There Is some Budget Good News, but It Is Actually Really Bad News

The  Office of Management and Budget has released the President’s FY2011 budget and the Congressional Budget Office has released its semi-annual Budget and Economic Outlook. Much of the coverage of these documents has focused on deficit numbers. This is not a trivial concern, particularly since the Bush-Obama policies of bigger government have dramatically boosted red ink.

But the most important numbers in the budget documents are the estimates of what is happening to government spending. The good news is that burden of government spending is projected to decline over the next few years from about 25 percent of GDP to less than 23 percent of GDP.
That’s the good news.


The bad news is that federal government outlays only consumed 18.2 percent of economic output when Bush took office. In other words, notwithstanding the good news cited above, the size and scope of government has increased dramatically since 2001. The worse news is that the long-run spending forecasts show a cataclysmic expansion in the burden of government. The “optimistic” estimate is that the federal government will consume more than 30 percent of GDP by 2050 and 40 percent of GDP by 2080.

http://biggovernment.com/2010/02/01/there-is-some-budget-good-news-but-it-is-actually-really-bad-news/

Bankruptcy could be good for America

By Gideon Rachman


In Winnie-the-Pooh , there is a significant moment when the bear is asked whether he wants honey or condensed milk with his bread. He replies "both". You can get away with this sort of thing if you are a much loved character in children's literature. But it is more problematic when great nations start behaving in a childish fashion. When Americans are asked what they want - lower taxes, more lavish social spending or the world's best-funded military machine - their collective answer tends to be "all of the above".

The result is that the US is piling up debt. A budget deficit of about 12 per cent of gross domestic product is understandable as a short-term reaction to a huge financial crisis. What should worry Americans is that, with entitlement spending set to surge, there is no credible plan to bring the budget deficit under control over the medium term.

The US has formidable strengths that will allow its government to be profligate for far longer than other nations could get away with. But if the US keeps running huge deficits, sooner or later the country will start flirting with bankruptcy. Oddly, it might be best if the crisis came sooner rather than later. For a surprising number of countries, running out of money has been the prelude to national renewal.

The two biggest and most beneficial geopolitical stories of the past 30 years - the spread of democracy and of globalisation - were driven by a succession of states finding their coffers empty.

The background to Deng Xiaoping's liberalisation of the Chinese economy in 1978 was a fiscal and foreign exchange crisis. Finding itself desperately short of cash, the Chinese government was much more willing to embrace heterodox economic ideas that promised to deliver faster growth and higher revenues. The rest is history.

It was the same story when India embraced economic reform in 1991. The Indian government found itself with foreign reserves that were worth just two weeks' worth of imports. The Indians had to send gold to London to secure an emergency loan from the International Monetary Fund. But Manmohan Singh - then finance minister, now prime minister - urged his colleagues to "turn this crisis into an opportunity to build a new India". They succeeded triumphantly.

Or take Latin America in 1982. When Mexico defaulted on its debts in that year, it triggered an economic crisis across the whole continent. But the long-term consequences of that crisis were beneficial. As Michael Reid, author of a recent history, has pointed out, "dictatorships buckled under the opprobrium of economic failure". The Argentine junta fell in 1983; Brazil moved to democracy in 1985.

Disastrous problems with government finances also played a huge role in provoking the reforms that eventually did for the Soviet Union. When Mikhail Gorbachev came to power in Moscow, he was faced with a national debt that almost doubled in his first three years in office. It was those financial pressures that helped to persuade him that economic reform - perestroika - was unavoidable.

By 1989, the whole of the Soviet bloc was struggling under the weight of rapidly increasing foreign debts. Why did the East German government not shoot demonstrators in the streets in October 1989? In large part, it was because it could not afford to. East Germany was on the verge of bankruptcy and desperately negotiating with West Germany for a loan.

These salutary brushes with national bankruptcy do not only happen to under-developed Asian nations, flaky Latin American dictatorships and crumbling communist regimes. The British still shudder at the memory of the UK government having to go "cap in hand" to the IMF in 1976. It was humiliating - but it served a useful purpose. Britain's brush with bankruptcy helped to convince the voters that things really needed to change, and prepared the ground for Thatcherism. France had a similar experience in the early 1980s - when capital flight from the country and collapsing tax revenues forced the government of François Mitterrand to abandon its hard-left policies.

Sometimes, if a government is truly rotten - East Germany in 1989 or France in 1789 - it is a good thing if a fiscal crisis leads to political collapse. But for most normal countries, it is much better to get close to the edge of national bankruptcy than actually to go over the Niagara Falls of sovereign default. As Britain discovered in the 1970s and India found in 1991, looking over the edge can create the atmosphere of crisis that allows governments to win the arguments for economic reform. An actual sovereign default, however, can destroy confidence and trust among citizens and investors for years.

