The dust is clearing around the recent negotiations in Europe concerning the “bailout” bill and what we are seeing, at least to me, is unnerving.
“France has won!” (“Paris seen as trumping Berlin at EU table” at http://www.ft.com/cms/s/0/4fbef0b4-5d5e-11df-8373-00144feab49a.html)
“The French government yesterday vowed to ‘reinvent the European model.” (“Sarkozy triumphs in his bid to rewrite the rules” at http://www.ft.com/cms/s/0/f2666c76-5d5d-11df-8373-00144feab49a.html)
The press has predominantly been following German Chancellor Angela Merkel over the past month or so as she struggled to achieve a “German” twist to the negotiations concerning the fate of Greece and the bailout package that was needed to keep the EU together.
Many in Germany did not like what her leadership has achieved as people voted against her party last Sunday making it ever so much more difficult for her to lead her nation.
Sarkozy, the president of France, kept a very low profile…for him.
And, who seems to have come out on top? France!
France’s intent? To build a new structure with greater budgetary policy co-ordination and more effective fiscal rules. In essence, to follow the French model, allowing the spenders to spend and the savers to pay for what the spenders are spending on.
The start is a vast loan facility to distribute cash quickly to “a stricken member” without prior approval from other national governments…especially Berlin! (However, the current effort is to last only three years, but once begun…)
Also, Sarkozy is said to be very happy with the decision of the European Central Bank to start buying euro-zone government debt. This is a massive step toward “Quantitative Easing” something the ECB had been constantly resisting.
The ECB has been “Bernankied”!
This shift in policy direction is seen by Sarkozy as “irreversible” and puts France in the driver’s seat.
In my mind, this “victory” just exacerbates the “race to the bottom” (See “How the euro-zone set off a race to the bottom” at http://www.ft.com/cms/s/0/5d666d5a-5c69-11df-93f6-00144feab49a.html.)
The feeling in Germany? The newspaper Bild Zeitung puts is very simply: "The 'safety parachute' for the euro is the ultimate crime for Europe. We Germans have made sacrifices for a stable euro for the last 10 years, with wage restraint and sacrificing pension rises. We have paid the price while others have been partying at our expense . . . Europe's path to a transfer union is simply a road to its ruin."
And, what direction are you betting the euro will go?
This whole muddle returns to the question of leadership and in Europe.
Unfortunately, I don’t see anyone there that I would call a real leader.
In terms of the leadership at central banks, the head of a central bank can only go so far in achieving a monetary policy independent of the party that rules a nation.
NOTE: Check out what recently happened to the head of the central bank in Argentina!
Ben Bernanke and the Federal Reserve System have never acted independently of the presidential administration in Washington, D. C. whether it was the Bush 43 administration or the Obama administration.
The only show of independence that Bernanke and the Fed has made is to keep the Congress from conducting an audit of them.
Alan Greenspan was the lackey of whoever was in the White House.
This is why the financial markets expect that sooner or later massive governmental deficits will be monetized. Central banks cannot forever “hold out” against a government that wants to continue to live way beyond its means.
And, because of this Jean-Claude Trichet should not be judged too harshly. The “profligates” are in charge and a central banker can only fight back so hard. At least if they want to keep their high profile position.
So, we go back to the victory that France has achieved. If people were uncertain over the future of the European Union and the future of the euro, in my mind a lot of that uncertainty has been removed.
The major uncertainties now relate to when the periodic financial upheavals are going to take place, how severe they will be, and how long it will take for a European leadership to arise that will have had enough of the “race to the bottom”?
Weak leadership always caves in to the popular short run viewpoint!
Showing posts with label Bush 43 administration. Show all posts
Showing posts with label Bush 43 administration. Show all posts
Wednesday, May 12, 2010
Tuesday, February 2, 2010
Stein's Law
Perhaps the most profound bit of information appearing in the news this morning concerning the budget proposal of the Obama administration is the citation of Stein’s law by the economist James Galbraith in the New York Times article “Huge Deficits May Alter U. S. Politics and Global Power.” (See David Sanger, http://www.nytimes.com/2010/02/02/us/politics/02deficit.html?hp.)
