Alan S. Blinder has all the credentials and accolades which liberal elites crave. He is a Princeton economics professor, the first member of President Clinton’s original Council of Economic Advisers, a former Vice Chairman of the Board of Governors of the Federal Reserve and one of Keynesian economics’ staunchest supporters. Recently in a Wall Street Journal op-ed, he juxtaposed two recent downgrades of the U.S. economy by two different entities in a Keynesian economist’s typical way. Right out of the gate he downplayed and ridiculed the Standard and Poor’s downgrade of the sovereign debt of the United States form AAA to AA+ as “not serious” if not “ridiculous.” He chastised the Standard and Poor’s assessment, which in reality has more to do with America’s massive and ever-growing national debt, as merely a downgrade focusing on “America’s politics.”
While passing off the S&P’s downgrade as trivial and without merit, and down playing America’s unsustainable debt, Blinder focused his attention instead on the Federal Reserve Board’s Open Market Committee’s recent downgrade of “its near-term assessment of the U.S. economy.” In other words, he believes the words of the Federal Reserve about U.S. economic conditions are much more important than stopping President Obama’s reckless spending and accelerated accumulation of debt. Here we have a Keynesian economist’s typical reaction to a very real problem of debt — spending and debt aren’t the problem.
Maybe a more informative way of evaluating the S&P downgrade could be developed from looking at the recent economic history of members of the Eurozone.
About a year ago, we were all told that Greece had a little spending problem and would need a rescue package of about $60 billion. But the European Central Bank and the IMF, which gets about 17% of its money from the American taxpayers, said they could handle the problem. In subsequent events, there have been the announcements of bailouts for Ireland, Portugal and another one for Greece.
Now the European Central Bank is buying the bonds of Spain and Italy. Furthermore, many European commercial banks own bonds from these same failing nations. So, the European Central Bank has started to purchase bad bonds from the banks too. This is a drastic move to prevent a “crisis” in these banks. What is the problem? Very simply, too much government spending that has produced too much government debt that these economies cannot pay off. So, the 22 European nations that participate in the Euro currency are, in the aggregate, an economic house of cards. Therefore, the value of the Euro currency is threatened.
How much debt is too much debt? On the chart below, we show how much public debt selected Euro nations have as a percentage of GDP. This is the standard of comparison.
As you can see, the best and biggest nations, Germany and France, have respectively, 83% and 81% of publicly held debt to GDP. One of the largest candidates for a bailout, Spain, has publicly held debt to GDP of just 60%.
Now let’s relate this to data to the publicly held debt of the United States from 2001 to the present.
On 9/30/08, the end of the last fiscal year before the Obama Administration, the debt held by the public was $5.808 trillion. As of August 18, 2011, it was $9.946 trillion. This is an increase of $4.138 trillion in less than 3 years. This is a 71% increase. It took over 200 years to acquire the first $5.808 trillion of publicly held debt and Obama only 3 years to increase it by 71%. This $9.946 trillion is 66% of our GDP through 6/30/11. In 2001, our publicly held debt was 33% of GDP and 40% in 2008. Now, it is 66% and it is on a trajectory increasing $1.379 trillion a year. So, it will reach 80% of GDP in about one and a half years.
Why wouldn’t the Standard and Poor’s rating agency find this to be problematic? S&P said, “Further near-term progress [toward reducing the deficit] is less likely than we previously assumed.” And, Alan S. Blinder thought that the S&P downgrade was “ridiculous” even though our public debt had increased 71% or $4.138 trillion in 3 years. Perhaps his opinion is just “not serious.”
In his irrational persistence, Mr. Blinder wants to continue to parse the Standard and Poor’s words:
contentious and fitful…. Where have they been since Hamilton and Jefferson crossed swords-not to mention since Barack Obama ran into implacable Republican resistance on everything?
It is highly probable that both Hamilton and Jefferson would have considered the Obama Administration’s radical spending, doubling of the publicly held debt in under four years, and job-killing regulations to be an unprecedented threat to the future of the Republic by rendering us unable to repay our debts.
If our famous economist, Mr. Blinder, has not noticed what is going on in Europe, maybe he should look at the data. It shows that in Western market economies too much government spending producing too much debt is threatening their economic future-right now.