Perhaps the most memorable thing said so far by an official in Barack Obama's administration was the remark by Rahm Emanuel, the White House chief of staff, that "you never want a serious crisis to go to waste". Mr Emanuel was widely condemned for flippancy and cynicism. But an examination of world history over the last 30 years suggests he was definitely on to something. Those much discussed emerging powers, the Brics (Brazil, Russia, India and China) all needed a fiscal crisis to set them on the road to economic reform and national resurgence. America may one day be lucky enough to experience its very own national fiscal crisis. Let us hope it is not wasted.
gideon.rachman@ft.com


Copyright The Financial Times Limited 2010.

A North American security perimeter on the horizon

By Dana Gabriel
Online Journal Guest Writer

NAFTA has extended from economic integration into a political and regional security pact which has been achieved through the Security and Prosperity Partnership (SPP) of North America, Plan Mexico, as well as other initiatives. Various pieces of legislation and reports, along with influential individuals have called for closer trilateral cooperation regarding common rules for immigration and security enforcement around the perimeter of the continent. A major part of the U.S. security agenda already includes the defense of North America, but a full blown security zone would bring Canada and Mexico further under U.S. control. A Fortress North America poses a serious threat to our sovereignty and would mean the loss of more civil liberties.

Plans for a North America security perimeter might have seemed like a pipe dream just a short time ago, but it could become a reality sooner than one thinks. Some believe that a perimeter approach to security would be a more effective way of providing safety while ensuring the free flow of trade and investment. For those pushing for deep continental integration, this move is seen as the next logical step. A recent article from the Toronto Star, Canada warms to idea of a tougher ‘perimeter’, suggests that Canadians might now be ready to debate the idea of perimeter security. David Biette who specializes in U.S.-Canada relations and is a member of the Woodrow Wilson Center stated that a, “Perimeter is no longer a dirty word. It’s beginning to come up again, at least in academic circles.” He went on to say, “Canada held back when it first came up and I can certainly understand why. There was still such bad feeling left over on free trade and what that might mean for Canadian sovereignty that perimeter security was just not palatable to Canadians.” Biette also added, “You ask yourself, ‘What would a mutually improved relationship look like?’ and really, there is nothing else. Perimeter is the one big thing – the last truly huge step on the horizon.” A North American security perimeter would be one of the final steps needed in the creation of a North American Union.

Some of the recommendations from the 2005 report, Building a North American Community co-sponsored by the Council on Foreign Relations, included a unified border, a North American border pass, a single economic space, as well as a common security perimeter by 2010. Many of the task force recommendations in areas of trade, transportation, energy, immigration and security became part of the SPP agenda. Despite the demise of the SPP, many of its key objectives continue to move forward under the North American Leaders Summit, as well as through other initiatives. In February of 2009, it was reported that former Canadian international trade and foreign affairs minister, David Emerson, “called on the government to aggressively seek stronger Canada-U.S. ties, up to and including a customs union. He said at minimum, Canada should advocate a North American security perimeter arrangement, a labour mobility agreement that modernizes NAFTA provisions, and greater integration on regulatory matters.” U.S. officials remain concerned on how risk assessments of people entering Canada are conducted as well as the differences in its immigration and visa policies. A common perimeter approach to border management and security would require harmonization of Canadian-U.S. immigration and customs standards.

It was clear before Obama became president that he wished to relax immigration restrictions with Mexico and supported some sort of amnesty program. In mid-December of last year, H.R. 4321 the Comprehensive Immigration Reform ASAP Act of 2009 was introduced in the House of Representatives. The Obama administration has been criticized for its lack of immigration enforcement. Many have warned that the new legislation would not only grant amnesty to millions of illegal aliens, but also increase legal immigration and create more loopholes in the system. In Sec. 143. Reports on Improving the Exchange of Information on North American Security, there is wording which could further promote deep continental integration. This includes yearly status reports, “in developing and implementing an immigration security strategy for North America that works toward the development of a common security perimeter.” Previous failed security and immigration bills also contained similar language referring to a shared security perimeter around the continent.

The Merida Initiative, also known as Plan Mexico is an extension of NAFTA and has its roots in the SPP. It is based on America’s failed war on drugs, which has been costly and ineffective. The Merida Initiative relies primarily on military and law enforcement solutions and is advancing police state measures. In a recent interview, Laura Carlsen director of the Americas Policy Program in Mexico City described how Plan Mexico, “was designed in Washington as a way to ‘push out the borders’ of the US security perimeter, that is, that Mexico would take on US security priorities including policing its southern border and allowing US companies and agents into Mexico’s intelligence and security operations.” She also commented that, “The Obama administration has supported the plan and even requested, and received from Congress, additional funds beyond what the Bush administration requested.” The Plan Mexico strategy is working towards the development of a common security perimeter and is further encouraging the militarization of Mexico. Continued drug violence in the country could be used as a pretext to set up a North American security perimeter

The recent foiled terrorist attack on Christmas day is accelerating the implementation of a high-tech control grid which could restrict, track and trace our movements. With the war on terrorism back in the forefront, the continued merging of North America might include Canada and Mexico playing a bigger role in regards to perimeter security. Canadian officials have announced that within the next several months, body scanners will be installed in 11 airports across the country. Some proponents of a continental security zone believe that it is the best way to secure North America, but at the same time falsely claim that this could be done with respect to each nation’s sovereignty. We are well on the way towards a North American security perimeter where trade and investment will be able to roam freely, while we are all forced to endure new security practices dominated by U.S. interests.

