OMB’s Orzag Was Against Deficits Before He Was For Them
by Morgen RichmondJust came across some rather grim analysis of the economic impact of massive, ongoing federal budget deficits from a group of prominent economists. It’s a little dated (2004) but still highly relevant considering that the deficit situation has dramatically worsened since then. Some highlights:
Substantial ongoing deficits may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy:
- As traders, investors, and creditors become increasingly concerned that the government would resort to high inflation to reduce the real value of government debt or that a fiscal deadlock with unpredictable consequences would arise, investor confidence may be severely undermined;
- The fiscal and current account imbalances may also cause a loss of confidence among participants in foreign exchange markets and in international credit markets, as participants in those markets become alarmed not only by the ongoing budget deficits but also by related large current account deficits;
- The loss of investor and creditor confidence, both at home and abroad, may cause investors and creditors to reallocate funds away from dollar-based investments, causing a depreciation of the exchange rate, and to demand sharply higher interest rates on U.S. government debt;
- The increase of interest rates, depreciation of the exchange rate, and decline in confidence can reduce stock prices and household wealth, raise the costs of financing to business, and reduce private-sector domestic spending;
- The disruptions to financial markets may impede the intermediation between lenders and borrowers that is vital to modern economies, as long-maturity credit markets witness potentially substantial increases in interest rates and become relatively illiquid, and the reduction in asset prices adversely affects the balance sheets of banks and other financial intermediaries;
- The inability of the federal government to restore fiscal balance may directly reduce business and consumer confidence, as the view of the ongoing deficits as a symbol of the nation’s inability to address its economic problems permeates society, and the reduction in confidence can discourage investment and real economic activity;
- These various effects can feed on each other to create a mutually reinforcing cycle; for example, increased interest rates and diminished economic activity may further worsen the fiscal imbalance, which can then cause a further loss of confidence and potentially spark another round of negative feedback effects.
Although it is impossible to know at what point market expectations about the nation’s large projected fiscal imbalance could trigger these types of dynamics, the harmful impacts on the economy, once these effects were in motion, would substantially magnify the costs associated with any given underlying budget deficit and depress economic activity much more than the conventional analysis would suggest. Indeed, the potential costs and fallout from such fiscal and financial disarray provide perhaps the strongest motivation for avoiding substantial, ongoing budget deficits.
Where did this analysis come from? It wasn’t The Cato Institute or The Heritage Foundation as one might expect. It’s from a research report published in 2004 by the left-leaning Brookings Institution, and was co-authored by none other than White House Budget Director Peter Orszag (along with Robert Rubin and Allen Sinai).
At the time, federal budget deficits were expected to total about $5 trillion in the proceeding 10 years. As things turned out, deficits totaled over $5 trillion from 2005-2009, and the current forecast is for nearly $10 trillion in additional debt to be added over the next 10 years.
Expect to see a major PR campaign initiated by the White House in January ahead of the State of the Union address focusing on the Administration’s commitment to getting the budget situation under control. However, it’s hard to see how they will have much credibility given that in the interim not only is the President hoping to sign a massive new entitlement program in ObamaCare, but Democrats are also crafting a new stimulus bill which will likely cost at least $75-100 billion.
Orszag talks a good game but the plain truth is that this Administration has exponentially increased spending without restraint. And not only did President Obama vote for the budget deficit he “inherited” as a Senator in 2008, he praised it for helping “restore fiscal responsibility in Washington“. In fact, he also lauded the Democrat-controlled Congress for rejecting cuts in domestic programs proposed by the Bush Administration.
Welcome to the New Era of Responsibility. “Fiscal and financial disarray” riding on a wave of Hope and Change.
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[...] This post was mentioned on Twitter by mikepfs and DRIP USA, AZ grassroots. AZ grassroots said: OMB’s Orzag Was Against Deficits Before He Was For Them http://bit.ly/4VeoXW #dripusa #ocra #tcot [...]
In 1787 Governor Morris headed the final draft of the Constitution and he knew the motivation of the bankers well as he had once worked for them. Governor Morris and Alexander Hamilton had presented the original plan for the Bank of North America to the Continental Congress, in the final year of the Revolution….and in a letter to James Madison dated July 2nd he stated, "The rich will strive to establish their dominion and enslave the rest. They always did. They always will…They will have the same effect here as elsewhere, if we do not, by the power of government, keep them in their proper spheres." James Madison was opposed to a privately owned central bank after seeing the exploitation of the people by the Bank of England. Thomas Jefferson was also against it, and Jefferson later made the following statement, "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations which grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."
politicians and economics……
isn't that like mixing ammonia and bleach?
