Destined for Deficits (Bush Budget "cuts" "rejected")

Destined for Deficits

By E. J. Dionne Jr.

Friday, March 18, 2005; Page A23


The sexy issues in budget fights get the headlines, and, Lord knows, drilling for oil in Alaska's Arctic National Wildlife Refuge is a big deal. But the budget's most revealing details are hidden in plain sight and thus ignored.

Here's a little-known fact symptomatic of everything wrong with the way Congress has dealt with our nation's finances over the past four years. Writers of both the House and Senate budget resolutions were careful to make sure that Congress would not consider budget cuts and tax cuts at the same time.

The House budget resolution requires the Ways and Means Committee to report legislation on tax cuts by June 24. But bills that will enforce cuts in entitlement programs aren't called for until Sept. 16. The Senate reverses the order: spending cuts by June 6, tax cuts on Sept. 7.

Why is this important? Because there are a couple of things our legislators and our president do not want citizens to do: (1) link the big deficits with the big tax cuts, or (2) notice that if the tax cuts weren't so big, cuts in domestic spending wouldn't have to be so big. The nice separation of those dates is just the ticket for obscuring the obvious.

Republican majorities in both houses want to go full speed ahead with tax cuts. But when it comes to domestic spending, they want to change their story entirely: "Oh my, oh my, look at those dreadful deficits! Really, we'd rather not make all these cuts, but we must bring down that terrible, horrible, awful debt."

It's particularly outlandish that Congress is about to extend cuts in taxes on capital gains and dividends at the same time that it's considering big cuts in Medicaid and the children's health insurance program. Tax cuts for the wealthiest Americans can't wait, so we have to cut health services to the poorest.<snip>

www.washingtonpost.com/wp-dyn/articles/A45505-2005Mar17.html

We can shout this stuff to the roof tops but where is the action from
the American people to stop this theft?

The proposed cuts were just theater. The outcome, few substative cuts, was preordained.

Little noticed is that the deficit now seems to be spinning out of control on a month over month basis. (sorry can't link any numbers this second) Tax reciepts are rising a bit but spending is surging forward.

The pace of the Treasury auctions now is staggering. The chance of a failed auction becomes a bit less remote. The FCB's (foreign cnetral banks are still stepping into the breach but are not taking the same percentatage of the auctions that they had been the previous 18 months or so.

I think it's possible that some sort of default by Uncle Sam is being planned. It is possible this was in fact a policy embraced by Cheney et. al.

It would be easy as pie to default on the Chinese held debt, and really all FCB debt if The Party endorsed it. John Q Public would revel in screwing any and all foreigners. Of course defaulting on the SS trust fund debt is inevitable but that's still a long way off.

Is default of U.S. treasury possible, likely, imaginable?

Well, when I starting studying money, I would never have believed anybody that a currency giant like the USD once would be under speculative attack that could threaten anarchy and chaos. Now, again, this sounds so unbelievable that 10 years ago, I would have laughed and said, "yes right after South Tirol becomes sovereign." Yet, Europe is uniting, despite any critics arguments, they got a single currency, Germany did unite although it never looked like it would happen, USSR collapsed destined for long fight against capitalism; all these things seemed unlikely until they really happened. I witnessed when the "Wall came down" in Berlin, though at the time I was just listening to the radio when they announced the Brandenburger Tor would be opened for GDR -- GDR doesn't even exist in spell check anymore - citizens to freely travel outside the communist block. It was empowering, it felt great, we all had waited for it for so long and thought we sure would not see the day it would happen. I saw them getting the Euro and how exciting this was, one giant step closer to the dream of the Common House of Europe, again, not to be anticipated in the next century.
But what we witness right now worries me. It is no longer a positive empowerment, it isn't like Santa accidentally dropped by in mid March to leave presents even for the grown-ups, no butterflies of happiness in your stomach, it is a doom, the endless dark storm cloud over your head, the grave you dig yourself. Who in their right mind is hoping this is really going to happen? And yet, it seems to be orchestrated and well planned. Someone is either not paying attention to the consequences of their actions -- although how naive can you really be to not see this coming? - or really looking forward to that day!
I just hope, 10 years from now, I won't be sitting here and tell over and over again (I doubt I would be able to afford a computer if it does happen!), I was there, I witnessed it, and we all thought it wasn't possible!
If this isn't a case for psychological problems ...

The dollar is not under "speculative attack".

America's import mania is sending dollars offshore in massive quantities. Those dollars accumulate in the accouts of exporters and in the case of asia, particularly China, those exporters exchange those dollars for their own currendies. Thus the central banks end up with all those dollars.

What to do with them becomes the question. For the last two years especially they have been using those dollars to buy US treasury securities. The effect is threefold. It supports the dollar. I keeps interest rates low and it funds our government and trade deficit.

In return they get a crummy too low return in ever depreciating dollars. In essence they are sending us their savings and seeing it disappear into the maw of our insatiable demand for stuff. It's a terrible deal for the citizens there but it's a dance which they are powerless to leave because to do so would threaten the entire system.

Speculation had almost nothing to do with it. Yes, lots of speculators are betting on a falling dollar but they are a tiny part of the whole gigantic flow of foreign exchange trading every day.

you are right, it is not a speculative attack as we have seen in third world countries, i.e. Asia, leading to the currency crisis there. But IMHO the dollar value is artificially kept low by low interest rates (comparatively) and the enormous deficit spending of this administration. I don't see the deterioration as result to import craze, it is sort of the reverse in my view, the dollar causes imports to rise or at least the production politics causes imports to rise (namely because it is cheaper to build abroad).
But keeping dollars in reserves (as do most Asian countries and many other unstable, developing nations) is nothing else but speculating on the stability of the currency. And the administration can be seen as attacking such reserves, by actively reducing the value of foreign held dollar debt. I call that speculation, just not by some hot traders of gone-wild branches trying to pocket for themselves or their bank, this is for the hawks to pick up.

You really think accidental the Korean government called this scare of moving its reserves from dollar into another currency and causing the dollar even more to shake? I think this is not coincidental and the god-almighty FED is not able to control it?

Looks more like DC is copying the China-dumping-currency strategy, but I could be wrong? After all China is building steam with it for long on cost of U.S., could just be the administration cheap attempt of countering the sell-out to China (I know, it almost sounds defending -- though this is the last I want to do, stick my neck out for Bush).

Papau, you are a macro/monetary person, what is your view on this?