Thursday, July 21, 2011

Is the Budget Deficit Problem a Myth?

At The Baseline Scenario, James Kwak writes:
The Gang of Six plan proposes to reduce the cumulative deficit by $3.6-3.7 trillion over ten years relative to the CBO’s March 2011 baseline. Everyone’s excited about it. Four trillion dollars! Hooray!
The weird thing is that if you are claiming deficit reductions against the CBO’s baseline, I think intellectual honesty requires you to point out that, according to the CBO’s baseline, there is no deficit problem. The projected 2021 deficit is $729 billion, but net interest spending is $807 billion (Table 1-5). That means that the primary budget is running a surplus of $78 billion, the entire deficit is due to interest payments on the debt, and the debt has stabilized around 75 percent of GDP. This is not a great situation, but it’s no emergency, either.
Aside from the absurdity of the CBO projections, I'm not following Kwak's thinking that the entire deficit being the result of interest payments is not an emergency.

Does Kwak realize that when interest rates climb, and they will, the deficit will sky rocket?

Does he realizes that Congress can't "cut" market rates?

Does he realizes that this likely will mean that Fed will enter the market in an attempt to put a lid on Treasury rates, and that this will only mean higher price inflation and ultimately even higher rates?

The interest rate problem is a big problem that will cause huge dislocations, and the rate climb is likely to have already started.


  1. "Does he realizes that Congress can't "cut" market rates?"

    Slow down there. Don't your realize all Treasury has to do is advertise on the Glenn Beck show.

  2. If it Quacks like a Kwak, then, yes its it a quack

  3. Whatever Glenn Beck says because he is The Overlord according to the NYT Resident Runt Paulie Krugman.

    From Baruch Spinoza to Barack Obama.

    Earthlings are too stupid to be free.

  4. I am interested in knowing what's inevitable following the inevitable. That is, what does the world look like after the Fed inevitably comes in, buys all the debt and emits all the money and drives interest rates even higher.

    Then what?

  5. James . . . Kwak? KWAK? Seriously? Are the TBTF's actually trying to adopt Bond villain names now?