"People are not stupid," Mr. Zedillo said. "They see the huge deficit, the huge spending, and wonder what comes next."
Exactly. When you have people like Niall Ferguson, Alan Blinder, Jeffrey Sachs, Peter Schiff, not to mention many, many other people, all agreeing on something, which makes common sense, you have to wonder why none of our leaders in Washington seem to be able to acknowledge it.
Just as, in September, they were unable to acknowledge the public's anger and frustration over the $700 TARP bill, today they hold their heads above the clouds over the growing concerns about the level of US debt.
But it is not just the former Mexican Presidente who is raising the issue, and frankly he speaks the truth. From the NYT today:
Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.
Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the United Stated government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington.
...
While the dollar’s status as refuge in a time of turmoil should prevent that kind of sell-off for now, a number of financial specialists warned that if fundamental factors like the lack of American savings and bloated budget deficits did not change, the dollar could eventually fall sharply .
Perhaps the likes of Geithner & Co. are more likely to listen to "financial specialists" than the other people I have mentioned, not to mention the average person on the street.
People like Marc Faber are now warning that the current downturn could be "far worse than the Great Depression." From this interview in 2007, Faber prophetically said that the solution to too much debt is not more debt.
Yet that is precisely what is happening. The government is going to issue $2.2 trillion in new debt this year. Almost none of this money is going go to into new production-- the stimulus is 40% tax cuts and about 40% social welfare, and the rest goes into the black hole of the financial system, propping up asset prices.
The economic crisis by now is quite simple: there was a massive bubble generated by too much debt. Either the bubble can fully deflate, or we can try to re-inflate it. The government seems to want to go the latter route. Even if consumer spending is "stimulated" by the stimulus, this will merely cause the prices of commodities and our current account deficit to start rising again. It does nothing for our real, long term economy.
The worst part of it is the notion that a stimulus represents Keynesian economics. THIS IS NOT KEYNESIANISM. Keynes argue for countercyclical fiscal policy: deficit spending when a nation's economy suffers from recession or when recovery is long-delayed and unemployment is persistently high—and the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays.
He did not address the situation where the government was deficit spending when times were "good". Furthermore, Keynes' hypothesis rests on the lack of aggregate demand during downturns and the government's need to stimulate that demand through fiscal policy. But where aggregate demand is lacking right now is not in the United States but in developing Asia and parts of Europe. Overstimulated aggregate demand through monetary policy in 2001-2006 is the reason for the bubble in the first place.
What needs to happen now is a devaluation in the US dollar. In any natural system, a country that runs a large deficit meets automatic adjustment by a decrease in the value of its currency. In fact, this was what was occurring in 2006 and 2007: as the dollar fell, US exports rose, and this kept the economy out of a deeper recession for most of 2008. But when the crisis hit, there was a sudden "rush to safety" and this halted the necessary adjustment of a fall in the US dollar. If the dollar fell, US exports would be more competitive, we would gradually be able to repay our foreign obligations, and the world economy would be rebalanced.
Right now the government is leveraging the US status as a "safe haven" in order to shift the burden of the collapsing private debt bubble to the government. The end result?
- We will have a massively overvalued currency that was prevented from its ordinary adjustment.
- We will not have significantly changed the structure of our economy (related to #1... an overvalued currency rewards consumption and punishes production).
- The huge and unrealistic obligations of the bubble will now be in government hands (related to #2 because an unproductive economy will hamper the government's ability to repay its debts).
Geithner and Obama need to address all three of these problems in the new "era of responsibility." Furthermore, people such as Faber and Schiff (even though I disagree with him) should be invited to the WH to get a hearing from the President. I don't care if Obama & Geithner don't agree with me.
What's scary is that they do not even seem to be acknowledging the concerns that have been building up for months over the government's over-extension. Right now there is no medium or long term economic strategy of any kind coming out of the administration. Instead they have Valerie Jarrett at Davos saying basically "We'll worry about the deficit later... after we re-inflate the bubble."
What's worse, there are all indications that Obama is going to ask for another $1 to $2 Trillion bank bailout, which would instantly destroy all the political capital and goodwill he has.
There is a chance that all of this could lead to an even more spectacular collapse later in the government bond market. And then the conservatives (whose policies created bubble economics) will come out and blame it all on "government." Whopee.
The only thing we can do is make as much noise as possible, and hope someone in the administration is listening.