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US Deficit Grows to Record

Clinton did a lot of middle of the road things that were not flashy, but produced results. He kept unemployment down, the surplus up and used a bi-partisan approach that inspired a lot of confidence on Wall Street. Robert Rubin (Republican who served as Clinton's Secretary of the Treasury) is an example, the street loved him.
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Well, you've said how he did it (not flashy, bi-partisan) and named his Secretary of the Treasury, but you still haven't said what he did. The unemployment down and surplus up are results, not tactics, right?

I've never gotten a good answer on this... what is it that a president does that is so crucial to the economy? I mean, budget and tax cuts have to figure in to it, but how? People are saying Bush's tax cuts aren't a good idea, and I have to agree given the deficit, but nobody seems to have numbers, or specifics, or much of anything. Damnit Jim, I'm an engineer, not an economist... is there any way to explain the differences of economic policy in a way that is both meaningful and not excessively complex? I don't want to go through the budget line by line, but I'd like some more info on this if anyone feels up to the task.

Just as a quick responses to the other ones (keep in mind I'm a total amateur here):
1) government agencies budgets normally increase on a yearly basis for inflation and such, right? If their budgets were planning on this and tax revenue does not increase then there's a net debt, right?

2) Did not Goldman Sachs (sp?) and the rest of wallstreet have vastly profitable years during the 90s? I'd assume they have to pay taxes on that, regardless of how many tax shelters they manage to hide money in. I assume the tech companies (before they went under) were paying taxes. While vast sums of money vanished into thin air, up until companies started filing for bankruptcy they were still paying taxes, right? I assume the govt lost a large amount of income when the market went belly up and suddenly lots of dotcom "millionaires" went broke, but up until then they would seem to have benefited from portions of it (though not the stock options, if I understand correctlly).

Anyway, anybody got an good sources on where to learn about this that don't involve the same old partisan bickering?

Edit: and cr*p, I wasted my 1000th post on this? Should have posted in G6's b-day thread... that would have at least won me some suck-up points :D
 
DrChinese said:


1. If GNP levels off, all other things equal, then the surpluses Clinton generated should have continued.
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Clinton generated? As one of the hard working tech workers who helped fuel the tech bubble that generated increased tax revenues through prosperity I resent that remark.

It wasn't Clinton's surplus, it wasn't Newt's surplus. It was our surplus.
 
corplinx said:


Clinton generated? As one of the hard working tech workers who helped fuel the tech bubble that generated increased tax revenues through prosperity I resent that remark.

It wasn't Clinton's surplus, it wasn't Newt's surplus. It was our surplus.
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A little testy today, eh Corp? (I also am a tech worker.)

Of course it was not Clinton's personal surplus. And it is not Bush's personal deficit. I simply used the term to indicate the time span of what was going on. If you prefer to call it Newt's surpluses, that's OK with me as well.

At any rate, if Bush - and Congress, etc. - had not tinkered with the formula in place at the end of the Clinton administration, then a flat GNP would not have produced the deficits we have now. Clearly, Bush spearheaded the changes (such as tax cuts) which led to the deficit.
 
From Aoidoi:
Um, economy massively growing then "oops" and it's nearly flat for years?
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Didn't go down, then.

from DrChinese:
. You won't find too many who agree with that assessment. People tend to pay taxes on realized appreciation, not paper fortunes.
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Actually people tend to use increased asset value to borrow money against for immediate consumption. It was a marked part of the 90's demand growth in the US and the associated increase in debt. In Britain there is the same effect when house prices rise; people re-mortgage or raise loans to "liberate the value", otherwise known as letting the sharks into your pool.
 
A comment on the "pump and dump" theme:

In the 1840's and 50's in Britain there was a Railway Boom analogous to the dot.con boom. The Railways were the great new thing of the future - the "New Economic Paradigm" - and everybody wanted a bit of it. As a result all sorts of railway lines were proposed, with no economic justification, simply to provide shares to feed this market. In the end the whole thing came crashing down and lots of money was lost.

And a lot of very useful railway lines had been built. When I say the money was lost, I mean it was lost to the original owners. To the navvies and engineers that built the railways much of it was income.

It's all very well attacking the dot.con affair, but it seems a bit rude to do it over the internet that would never have grown so quickly had it not happened. OK, a lot of people lost money, but take comfort in the fact that not one of them was me.
 
CapelDodger said:
A comment on the "pump and dump" theme:

In the 1840's and 50's in Britain there was a Railway Boom analogous to the dot.con boom. The Railways were the great new thing of the future - the "New Economic Paradigm" - and everybody wanted a bit of it. As a result all sorts of railway lines were proposed, with no economic justification, simply to provide shares to feed this market. In the end the whole thing came crashing down and lots of money was lost.

And a lot of very useful railway lines had been built. When I say the money was lost, I mean it was lost to the original owners. To the navvies and engineers that built the railways much of it was income.

It's all very well attacking the dot.con affair, but it seems a bit rude to do it over the internet that would never have grown so quickly had it not happened. OK, a lot of people lost money, but take comfort in the fact that not one of them was me.
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Don't forget Black Firday when some pumpers hyped gold prices and then began selling off their gold as the prices when up, then Grant unloaded a bunch of US gold onto the market to foil the plan of the pumpers and then the market crashed and there was a huge depression, yet the two guys that had created the entire scam got out of it as ultra wealthy millionairs and died with massive fortunes.
 
