as a percentage of the overall 
>> economy.
>>
>> Neither campaign is backing off campaign promises - McCain to cut taxes 
>> and Obama to expand health and education programs - in light of the 
>> bleaker new figures.
>>
>> "We can't afford not to invest in some major initiatives such as health 
>> and energy and more tax cuts," said Obama economic adviser Jason Furman.
>>
>> But Democrats controlling Congress suggest that may have to change once 
>> President Bush's successor takes office.
>>
>> "Whoever becomes the next president will have a very, very sobering first 
>> week in office," said Senate Budget Committee Chairman Kent Conrad, D-N.D.
>>
>> McCain promises to renew the full roster of Bush tax cuts enacted in 2001 
>> and 2003 and add many more for businesses and upper income people who pay 
>> the alternative minimum tax. The Bush tax cuts expire at the end of 2010 
>> and renewing them would soon cost well over $200 billion a year. 
>> Eliminating the alternative minimum at the same time would cost almost as 
>> much.
>>
>> Obama would repeal tax cuts on wealthier taxpayers and investors but would 
>> leave most of the Bush tax cuts in place while seeking additional cuts for 
>> senior citizens, the middle class and the working poor. And he also wants 
>> lots of new spending for health care, education and many other federal 
>> programs.
>>
>> "There's a total disconnect between today's report and what we're hearing 
>> on the campaign trail," said Robert Bixby of the Concord Coalition budget 
>> watchdog group.
>>
>> The deficit situation confronting the next president is reminiscent of 
>> that which Bill Clinton faced in 1993. Under Wall Street pressure, Clinton 
>> abandoned promises of tax cuts and pushed a tax-heavy deficit reduction 
>> plan through a Democratic Congress.
>>
>> The administration said the deficit was being driven to an all-time high 
>> by the sagging economy and the stimulus payments being made to 130 million 
>> households in an effort to keep the country from falling into a deep 
>> recession. But the numbers could go even higher if the economy performs 
>> worse than the White House predicts.
>>
>> The budget office predicts the economy will grow at a rate of 1.6 percent 
>> this year and will rebound to a 2.2 percent growth rate next year. That's 
>> a half point higher than predicted by the widely cited "blue chip" 
>> consensus of business economists. The administration also sees inflation 
>> averaging 3.8 percent this year, but easing to 2.3 percent next year - 
>> better than the 3 percent seen by the blue chip panel.
>>
>> "The nation's economy has continued to expand and remains fundamentally 
>> resilient," said the budget office report.
>>
>> A $482 billion deficit would easily surpass the record deficit of $413 
>> billion set in 2004. The White House in February had forecast that next 
>> year's deficit would be $407 billion.
>>
>> The deficit numbers for 2008 and 2009 represent about 3 percent of the 
>> size of the economy, which is the measure seen as most relevant by 
>> economists. By that measure, the 2008 and 2009 deficits would be smaller 
>> than the deficits of the 1980s and early 1990s that led Congress and 
>> earlier administrations to cobble together politically painful 
>> deficit-reduction packages.
>>
>> Still, the new figures are so eye-popping in dollar terms that they may 
>> restrain the appetite of the next president to add to the deficit with 
>> expensive spending programs or new tax cuts. In fact, pressure may build 
>> to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled, 
>> with Congress also feeling pressure to curb spending growth.
>>
>> The administration actually underestimates the deficit since it leaves out 
>> about $80 billion in war costs. In a break from tradition - and in 
>> violation of new mandates from Congress - the White House did not include 
>> its full estimate of war costs.
>>
>> Obama's campaign used the new numbers to assail McCain for embracing 
>> Bush's tax cuts. As for Obama's plans, campaign adviser Furman said the 
>> candidate would cut wasteful spending, close corporate loopholes and roll 
>> back the Bush tax cuts on upper brackets while still promising to make 
>> "health care affordable and putting a middle class tax cut in the pocket 
>> of 95 percent of workers and their families."