In the early 1900's, Rothschild, Jacob Schiff, the head of Kuhn, Loeb and Co., in a speech to the NY Chamber of Commerce, stated, or threatened, “Unless we have a Central Bank with control of credit resources, this country is going to undergo the most severe money panic in its history.” They put J. P. Morgan at the forefront. Interestingly J. P. Morgan's father, Julius Morgan, a financial agent to the British, and after Julius' death, J. P. Morgan took on a British partner, Edward Grenville, who was a long time director of the Bank Of England. J. P. Morgan and his cohorts secretly crashed the stock market. They were aware that thousands of small banks were so vastly over extended, some only had reserves of 1% under the fraudulent fractional reserve principle. Within only a few days, bank runs became commonplace. Morgan stepped up and announced he would support these failing banks. What he failed to mention is that he would do this by manufacturing money out of nothing. Congress let him do it! So, Morgan manufactured $200,000,000 of this completely reserveless private money, purchased goods and services with it, and sent some of it to his branch banks to lend out at interest.
Too bad it does not have the same effect, I mean on the Politicians
Obama's debt cieling is a simple test
IF America still has National Standing
Raise Debt Cieling
ELSE
Flee to Switzerland and live on stolen TARP and Stimulus funds
Don't hold your breath waiting for politicians to tell you the truth, especially the ones on the left.
I know, I swallowed their crap for years before finally waking up.
The original flip-flopper, John Kerry, was against raising the deficit cap in 2004. ''This can be called a birth tax, a birth tax that is dumped on the back of every American child unwillingly," said Kerry, who voted against the borrowing increase [0.8 trillion in 2004, not 1.8 trillion in 2009].
http://www.boston.com/news/nation/washington/arti...
In 1913, Representative Charles A Lindbergh Sr. stated about the Federal Reserve, "This Act establishes the most gigantic trust on earth. When the President signs this bill, the invisible government of the monetary power will be legalized. The people may not know it immediately, but the day of reckoning is only a few years removed…The worst legislative crime of the ages is perpetrated by this banking and currency bill."
Interestingly, only a few weeks earlier, in October, Congress finally passed a bill legalizing direct income tax of the people. This was in the form of a bill pushed through by Senator Aldrich, which is now commonly known as the 16th amendment. The income tax law was fundamental to pay interest to the Federal Reserve. This is because the Federal Reserve was a system which would run up, essentially, an unlimited Federal debt.
The only way to guarantee the payment of interest on this debt was to directly tax the people, as they had done with the Bank Of England.
Let's summarize how the Federal Reserve creates money out of nothing. It is a four step process:
The Federal Open Market Committee approves the purchase of United States Bonds*.
The bonds are purchased by the Federal Reserve.
The Federal Reserve pays for these bonds with electronic credits to the seller's bank, these credits are based on nothing.
The banks use these deposits as reserves. They can loan out over ten times the amount of their reserves to new borrowers, all at interest.
* Bonds are simply promises to pay or Government IOU's. People purchase bonds in order to get a secure rate of interest. At the end of the term of the bond, the government repays the bond, plus interest and the bond is destroyed.
Let's look at an example of how this works with a Federal Reserve purchase of $1,000,000 of bonds. This then gets turned into over $10,000,000 in bank accounts. The Federal Reserve in effect creates 10% of this totally new $10,000,000 and the banks create the other 90%.
In April, 1929, Paul Warburg sent out a secret warning to his friends that a collapse and nationwide depression had been planned for later that year. It is certainly no coincidence that the biographies of all the Wall Street giants of that era: John D. Rockefeller; J. P. Morgan; Joseph Kennedy; Bernard Baruch; et al, all marveled at the fact these people got out of the stock market completely just before the crash and put their assets into cash or gold.
So, as all the bankers and their friends already knew, in August the Federal Reserve began to tighten the money supply. Then on 24th October the big New York bankers called in their 24 hour broker call loans. This meant that both the stockbrokers and their customers had to dump their stocks on the stock market to cover their loans, irrespective of what price they had to sell them for.
As a result of this the stock market crashed on a day that would go down in history as, "Black Thursday." In his book, The Great Crash 1929, John Kenneth Gailbraith makes the following shocking statement
Did this little PUNK, Orzag, change his mind about Defecits BEFORE the Nobel Prize winning PAUL KRUGMAN did? Or after? I remember how up in arms he was when G.W. was running $450 Billion in the red. Now, it seems, he's upset that his DEAR LEADER, the Boy King, can't spend us in to oblivion fast enough. I wonder why they changed their minds?
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