Nonetheless, Mr. Blinder outrageously claims “‘near term’ deficits are not America’s main concern.” How can any economist say that near term deficits are not our main concern when the Obama Administration’s trajectory of deficit spending, if not checked by “implacable Republicans,” will put us at a publicly held debt to GDP percentage of 80% in about a year and half? This is exactly where European nations are going past the point of no return. Both Germany and France are at 80% of debt to GDP. Portugal, Ireland, Belgium, Italy and Greece are all over 93% debt to GDP. And if interest rates rise from 50 year lows to more typical historic rates and publicly held debt to GDP increases to 100% of GDP, we will be crippled. And then the only thing about the next decade will be economic struggles from higher taxes because of oppressive interest payments.
For fiscal year 2008, Treasury Direct reports that interest expense was $451.1 billion on the total debt outstanding of $10.024 trillion. Therefore the annual interest rate expense is 4.49%. This includes the debt held by the public, Social Security and other intergovernmental obligations.
If we prorate this to just the debt held by the public on 9/30/08 of $5.808 trillion annual interest expense would have been $261 billion. This is the interest expense for which Congress appropriates money. So, for perspective purposes, let’s project pro forma interest expense on the $15.003 trillion GDP as of 6/30/11 and assuming we had reached a debt held by the public of 100% of this same GDP. The total annual interest expense on the debt held by the public would be $673.6 billion.
This would be more than 2.5 times the 2008 amount. In terms of historic context, 4.49% would be a fairly low historic interest rate. During the stagflation of the late 1970-82 period, interest rates for treasuries peaked at over 15%, at a time when annualized inflation peaked at over 12%. So, higher interest rates are correlated with higher inflation. As the Bureau of Labor Statistics reported, “[o]n an unadjusted basis, prices for finished goods moved up 7.2 percent for the 12 months ended July 2011.” Suppose, because of inflation, the annual interest rate doubled to 8.89%. In this case, our pro forma calculation for interest expense on publicly held debt of 100% of GDP of $15.003 trillion would be $1.346 trillion. If government receipts in 2008 were about $3 trillion, it would require about 44% of these receipts just to pay our interest. And, when we look at Europe cracking at the seams as debt to GDP gets above 80% with the lowest interest rates in over 50 years, you can only conclude that the outsized government debt will be an immediate economic death trap if inflation coming from Obama’s reckless excessive spending causes interest rates to rise.
But, fear not, for Alan S. Blinder criticizes: “S&P may not worry much about our struggling economy.”
But, he continues:
…so does Federal Reserve Chairman Ben Bernanke. Which brings me to the more serious downgrade. Meeting on Aug. 9, the Federal Open Market Committee (FOMC) downgraded its near-term assessment of the U.S. economy sharply. Since the Fed’s code of conduct mandates the use of Fedspeak instead of English, let me offer a quick translation: ‘Yikes! Things have sure deteriorated quickly!’
Well excuse me, but here is my favorite Keynesian economist admitting that all the Keynesian policies of the Obama Administration (radical deficit spending, huge unprecedented annual deficits and an almost doubling the total debt outstanding by the end of his first term) have been a complete failure. Thank you Alan S. Blinder for proclaiming the truth about Keynesian economics and the Obama Administration.
In the light of this true confession, he observes:
…the FOMC majority was so concerned about the health of our economy that they felt a duty to offer some support to the frail economy and to soothe the nearly panicked financial markets….
So, unless the storm clouds lift quickly, there is probably more easing to come. That could mean another round of quantitative easing, such as the Federal Reserve buying more Treasury Bonds.
The final hell of Keynesian economics is inflation. It comes from printing money just like monopoly money. And quantitative easing is extremely controversial and has never been used on the scale that Ben Bernanke has been doing it in America. Every time more printed currency is put into circulation, the value of your income and your assets declines.
A current example of destructive inflation of what should be a very wealthy nation is Venezuela with oil reserves perhaps greater than Saudi Arabia. Venezuela has been suffering from runaway inflation of about 30% for several years. The “now-dictator” for a year Hugo Chavez prints money and takes over companies in the private sector to distribute benefits to his chosen followers. And so, Venezuela cannot even produce enough coffee for domestic consumption, and the Venezuelan economy continues to collapse.
On August 9, the Federal Reserve Open Market Committee was conflicted as never before in history about a call for two more years of unprecedentedly low interest rates and the prospect of another round of quantitative easing and printing more money.
This is not brilliant or creative, but pure Keynesian Socialist doctrine on how to destroy the value of our currency and assets. But, because of his ideology, Mr. Blinder remains blind to it.