>>
>> Monday's figures capped a remarkable deterioration in the United States' 
>> budgetary health under Bush's time in office.
>>
>> He inherited a budget seen as producing endless huge surpluses after four 
>> straight years in positive territory. That stretch of surpluses 
>> represented a period when the country's finances had been bolstered by a 
>> 10-year period of uninterrupted economic growth, the longest expansion in 
>> U.S. history.
>>
>> In his first year in office, helped by projections of continuing 
>> surpluses, Bush drove through a 10-year, $1.35 trillion package of tax 
>> cuts.
>>
>> However, faulty estimates, a recession in March 2001 and government 
>> spending to fight the war on terrorism contributed to pushing the deficit 
>> to a record in dollar terms in 2004.
>>
>> =================
>>
>>
>>
>> The Bush Budget Deficit Death Spiral
>> by Robert Freeman
>>  Lenders talk about a "debtor's death spiral." It occurs when borrowers 
>> get so far in over their heads they begin borrowing money just to cover 
>> the interest payments on past borrowings. The borrowers have to do this to 
>> keep the lending flowing but they can no longer plausibly pay down the 
>> principal. As new debt compounds on old, bankruptcy becomes imminent. 
>> Further lending is foolhardy. Foreclosure is only a matter of time.
>>
>> The U.S. is starting to look like it is entering just such a death spiral. 
>> It is foretold not simply by the large and growing deficits, nor by the 
>> fact that their carrying costs will rise quickly as interest rates rise. 
>> Rather, it is the fact that these trends are becoming irreversible, a 
>> structural part of the U.S. economy.
>>
>> When the ultimate collapse will occur, whether it comes with a bang or a 
>> whimper, how it will be triggered, and how severe it will be are as yet 
>> unknown. But as Herbert Stein, Chairman of the Council of Economic 
>> Advisers under Richard Nixon was fond of saying, "Things that can't go on 
>> forever, don't."
>>
>> The first signs of impending trouble are the exploding budget deficits 
>> themselves. They began, of course, under the parlous economic stewardship 
>> of Ronald Reagan. Reagan cut the marginal tax rate on the wealthiest of 
>> Americans from 70% to 38%. He promised it would spur an orgy of investment 
>> and rocket the economy to new levels of production and prosperity. 
>> Instead, his "supply side economics" did the exact opposite. It produced 
>> the deepest recession since the Great Depression.
>>
>> Output fell 2.2% in 1982 while budget deficits soared. When Reagan took 
>> office in 1981, the national debt stood at $995 billion. Twelve years 
>> later, by the end of George H.W. Bush's presidency, it had exploded to $4 
>> trillion. Reagan was a "B" grade movie actor and a doddering, probably 
>> clinically senile president, but he was a sheer genius at rewarding his 
>> friends by saddling other people with debts.
>>
>> Bill Clinton reversed Reagan's course, raising taxes on the wealthy, and 
>> lowering them for the working and middle classes. This produced the 
>> longest sustained economic expansion in American history. Importantly, it 
>> also produced budgetary surpluses allowing the government to begin paying 
>> down the crippling debt begun under Reagan. In 2000, Clinton's last year, 
>> the surplus amounted to $236 billion. The forecast ten year surplus stood 
>> at $5.6 trillion. It was the last black ink America would see for decades, 
>> perhaps forever.
>>
>> George W. Bush immediately reversed Clinton's policy in order to revive 
>> Reagan's, once again showering an embarrassment of riches on the already 
>> most embarrassingly rich, his "base" as he calls them. He ladled out some 
>> $630 billion in tax cuts to the top 1% of income earners. In true 
>> Republican fashion, they returned the favor by investing over $200 million 
>> to ensure Bush's re-election. Do the math. A $630 billion return on a $200 
>> million investment: $3,160 for $1. I'll give you $3,160. All I ask is that 
>> you give me $1 back so I can keep the goodness flowing. Do we have a deal? 
