For those who want more than The
Onion’s take on the debt ceiling and who are slightly skeptical of James Grant’s
wish for a return to the gold standard, Harvard professor and economic
historian Niall Ferguson has offered his analysis on the current Washington
distractions:
In his vain attempt to stop the Senate
striking out the defunding of ObamaCare from the last version of the continuing
resolution, freshman Sen. Ted Cruz managed
to quote Doctor Seuss while re-enacting a scene from the classic movie
"Mr. Smith Goes to Washington."
Meanwhile, President Obama has become the Hamlet of
the West Wing: One minute he's for bombing Syria, the next he's not; one minute
Larry Summers will succeed Ben Bernanke as chairman of the Federal Reserve, the
next he won't; one minute the president is jetting off to Asia, the next he's
not. To be in charge, or not to be in charge: that is indeed the question.
Political drama is highly entertaining. It has mesmerized
the nation for weeks now. Unfortunately, Ferguson notes, the theater is
burning:
Yet,
entertaining as all this political drama may seem, the theater itself is indeed
burning. For the fiscal position of the federal government is in fact much
worse today than is commonly realized. As anyone can see who reads the most
recent long-term budget outlook—published last month by the Congressional
Budget Office, and almost entirely ignored by the media—the question is not if
the United States will default but when and on which of its rapidly spiraling
liabilities.
As the
CBO noted last month in its 2013 "Long-Term Budget Outlook," echoing
the work of Harvard economists Carmen Reinhart and Ken Rogoff: "The
increase in debt relative to the size of the economy, combined with an increase
in marginal tax rates (the rates that would apply to an additional dollar of
income), would reduce output and raise interest rates relative to the benchmark
economic projections that CBO used in producing the extended baseline. Those
economic differences would lead to lower federal revenues and higher interest
payments. . . .
"At
some point, investors would begin to doubt the government's willingness or
ability to pay U.S. debt obligations, making it more difficult or more
expensive for the government to borrow money. Moreover, even before that point
was reached, the high and rising amount of debt that CBO projects under the
extended baseline would have significant negative consequences for both the
economy and the federal budget."
As James Grant wrote (and as I quoted yesterday), the question
is not whether the government will default but when and how. Ferguson offers
this sobering assessment:
It
should now be clear that what we are watching in Washington is not a comedy but
a game of Russian roulette with the federal government's creditworthiness. So
long as the Federal Reserve continues with the policies of near-zero interest
rates and quantitative easing, the gun will likely continue to fire blanks.
After all, Fed purchases of Treasurys, if continued at their current level
until the end of the year, will account for three quarters of new government
borrowing.
But the
mere prospect of a taper, beginning in late May, was already enough to raise
long-term interest rates by more than 100 basis points. Fact (according to data
in the latest "Economic Report of the President"): More than half the
federal debt in public hands is held by foreigners. Fact: Just under a third of
the debt has a maturity of less than a year.
Hey,
does anyone else smell something burning?
Makes you want to go back to The Onion….
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