Skip to comments.Fed Calls US Economy "Unsustainable"
Posted on 10/06/2010 5:00:25 PM PDT by citizenredstater9271
Federal Reserve Chairman Ben Bernanke gave a speech in Rhode Island on Monday. Bernanke warned the audience of the Annual Meeting of the Rhode Island Public Expenditure Council that the state of American finances is "unsustainable."
Bernanke is quoted as saying:
"Let me return to the issue of longer-term fiscal sustainability. As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit."
He went on:
"The budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9-1/2 percent of national income during that time. For comparison, the deficit averaged 2 percent of national income for the fiscal years 2005 to 2007, prior to the onset of the recession and financial crisis. The recent deterioration was largely the result of a sharp decline in tax revenues brought about by the recession and the subsequent slow recovery, as well as by increases in federal spending needed to alleviate the recession and stabilize the financial system. As a result of these deficits, the accumulated federal debt measured relative to national income has increased to a level not seen since the aftermath of World War II."
So is the FED QE policy of pumping up its balance sheet with dreck.
This is most certainly an unexpected revelation.
Bastard should be imprisoned. JMHO.
You know what he didn’t say?
Federal wealth transfers (entitlement spending) exceed gross federal tax reciepts. This year.
We are bust. As of this year.
Oh, well, it was a nice run. Perhaps Obama will make his horse a Senator, just to point out how silly they are.
But I thought TARP and all the stimuls scams ... I mean schemes... SAVED THE ECONOMY!
California asked for and deserves this!! Oh wait....
After WW2 the US economy was more productive than the rest of the world combined. We roared ahead and paid down that war debt without much trouble.
Now we’re mired in a long term decline and our manufacturing base has been shrinking for 30 years. I don’t see any way out of this one except reduced standards of living. We may end up sliding into 2nd world status in a decade or so.
I’ll pray for another Reagan or George Washington.
“unsustainable.” Everyone should perceive this as a WARNING of the fiscal mess we are in and crisis it could become. If the Republicans win the House, come January they better be ready to do the “hard work” of chopping a whole lot of BS spending, or they will get replaced in 2 years.
Completely agree. Given all the forces at work, the decline is inevitable.
And so do Bammy:
President Barack Obama, calling current deficit spending unsustainable, warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.
We cant keep on just borrowing from China, Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. We have to pay interest on that debt, and that means we are mortgaging our childrens future with more and more debt. Holders of U.S. debt will eventually get tired of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. It will have a dampening effect on our economy. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aJsSb4qtILhg
We've been in decline since the anti-war hippies started voting.
And they won't be replaced by other Republicans. The Drive-By media and Obama administration will rail against "having gone backwards". The stalinists will be granted power once again, and 2012 may wind up being our country's last election - not counting subsequent "elections" where the RATs will consistently win like Saddam Hussein always won his "elections" with 100% of the "votes".
Internally creating. Using what we are. No thought given to that...
Did you forget your /s tag?
I just didn’t deem it necessary.
Who knows for sure, but I wonder that if and when the economy collapses, will it trigger that civil war that many people expect? Again, who knows for sure, but I think there might be a better than even chance that eventually, we may find out.
The good news is, Rush refuses to back away from calling this economic moron a "jackass"
Exactly what is it that the Fed might think there is to sustain?
Just be prepared. The country is toast. Judging from the metal markets something very bad is about to happen. A currency crisis is on our doorstep and al, this moron can say is it’s unsustainable. He has been the classic enabled of the over spending and deficits. If the Fed didn’t buy the worthless paper the govt couldn’t pull these scams.
This is the BIG question... will the Repubs have a spine this time???
Interesting slant at your link.
Who is John Galt?
Yep, a currency crisis is in the works. It will just be a matter of time. There is a world wide race to debase ones own country’s currency.
In fact there will be an IMF meeting this Friday, a currency meeting.
Obama’s horse would do a better job than John Kerry.
I just think about all the new people who are realizing that they are conservatives, and how they might perceive what was posted, without a sarcasm tag.
Obama must be doing the oprah ‘happy dance’.
>> This is the BIG question... will the Repubs have a spine this time???
They will kick the can down the road, like always.
The (R) side loves (and depends upon) big government as much as the ‘Rats do.
