Bernanke Not Bullish

Economy,Free Markets,Government


Federal Reserve Chairman Ben Bernanke testified today before the House Budget Committee. Afterwards there was some grilling as to the real size of the federal budget deficit. Also discussed in casual passing were the fishy accounting practices galvanized to reduce said deficit — raiding social security and Medicare, for example. The kind of fraud that if committed in the private sector would net the perp serious jail time.
More crucially, Bernanke had some dire economic forecasts about “the evolution of national debt” and the “high rates of government borrowing.” As libertarian writers never tire of reminding their readers, the national debt and government borrowing will “drain funds away from private capital formation and thus slow the growth of real incomes and living standards over time. i the necessity of paying interest on the foreign-held debt would leave a smaller portion of -ur nation’s future output available for domestic consumption. Moreover, uncertainty about the ultimate resolution of the fiscal imbalances would reduce the confidence of consumers, businesses, and investors in the U.S. economy, with adverse implications for investment and growth.”
If current trends in government spending continue, the forecast for the proverbial children caring conservatives and Democrats so love to invoke is particularly grim. Said Bernanke:

According to the CBO projection that I have been discussing, interest payments on the government’s debt will reach 4-1/2% of GDP in 2030, nearly three times their current size relative to national output. Under this scenario, the ratio of federal debt held by the public to GDP would climb from 37% currently to roughly 100% in 2030 and would continue to grow exponentially after that. The only time in U.S. history that the debt-to-GDP ratio has been in the neighborhood of 100% was during World War II. People at that time understood the situation to be temporary and expected deficits and the debt-to-GDP ratio to fall rapidly after the war, as in fact they did. In contrast, under the scenario I have been discussing, the debt-to-GDP ratio would rise far into the future at an accelerating rate. Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both.

4 thoughts on “Bernanke Not Bullish

  1. Dan Maguire

    It’s incredible. How many times can a Federal Reserve Chairman get up in front of these committee members and say, “We need to do something in order to avert impending disaster,” after which nothing gets done? Please pardon the Dylan-esque rhetorical question.

    Fact: Social Security is a pyramid scheme. Retirees are living too long and there just ain’t enough young’uns coming up to keep the scheme going. [Aside: In my state, when the deer herd has become too large in the past, the state has implemented a catchy “Bag A Buck” program to help reduce the size of the herd. I think a “Bag A Boomer” program might work wonders for Social Security – present readership excluded, of course.]

    Medicare is worse than a pyramid scheme. With medical care, there is a supply of providers that is for all intents and purposes fixed. Making the services of those providers free to the consumer – well, the buck’s gotta get passed somewhere, and that somewhere ends with you and me.

    Oh yeah, add in the cost of the Iraq war on top of everything else. Frankly, it’s amazing that this consumption binge has lasted as long as it has. I suspect that this “foreign debt” is akin to a few freebies from a drug dealer before a lifetime of addiction kicks in.

    I’m an old crank before my time, I guess.

  2. james huggins

    Ford Motor Company is selling tons of vehicles and still losing money. Other major corporations are cutting back due to projected losses. It seems that when something gets so huge it becomes unresponsive to short term corrections and long term corrections are so many shots in the dark due to fast changing market conditions. The government is many times larger and unlike corporations can merely tax more to make up shortfalls or else spend money that isn’t really there. Couple this with the fact that the spending decisions are made not to maximize profit or minimize losses but for ideological reasons and self enrichment of the guardians of the public trust we have elected to office. These un-natural practices have finally reached their breaking points and what happens next could be a real mess.

    Mr. Maguire, from one old crank to another, welcome.

  3. John Danforth

    Unhappily, it looks like the libertarians are correct about the fundamentals.

    It’s “all right” because all other world currencies are fiat money as well. As long as they all inflate their currencies at about the same rate, none collapses relative to the others, and everything is all right … for now. We’re all in the same boat, and the hope is that there is safety in numbers. But politicians have a perverse incentive to weaken their own currency in order to prop up exports or limit imports. They get to spend the money created out of thin air, and it ‘helps’ the economy as well! It’s a constant race to devalue the currency just fast enough to not cause a systematic failure.

    All pyramid schemes are doomed to fail eventually. And the end of this one will come without much warning (other than from those pesky libertarian writers). Now, with capital flight from the remains of our manufacturing sector fully underway, the public sector having outnumbered the farming and manufacturing sectors long ago, and record numbers of people taking public assistance, I have to wonder how far off that day is. What Greenspan didn’t mention this week, as far as I know, is the risk that a sudden, deep recession in the United States could set off a worldwide depression, with the various fiat currencies tumbling like a house of cards.

    What is more frightening to me than the prospect of a worldwide depression is the contingency plans that surely must have been laid to assume or maintain control in such a scenario. With such a great number of people already helplessly dependent on the government for their sustenance, I predict that these plans do not include a return to a value-based currency, more economic freedom, or any restrictions on government to prevent them from worsening and prolonging the problem.

    –John Danforth–

  4. Dan Maguire

    Mr. Huggins, I send you my Grampa Simpson-ish greetings in return.

    Hmmm…I’m not hearing a lot of support for my “Bag A Boomer” idea. I concede that it’s unconventional, but you gotta admit, it would help clear away the top of the pyramid. Alas, I will have to comfort myself with the certainty that I’m an unrecognized genius. Not.

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