COUNTDOWN TO US BUDGET BLOWUP

How long before the US budget implodes?

It's an intriguing question.  If deficits of the current magnitude continue, at some point confidence will fail and higher interest rates will detonate the debt.

We'll have a financial crisis like the last, but without the reserves to cushion the pain. The US will have to get by on a balanced budget, with no time to adjust.  Recession will be on this economy like a teen on pizza.

Alice Rivlin is a person of extraordinary eminence among budgeteers with a mild left leaning bias. She is an alumnus of the Clinton administration - yet well respected across the aisle.  Paul Ryan has worked with her on his health care reform proposal.  

She reinforces fiscal conservative sentiment when she says: "I don't think we have very much time at all. We may get our comeuppance fairly soon. ...we're gonna decide we're not competent - this government does not work."[1]

The conclusion that readers of Ron Suskind's sympathetic look at Obama as President, Confidence Men, come to is that Obama has largely wasted his presidency on the deficit reduction score. In fact, he actually made the situation worse - Obamacare being Exhibit A.  Now, he seems to be running out the clock.  

How much precious time does the US have to right the budgetary ship?  Four staff economists at the International Monetary Fund took a look at the issue across various nations in their work FISCAL SPACE.

They conclude the ultimate debt limit is controlled primarily by two factors: 1) How fast the economy is growing - including inflation.  and 2), the level of interest rates. 

For example, if the economy is growing at 5% including inflation, debt is at moderate levels, and interest rates on that debt are 4%, then deficits can run at 1% of GDP without becoming unsustainable. 

If one takes the same situation, but debt is at high levels, people spook more easily. A small disturbance can push interest rates up fast, and kaboom, and the debt sprints explodes to an unsustainable level.  Once government's access to debt is cut off, unemployment will skyrocket and everything else swirls down drain.

The trick is to adjust the economy to run without that debt before it gets axed. It's not easy. So far, the body politic has retched at the mere thought of it. 

The IMF, Alice Rivlin nor anyone else knows how close we are to the precipice.  We might be a step, a hundred yards, or a mile.  But the global economy is moving in that direction.

What can you do?  Write your elected officials at every level of government whether they be friend or foe.  Or call them.  Tell your friends.  Influence elections.  Vote for candidates that have detailed plans to lower deficits.

And control what you personally can control.  Save as much money as possible for yourself and your family.  You will need it later more than now.

Is this viewpoint nuts?  Let us know.

---

[1] from Committee for a Responsible Federal Budget (CRFB) seminar on Go Big, from 21 Sep 2011, 

20 minutes into Panel 1.