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Topic: Federal Budget

A Trap, Not an Opportunity

Posted on Aug. 30, 11 | 12:33 PM by David Keating | Topic: Federal Budget
Washington Post columnist Ezra Klein notes the inflation-adjusted yield on Treasuries has turned negative.  Therefore, "it would be foolish not to borrow" more money and have the government make more investments.

He names the usual litany of "investments" the government ought to be making in infrastructure, education and fiddling with tax incentives to boost hiring.

The problem he fails to discuss adequately in the column is that government borrowing right now is heavily tilted to short bonds.  So he is really recommending politicians load up on more debt with a 5-year or 7-year balloon payment.

Now, if we knew we had the money to pay off this debt in 7 years, he'd be right, it would be a no-brainer to borrow the money.

But the fiscal picture doesn't look too good in seven years. 

What this means is that when the balloon payment comes, we will have a lot more debt.  And it may well be refinanced at an interest rate that won't be affordable.

Lots of people have lost their homes or cars with balloon payments.  Let's not bet our nation's credit on it.

Now in fairness to Klein, he puts in one sentence that says "We should ... put in place a firm plan to cut deficits later, once the economy is back on track and investors have other places to put their money."

The problem is that politicians will only take the advice to spend now, with catastrophic results later.
Member Comments (2)

The Club's David Keating on the Debt Ceiling Compromise

Posted on Aug. 04, 11 | 11:14 AM by Andrew Roth | Topic: Federal Budget

Member Comments (5)

Tom Coburn: Politicians Won, American People Lost

Posted on Aug. 02, 11 | 09:56 AM by Andrew Roth | Topic: Federal Budget

Member Comments (1)

Spending Caps: Boehner v Reid

Posted on Jul. 26, 11 | 12:38 PM by David Keating | Topic: Federal Budget
I took a look at the discretionary spending caps in the years 2014 to 2021 in the Reid version of the debt ceiling bill vs. the Boehner one. 

It's remarkable how little difference there is. In fact, over the 8 years, the total is exactly the same, $9.17 trillion!  At most, Boehner's amount in any given year is only lower by 0.36%.

Now, there may be more difference than it appears.  The Reid bill allows the OMB to make adjustments to the caps.

To the numbers (amounts in billions):

Year Reid Boehner
2014 $1,068 $1,066
2015 $1,089 $1,086
2016 $1,111 $1,107
2017 $1,134 $1,131
2018 $1,156 $1,156
2019 $1,180 $1,182
2020 $1,204 $1,208
2021 $1,228 $1,234

Member Comments (1)

"Hysteria and the Debt Debate"

Posted on Jul. 26, 11 | 11:21 AM by David Keating | Topic: Federal Budget
Brian Wesbury and Robert Stein of First Trust make many good points in their latest article.  Here are a few:

Contrary to popular belief, the “debt ceiling” has turned into the investor’s best friend. Professional politicians don’t like it, because they don’t want to limit their degrees of freedom. But the “limit” on debt, forces a debate about the size of government (and spending) before a country gets to the point of no return. In other words, the debt ceiling is a good thing.

Moody’s (the rating agency) has said that the US should get rid of the debt ceiling altogether, but this has it exactly backward. Greece never had this debate and spent its way into oblivion. The debt ceiling could very well keep the US from that fate. Nonetheless, the professional political class (and this includes the ratings agencies), are trying to scare people with a forecast of Armageddon.

Later in the article:

Three things about this really bother us. First, where were the rating agencies when spending was ratcheted up so much? Why are they only speaking out now? Second, massive amounts of spending were done in the name of short-term economic stimulus. Forget whether it worked or not – how did this become permanent spending? And third, what about the economy? The huge increase in government spending has hurt the economy, cutting it back will boost growth.

Our models suggest that without the large increase in government spending that has occurred over the past five or six years, real GDP would be 3.2% larger today ($450 billion) than it is, the unemployment rate would be 7.6%, the US would have 2.5 million more jobs, and the stock market would be 24% higher (Dow 15,650 and S&P 1660).

The debt ceiling seems to be the only tool that might work. The benefits of using it, if successful in cutting the size of government relative to GDP, could be huge. Not only would jobs and growth pick up, but the stock market would rise, too.

What investors should be worried about is if this debate fails to limit the size of government, not that it leads to a pointless and unjustifiable downgrade by ratings agencies. Investors need to remain calm. Let the politicians be hysterical.

Member Comments (3)

Boehner Plan Would Probably Prompt Downgrade

Posted on Jul. 26, 11 | 10:24 AM by Andrew Roth | Topic: Federal Budget

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20 Democrats Support a Balanced Budget Amendment

Posted on Jul. 22, 11 | 01:37 PM by Barney Keller | Topic: Federal Budget
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Rep. Walsh Takes on Chris Matthews on MSNBC's Hardball

Posted on Jul. 20, 11 | 12:01 PM by Andrew Roth | Topic: Federal Budget

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Rep. Tom Graves Previews the Cut, Cap, and Balance Vote

Posted on Jul. 18, 11 | 03:39 PM by Andrew Roth | Topic: Federal Budget

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Rep. Chaffetz Calls McConnell's Idea "Stupid"

Posted on Jul. 13, 11 | 04:16 PM by Andrew Roth | Topic: Federal Budget

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Cut, Cap, and Balance! - Pence Says It's Time for the States to Decide

Posted on Jul. 08, 11 | 11:57 AM by Andrew Roth | Topic: Federal Budget

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