Deflation Nation

I hate kicking off 2004 with a post about the dismal science, but since I haven't written much about the economy of late, and since its strength is likely to be the key to the outcome of this year's election, this seems like a good time to weigh in.

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How Will Bush Deal With the Deficits? Connecting the Dots to Iraq

Republican hearts are all aflutter over one quarter of strong GDP numbers. But the 8.2% third quarter growth was purchased on credit-the $374 billion budget deficit that was the largest in the country's history. All indications are that next year's deficit will be even larger, exceeding half a trillion dollars. There is simply no magic to "growth" under these conditions. Any idiot with a hand full of credit cards charged to the next generation's children can gin up the short term illusion of prosperity. Until, that is, the bills come due. George W. Bush inherited a $127 billion fiscal surplus but ran through all of that and more in his first year. He has turned a $5.6 trillion 10 year forecast surplus into a $3+ trillion forecast loss-an almost unimaginable reversal of $9 trillion in only three years. And this, in an economy that has grown for ten of the last twelve quarters. The result of this psychotic profligacy, according to the Congressional Budget Office, will be a national debt of $14 trillion in 10 years. Interest payments alone will approach a trillion dollars a year and will exceed spending for all discretionary federal programs combined. Even more surreal, a study commissioned by former Treasury Secretary Paul O'Neil indicated that the 50 year forecast U.S. deficit would reach $44 trillion. The study was suppressed and O'Neil was fired. How, then, does a nation deal with debts that so greatly outrun its ability to pay? There are basically only five strategies. All are unappealing. Most are calamitous.

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Rubin Gets Shrill
by Paul Krugman

The point made by Mr. Rubin now, and by Mr. Mankiw when he was a free agent, is that the traditional immunity of advanced countries like America to third-world-style financial crises isn't a birthright. Financial markets give us the benefit of the doubt only because they believe in our political maturity — in the willingness of our leaders to do what is necessary to rein in deficits, paying a political cost if necessary. And in the past that belief has been justified. Even Ronald Reagan raised taxes when the budget deficit soared. But do we still have that kind of maturity? Here's the opening sentence of a recent New York Times article on the administration's budget plans: "Facing a record budget deficit, Bush administration officials say they have drafted an election-year budget that will rein in the growth of domestic spending without alienating politically influential constituencies." Needless to say, the proposed spending cuts — focused only on the powerless — are both cruel and trivial. If this kind of fecklessness goes on, investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won't be pretty.

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No end in sight to dollar's descent
Federal Reserve's insistence on rock-bottom interest rates triggers currency rout