Just as long as Obama doesn’t start playing a musical instrument.
There’s a difference?
Heiden’s 45th Symphony - “Heiden’s Farewell.”
Yes it is a commie source but this is the only one I could see which exposes the FED in this.
The budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9-1/2 percent of national income during that time. For comparison, the deficit averaged 2 percent of national income for the fiscal years 2005 to 2007
will gold go up?
Sure that's true, we even helped rebuild Europe and Japan until they got back on their feet again. Before World War 2 started, we at least had an industrial base to start from. Now most of our heavy industry has been ceded to China.
Every country gets it's turn in the limelight.
Yes and thats why I’m thinking about putting all of my savings in gold.
CLOSING ONE EXIT
I am going to take you through the speech. As you read what he said, keep asking yourself this question: "What is he trying to tell Congress?"
He made it clear that Congress cannot maintain its present course. The markets will not allow this. He said that there will be a day of reckoning: rising interest rates. At some point, lenders will decide that the United States government is no longer a reliable borrower.
This warning goes to the heart of Congress's deception procedure. He said that interest rates will rise. But everyone can see that rates will rise on a vastly expanded level of debt. The deficits keep pushing up the total national debt. The interest rate burden is minimized today because interest rates are at lows not seen since the Great Depression. It does not cost much to roll over the debt.
This is true in the private capital markets, too. Borrowers can expand their level of personal debt because their monthly debt repayment schedule is reduced by lower rates. This lures the public into more debt. Bernanke mentioned this in passing. He can see what is coming. When rates rise, consumers will cut back on new debt and more purchases.
He told his audience that the escape hatch of ready lenders is going to close. The lenders will reduce their purchases of debt at low rates.
This is another way of saying that the AAA rating of the U.S. government will fall. The idea that you cannot lose by buying Treasury debt will go the way of the dodo bird. This was a major prediction by the FED Chairman. It went right to the heart of Congress's deferral of the day of reckoning.
His point was that one of the two exits will be closed by the free market. The lenders will close it. They will do so out of self-interest.
This will leave only one other exit: the willingness of the Federal Reserve System to buy Treasury debt. He never directly referred to this, but it was implied.
As I take you through the speech, keep this in the back of your mind: "Why is he telling this to Congress?" I can think of this reason: he was telling Congress not to count on the FED to bail out Congress when the lenders start saying "no." He is saying that Congress must begin to impose the cuts in the future, because the FED is going to let interest rates rise. The deception will have to end at that point.
He was telling Congress to begin to decide whose oxen must be gored.
NO WAY OUT
He was trying to get Congress's attention. Yet this was indirect. He was not giving the speech at a Congressional hearing. He was giving it to a group in Rhode Island -- off the beaten path.
There is no way around it--meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices.
Difficult decisions? Sacrifices? Congress? The name of the game in Congress is to avoid difficult decisions and sacrifices. Congress assumes that the FED will be there as the lender of last resort.
I sense that this speech was his attempt to send a signal: "Don't plan on the FED to bail you out."
Then he offered hope. It was purely hypothetical hope
But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability. Conversely, good fiscal management is a cornerstone of sustainable growth and prosperity.
I ask: Why should we expect good fiscal management from Congress? When? Congress has played "kick the can" for as long as I have monitored Congress: half a century. Bernanke knows this.
What nation in the West has adopted "good fiscal management"? They are all running deficits. They all rely on their central banks to bail them out from time to time.
He was telling Congress that the game of kick the can must end. But not yet! It is not mandatory that anything be done now. It can all be deferred. Indeed, it must be deferred.
For now, the budget deficit has stabilized and, so long as the economy and financial markets continue to recover, it should narrow relative to national income over the next few years. Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk.
This authorizes Congress to kick the can until 2013. That is what Congress wants to hear. But he put a poison pill in the party cake.
Over the medium- and long-term, however, the story is quite different.
Nobody in Congress ever pays any attention to anything further out than two years. He knows that. So, he concentrated his speech on 2013 and beyond. This means that Congress will not ask him to elaborate.
BUREAUCRATIC BUZZ WORDS
Bernanke used the standard bureaucratic buzz words. "Challenge." This means "politically unsolvable." "Sacrifice." This means "what Americans did during World War II." "Difficult." This means "deferrable."
