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U.S. Debt: Has its Past Become its Future?

Interest-Rates / US Debt Aug 05, 2011 - 01:31 PM GMT

By: Casey_Research

Interest-Rates

Frank Trotter, President, EverBank Direct writes: Friends who know that I speak frequently about global economics have been calling to see what I think about the smackdown arguments over spending in Washington. I have surprised them all by saying that it’s really an empty record. Well, I suppose there is some kind of odd entertainment factor in the recent public debates about the U.S. debt ceiling.


Republican politicians and their tea-slurping back-benchers are stridently stating that they are finally holding the line on spending. A press release on Representative Boehner’s website trumpets, “In January, the first week that we were sworn into office, the president asked for an increase in the debt ceiling, and I made clear at that time we there would be no increase in the debt ceiling without significant cuts in spending and changes to the way we spend the American people’s money.”

That’s tellin’ them.

“Republicans are behaving like thugs in debt ceiling debate,” says a letter to the Baltimore Sun, summarizing the feeling many Democrats have about the process. The letter goes on to promote “a plan that starts with some sacrifice by the Wall Street fast money crowd who put the economy in the ditch in the first place.”

Take that, Wall Street. Humpf.

Being a simple country banker, I tend to go straight to the numbers. A trip over to the Congressional Budget Office – the folks with the green eyeshades in charge of translating the mumbo-speak of Congress into something practical – reveals the pearl within the plan. As we have all read many times now, the approved plan calls for $917 billion in “reduction in budget deficits.” Of course there are many qualifiers but one layer down, the appalling figures are written in black and white for all to see.

For the 2012 budget year a total of – wait for it – $21 billion in reductions is proposed, followed by $42 billion and $59 billion in 2013 and 2014. Can anyone guess when the next presidential election will be held?

Now, the CBO made a projection in 2001 (as it does every year). The swing from the projected budget at that time versus the actual outcome resulted in an $11.8-trillion “error.” The CBO had projected a cumulative surplus of $5.6 trillion, and of course over the past ten years we have seen an actual cumulative deficit of $6.2 trillion. Around our shop that might get someone fired, but as the CBO correctly says, “The actual results have differed from those projections because of subsequent policy changes, economic developments that differed from CBO’s forecast, and other factors.”

Guess so.

All of this takes me right back to where I was a month ago, and ten years ago. Déjà vu all over again. Just months after that 2001 CBO projection, we came to believe that the relative U.S. budget situation, monetary policy, and other factors would contribute to a weak U.S. dollar for the foreseeable future. Since then holders of some of our favorites like Australian dollars (+112%), Norwegian kroner (+69%), Canadian dollars (+60%), and even the troubled euro (+62%) have enjoyed excellent returns as the U.S. dollar has sunk (August 1, 2001-August 1, 2011 currency price change only; source is Bloomberg).

There are many troubles around the world, and the global economy is choppy at best. The U.S. isn’t the only country that is fighting a spendthrift past.

If Congress had agreed to a plan to reduce the federal government’s role in the economy from over 25% of GDP today to, say, 10% by 2030 using a combination of outright cuts, elimination of an imperial military, significant privatization, and returning Social Security to the last-ditch plan it was meant to be, I might change my tune. But after this last round of languid Congressional efforts I’ll continue to maintain that we will see the U.S. dollar decline in the intermediate and long term against fortified economies like Norway, Australia, and Singapore.

Excuse me, I need to step out to make another trade. You might want to as well.

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© 2011 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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