Thread: Severe Threat': Deficit Crisis May Dwarf 2008 Meltdown

'Severe Threat': Deficit May Spark Crisis That Dwarfs 2008 Meltdown

Thursday, 24 Mar 2011 09:10 AM
By Forrest Jones

The gaping deficits are threatening the economy to the point they can no longer be ignored by anyone in government and may lead “to a crisis that could dwarf 2008," 10 former members of the President’s Council of Economic Advisers write in an open letter published by Politico.

The letter, written by former chairmen and chairwomen of the council serving both Republican and Democratic administrations, say recommendations by budget watchdogs Erskine Bowles and Alan Simpson arguing that the long-run federal budget deficit will pose a serious threat to the economy need much more attention from both political parties. Bowles and Simpson co-chaired the White House’s deficit-reduction commission in 2010.

The nonpartisan Congressional Budget Office in January raised its estimate for the annual deficit from $1.1 trillion to $1.5 trillion. It said the tax cuts would add $400 billion to this year's gap. The budget year ends Sept. 30.

The full-year deficit would exceed 2009's record deficit of $1.41 trillion. And it would mark the third straight year of $1 trillion-plus deficits.

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Erskine Bowles (left) and Alan Simpson

"There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention," the authors write in the letter addressing Congress and President Barack Obama.

"While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising healthcare costs are likely to create a large and growing gap between spending and revenues. These deficits will take a toll on private investment and economic growth."

Lenders, the authors point out, will run out of patience with Washington's spending spree.

"At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008."

To get the country out of its fiscal mess, the government must slash discretionary spending substantially, according to the Bowles-Simpson report.

"Everything is on the table, including security spending, which has grown rapidly in the past decade," the authors point out.

Tax reform is also needed, which was called for in the report issued by Bowles and Simpson.

Yet not everyone will fully agree on how to steer the economy away from overspending, and the Bowles-Simpson report will not receive a warm embrace from all of the nation's economic leaders.

"The commission’s recommendations for slowing the growth of government healthcare expenditures — the central cause of our long-run deficits — are incomplete. It proposes setting spending targets and calls for a process to suggest further reforms if the targets aren’t met. But it also lays out a number of concrete steps, like increasing the scope of the new Independent Payment Advisory Board and limiting the tax deductibility of health insurance."

But it is a start, and a good start at that.

"To be sure, we don’t all support every proposal here. Each one of us could probably come up with a deficit reduction plan we like better. Some of us already have. Many of us might prefer one of the comprehensive alternative proposals offered in recent months," the letter reads.

"Yet we all strongly support prompt consideration of the commission’s proposals. The unsustainable long-run budget outlook is a growing threat to our well-being. Further stalemate and inaction would be irresponsible."

Bowles and Simpson have said the U.S. will battle a destabilizing fiscal crisis in two years or even sooner if spending isn't brought under control.

"This problem is going to happen long before my grandchildren grow up," Bowles, who was White House chief of staff during the Clinton administration, said recently, according to the Wall Street Journal.

"This is a problem we are going to have to face up to it maybe two years, maybe a little less, maybe a little more."

Simpson, a former Republican senator from Wyoming, agrees, adding "I think it will come before two years."

Read more: 'Severe Threat': Deficit May Spark Crisis That Dwarfs 2008 Meltdown

http://www.moneynews.com/Headline/Econo ... ode=BEED-1

Study: US Finances Among Worst in Developed World

Thursday, 24 Mar 2011 12:27 PM
By Forrest Jones

The United States is one of the worst of the developed economies when it comes to financial stability and should expect to stay there until it tackles its debt problems, according to the Comeback America Initiative, a nonprofit organization promoting fiscal stability.

The organization's Sovereign Fiscal Responsibility Index ranks the U.S. at 28th among 34 countries when it comes to being able to meet financial challenges.

"We think it is important for the American people to understand where the United States is as compared to other countries with regard to fiscal responsibility and sustainability," David Walker, head of the organization and former U.S. comptroller general, tells CNBC.

"Americans are used to rankings and they're used to ranking very high, but frankly in this area we rank very low."

The report did find a silver lining for Americans.

"Here's the good news: Some of the top countries had their own fiscal challenges, made reforms and now rank highly," Walker says.

