More and more people are calling for Treasury Sec. Tim Geithner's resignation. Among them calling for his resignation include Jim Rodgers, Peter DeFazio,
I particularly like this passage from The New Republic article,
"Finally, on the deficit and unemployment, it's true that Geithner has been outspoken about reining in the deficit. It's also true that dwelling on the deficit can seem beside the point or worse with unemployment stuck in double digits. But it's worth considering the role of a Treasury secretary here. As one Treasury official told me a couple months ago, almost every Treasury secretary embraces somewhat more fiscally conservative views than he actually holds,** because one of the Treasury secretary's jobs is to reassure our creditors we'll pay them back. Were Geithner to suddenly argue that the deficit isn't a big deal--even though there's a strong economic case that we should ignore it for the next year or two and focus on stimulus--the bond markets would probably go nuts. By reassuring the bond markets, Geithner buys the administration a little cover."
Elliot Spitzer lashed out at Sec. Geithner on a recent episode of the Rachel Maddow show especially hitting hard the notion that the Obama Administration owns none of the financial collapse. He basically said that they do in the presence of Sec. Geithner. Spitzer has also written on this matter in The Daily Bail.
A sure sign of his impending departure is the political heat he's drawing to the Obama Administration. Dumping him might reduce that heat, but will it lead to a fundamental change in Administration policy? I suspect that either the Administration will have him resign and we'll also see a greater focus on job creation rather than debt reduction or the Administration won't fundamentally change course. I hope they use his departure as an opportunity to roll out a new approach to the economy.
Saturday, November 28, 2009
Wednesday, November 25, 2009
Housing and Jobs
There's a new report out talking about renewed weakness in housing. My take on this is it reinforces the importance of added stimulus to help the economy along. Residential investment in housing as a percent of GDP is in the 4 - 6 percent range (see graph here) It's interesting to go back to 2008 and see how these issues were talked about then. While that article mentioned the drop in exports, later last year, net exports (exports minus imports) grew and were a bright spot in the GDP numbers. Click here. It's striking to note the decline in consumer spending and the dramatic drop in both housing and non-residential investment, with the latter falling off a cliff. Housing prices aren't going to recover until consumers are feeling more flush rather than flushed out. In turn, the jobs and income situation is going to need more improvement before consumers start spending more.
While analysts point to the drop in housing prices as the trigger for the recession and the current drag on the economy, I think the fall in housing prices is more symptomatic of the problem (they certainly are part of the problem). It's housing prices and their impact on equity, and how drops in equity combined with greater financial uncertainty, and bank's reluctance to lend that have combined to undercut consumer spending. Consumer spending is the key to economic recovery.
While analysts point to the drop in housing prices as the trigger for the recession and the current drag on the economy, I think the fall in housing prices is more symptomatic of the problem (they certainly are part of the problem). It's housing prices and their impact on equity, and how drops in equity combined with greater financial uncertainty, and bank's reluctance to lend that have combined to undercut consumer spending. Consumer spending is the key to economic recovery.
Monday, November 23, 2009
How is the U.S. Government debt like our personal debt?
Republicans and conservative Democrats have done a very good job over the years beating the 'debt is bad drum.' We've been told many falsehoods, and many have drunk the cool-aid.
One tune is how the government needs to balance it's budget just like we balance our home budget. If in any month your spending exceeds your income, you run a deficit that month. This is just like how the government runs a deficit. When we as consumers and workers run a deficit, we then need a way to make up the shortfall. We do that by some combination of borrowing or taking money out of savings. When we borrow to finance our monthly deficit, we incur debt. This is just like how it works for the government.
When we incur more and more personal debt, and have no increase in income, we do find it more and more difficult to carry that debt. We pay more of our income in interest payments and we have less flexibility in our budgets.
When the government incurs debt, that debt also is income to the economy! Yes, the interest payments on the debt is simultaneously income to the bond holders. This is one difference between government debt and personal debt. With personal debt we experience the interest payment as money leaving. With interest on government debt, the interest payments leave when they go to people and institutions (like other governments) outside the U.S. This raises the question of who holds the bonds that the government issues to finance the deficit?
It quickly gets tricky addressing questions about who owns the debt and what amount of debt we have. I am limiting myself here to debt of the U.S. Federal government. This excludes debt we as private citizens and businesses owe, and it also excludes the debt of other levels of government. An interesting overview of federal debt, deficits, and economic activity is contained in a report by the Government Accountability Office. A quick snapshot on the issue is available here. While these studies are a few years old now, they still provide a good overview of the issues. Whereas, the MSNBC article identifies Japan as the largest foreign owner of U.S. federal debt, China has now surpassed Japan as the largest foreign owner of U.S. Federal government debt.
Keep in mind when someone compares debt to GDP, they are comparing a cumulative amount (debt) to an annual amount (GDP). This would be like you adding up your mortgage and installment principal balances and comparing it to your annual income. It's unclear what such a comparison indicates. Whereas, comparing deficit or surplus to GDP compares annual amounts for both. By analogy, this is comparable to you adding up your mortgage and installment monthly payments and dividing that by your monthly income. As we know, this comparison is made when buying a home.
The largest single holder of U.S. Treasury bonds (how we finance deficits) is the U.S. Government itself! Yup, it's not China. China is the single largest foreign owner of U.S. government debt. About 25-30 percent of all U.S. government debt is owned by foreigners. That means that about 70 percent of the bonds are held in the U.S. Cut the debt, cut the income to holders of the debt.
