January 24, 2005
The Fed Is Worried
The New York Times's Edmund Andrews believes that the Fed is fed-up with the disaster that is Bush administration fiscal policy:
The New York Times > Business > Your Money > Economic View: Deficits May Be Wearing Thin at the Fed: Despite Mr. Greenspan's reputation as a staunch opponent of fiscal deficits, he tiptoed around criticism of the soaring federal debt that Mr. Bush ran up in his first term and will almost certainly continue to run up in his second.... But something new is afoot... a rising concern at the Fed about the nation's imbalances: the federal deficit, which hit $413 billion in 2004; a low and declining national savings rate; evidence of speculative behavior among investors and consumers; and the country's enormous trade and financial deficit with the rest of the world....
The trade deficit this year is almost certain to exceed $600 billion - nearly 6 percent of the nation's economy, and still climbing. "This situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk," Mr. Greenspan said. That, he continued, would make the cost of foreign debt "increasingly less tenable." To most economists, such comments are simply a statement of time-honored truth: a borrower who runs up huge debts will become a bigger risk to lenders and gradually have to pay higher rates. But Mr. Greenspan's comments also carried a warning: rising budget and trade deficits come at the price of higher interest rates....
In private sessions, Mr. Greenspan may well be warning Mr. Bush in blunter terms. The Fed chairman meets regularly with Vice President Dick Cheney and periodically with Mr. Bush. There is a rumor in Washington - thus far unconfirmed - that Mr. Greenspan warned the White House in mid-December that it would have to take more credible steps than it has so far to meet its goal of cutting the deficit in half by 2009....
What is certain is that the White House has started to signal tough cuts - trimming as much as $30 billion over six years at the Pentagon - and Mr. Bush has adjusted his rhetoric about the deficit....
Complicating the chemistry between the White House and the Fed this year is Mr. Greenspan's anticipated retirement in January 2006. White House officials are trying to expand their list of potential successors. One early favorite - John B. Taylor, under secretary of the Treasury - is no longer in contention, according to people close to the White House.
White House officials are also cool about Martin Feldstein, the esteemed Harvard professor and director of the National Bureau of Economic Research. Mr. Feldstein has been a passionate supporter of tax cuts and partly privatizing Social Security - Mr. Bush's top economic priorities. But some officials are still angry that Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, criticized deficits run up by his boss....
R. Glenn Hubbard... Ben Bernanke...
I must, however, protest this claim of "tough cuts": $5 billion a year out of the Pentagon budget--cuts which are unlikely to materialize--won't even show up in the CBO's summary table.
Posted by DeLong at January 24, 2005 09:40 AM
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Much as I would like to believe that Andrews has nailed this story, I don't think he has made his case. For one thing, it's hard to find anybody buy Geithner who'll own up to being concerned about investor appetite for risk. Talking tough about higher rates is pretty normal during a rate hike cycle. Fed officials during the recent period of weakness did note the fortuitous timing of fiscal deficits, but well before November (when Andrews notes that Greenspan suggested their may be trouble financing US deficits), Fed officials have bemoaned the continued growth in US deficits.
The real clincher, Greenspan threatening to badmouth Bush's fiscal stance in public, is not substantiated. Even Andrews acknowledges that.
Posted by: kharris at January 24, 2005 09:58 AM
If Greenspan has been talking to Bush and Cheney about deficits being bad, it's a wonder he hasn't "taken early retirement." After all, the history of this administration is that anyone who tells them anything they do not want to hear winds up out on the street.
As for Bush's "tough cuts," they're just pipe dreams at this point. The deficit is so big and ballooning so rapidly that it would take a budget massacre to make even a slight dent. And since Bush (and the Republicans in general) would rather eat worms than admit that maybe some tax increases are in order, I can see no possible alternative outcome here other than complete economic collapse.
Posted by: Derelict at January 24, 2005 09:59 AM
If, in fact, Greenspan has begun 'talking tough' about deficits, its a perfect example of why Fed governors are appointed to fixed terms and cannot be forced out by an unhappy administration.
That said, I don't see how anyone can write, with a straight face, that Chimpy has started to signal 'tough cuts' when his biggest priority is adding $2 trillion in borrowings to privatize social security.
