Ahem, the story from The Hill on the ever rising tide of Federal budget deficits lists financial firm bailouts first as causes of the red ink, with falling tax receipts second. And the very same bailout recipients are crowing about their profitability. Now admittedly, the biggest contributors to the July increase were Fannie and Freddie, but others have comments that the financial terms of the rescues were far too favorable to the industry. And that’s before considering that the norm in countries whose bank recapitalizations are seen as models is to get rid of existing management and the board, install replacements, give them strict targets, and then aside from checking progress against targets and being ready to intervene if results fall short, to leave the new management to sort things out. Were any real demands made of these banks? Aside from (in cases) raising more capital, the answer is pretty much “no”.
The Kenneth Rogoff and Carmen Reinhart studies of financial crises has also found the the biggest culprit in government deficits in crisis countries is not stimulus measures, but collapsing tax revenues.
From The Hill (hat tip reader Dwight):
Bailouts for financial firms and billions in tax revenue lost because of the recession drove the deficit to a record $1.3 trillion in July, according to the independent Congressional Budget Office (CBO).
Tax receipts that have fallen due to the poor economy and increased spending to save car companies, banks and mortgage firms were major contributors to the federal deficit, according to CBO, which provides official budget numbers for Congress. The federal deficit grew by another $181 billion in July.
Falling tax receipts and increased spending on bailouts for auto companies and the financial sector and for the economic stimulus package added to the deficit, according to CBO, which provides official budget numbers for Congress.
Spending through July of 2009 has increased by $530 billion, which is 21 percent over the same period in 2008. The bailout money for Freddie Mac and Fannie Mae accounted for almost half of the spending increase. Unemployment benefits have more than doubled, Medicaid spending has grown by a quarter and Medicare spending has increased by 11 percent.
Tax revenue for the first three quarters of 2009 has fallen by approximately $350 billion, or 17 percent compared to the same period last year, due mostly to the effects of the recession on payroll, income and corporate taxes. A third of the decline is due to tax breaks in the stimulus, including the middle-class tax cut that President Obama campaigned on during last year’s election.
The independent budget scorekeeper has projected the deficit to reach $1.8 trillion by the end of the fiscal year, Sept. 30. The deficit in 2008 reached $455 billion, which was a record at the time.
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Rising deficit = No recovery.
Prices were artificially inflated for years due to massive allowance of credit, which created an illusion of wealth in America, on which an illusion of growth in China found support.
Massive allowance of credit cannot return without causing the financial sector to implode again, with no more rope to save itself, which means America must find a way to create wealth to make up for the dissipation of the illusion created by massive allowance of credit.
If this wealth is not created soon, China's growth which was supported by the illusory wealth of America will shrink if not outright go into the negatives, due to the permanently reduced levels of consumption in America.
Either the US population becomes wealthy again, or China will have to find a new source of consumption to sustain its growth.
The fastest way to create demand will be for massive allowance of credit by financial institutions in China to the Chinese people, with all of the problems that this implies.
So, where are we all going?
"So, where are we all going?"
And why are we in this handbasket?
The recession has also led to a drop in SS receipts and an increase in payouts. Receipts have been below last year on a month over month basis since March. Going forward SS is going to be a drag on the deficit (as it is looking like the 2016 crossover date is too optimistic).
The US of A has become the greatest Ponzi scheme in history.
We're having a monumental credit collapse of a recession the result of which is your getting dishwater instead of chicken soup. If one is to believe that the bail outs are the cause of the distress, they fail to understand that the recession is causing substantial losses in potential tax revenues.
In many respects this preoccupation with the deficit increase and its causes is a non event. I say that because the causitive force is the credit collapse, not an excess inventory of things which can be corrected in relatively short order. No this is a disease that has been festering for over 50 years.
Our focus should be on what can be done to extinguish/repudiate that debt that cannot be serviced in the current time frame. Now actions to that end will lead to the failure of major banking institutions and those failures will impair the ability of the Treasury to fund the operations of the Federal Government.
If you don't have savings from which the the Federal Government can fund the stimulus programs you end borrowing and in that borrowing you, under a fiat currency regime, monetize Federal Debt. That action reduces the purchasing power of your money.
So I say that we should begin to save more, spend less, pay down debt and recognize that we are headed for a good many years of no growth. We should welcome deflation in that it will operate to enhance the purchasing power of our money. In an environment of deflation it will become increasingly clear that we have too many people in this country. That will create another problem of civil unrest and potentialy a revolution.
So, we can recognize that the reduced rate of tax receipts is being caused by our excessive use of credit and that it may be that most of bail out efforts are counter productive.
Hi,
I was looking through the CBO projections from here, as you do, on a muggy monday night.
http://www.cbo.gov/doc.cfm?index=10296
then i got to thinking, if the stimulus program actually worked, then deficits are not negative, they are a positive and japan/zimbabwe are simply leading indicators that it really doesn't matter what Governments do with taxpayers money. Now you probably can't even read that, heh, but my obeservation is that if the objective is to borrow money via the deficit, to grow GDP, then GDP ought to grow by the same amount of the borrowing, or you are on a loser. I picked a short time frame, 2010-2014
What the numbers for the CBO's projection of Obamas spending plans show is that there is a fice year deficit of 4.4 trillion, but that GDP only increases by 3.2 trillion, leaving a loss to the economy (taxpayer?) of 1.2 trillion over five years. The CBO assumes mo,inal GDP growth of above 4.5% for four years by 2011. Now call me dumb if you want, but I relate this to me as an indiviudal seeking a loan of 100,000 bucks, showing my plans to the bank manager and telling him I will turn it into 70,000 in five years. I think a smart man would say I have aplan that at least stands a chance of growing GDP rather than a plan that is based on "heroic" GDP growth rates and a know loss.