>> Republicans know return on investment.
>>
>> But the cost to the public has been a return to the exploding deficits of 
>> the Reagan years. Bush blew through Clinton's surplus in his first year. 
>> The 2004 deficit reached $415 billion, a record. Still, its real size is 
>> masked by the fact that Bush has shifted $150 billion from the Social 
>> Security trust fund in order to make the shortfall look smaller. It's like 
>> pretending you're richer when you move money from one pocket to another. 
>> Both sums have to be repaid, so the real amount borrowed is the $415 
>> billion "nominal" deficit plus the $150 billion from Social Security or 
>> $565 billion.
>>
>> This shell game with federal trust funds taints all official forecasts 
>> about Bush's deficits going forward. For example, the Congressional Budget 
>> Office estimates Bush's cumulative ten year deficit at $2.3 trillion, to 
>> be sure, a breathtaking shortfall from the $5.6 trillion surplus he 
>> inherited from Clinton. But as with the yearly number, this one ignores 
>> the trust fund sleight of hand, an omission of some $2.4 trillion. When 
>> this is added back in, Bush's ten year deficit leaps to $4.7 trillion, 
>> $10.3 trillion short of Clinton's number.
>>
>> But even that number is understated because the CBO forecasts are based on 
>> current law. Bush's tax cuts have not yet been made permanent. If Bush is 
>> re-elected and the cuts are made permanent, that would add another $3.2 
>> trillion to the shortfall. It was not too long ago that a $3.2 trillion 
>> increment to anything would have made sober people's noses bleed but such 
>> figures are mere accounting details to the Big Thinkers in the White 
>> House, especially since it will not be their constituents who are paying 
>> it back.
>>
>> Add it all together-the "nominal" deficit, the stealth siphoning from 
>> Social Security, and the permanent effects of Bush's tax cuts-and the 10 
>> year deficit explodes to a mind-boggling $7.9 trillion. Within ten years, 
>> the government will owe more than $15 trillion. And this, at precisely the 
>> time the government needs fiscal solvency to begin paying the Baby Boomers 
>> their Social Security.
>>
>> This run-up in debt represents the most rapid, predatory looting of public 
>> wealth in the history of the world. The interest costs alone will consume 
>> the government and, soon, the entire economy. In fiscal 2004, interest 
>> costs came to $321 billion against a deficit of $415 billion. So three 
>> quarters of all the current year borrowing is spent paying interest on 
>> past borrowing. This is the most immediate symptom of the deficit death 
>> spiral.
>>
>> And the situation will only get worse when interest rates rise, as they 
>> must. The U.S. has enjoyed an unprecedented period of low rates, the 
>> lowest in 50 years. The only direction they can go is up. And they will 
>> rise quickly once foreigners, who are more and more the buyers of U.S. 
>> debt, become saturated with dollars and begin to eschew additional 
>> lending.
>>
>> This is effectively what happened in the early 1970s when the Arab oil 
>> sheikdoms realized that Nixon had decoupled the dollar from gold 
>> redemption but was still paying for oil in dollars-essentially paper. The 
>> sheiks tripled the price of oil in 1973 and again in 1978. The OPEC "oil 
>> shocks" wrought havoc on the American economy, putting a death to the 
>> halcyon days of post-World War II economic growth. Today's oil at $50 a 
>> barrel is the modern day enactment of the same implicit disdain for 
>> dollars.
>>
>> The Japanese did the same thing in 1987. For years they had funded 
>> Reagan's massive supply side budget deficits but had been made fools as 
>> the dollar was losing 15% a year in value, more than wiping out the 5% 
>> return they were receiving on their treasuries. They wisely stopped buying 
>> in October 1987, precipitating the greatest one-day U.S. stock market 
>> collapse since the Great Depression.