Posted by: flory at January 24, 2005 10:56 AM
Worms will not be eaten :) and there is simply not enough leeway for cuts that will meaningfully limit a deficit increase. Rather, this Congressional majority will be concerned with preserving changing election patterns. Congressional district to district there will be scant tough federal spending cuts. Worms?
Posted by: anne at January 24, 2005 11:03 AM
When the annual budget deficit is $413B (really $560B when you factor out the Social Security fund buildup), any spending cuts (or revenue increases) that aren't on an order of tens of billions *annually* aren't even worth paying attention to; they're in the white noise compared to the size of the problem.
And the discretionary part of the budget is too small, nowadays, for politically palatable cuts there to make much of a difference; such cuts are (a) symbolic, not substantive; and (b) usually penny-wise and pound-foolish anyway, since all the easy cuts have long since been done.
And forget worms - Bush would probably swallow hot coals than raise taxes.
Posted by: RT at January 24, 2005 11:26 AM
There shoulda been a 'rather' in that last sentence.
Posted by: RT at January 24, 2005 11:30 AM
Did someone say something about eliminating farm subsidies? Or was I just hoping?
Posted by: Sebastian holsclaw at January 24, 2005 11:59 AM
House Ways and Means Chairman Thomas said "taxes" -- heh heh.
(Course, he said "taxes" in a way that would make our trade partners go nuclear - make that "nukular" - if we did it.)
Posted by: kharris at January 24, 2005 12:26 PM
As we have seen, if the Pentagon wants to do something, it simply "reprograms" funds.
Despite that little clause in the Constitution about Congress authorizing expenditures.
When law and order completely break down in a few years, when there are draft riots and other forms of resistance to unjust authority, remember the example set on the invasion of Iraq, on the "authorization" of torture, and on the misappropriation of public funds by the Pentagon to do whatever they want.
But in the meantime, the Pentagon will simply take what it wants and to h--- with the Congress, the president, or the Federal Reserve.
Posted by: Charles at January 24, 2005 02:27 PM
I can imagine the conversation Greenspan had with Bush:
Greenspan: You've gotta cut the fiscal deficit or else there is a modest probability of a fiscal crisis.
Bush: Cutting deficit is hard work.
Greenspan: ... You don't suppose you can cut spending.
Bush: Oh come on! Cutting spending is an easy way out. Our nation will just have to be more productive. We should produce more goods, export more. We should export our comparative/absolute advantage -- LONG TERM TREASURY BONDS. We should produce more bond certificate to finance the deficit, just like Arnold did in Carlifornia. The Chinese and the Japanese will buy infinite many of them. We should print the pictures of the Founding Fathers on our bonds. That way, nobody will redeem it because everybody loves freedom and our Founding Fathers represent freedom and nobody loves freedom more than the central banks of Japan and China.
Posted by: weco at January 24, 2005 03:08 PM
Dr. Delong; what would happen if a good portion of our foreign trade balance stopped coming back into US debt instruments, but instead, the creditor nations simply start paying for goods on the international marketplace with our dollars.
My understanding is this would show up as an increase in the velocity of money, and the sterlizing affect of having the trade deficit funds go straight into treasury bonds would be wiped out - that is, the dollar would devalue, and the US would experience inflation, with that inflation showing up mostly in commodities and other international trade goods.
Can you provide the math to properly illustrate what theoretically happens?
Posted by: Charlie at January 24, 2005 03:29 PM
The mark of a good president would be to admit
that tax cuts for the wealthy need to be scaled
back. Anything else is congruent with "worse
Posted by: Hedley Lamarr at January 24, 2005 05:26 PM
$5 Billion cut in defense is a huge joke when Bush has increased defense spending from $300 Billion to $450 Billion. $100 Billion cut would be more like it and that would dent the deficit.
Answer this question: "Do you feel $150 Billion safer?
Posted by: bakho at January 24, 2005 08:22 PM
You're asking the wrong question. It should be: "Is Halliburton billions of dollars richer?" And the answer is:
Posted by: Basharov at January 24, 2005 10:22 PM
Is there any way to cut the federal budget that would primarily hurt blue states?
Even if red states were hurt bad, if blue states were hurt a lot worse the votes might still be there. They could blame the whole thing on our foreign enemies like china and traitorous japan, and point out we're at war, and if they can keep red state support they'd come out OK.
Posted by: J Thomas at January 25, 2005 02:39 PM
Posted by: at February 13, 2005 03:38 PM