Normally I'm all for the truth being broadcast, but is it appropriate for a Republican congressman to be saying this to America's largest creditors?
"We heard across the board — in private — substantial, continuing and rising concern," Representative Mark Kirk said after a trip to China that included talks with government officials and central bank chief Zhou Xiaochuan.
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He said he told the Chinese that the budget deficit could be even bigger than predicted, due in part to the rising costs to the US economy of health care.
"One of the messages I had — because we need to build trust and confidence in our number one creditor — is that the budget numbers that the US government has put forward should not be believed," Kirk said.
"Congress is actually going to spend quite a bit more," he said.
I'm wondering how Kirk thinks that it builds "trust" with the Chinese by telling them that we are lying? That we are spending like drunken sailors (No offense to drunken sailors intended. At least they spend cash), and thus our debt is getting risky?
That's not to say that Kirk is wrong.
| This chart screams "Out of control spending". But when you realize that the chart also understates how big the deficits are actually going to be, that's when you realize that it wouldn't take much to scare our Chinese creditors into cutting their losses.
This sort of deficit spending will mean that in 10 years, one of every 6 dollars in tax revenue will go towards servicing the existing debt. If nothing is done, by 2030 it will be one out of every three dollars of revenue.
That will make most social programs unaffordable. |
Even the huge and chronic deficits projected above are likely understated. The Fed is projecting unemployment to remain above
9% through the end of 2011. That much unemployment means lower tax revenue.
It's enough to
make one wonder what it would take to get spending under control again.
"This isn't a temporary stimulus but a ramp-up in debt followed by a greater explosion in spending and debt," he told Fortune, predicting a day when America's creditors will start viewing the U.S. Treasury as a risky bet. "The bond markets will come after us with a vengeance. We're playing with fire."
With budget cuts of the magnitude necessary to cut the deficit virtually off the table, massive tax increases in the form of a VAT are becoming increasingly likely. But don't kid yourself - the days that just raising taxes on the rich as a solution are long gone. It would require tax increases across the board.
All that new debt has to be financed by someone, and the Chinese, after talking to Kirk, are looking at changing the rules on how it is issued.
(Reuters) - A top Chinese banker on Sunday called on the U.S. government and the World Bank to sell yuan-denominated bonds in Hong Kong and Shanghai to encourage the development of debt markets in those centers and to promote the yuan as a major international currency.
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He said that foreign currency risk, particularly the risk that the yuan would continue to appreciate against the U.S. dollar as it has in recent years, could be hedged.
What this means is that the Chinese are worried that all the huge deficits in America are a risk to the dollar, and all future dollar-based debt.
Another thing weighing on future budgets is the fact that the financial markets have yet to see the lion's share of their losses accounted for.
McKinsey expects the US banking and securities industry to incur losses averaging $125 billion per quarter through 2010, with the bulk of it concentrated in commercial banking loans.
Importantly, many of these losses will be concentrated in the banks that the stress tests revealed to be undercapitalized.
A congressional panel is now calling for new stress tests of the banks, since the old stress test only tested for a peak of 8.9% unemployment, a level that has already been surpassed.