He then listed the "challenges." They are challenges indeed.
If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace.
Got that? Unsustainable. This means "cannot be sustained." It means "no exit." It means "dead end."
Moreover, as the national debt grows, so will the associated interest payments, which in turn will lead to further increases in projected deficits.
It's a vortex. The deficits will become self-reinforcing. It will get more difficult to control them. Today, with very low rates, deficits are growing relentlessly. What happens when rates rise?
Expectations of large and increasing deficits in the future could inhibit current household and business spending--for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending--and thus restrain the recovery.
He was warning Congress that the effects of deferral will be to raise rates. When rates rise, the consumer will cut back on spending. This will produce a recession, or at least a slowdown. That will cut tax revenues. So, as rates rise, it will get harder to collect taxes. Again, this is a vortex. By deferring the spending cuts, Congress will make the disaster worse when rates rise. As he said, this will reduce Congress's ability to escape.
Concerns about the government's long-run fiscal position may also constrain the flexibility of fiscal policy to respond to current economic conditions.
Translation: "Congress will have little wiggle room when the lenders say no."
Accordingly, steps taken today to improve the country's longer-term fiscal position would not only help secure longer-term economic and financial stability, they could also improve the near-term economic outlook.
Notice the passive voice: steps taken. Question: "Exactly who must take exactly what steps?" Answer: silence. He was not going to identify the oxen that will have to be gored. That's Congress's problem, not his.
Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors.
Translation: this is not going away. Why not? Because it's demographic. It's already in the pipeline.
Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs. As the health-care needs of the aging population increase, federal health-care programs are on track to be by far the biggest single source of fiscal imbalances over the longer term.
Which Congressman will stand up and say, "We're going to cut off Granny's life-support?" None? Well, then, we have "daunting challenges."
In Rhode Island, as in other states, the retirement of state employees, together with continuing increases in health-care costs, will cause public pension and retiree health-care obligations to become increasingly difficult to meet. Estimates of unfunded pension liabilities for the states as whole span a wide range, but some researchers put the figure as high as $2 trillion at the end of 2009.
What are states doing to deal with this? Exactly what Congress is doing to deal with Medicare's deficits: not a thing.
As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit. Herbert Stein, a wise economist, once said, "If something cannot go on forever, it will stop." One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point.
At what point? When the FED stops buying Treasury debt. Then there will be a default. Of course, he never used this politically incorrect word. But it is clear that he expects Congress to intuit this.
Will Congress intuit this? Of course not. It will kick the can.
He droned on and on, as he always does. He listed what everyone knows and always ignores. But he did his duty. He warned them. He gave no specifics. Specifics are what he never gives. But he ended on this.
Today I have highlighted our nation's fiscal challenges. In the past few years, the recession and the financial crisis, along with the policy actions taken to buffer their effects, have eroded our fiscal situation. An improving economy should reduce near-term deficits, but our public finances are nevertheless on an unsustainable path in the longer term, reflecting in large part our aging population and the continual rise in health-care costs. We should not underestimate these fiscal challenges; failing to respond to them would endanger our economic future.
Will Congress fail to respond? Of course. Is our economic future endangered? Of course.
Well-designed fiscal rules cannot substitute for the political will to take difficult decisions, but U.S. and international experience suggests that they can be helpful to legislators in certain circumstances.
In other words, rules won't work if there is no political will to impose sacrifice on voters. Is there such will? Of course not. So, now that we know fiscal rules will not work, let us end with cheerleading for fiscal rules.
Indeed, installing a fiscal rule could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which itself would be good for confidence. A fiscal rule could also focus and institutionalize political support for fiscal responsibility. Given the importance of achieving long-term fiscal stability, further discussion of fiscal rules and frameworks seems well warranted.
End of speech. Applause. Lunch.
Am I saying that the speech was an exercise in futility? Of course. Does Bernanke know this? Of course. Will anything change until the day that Congress hits the brick wall of the refusal of lenders to lend? No.
I agree. The Republicans have one more shot or forever be in the dustbin of history.
It is weird out here. People act as if the the economy is in good shape where I live. They are still shopping and going out as if there is no problem at all. They are buying overpriced nonessential goods.
Bernanke is a criminal and the FED needs to be ended ASAP. Go back to gold and silver and end the financial crisis for good.
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