Saturday, November 06, 2004

Excessive Spending: Spending... Too Much?

Another domestic issue I raised after the election was Excessive Spending.

I recently wrote the following to an economist at George Mason University:

It is obvious... or should be... that the U.S. has been the economic engine of the world. What is less obvious is the relationship of borrowing to economic health. At an individual level, borrowing can provide both opportunity and risk. It all depends on the ability of the individual to leverage the borrowed money to make even more money: that's growth. That's a win-win for the lender and the borrower. If not, it is a lose-lose.

What begins to get clouded in my mind is the relationship of borrowing and economic health at a national or international level. The nature of borrowing is less defined to me. The national debt is pretty easy for most of us to understand... the government is spending more than it is receiving through taxes, so it borrows money (bonds, notes) to cover the shortfall. Our faith is that somehow the government will find a way to pay the interest on the bonds and still have enough left to handle the business of government. Some of us get concerned when
the debt level seems a bit excessive.... $7,429,582,471,118.88

That's about $25,000 for every person in the U.S. I guess that's manageable, but I hope it doesn't come due soon.

The other statistic that we all hear about, but have difficulty with the implications is the Trade Deficit

A net annual negative of $0.5 trillion and growing just does not seem to be healthy borrowing to me. I think that others share some of my concern.

It appears that we are presently borrowing heavily to sustain a consumer-based economy with artificially low prices. Many corporations and individuals are benefitting from this at present, but perhaps not as much as we might like to believe.

The questions is: who pays the piper... and when? How?
Technically speaking a trade deficit is not borrowing. Money is exchanged for goods. And in the past, there has been an inverse correlation of the trade deficit to unemployment... mainly because as unemployment rose, demand fell and imports fell. Perhaps my concerns are unfounded, but during this last recession, as unemployment rates increased... so did the trade deficit.

Now, quite honestly, I do not have the breakdown of how much of the deficit was related to oil and how much to other imports. What concerns me is that in exchange for U.S. cash, we are consuming increasing amounts of foreign products, employment is only slowly rising and the economy is not exactly steaming ahead.

But more than that is the issue of what is happening with that cash. A large amount goes into "safe haven" securities... foreigner are purchasing U.S. government bonds. Some of it is used by the producers of imported products to become even more competitive against domestic producers. Some of it is used to establish manufacturing or distribution footholds within the U.S. ... something that helps employment and the economy.

Perhaps it is unfair to lump the national debt and trade deficits together as "borrowing", but the trade deficit does one thing that leaves me just a little paranoid... especially at 1/2 trillion dollars per year... and that is the issue of control. Somewhere in the equation of getting goods for cash is the part that says Cash = Control. Cash becomes the power to influence, the power to compete, and the power to control.

So maybe it isn't totally unreasonable to think that great debt and exchanging goods for control might not be a great long-term strategy. It hasn't hurt so far... but we now have a total national debt of $25,000 per person and an annual trade deficit of about $1,700 per person... every man, woman and child.

Somewhere, it seems, there must be a piper.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
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- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)