THE MUFTIC FORUM

Mom

Forget GNP measures – no one uses that now.

GDP is best measure

Our GDP is currently 14 trillion.  That is measure of ALL goods and services CONSUMED in the US in a year.

There are difference between what the CBO estimates the growth of GDP is going to be, 2.3% and what Obama OMB estimates it is going to be  2.6% -- so that is driving a lot of the debate believe it or not…

In OBAMA plan, annual budget deficit  is expected to grow to about 1.8 trillion, that is  rounded 13% of current GDP.  What that is in terms of percentage of future GDP depends on your growth assumptions. – Higher growth means lower percent of GDP  AND higher tax revenues too which reduce that percentages even more.

OUR entire Government Debt – i.e.  the amount of ALL US Treasury obligations is climbing to say 11.0 trillion dollars under OBAMA Plan.  That is 78.5% of current GDP.  Again, what percent of future depends on which estimates you want to use.

If you assume that Economy grows at 2.6%, then in four years you have GDP of 15.5 billion…at 2.3% than 15.3 Billion in GDP. 

Obama says he wants to cut deficit in half – but he means half of 1.8 trillion, or down to 900 billion.  Under OMB then in four years national deficit is 5.8% of GDP versus 6.0% under CBO estimates.

SO where is the beef?  Beef is that ten years forward, using 2.6% versus 2.3% becomes VERY meaningful due to compounding  and we can get below 3% with OMB growth but not CBO estimate

BUT that is ten years away – so who the heck knows?

Mom – during WWII our budget deficit as % of GDP was over 20% -- so at 13% that is really really meaningful stuff.

 Most fiscally sound economies aim for no more than 3% budget deficits, and total gov’s debt as % of GDP under 50%, but there are also different accounting tricks govs can use.

I would have no issue if US ran 5-6% deficits and total gov’s debt at 60% of GDP – that is what Obama is aiming for LATER. per Ted Muftic

Regarding deficits and inflation. Fiscal hawks are concerned that running huge deficits is inflationary. Because deficits are primarily financed by the Fed printing money -- actually increasing the supply of money such that there is too much money chasing too few goods. In such an environment, the value of the dollar goes down globally. It is complicated to explain how debt increases the money supply except to say that the fed creates it by lending it..money is "loaned into existence"

But one thing that these fiscal hawks fail to take into account during a major financial crisis like the one we just had is that when debt is not repaid -- money gets destroyed--ie the supply of money shrinks actually
We have had trillions of dollars in debt destroyed through bad loans and this is Deflationary -- so while pseudo economists rail against all this stimulus and liquidity being pumped into the system as inflationary and debasing the value of the dollar -- they fail to take into account the effects of money destruction and just assume we are creating money on top of money. This is dangerous populism.
The fed is involved now in a very delicate balancing act -- and in the months ahead it will have to closely monitor the money supply and carefully drain liquidity in an appropriate and measured manner to prevent the possibility of inflation picking up once normal lending cycles begin in the system. Per Ted Muftic

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I would not recommend it. Primarily because it needs to be financed somehow and that is through the selling of debt. But that crowds out other borrowers who want to raise debt to promote business/ economic growth which may prove more sustainable and more productive over long run -- better use of money than paying interest on interest of UST. So would prefer it closer to 3-4 points over the long run.  

 Would 5-6% debt to GDP be a disaster ?

Who knows? -- economy could grow at 4 pct making it moot. But we haven't even addressed entitlement reform which could be another huge spending..who knows past the end of his first term? All you could say is that given what a freaking disaster we went through, 5-6 pct by fifth year is fine and won't kill us. And those who say it will may not fully appreciate the massive de leveraging taking place across our entire economy in the private sector making our total national debt (private, consumer, gov) potentially the lowest it has been in decades relative to our economy which in long run means higher savings which is healthy.. So so many variables..

If it would not be a disaster, what would be the down sides?

  I would not recommend it. Primarily because it needs to be financed somehow and that is through the selling of debt. But that crowds out other borrowers who want to raise debt to promote business/ economic growth which may prove more sustainable and more productive over long run -- better use of money than paying interest on interest of UST. So would prefer it closer to 3-4 points over the long run.

   Per Ted Muftic