From a political perspective, I find it striking that the total U.S. Federal debt increased from about $6 trillion in 2000 to about $9 trillion in 2009, a 50 percent increase. The causes of this rise is no mystery - two wars and two tax cut.
There are geo-political implications to foreign owners of U. S. debt. This is especially true as more and more of the foreign ownership resides in one country. Also, just as in our personal budgets, as debt grows, our ability to respond to emergencies declines, so to with increases in government debt.
This short overview has not discussed the value of the dollar and debt and it has simplified the discussion by not considering how those receiving interest from government debt sped it in the U.S. versus overseas.
One tune is how the government needs to balance it's budget just like we balance our home budget. If in any month your spending exceeds your income, you run a deficit that month. This is just like how the government runs a deficit. When we as consumers and workers run a deficit, we then need a way to make up the shortfall. We do that by some combination of borrowing or taking money out of savings. When we borrow to finance our monthly deficit, we incur debt. This is just like how it works for the government.
When we incur more and more personal debt, and have no increase in income, we do find it more and more difficult to carry that debt. We pay more of our income in interest payments and we have less flexibility in our budgets.
When the government incurs debt, that debt also is income to the economy! Yes, the interest payments on the debt is simultaneously income to the bond holders. This is one difference between government debt and personal debt. With personal debt we experience the interest payment as money leaving. With interest on government debt, the interest payments leave when they go to people and institutions (like other governments) outside the U.S. This raises the question of who holds the bonds that the government issues to finance the deficit?
It quickly gets tricky addressing questions about who owns the debt and what amount of debt we have. I am limiting myself here to debt of the U.S. Federal government. This excludes debt we as private citizens and businesses owe, and it also excludes the debt of other levels of government. An interesting overview of federal debt, deficits, and economic activity is contained in a report by the Government Accountability Office. A quick snapshot on the issue is available here. While these studies are a few years old now, they still provide a good overview of the issues. Whereas, the MSNBC article identifies Japan as the largest foreign owner of U.S. federal debt, China has now surpassed Japan as the largest foreign owner of U.S. Federal government debt.
Keep in mind when someone compares debt to GDP, they are comparing a cumulative amount (debt) to an annual amount (GDP). This would be like you adding up your mortgage and installment principal balances and comparing it to your annual income. It's unclear what such a comparison indicates. Whereas, comparing deficit or surplus to GDP compares annual amounts for both. By analogy, this is comparable to you adding up your mortgage and installment monthly payments and dividing that by your monthly income. As we know, this comparison is made when buying a home.
The largest single holder of U.S. Treasury bonds (how we finance deficits) is the U.S. Government itself! Yup, it's not China. China is the single largest foreign owner of U.S. government debt. About 25-30 percent of all U.S. government debt is owned by foreigners. That means that about 70 percent of the bonds are held in the U.S. Cut the debt, cut the income to holders of the debt.
From a political perspective, I find it striking that the total U.S. Federal debt increased from about $6 trillion in 2000 to about $9 trillion in 2009, a 50 percent increase. The causes of this rise is no mystery - two wars and two tax cut.
There are geo-political implications to foreign owners of U. S. debt. This is especially true as more and more of the foreign ownership resides in one country. Also, just as in our personal budgets, as debt grows, our ability to respond to emergencies declines, so to with increases in government debt.
This short overview has not discussed the value of the dollar and debt and it has simplified the discussion by not considering how those receiving interest from government debt sped it in the U.S. versus overseas.
Reduce Federal Debt or Grow Jobs?
The New York Times is running a story (series) on the "problem of the debt." One of their Op-ed writers, Paul Krugman, counters in an op-ed piece today that the "problem" is overblown.
Should we be more concerned about the debt than unemployment? No.Unemployment is a greater problem. There will come a time when more and more government spending (and debt) will run a greater risk of triggering inflation, but not now. We need to be spending - 'priming the pump' - its called, incur more debt, and help the economy recover.
There are rumblings of a Republican proposal to cut taxes to stimulate the economy. I can guarantee you this has more to do with appealing to the Republican Base than it does to any desire to actually stimulate the economy. Here's why.
A $100 billion tax cut and a $100 billion injection of new government spending will not affect the economy the same way. There are these things called multipliers. They do just what their name suggests - they multiply the impact from a tax cut versus an injection of new government spending. It turns out that cutting taxes has less stimulative effects than an increase in new government spending. In other words, there is more 'bang for the buck' from new government spending than there will be from an equal amount of tax cuts.
With Roubini indicating unemployment will increase to at least 11 percent (earlier post), we need stimulus now.
Should we be more concerned about the debt than unemployment? No.Unemployment is a greater problem. There will come a time when more and more government spending (and debt) will run a greater risk of triggering inflation, but not now. We need to be spending - 'priming the pump' - its called, incur more debt, and help the economy recover.
There are rumblings of a Republican proposal to cut taxes to stimulate the economy. I can guarantee you this has more to do with appealing to the Republican Base than it does to any desire to actually stimulate the economy. Here's why.
A $100 billion tax cut and a $100 billion injection of new government spending will not affect the economy the same way. There are these things called multipliers. They do just what their name suggests - they multiply the impact from a tax cut versus an injection of new government spending. It turns out that cutting taxes has less stimulative effects than an increase in new government spending. In other words, there is more 'bang for the buck' from new government spending than there will be from an equal amount of tax cuts.
With Roubini indicating unemployment will increase to at least 11 percent (earlier post), we need stimulus now.
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