Understanding Where We Are Headed...

Economists lately have, to a large extent deservedly, been given a bum rap: there were few that saw the problems coming, and of those few that saw it, even fewer listened.

Here is a a commentary in the FT that shows that despite all this, there are those who do see the light whilst many colleagues remain firmly committed to business as usual, which is exactly the wrong thing to be doing.

These are the facts:

Under President Barack Obama's budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America's ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

Let me reiterate: these are the facts, not opinions: ignore this development at your peril. No country - none, zilch, nada, keine - which has taken on severe debt levels for discretionary spending has survived. There is only one half-exception, Japan, where the government continues to fiddle while the Japanese Rome burns, but they are already strait-jacketed by government finances.

Discretionary spending is money spent on things that are nice to have, but not necessary: countries get into this kind of debt when they fight wars, when massive national disasters hit, but not to fund political babble and wishful thinking.

It's the job of economists to be dismal, to pour ice-cold water over overheated politicians and pundits.

John Tayler, the economics professor who writes these words, points out that there are really only two ways out of the debt: massive and punitive increases in taxes that would necessarily have to include not merely the rich, but most importantly the middle class and the working poor. These are not taxes to pay for health care (which could be offset by reductions in private insurance), but rather to pay for the debt.

The other alternative is inflation, i.e. making money worth less and less.

Done deliberately, this has devestatiing effects on currency values, as the currency will devalue to compensate for inflation. This is how economies work and cannot be avoided: devalue your currency massively, as would need to be the case, and you screw anyone who has every invested in your country. Really want to burn China and Japan for having invested in the US? Eliminate the people who are happiest buying US debt because it is the safest investment in the world?

But rather than facing up to facts, the economic illiterates - actually, they're not so much economically illiterate as actively economic denialists - that have power in Washington are already heavily invested in making excuses instead of changing policies that will clearly damage the US economy.

To put it bluntly:

The time for such excuses is over. They paint a picture of a government that is not working, one that creates risks rather than reduces them. Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis. The problem is that policy is getting worse not better. Top government officials, including the heads of the US Treasury, the Fed, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission are calling for the creation of a powerful systemic risk regulator to reign in systemic risk in the private sector. But their government is now the most serious source of systemic risk.

Straight words, accurate, but if anything they will fall on the ears of Democrats who have put their fingers in their ears and are loudly crying "la la la I can't hear you la la la".

Which may be amusing to their political supporters.


But which is a disaster for the rest of us.

The only light at the end of the tunnel right now is that the Democrats will not be able to blame anyone for this in 2012. They have both the executive and legislative levers of power, and what they do must be clearly placed at their feet. Not that they won't try to deny, and will have their friends in the media support them.

Doesn't change the reality of the situation: we are on a very dangerous road, one that will take great skill to transcend.





Which is clearly and transparently missing in Washington today.