Dana Gabriel is an activist and independent researcher. He writes about trade, globalization, sovereignty, as well as other issues. Contact: beyourownleader@hotmail.com. Visit his blog site at beyourownleader.blogspot.com.

Copyright © 1998-2007 Online Journal

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How Barack Obama and Ben Bernanke are destroying the dollar – and perhaps ushering in the amero

First under the Bush Administration and even more so under President Obama, the federal government has been seizing power and spending money as it hasn’t done since World War II. But as bold as the Executive Branch has been during this financial crisis, the innovations of Fed chairman Ben Bernanke have been literally unprecedented. Indeed, it is entirely plausible that before Obama leaves office, Americans will be using a new currency.

Bush and Obama have engaged in record peacetime deficit spending; so too did Herbert Hoover and then Franklin Roosevelt (even though in the 1932 election campaign, FDR promised Americans a balanced budget). Bush and Obama approved massive federal interventions into the financial sector, at the behest of their respective Treasury secretaries. Believe it or not, in 1932 the allegedly “do-nothing” Herbert Hoover signed off on the creation of the Reconstruction Finance Corporation (RFC), which was given billions of dollars to prop up unsound financial institutions and make loans to state and local governments. And as with so many other elements of the New Deal, FDR took over and expanded the RFC that had been started under Hoover.

In the past year, the government has seized control of more than half of the nation’s mortgages, it has taken over one of the world’s biggest insurers, it literally controls major car companies, and it is now telling financial institutions how much they can pay their top executives. On top of this, the feds are seeking vast new powers over the nation’s energy markets (through the House Waxman-Markey “Clean Energy and Security Act” and pending Kerry-Boxer companion bill in the Senate) and, of course, are trying to “reform” health care by creating expansive new government programs.

For anyone who thinks free markets are generally more effective at coordinating resources and workers, these incredible assaults on the private sector from the central government surely must translate into a sputtering economy for years. Any one of the above initiatives would have placed a drag on a healthy economy. But to impose the entire package on an economy that is mired in the worst postwar recession, is a recipe for disaster.

Debt and Inflation


Conventional economic forecasts for government tax receipts are far too optimistic. The U.S. Treasury will need to issue far more debt in the coming years than most analysts now realize. Yet even the optimistic forecasts are sobering. For example, in March the Congressional Budget Office projected that the Obama administration’s budgetary plans would lead to a doubling of the federal debt as a share of the economy, from 41 percent of GDP in 2008 to 82 percent of GDP by 2019. The deficit for fiscal year 2009 (which ended Sept. 30) alone was $1.4 trillion. For reference, the entire federal budget was less than $1.4 trillion in the early years of the Clinton administration.

Clearly the U.S. government will be incurring massive new debts in the years to come. The situation looks so grim that economist Jeffrey Hummel has predicted that the Treasury will default on its obligations, just as Russia defaulted on its bonds in 1998. But another scenario involves the Federal Reserve wiping out the real burden of the debt by writing checks out of thin air to buy up whatever notes the Treasury wants to issue.

Many analysts are worried about Fed chairman Ben Bernanke’s actions during the financial crisis; Marc Faber is openly warning of “hyperinflation.” To understand what the fuss is about, consider some facts about our monetary and banking system.

The United States has a fractional reserve banking system. When someone deposits $100 in a checking account, most of that money is lent out again to other bank customers. Only a fraction – typically around 10 percent – needs to be held “on reserve” to back up the $100 balance of the original depositor. A bank’s reserves can consist of either cash in the vault or deposits with the Federal Reserve itself. For example, suppose a given bank has customer checking accounts with a combined balance of $1 billion. Assuming a 10 percent reserve requirement, the bank needs $100 million in reserves. It can satisfy this legal requirement by keeping, say, $30 million in actual cash on hand in its vaults and putting $70 million on deposit in the bank’s account with the Fed.

Normally, the Fed expands the money supply by engaging in “open market operations.” For example, the Fed might buy $1 billion worth of government bonds from a dealer in the private sector. The Fed adds the $1 billion in bonds to the asset side of its balance sheet, while its liabilities also increase by $1 billion. But Bernanke faces no real constraints on his purchasing decisions. When the Fed buys $1 billion in new bonds, it simply writes a $1 billion check on itself. There is no stockpile of money that gets drained because of the check; the recipient simply deposits the check in his own bank, and the bank in turn sees its reserves on deposit with the Fed go up by $1 billion. In principle, the Fed could write checks to buy every asset in America.

Monetary Catastrophe

Since the start of the present financial crisis, the Federal Reserve has implemented extraordinary programs to rescue large institutions from the horrible investments they made during the bubble years. Because of these programs, the Fed’s balance sheet more than doubled from September 2008 to the end of the year, as Bernanke acquired more than a trillion dollars in new holdings in just a few months.

http://www.lewrockwell.com/murphy/murphy165.html