Obama's Cartoonanomics Part II: Deficits to Infinity and Beyond!

Another Walt Disney classic entered my mind when thinking about Barack Obama's reckless spending spree masquerading as an economic strategy.

It, in the words of Buzz Lightyear ----promises America budget deficits  "To Infinity... and Beyond"

Before we embark on a raftload of new spending, let's look at where we are.  Four months into the present fiscal year, the US government is already $563 billion in the hole.   And don;t look for April 15 to slow down the torrent of red ink; CT's estimated tax receipts are dropping into the abyss. and there's no reason to think federal receipts are going to be any different.  So add in the rest of the TARP, a second installment of the auto bailout, and other stuff already in the works and we are going to be well into the world of trillion dollar deficits.

Now, a lot of this is simply automatic Keynesian stabliizers like lower tax receipts and higher transfer payments kicking in. But what the Obama plan, with its time delays does, is cause government spending to ramp up long after the present economic crisis is likely to have abated.   

Building roads in 2009 and 2010 is one thing; expanding social service bureaucracies in 2011, 2012 and 2013 is another thing entirely.

So let's assume Obama gets his trillion dollar wish list and we get a $2 trillion budget deficit in 2009 or 2010.   

Well, we are talking a percentage of budget deficit as compared to the size of the national economy unprecedented in American peacetime history.

Some Democrats will point out that Ronald Reagan put the nation heavily into debt. However, his deficits never exceeded 7% of GNP and were a downpayment on a) winning the Cold War and b) recharging the private sector economy.

The resulting peace dividend and more productive economy enabled the national debt load to shrink in the 1990's and to handle the decision to pay for the GW Bush War on Terror with borrowed funds. 

But , there's no point the Obama team can point to that would inflect the debt downward. There's no Cold War to win that will enable social spending to relent, now is there? Indeed, such of the Obama agenda promises to grow government and slow economic growth

So we are on a path to deficits running to "Infinity and beyond". For this, we need to consider compound interest.

In 2008 the nation paid $451 billion of interest on its federal debt.  (The total debt was about $10 Trillion). Let's assume that we increase our debt to $18 Trillion. Unless interest rates drop to an unsustainable amount, we are now going to pay $700 Billion in interest. (anyone really think the Chinese will lend us money @ 3% forever, c'mon)

And remember, interest runs on unpaid interest. So much as a borrower who pays the minimum on Visa gets deeper and deeper into debt, so will our nation. And what's $700 billion annually roughly?   It's more than the defense budget or social security costs these days.

So when we pay taxes, we'll be paying for our bankers, not for our services.  As a practical matter, the deficits will be self-sustaining; it's quite unlkely we will "grow our way out of them" ala the productivity boom post Reagan and no politician will survive the requisite tax hikes and budget cuts to balance the budget and retain office afterward.  Political Courage is always a greater deficit than finances, anyway.

Francis Cionfrocca is rather sanguine about what this all means. 

That means we're going to be borrowing trillions of dollars, possibly every year, for a very long time to come. Where's that going to come from?It's going to come from the surplus countries, those that produce more goods, services, and/or commodities than they need to meet domestic demand. (The key surplus countries today include China, Japan, Germany, Norway, Switzerland, and the oil-exporting countries in the Middle East. South Korea recently slipped into deficit. Russia's status is unclear, given the decline in the oil price.) 

He points out it took the UK close to a century to dig out of a similar debt load. I'm not so sure it won't take just as long for us.

I'm really not sanguine about letting the Chinese play banker. I've played banker before with indebted developers who had more debt obligations than free cash flow. Here's what happens to those poor souls.

a) They earn no profits. The bank lets them make just enough in management fees not to abandon the property.

b) The tenants are reeemed with as many rent hikes as we could get away with before tenants moved out.  

c) We permitted as little to be spent on building maintainance as we could get away with.

The bottom line is both the owner and tenants get hosed so the property can gin up as much revenue for the bank as possible. And yes, if contract debt service still exceeds net revenue, the debt piles up.

I'm sure there are tenements in this predicament on Chicago's South Side.  There's a very real possibility the whole country ends up that way, unless we are convinced Beijing will be the world's most benign banker.  Otherwise, welcome huge tax hikes and poor public services so we can service foreign debt.

As for myself, I prefer not to depend on the kindness of strangers.

Obama demands action now. without considering the consequences. Perhaps, because like Buzz Lightyear in Toy Story II. "he's always sure"

He just never bothers to explain why.