Monday, September 22, 2008

Thoughts on the US economy

The US Government debt will rise to $11.3 trillion with the proposed $700 billion bailout of troubled mortgages now before Congress. That amounts to $37,098 of public debt per citizen.  To say the US financial system is stressed is to understate the issue.  The question is whether foreigners will come to demand higher interest rates on US IOU's.  Tax increases are ruled out by the political stances of each of the current Presidential candidates - Obama simply wants to shift the tax burden from poor to rich.  They are also ruled out in the US by fears such increases will intensify the likely forthcoming US recession.

The British don't seem to have the same conccerns. A tax increase of 5 pence in the pound is anticipated to cover their financial-crisis-induced budgetary problems.

US policy options are narrowing as the US economy faces the prospects of decades of removing a massive public debt burden. With a current account deficit of around $800 billion - accumulating at the rate of around $13 per US citizen per day - around 7% of GDP in aggregate - there seem to be no easy policy options.   Eventually taxes in the US must be increased and public spending cut so that the US economy pays its way internationally.  It is difficult to think of these things in the midst of a financial crisis but the US response to this crisis further constrains its longer-term policy options.

6 comments:

jc said...

Harry, with due respect. this bailout is smaller than the SL/RTC bailout of the early 90's.

Like then we'll get four odd years of sub par growht and it will start all over again.ejiba

Spiros said...

Nouriel Roubini reckons there's two more waves to come. Next will be the run on the hedge funds, and then the private equity groups will crash when they can't refinance their LBOs.

Since there's been a trillion in private equity LBOs, it might end up being a tad bigger than the early 90s.

Roubini might be wrong, but he's called it right so far.

jc said...

Spiros:

At times like this every single asset on a bank's balance sheet looks suspect.

i'm not suggesting we don't have a storm on our hands of immense proportions, but it's no longer a hurricane.

By the way the banks had similar exposure on their books in the early 90'a called LOB loans.

I think Roubini is far too bearish.

jc said...

Credit Suisse said it's about a $1.3 trillion. So far the banks have written off about $500 billion, so the US$700 sounds about right.
Their chief market economist is pretty good by the way.

Anonymous said...

jc,

early 90's we (USA) had cheap energy, peace, relative prosperity, rising employment, a "doing okay" middle class, were headed toward a balanced budget (eventually Clinton managed a 2$Bn surplus), and our world bankers loved us.

now energy is expensive, we import most of our food and most of our manufactured products, we borrow 2$Bn/day to pay for it, the middle class is against the wall and having as much trouble with mortgages and credit as the poor, we have rising unemployment, we're mired in a 10 $Bn/month war, and the world is a far more competitive place (with a rising China, Russia, and India), and our world bankers are worried about us.

On top of all that, when Bush entered office, the National Debt was $5.8 trillion, and in eight years we've doubled it so we have a far heavier interest burden to carry. Key here is our world bankers are worried about us and our gonzo consumption and negative savings rate.

I think we've got some serious troubles ahead.

ehj2/retired yank engineer

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