Monday, June 27, 2011

And the hits just keep on comin'

Lawrence Lindsey explains why any budget deal to cut the national debt will be dwarfed by a normalization of interest rates which will lead to more expensive payments on the debt we already have. From "The deficit is worse than we think":
First, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020.

The 10-year rise in interest expense would be $4.9 trillion higher under "normalized" rates than under the current cost of borrowing. Compare that to the $2 trillion estimate of what the current talks about long-term deficit reduction may produce, and it becomes obvious that the gains from the current deficit-reduction efforts could be wiped out by normalization in the bond market.
As Charles Krauthammer noted, this is all "heading towards a train wreck on August 2nd." The Democrats want huge tax increases on the wealthy they couldn't pass when they had wide majorities in both houses of Congress. Their other brilliant idea is eliminating tax subsidies (the same ones every other industry in America employs) for the oil and gas companies to save a whopping $2 billion/year - or roughly half of what we overspend every day. The Republicans are boxed in by the Tea Party freshmen who were elected to stop runaway government borrowing and spending.

For the record, I think income tax rates need to go up such that everybody bears some burden for the federal government we "enjoy". (Then maybe more people will wonder if it's worth the expense.) On the other side of the coin, we can't realistically pare down our $1.6 trillion deficit without restructuring entitlement spending; it's a fantasy to believe otherwise.

Despite the warnings from the credit rating agencies, it seems our *cough* leaders *cough* in Washington believe we can escape this debt crisis with just a "haircut." But unless dramatic action is taken - and soon - it's going to be haircut today, amputation tomorrow.


Anonymous said...

Debts that can't be paid, won't be.

Fats Waller said...

One never knows, do one?

Bram said...

Get the printing presses warmed up - it's time to make the jump to hyper-inflation.

another Eric Lindholm said...

Gotta raise taxes and cut way back on entitlement spending -- can't disagree with you there. Maybe we should form a third party.

Brzza said...

I'd settle for a second party.

Anonymous said...