Aoidoi said:
While Bush is indeed getting on my nerves, don't you think that the collapse of the internet and tech booms had a bit to do with this?
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What do stock prices have to do with the government spending more than it takes in?

Anyone who thinks that the War on Terrorism isn't the main contributing factor here is just plain fooling themselves.

Clinton's surpluses were based on imaginary money, and now that it has vanished we're stuck with reality.

I don't know that Bush is handling this correctly (I'm not even sure if there is a "correct" way to handle it), but praising Clinton for presiding over the largest pump-and-dump scam in history and blaming Bush for it's collapse seems a tad... partisan.
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You are correct in both of these paragraphs.

What would you prefer Bush to do? What programs do you want him to cut?
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Speaking personally: Anything not authorized by the Constitution. That would take care of 90% of the budget.
 
Ziggurat said:
The exhuberence was based on imaginary money. The surplus itself was quite real, even if it wasn't going to last.
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The surplus was real only if you do like Congress did and pull Social Security money into the general budget. Without SS, they were still running a deficit.
 
CapelDodger said:
However, it is overall (other things being equal) good for employment and investment. (Borrow to make productive investments, then pay back later with devalued money.)
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Except that that isn't how it works. Banks charge interest on money, and the interest rate figures in the rate of inflation. That's why loans were so hard to get in the late '70s; the intense inflation rate made banks loan money at over 15% interest and people didn't want to borrow.

If this get out of hand, of course, you get a complete breakdown and you have to re-boot. (see Argentina)
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Argentina's problem was largely due to the government printing more money and incurring more debts to pay for thier programs. They then tried to hide it by making it look like a legitimate debt, and not government-sponsored counterfieting, but that just doesn't work. The Argentinian peso plummeted and they spun into hyperinflation.

Our government does the exact same thing. And although our economy is so strong it's been able to withstand it so far, sooner or later the same thing is going to happen to us unless something changes.
 
CapelDodger said:
Not if you funded the debt by issuing bonds. These have a fixed interest rate.
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You can get loans with fixed interest rates, too, but the problem with those is that the interest rate is already figured to cover inflation, and they try to overshoot it a bit so they'll make money even in a worse case, so you're usually better off in the long run with a variable interest rate.

The problem with government bonds is that the government just prints more money to pay them off, and so they actually contribute to the inflation problem.
 
shanek said:

The problem with government bonds is that the government just prints more money to pay them off, and so they actually contribute to the inflation problem.
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So you agree, I presume, that record deficits are bad for the US economy?
 
From shanek:
the intense inflation rate made banks loan money at over 15% interest and people didn't want to borrow.
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The real interest rate is the relevant factor. Real interest rates are the nominal rate minus the inflation rate. Banks are obviously keen on positive real interest rates, borrowers on negative ones. Whether inflation is 2% or 22%, real interest rates of 2% are still just that. Banks have no interest in pricing their services - provision of credit - out of the reach of their market; real interest rates are determined by supply and demand (and you'd surely approve of that).
 
From shanek:
The problem with government bonds is that the government just prints more money to pay them off, and so they actually contribute to the inflation problem.
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The vast majority of government bonds are rolled over by the issuing of new bonds.
 
CapelDodger said:
The real interest rate is the relevant factor. Real interest rates are the nominal rate minus the inflation rate.
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But what the banks found in the '70s is that the market responds to the nominal interest rate more than it does the real one. They had trouble convincing people to take out the loans at 15% interest even after explaining that 10% of it was due to inflation. This is one reason inflation has a negative effect on economic growth.

Banks have no interest in pricing their services - provision of credit - out of the reach of their market;
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Of course they don't. But high inflation rates leave them with little alternative. Again, borrowers tend to respond more to nominal rates than they do to real rates.
 
from shanek:
You can get loans with fixed interest rates, too, but the problem with those is that the interest rate is already figured to cover inflation, and they try to overshoot it a bit so they'll make money even in a worse case, so you're usually better off in the long run with a variable interest rate.
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Consider: if that were the case, why does anybody raise money on long-term bonds? They've been doing it for a long time, so they've had a chance to learn better.

If the money you're raising will be invested in something liquid - other tradable paper, foreign currency or tradable commodities - then short-term money is probably appropriate. In that case the investment can be liquidated and the loan paid off if interest rates rise too high to make the loan worthwhile. However, short-term money is usually more expensive than medium or long-term money, so unless your investment is particularly risky longer-term finance is better.

Banks charge less for longer-term money since it reduces a bank's risks, and interest rates are highly sensitive to risk. All investment institutions make their judgments as to future inflation, as do large-scale borrowers. An institution that takes a gloomy view reduces its risk but is likely to be undercut by other institutions. Competition sets interest rates.
 
CapelDodger said:
Consider: if that were the case, why does anybody raise money on long-term bonds?
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Notice I said "usually." There is certainly a place for bonds and other fixed-interest returns in a long-term portfolio. But I was mostly referring to loans anyway.
 
quote:
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Originally posted by CapelDodger

The vast majority of government bonds are rolled over by the issuing of new bonds.
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And makes bond-issuing no better than a pyramid scam.
 
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