Instead of continuing to fight with reader over my taste for expansionary fiscal and monetary policy, I will quote John Thomas, writer of The Diary of the Mad Hedge Fund Trader. He is a former colleague of mine from The Economist and recently interviewed me on his radio program, but don’t hold that against him. John writes first about a chart he reproduced above from Clusterstock, which I am too hamfisted to insert here. It is a PDF file. John writes:
Out of a current projected budget deficit of $1.3 trillion, $700 billion, or 54% comes from the Bush era tax cuts, $320 billion (25%) from a tax revenue fall off caused by the Great Recession, $200 billion from the wars in Iran and Iraq (15%), and $50 billion (4%) is generated by Obama’s recovery measures. The TARP and the bailout of Fannie Mae and Freddie Mac are so small, they don’t even register on the chart. All of the angst, complaining, moaning, blustering, and carping is about the 4%. You often see this in politics, where the debate gets focused on where the problem isn’t, not where it is, and is a big reason why I’m not in that business. Markets have a fascinating way of seeing straight though this impenetrable fog.
He adds:
So while the noise out of Washington is trying to convince us that these deficits are ruinous, the ten year Treasury bond yields we saw yesterday at a stunning 2.97% are telling us that, in fact, they are no problem at all, and that the government can now borrow nearly infinite amounts of money at the lowest interest rates in history. There are some other really interesting things that this chart and the bond market are telling us. The Bush tax cuts expire next year, and a recovering economy will bring a return of tax revenues, eliminating 79% of the deficit. The scheduled withdrawal from Iraq next year will cut another 7%. This assumes that Obama is unable to get a single additional piece of legislation through the congress, a distinct possibility if he loses control of congress in November. This is the writing on the wall the bond market is attempting to focus our blinkered eyes on. If anyone else has another set of believable numbers that reaches a different conclusion, I am all ears.
Vivian adds: According to CNN News, Federal spending, about 25% of GNP this year, is to drop by 2013 to about 23%. Under Ronald Reagan, in 1983 it was 23.5%. Moreover 60% of what the Federal budget is spent for is Social Security and Medicare, defense, and interest on debt. Interest cannot be cut; it involves the full faith and credit of the USA. Defense costs $700 bn and probably is also uncuttable. That leaves insurance. The main reason Medicare and Social Security cost so much is that people are living longer.
One argument for a comprehensive national health program is to better integrate care of the old into the system as a whole. But having overpaid for healtcare protection most of my working life as a freelance journalist and a self-employed businesswoman, I cracked a bottle of Cava when I finally qualified for Medicare at 65. (For some reason you get Medicare at 65 even if you cannot retire until you are older. )
The rest of the US budget has jumped from about 7% of GDP before the great contraction to 10% now. But it jas been in the 6- 9% range for decades and is forecast to fall to about 8% again in a few years.
Yesterday, Federal Reserve Bank of Atlanta Prexy Dennis Lockhart said US economic recovery isn’t yet sustainable enough to allow interest rates to be raised or the Fed’s balance sheet to be shurnk. This apparently triggered a 3pm market plunge which was all that window-dressing month-end outfits needed to get selling.
Note that Tom McClellan of the McClellan Market Report (and the McClellan Oscillator) says of the Death Cross we reported yesterday: “the crossing of the 50-day MA below the 200-day MA has about as many whipsaws as good signals”.Tom is cautiously bullish based on his proprietary charts comparing the present selloff to that of August 1998 and the boost in lumber prices.
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