>>
>> The "dollar overhang" problem caused by Bush's record budget deficits is 
>> compounded by record U.S. trade deficits. Every month, the U.S. economy 
>> buys some $50 billion more from the world than it sells, in the act 
>> flooding the world with private dollars. These are on top of the public 
>> dollars from the budget deficits. The total trade deficit for 2004 will 
>> amount to some $680 billion. As recently as 1992, the amount was only $34 
>> billion, a twenty fold increase in just over 10 years, another sign of the 
>> spiral.
>>
>> These "twin deficits"-trade and budget-combine to well over $1 trillion a 
>> year of borrowing. Their effect is to bury the world's economy in dollar 
>> debts, dollars that increasingly buy less and less. As mentioned above, no 
>> one knows when the world will say, "enough." Japan holds a reported $1 
>> trillion supply of dollars, China, more than half a trillion. Both have 
>> bought dollars-in effect loaning equivalent sums to the U.S.-in order to 
>> keep the value of their own currencies low and therefore make their own 
>> goods cheaper in American markets.
>>
>> The Bush administration claims that both countries will continue to buy 
>> dollars so that their own currencies will not rise. But the danger is that 
>> once one major player declares it doesn't want any more dollars there will 
>> be a rush for the exits. Demand for dollars, and with it, the dollar's 
>> price, will plummet. The last player holding dollars will be stuck with 
>> the bag, a multi-trillion dollar stash of dollar holdings that are worth 
>> only a fraction of what they were just a month before.
>>
>> In other words, there are structural incentives biasing the descent toward 
>> chaos rather than order. Already, the dollar is down 19% over the past 
>> year, an eerie harkening of the Japanese experience of the late eighties. 
>> Its decline is being cagily "managed" by the U.S. Treasury which has 
>> muscled foreign central banks into picking up the slack since private 
>> foreign buyers have begun to refuse further dollar purchases. Foreign 
>> central banks now hold some 40% of total U.S. government debt.
>>
>> The only way the U.S. government can prevent a stampede is to raise 
>> interest rates-the return for holding dollars. And Alan Greenspan has 
>> begun this process. But this, of course, increases the carrying costs of 
>> the national debt. As if a $7 trillion national debt funded at 4% isn't 
>> bad enough, envision a $15 trillion debt at 10%. Instead of $300 billion a 
>> year in interest costs, think of $1.5 trillion. Instead of interest 
>> amounting to 3% of GDP, imagine the carnage as it approaches 10%.
>>
>> The higher rates will put a knife in the heart of an already tenuous 
>> recovery, undermining the only process by which payoff might ever be 
>> accomplished. It will suck all of the oxygen out of the economy. 
>> Economists call this the "crowding out effect" when lending to the 
>> government gets priority over private lending. After all, government has 
>> the power to tax in order to fulfill its obligations whereas private 
>> borrowers do not.
>>
>> But the market rations shortages by raising prices-interest rates-forcing 
>> private borrowers to pay ever more for scarce capital. In this way, 
>> markets for private debt mirror markets for public debt. Investment, the 
>> foundation of future growth, will be savaged. New roads, hospitals, 
>> factories, schools and research will be sacrificed to escalating interest 
>> rates borne of stratospheric debt.
>>
>> This occurred during the deficit-burdened 1980's when investment grew at 
>> an annual rate of only 2.5% versus 6.9% in the surplus-graced 1990's. And 
>> not surprisingly, productivity suffered as well. It grew at a meager 1.4% 
>> per year during the 1980's but almost 50% faster, 2.0%, during the 1990's.
>>
>> This is the perverse, inescapable cycle-the death spiral-that comes part 
>> and parcel with too much debt. Its relentlessly rising carrying costs 
>> steadily erode the possibility of getting out from underneath it. Higher 
>> debt loads lead to higher interest rates, which lead to lower investment 
>> which leads to slower growth and, ultimately, diminished prosperity. And 
>> it develops a runaway, recycling dynamic all its own.