The top five countries were Australia, New Zealand, Estonia, Sweden, China and Luxembourg.

The U.S. should run a $1.5 trillion fiscal deficit this budget year ending Sept. 30, according to the nonpartisan Congressional Budget Office, the Associated Press reports.

The full-year deficit would exceed 2009's record deficit of $1.41 trillion. And it would mark the third straight year of $1 trillion-plus deficits.

A group of past heads of the Council of Economic Advisers have written in a letter published by Politico calling for leaders to take public spending seriously.

"We find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention," the authors write in the letter addressing Congress and President Barack Obama.

http://www.moneynews.com/StreetTalk/us- ... /id/390629

As Adjusted Monetary Base Rises By Half A Trillion In 2011, Treasury Runs Out Of Debt Ceiling Delay Measures

by Tyler Durden
03/24/2011 21:24 -0400
28 comments

Something very notable happened today receiving exactly zero recognition by the mainstream press: the process of winding down the Supplementary Financing Program ended, with either zero (assuming the entire $25 billion in 56 Day CMB matured without rolling) or $5 billion (as per the Treasury's disclosure), http://www.zerohedge.com/article/here-i ... illion-liq remaining under the SFP. This means that the entire $200 billion buffer that had previously afforded the Treasury breathing room with the looming debt ceiling, is now gone, and next steps include such drastic measures as a partial or complete government shutdown, as no incremental funding will be available to fund the daily deficit. As a reminder, as of today https://www.fms.treas.gov/fmsweb/viewDT ... 032300.pdf the Treasury had a total of $12.24 trillion in debt, just $70 billion below the ceiling, and $14.172 of debt subject to the limit. Which is not good because as per today's refunding announcement there is $99 billion in 2, 5 and & 7 year debt coming down the line next week. http://www.treasurydirect.gov/RI/OFAnnce Which means that while the formal debt ceiling will not be breached, the total amount of debt including the fluff not counted, will surpass $12.4 trillion by next Friday. In the meantime, the SFP unwind continues to have a major impact on the adjusted monetary base. As we have discussed in the past, excess reserves continue to go parabolic, purely as a function of the SFP unwind and ongoing QE2, which in turn is impacting the adjusted monetary base, which is now half a trillion greater year to date. As we predicted previously, excess reserves will hit $1.7 trillion by the summer. These rose by $72 billion in the past week to approximately $1.4 trillion, which means that by the time QE2 is over, the Adjusted Monetary Base will hit $2.7 trillion, a $750 billion increase in 6 months. And if QE3 gets the green light, all bets are off. And once this surging monetary base is converted from excess reserves to currency in circulation, that is the moment when Weimar comes a-knockin'.

The AMB chart that speaks volumes (link). http://research.stlouisfed.org/publicat ... /page3.pdf



http://www.zerohedge.com/article/adjust ... gation-mea

Someone Leak Something?

by Tyler Durden
03/24/2011 16:04 -0400
325 comments

Something rather disturbing from a European trading desk...

TODAY TWO LARGE MACRO FUNDS OVER HERE HAVE GONE WILDLY LONG S&P. NOT LONG. WE TALKING 250% NET LONG. IT LOOKS LIKE CONCERTED ACTION ON GDP DGRADES FROM GS AND BOFA ARE THE LETTER DELIVERED TO BEN ON QE3. HUGE DIRECTIONAL BET WITH NEW CAPITAL PUT AT WORK. MOST LIKELY THE TWO INSTITUTIONS ARE COORDINATING ACTION WITH OFFICES IN CONNECTICUT. CHECK INFLOWS OF BLUE CHIP HEDGE FUNDS IN JAN FEB. APPLY 2.5 LEVERAGE. WE ARE TALKING ABOUT SOME 40-60BN PUT AT WORK PRIMARILY ON EMINIS AT THE MOMENT. WHETHER SOME EXTERNAL FORCE WILL LEAVE THEM HIGH AND DRY I DON'T KNOW. BUT IF ANYTHING SEEMED TO BE AT LEAST NOT TOO IRRATIONAL UP TO NOW, IN THIS THIRD WAVE, BE READY FOR REAL ROCK AND ROLL.

http://www.zerohedge.com/article/someone-leak-something