Ben Potter has a piece in today’s AFR which, unusually for the “non-Fox media”, contains a fine analysis of the chasm between US spending and revenue and the tears that are likely to be shed once this becomes recognised as unbridgeable.
It is similar to this eminently understandable video message
Here is an extended quote from the Potter piece for those unable to penetrate the paywall
America consumes more than it produces, promises its citizens more than it can pay for, and writes IOUs to pretend it can go on. With debts of $US16 trillion, it can’t.
If America’s politicians won’t explain this to voters and agree how to fix it, global investors will get around to letting them know. The most predictable financial crisis in history will be upon them.
This should be the biggest issue in the presidential election. But the problems can’t be solved without hurting a lot of voters – not just millionaires – so deficits and entitlements can’t be honestly debated in the campaign. Hence the focus on Mitt Romney’s taxes and Barack Obama’s “redistribution”.
Because America’s politicians won’t do anything, Federal Reserve chairman Ben Bernanke is trying to do something. He’s trying to solve pernicious slow growth and unemployment by keeping interest rates as low as he can for as long as it takes. Yet something is not better than nothing if it yields diminishing returns and comes with mounting risks of inflation, financial market distortion, and damage to the Fed balance sheet.
Already holding $US2.6 trillion of Treasury and mortgage securities, the Fed is simply going to buy more until unemployment falls to near the long-term rate of 5.2 per cent to 6 per cent and stays there. Since the Fed doesn’t expect this to happen until 2015, its bond portfolio could reach $US4 trillion or more, all bought with newly printed money.
To say that the Fed is sailing deeper into uncharted waters, as Dallas Fed president Richard Fisher argued in a speech last Wednesday, is a huge understatement.
He argues that no one at the Fed really knows what’s holding consumers and businesses back or what it would take to entice them to spend and invest, and that the sand in the gears is more likely to be uncertainty about jobs, taxes and red tape than lack of credit.
Fisher argues the cost of more QE is high. No one at the Fed knows how to navigate safely back to a “normal” balance sheet from where the Fed is now, let alone from $US4 trillion.
As with the US government’s debts, the deeper you go in, the harder it is to get safely out. The Fed and theUSgovernment, with its trillion-dollar deficits and $US16 trillion debt, are already at a point where any attempt to sail back to safety in a reasonable time will look unreasonably contractionary to many.