Stein’s law (as familiarly presented) states that “If a trend cannot continue, it will stop.”
Galbraith also provides us with his own wisdom: “Forecasts 10 years out have no credibility.”
Now to the budget of the United States government!
What is the primary trend connected with the federal budget? Government expenditures will go up, and up, and up. Congress does not have the discipline to stop expenditures from increasing. Neither do presidential administrations.
But, what about the deficit?
There is only one way the deficit can or will be reduced: revenues coming into the government must increase. And, of course, they must increase at a faster pace than expenditures are growing.
This was the pattern in the Clinton administration years, 1993-2001. For this 8-year period, total receipts coming into the federal government rose 7.1% per year. (Note that for the 7-year period of 1993 -2000, the annual rate of increase was 8.4%.)
This contrasted with the compound growth rate of total federal government outlays which rose by 3.6% per year. Thus, the Clinton administration began in fiscal 1993 with a total deficit of $255 billion and recorded a surplus in fiscal year of 1998 of $69 billion, followed by surpluses of $126 billion, $236 billion, and $128 billion.
The major contributors to the growth rate in total receipts was Individual income taxes and Social insurance and retirement receipts. The compound growth rates of these items was 8.7% and 6.2%, respectively. Note that the compound growth rate for real GDP during this time period was 3.5%.
The figures for Bush 43 show a substantially different configuration. Total receipts of the federal government grew by only 3.6% per year during this administration. (Note that the compound growth rate for real GDP was 2.3% at this time.) The greatest growth in revenue came from corporate income taxes which grew every year by 10.5%
There was a surge during the Bush 43 years of total outlays which rose by 8.3% year-after-year. The biggest contributor to this was the outlay for national defense, and these expenditures rose, on average, by 10.2% every year. (Note that in the Clinton administration these outlays rose by less than 1% per year.)
It seems to me that the trend in outlays over the next few years will remain rather high. America is a nation at war! Defense outlays will continue to rise. The question is, how much? This is a unknown known. My guess here is that present estimates are low!
The big question relates to how much other expenditures will rise, expenditures related to health care, energy, global warming and others. The exact cost of this spending are anyone’s guess right now. These expenditures we can put in the category of known unknowns. Given the history of government it is impossible for me to believe that health care reform will not “cost us one dime” as stated by the President. We don’t really know when these other programs will be pushed and expanded, but they still remain on the “to-do” list of the President.
There are always “other” things, the unknown unknowns. You guess.
The trend in outlays is up, but the question is by how much? The mean of the Clinton and Bush 43 years is just about 6% per year!
Is there any way that revenues can come anywhere close to a 6% per year annual increase?
It was done in the Clinton years, but that was with an economy that was increasing, in real terms, at 3.5% compound rate. I just don’t see it over the next 5 to 10 years.
Raising taxes? Are you crazy!
Yes, the Bush 43 tax cuts will not be renewed, but, there will not be any other tax increases that will raise revenues substantially. Not with the unemployment figures captured in the current budget document.
So, what are we faced with?
Given the scenario I have just painted my guess for the sum of government deficits over the next 10 years is from $15-$18 trillion. This is substantially above the $8.5 trillion total presented in the current Obama budget documents.
If this scenario for the federal budget is anywhere close to reality then one could argue that it is the blue-print for an excessive credit inflation in the upcoming years that will be unlike anything we have seen in the past in the United States!
And, what is the good news?
To quote Galbraith, “Forecasts 10 years out have no credibility.”
Whew! You had me scared two paragraphs ago.
Any more good news?
Sure, to quote Herb Stein, “If a trend cannot continue, it will stop.”
The trend commented on above is the growth of total federal government outlays. It must stop! But, it will not stop if the United States is fighting at least two wars, fighting unemployment, fighting for health care reform, fighting for other “musts” on the Presidential “to-do” list, and taking care of those unknown, unknowns that always seem to pop-up.
“If a trend cannot continue, it will stop!”
What is going to make the trend in total federal government outlays stop?
