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Loose Lending Was Not Enough

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January 08, 2008 – Comments (7)

I continue to be shocked by the degree of incompetence and fiscal irresponsibility that I read about, the latest from  Nouriel Roubini.

 "In 2000 the US was running a large fiscal surplus – about $300 billion or 2.5% of GDP; by 2004 – after two large and unsustainable tax cuts and massive defense and national security spending increase - that surplus had evaporated into a 3.5% of GDP deficit. And while the overall deficit shrank after 2004, on a cyclically adjusted basis the structural deficit is very large now. So, unlike 2001 the US cannot afford now a massive  - 6% of GDP - fiscal stimulus like the 2001-2004 one. Even the Summers proposal adds up to less than 1% of GDP.   That unsustainable and reckless fiscal and monetary (Fed Funds down from 6.5% to 1%) policy stimulus in 2001-2004 was sarcastically referred to as “best recovery that money can buy” by the sensible and brilliant Ken Rogoff (a “Republican” economist who was at the time the chief economist of the IMF)."

 Add to this that the loose lending standards leveraged the problem of running a deficit budget.  That's how you end up with Americans spending 130% of their income for 5 years.

This is a disaster of unprecedented levels...

What erks me is that who ever the next President of the USA is will probably be blamed in the minds of the uninformed, rather than holding Bush responsible.  I remember a discussion I had with Dave Barrett once, one of our former Premieres of British Columbia in the 70s.   He was going on and on about Trudeau being the best Prime Minister Canada ever had, yet Trudeau is the single individual most responsible for the enormous difference in changing lifestyle that I was on the top end of receiving.  He had practically no debt when he entered office and and when he left back in the early 80s program spending exceeded taxes by $40 billion per year, excluding debt servicing. No wonder there were unprecedented good times in the 70s.

When I glance quickly at the US numbers, Canada was pretty much in the same place with our federal government debt as the US currently is, however, we didn't also have negligent levels of consumer debt.

The debt rises more under the person trying to control it than the person who created it because you can't fix that kind of deficit all at once and debt servicing costs at first go up faster than the cuts to spending and increases in taxes that must happen.  There is no choice in this matter.  There is a limit to the amount of money that can be borrowed and I would suggest that the US has exceeded that limit, only the lenders were asleep at watching their investments and they are only now realising their losses. 

The spending spree is over and I can't see how the US recovery isn't harder than what I feel like I have lived through for Canada to get its debt back under control. 

 

7 Comments – Post Your Own

#1) On January 08, 2008 at 11:03 AM, TDRH (99.62) wrote:

The next president of the US is going to inherit an economic cycle very similar to the one that  Jimmy Carter walked into.  Not a fan of Carter's by any stretch, but not sure he deserved all the blame he received.

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#2) On January 08, 2008 at 12:34 PM, dwot (42.49) wrote:

http://www.economicsbriefing.com/2008/01/moodys-several-bond-issuers-missing.html

http://www.economicsbriefing.com/2008/01/feds-plosser-despite-inflation-threat.html 

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#3) On January 08, 2008 at 9:21 PM, abitare (78.91) wrote:

dwot,

We really think a like. I cannot imagine that the current presidential cannidates have any clue how bad the economic situation that is going to be handed to them.

TDRH,

Concur totally. Carter was given the Veitnam War debt and "Nixon's closing the gold window" US dollar. The next president is in for a real treat.

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#4) On January 08, 2008 at 9:34 PM, dwot (42.49) wrote:

Interesting, I could have sworn I put a link to Nouriel's blog on this issue.  Let me try again. Nouriel....

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#5) On January 08, 2008 at 10:40 PM, DemonDoug (43.56) wrote:

hopefully if the demorats aren't stupid enough they will be able to pin the economy on bush, because yes it pretty much is all his fault (not being sarcastic, he's just like a really bad CEO that runs a company into the ground).  The good thing is that we are a resilient country, so if we get a demorat in there who does the right things, we could have some economic pain and recession for 2 years and by the 4th year things could be looking up, and they could take all the credit.  We could also argue that this election coming up is similar to the conditions in 1992, although IIRC there wasn't as much debt and the economy was in worse shape so we might have some more downward pressure to go first.

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#6) On January 08, 2008 at 10:48 PM, dwot (42.49) wrote:

That's only two things, Carter didn't face also enormous personal debt, a housing bubble, over building of the economy (17.9 million empty homes), interest rates weren't low so people had a different kind of debt, owing so much to foreigners, the list is so much longer...

I haven't studied that period for US economics.  Canada's economy was good.

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#7) On January 08, 2008 at 10:57 PM, dwot (42.49) wrote:

DemonDoug, maybe, but I think debt is the downfall of all nations.  It killed Mexico in the 80s.  It is killing Zimbabwe right now.  Canada's economy had such a hard time because of debt.  Africa has never turned itself around because of debt.

Americans have been getting a premium for most they do because the dollar was strong and considered safe.  I think that perception has changed.

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