>>
>> Finally, it is not only the high absolute levels of debt, nor their rapid 
>> expansion, nor even the imminence of much higher interest rates that 
>> consign the U.S. to the certain oblivion of a deficit death spiral. It is 
>> that this toxic combination of circumstances has become structural, 
>> irreversible, locked into the very nature of government economic policy. 
>> It is like a driver hurtling down a cul de sac and gluing his foot to the 
>> accelerator.
>>
>> The very purpose of the Reagan supply side tax cuts was to funnel more of 
>> the nation's wealth to those already wealthy. This is what David Stockman, 
>> Reagan's Budget Director, meant when he called them a "Trojan Horse." And 
>> they did their job wonderfully.
>>
>> In 1980, the top 20% of income earners captured 43.7% of all national 
>> income. By 1992, at the end of the first Bush administration, their share 
>> had risen to 46.9%. Today it is over 49%. Meanwhile, the lowest four 
>> fifths of all income earners have seen their share of national income 
>> decline. The lowest quintile's share has shrunk from 4.2% to 3.5%. The 
>> second lowest quintile has fallen from 10.2% to 8.8%. The middle quintile 
>> has seen its share fall from 16.8% to 14.8%. And the second highest 
>> quintile has suffered a decline from 25.0 to 23.3%. It is empirically the 
>> case that the rich are getting richer while everyone else is getting 
>> poorer.
>>
>> The problem this holds for national economic management is that the rich 
>> consume a much lower percentage of their income than do those who are not 
>> rich. How many cars can you drive at one time, anyway? The rich are also 
>> the most likely to spend what money they do on foreign luxury goods, take 
>> foreign vacations, make investments in foreign countries, or just let the 
>> money sit in the bank.
>>
>> The poor, working, and middle classes, on the other hand, spend virtually 
>> everything they earn. The car needs new tires, the kids need new shoes, 
>> the washing machine needs fixing, they're two months behind on the rent 
>> and three months behind on the credit cards. In all of these ways, income 
>> shifted through the tax code to middle and lower quintile earners is 
>> quickly spent while income shifted to the wealthy is not. This is not 
>> class warfare. It is Economics 101.
>>
>> It is personal consumption-spending-that generates 67% of GDP. If more of 
>> the nation's income goes to those who do not consume its output, while 
>> those who do consume it have less and less income, a structural shortfall 
>> emerges where there is simply not enough purchasing power to sustain GDP. 
>> GDP will ratchet steadily downward in mirror image to the rate at which 
>> national income is transferred upward.
>>
>> The only recourse is for the government to step in to pump up demand. This 
>> is the role the deficits play in sustaining GDP. This is why deficits 
>> exploded under Reagan, Bush I, and Bush II, all of whom cut taxes on the 
>> rich, but declined under Clinton who raised them. Rising public deficits 
>> are necessary-in fact, indispensable-to sustaining GDP because so much of 
>> the nation's wealth has been transferred from those who, as a matter of 
>> necessity, spend it to those who, as a matter of taste, do not.
>>
>> Supply side economics (and that includes Bush's ill-disguised variant) 
>> rests on the repeatedly disproved faith that investment and prosperity are 
>> caused by giving ever more of the nation's wealth to the already wealthy. 
>> As long as this lunacy continues to drive tax policy, the government will 
>> keep expanding federal deficits. Eventually, possibly soon, this will 
>> cause a collapse of the dollar that can only be reversed by raising 
>> interest rates. But that will explode the carrying costs on the by-then 
>> mammoth debts, vitiating private sector investment. And that will kill all 
>> future prospects of meaningful growth.
>>
>> This is the essence of the Bush budget deficit death spiral. To be sure, 
>> the debts are an unequalled bonanza for those few who lend the money, for 
>> they get to do so at ever-higher rates of interest. But it is a death 
>> sentence for all the rest of the economy.
>>
>>
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