I’ve got my ideas. You go ahead and write your own script!
Stein’s law (as familiarly presented) states that “If a trend cannot continue, it will stop.”
Galbraith also provides us with his own wisdom: “Forecasts 10 years out have no credibility.”
Now to the budget of the United States government!
What is the primary trend connected with the federal budget? Government expenditures will go up, and up, and up. Congress does not have the discipline to stop expenditures from increasing. Neither do presidential administrations.
But, what about the deficit?
There is only one way the deficit can or will be reduced: revenues coming into the government must increase. And, of course, they must increase at a faster pace than expenditures are growing.
This was the pattern in the Clinton administration years, 1993-2001. For this 8-year period, total receipts coming into the federal government rose 7.1% per year. (Note that for the 7-year period of 1993 -2000, the annual rate of increase was 8.4%.)
This contrasted with the compound growth rate of total federal government outlays which rose by 3.6% per year. Thus, the Clinton administration began in fiscal 1993 with a total deficit of $255 billion and recorded a surplus in fiscal year of 1998 of $69 billion, followed by surpluses of $126 billion, $236 billion, and $128 billion.
The major contributors to the growth rate in total receipts was Individual income taxes and Social insurance and retirement receipts. The compound growth rates of these items was 8.7% and 6.2%, respectively. Note that the compound growth rate for real GDP during this time period was 3.5%.
The figures for Bush 43 show a substantially different configuration. Total receipts of the federal government grew by only 3.6% per year during this administration. (Note that the compound growth rate for real GDP was 2.3% at this time.) The greatest growth in revenue came from corporate income taxes which grew every year by 10.5%
There was a surge during the Bush 43 years of total outlays which rose by 8.3% year-after-year. The biggest contributor to this was the outlay for national defense, and these expenditures rose, on average, by 10.2% every year. (Note that in the Clinton administration these outlays rose by less than 1% per year.)
It seems to me that the trend in outlays over the next few years will remain rather high. America is a nation at war! Defense outlays will continue to rise. The question is, how much? This is a unknown known. My guess here is that present estimates are low!
The big question relates to how much other expenditures will rise, expenditures related to health care, energy, global warming and others. The exact cost of this spending are anyone’s guess right now. These expenditures we can put in the category of known unknowns. Given the history of government it is impossible for me to believe that health care reform will not “cost us one dime” as stated by the President. We don’t really know when these other programs will be pushed and expanded, but they still remain on the “to-do” list of the President.
There are always “other” things, the unknown unknowns. You guess.
The trend in outlays is up, but the question is by how much? The mean of the Clinton and Bush 43 years is just about 6% per year!
Is there any way that revenues can come anywhere close to a 6% per year annual increase?
It was done in the Clinton years, but that was with an economy that was increasing, in real terms, at 3.5% compound rate. I just don’t see it over the next 5 to 10 years.
Raising taxes? Are you crazy!
Yes, the Bush 43 tax cuts will not be renewed, but, there will not be any other tax increases that will raise revenues substantially. Not with the unemployment figures captured in the current budget document.
So, what are we faced with?
Given the scenario I have just painted my guess for the sum of government deficits over the next 10 years is from $15-$18 trillion. This is substantially above the $8.5 trillion total presented in the current Obama budget documents.
If this scenario for the federal budget is anywhere close to reality then one could argue that it is the blue-print for an excessive credit inflation in the upcoming years that will be unlike anything we have seen in the past in the United States!
And, what is the good news?
To quote Galbraith, “Forecasts 10 years out have no credibility.”
Whew! You had me scared two paragraphs ago.
Any more good news?
Sure, to quote Herb Stein, “If a trend cannot continue, it will stop.”
The trend commented on above is the growth of total federal government outlays. It must stop! But, it will not stop if the United States is fighting at least two wars, fighting unemployment, fighting for health care reform, fighting for other “musts” on the Presidential “to-do” list, and taking care of those unknown, unknowns that always seem to pop-up.
“If a trend cannot continue, it will stop!”
What is going to make the trend in total federal government outlays stop?
I’ve got my ideas. You go ahead and write your own script!
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