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A response to:
There is no fundamental deficit crisis
Brad DeLong our guest wrote on Feb 16th 2011, 17:51 GMT

HOW close is America to fiscal crisis, The London Economist asks: "The Congressional Budget Office projects that America's 2011 deficit will be $15 trillion, or 9.8% of GDP, and debt held by the public in the 2011 fiscal year will approach 70% of GDP...".

John Makin laments that "a a fiscal crisis—signalled by sharply higher borrowing costs for the United States government—probably won't emerge" soon. Stephen King laments that "America's fiscal arithmetic simply does not add up". Scott Sumner laments that "our fiscal regime is becoming increasingly dysfunctional...radical reform would be quite helpful". "The ingredients are in place for a crisis," claims Peter Boone. "America is bankrupt," claims Larry Kotlikoff.

Tom Gallagher, by contrast seems to have it much closer to right: "[W]hat the economy could use is a debate over medium-term entitlement and tax changes. Instead what it's getting is a debate over near-term non-security discretionary spending."

What is going on? Start with Figure A-1 from the CBO's 2010 Long-Term Budget Outlook:

This tells us that America has a large short-term deficit now: we are still in a deep downturn, and as a result revenues are temporarily below trend and spending is temporarily above trend. But, the CBO projects in its current-law extended baseline, as the economy recovers revenues will rise and spending will decline, and from 2015 on the dotted revenue line matches the top of the primary spending line.

Our current deficit is not a problem: running a deficit during an economic downturn is healthy and appropriate. Our short-term deficit problem is that our deficit is not large enough given that if Congress simply goes on autopilot the revenue and primary spending lines are likely to cross by themselves in four years.

And our long term projected spending and revenue balance is not a problem *if*. If the economy and if programmes perform as expected, if the US government continues to be able to finance its debt at a real interest rate less than the growth of labour productivity plus the labour force, and if Congress and the president do not do anything further to raise spending above or decrease taxes below current law, the United States simply does not have a fundamental fiscal crisis.

The problems are all in the *ifs*. If people fear that there will be a fiscal crisis they could demand an interest rate premium for rolling over US government debt, and then we would we have a non-fundamental fiscal crisis. Could we have one? Yes: the East Asian economies had one in 1997-1998. Had foreign investors not panicked and fled, there would have been no problem. Those foreign investors who did not panic did well. Those who bailed themselves in at the bottom of the crisis did extremely well. But that was no consolation to the East Asian governments that faced the crisis, or to the East Asian workers rendered unemployed by the consequences of the crisis.

However, today there are no signs of any possibility of a collapse of foreign investor confidence in their US Treasury holdings. A non-fundamental crisis is not even a cloud on the horizon.

But there are the other *ifs*.

The big *if* is, to put it simply, this: Congress will pass something stupid and the president will sign. Congress might never come up with pay-fors for its recurrent AMT patches. Congress might remove the revenue raising parts of the Affordable Care Act. Congress might remove the cost saving parts of the Affordable Care Act. The Supreme Court might decide, just for the hell of it, to rule that the cost saving parts of the Affordable Care Act are unconstitutional. Congress might pass a big unfunded tax cut just for the hell of it. Congress might pass a big unfunded spending increase just for the hell of it.

All of these *ifs* are very real worries.

But none of them can be fixed by legislative action now.

No Congress now can cement up the exits to keep some future Congress from doing something really stupid.

And dinking around with cuts to non-security discretionary spending right now doesn't do anything to help.

What is the solution to our long-run deficit problem? It is simply this: elect honourable and intelligent women and men to Congress. Elect representatives who will not pass unfunded tax cuts—as the Republicans did in 2001. Elect representatives who will not pass unfunded spending increases—as the Republicans did in 2003. Elect presidents who will promise at the start of their turns to veto legislative acts that do not meet long run paygo requirements. Choose Supreme Court justices who will not prostitute their high office for the short term political benefit of the party they happen to belong to—as the Republican justices did after the 2000 election.

Gee. I guess our long run fiscal problem is really dire and insoluble.

Readers' comments



First off I hate reading an annalysis that includes debt "Held by the public".

The total debt outstanding is the only relevant figure. The fact that $5 trillion in non pubilicaly issued us goverment debt is held by numerous US goverment managed pension funds has no bearing on the debt burden this non public debt places on the Goverment.

In fact the debt held by the Goverment pension funds places a more severe burdon and strain on the Goverment financial health than does publicely issued debt.

This non publecly issued debt burden cannot be relieved by either debasing the US $ or by running negative interest rates for you the left pocket of the goverment is just stealing from the right pocket.

The current negative interest rate invironment, while it reduces the burden of the publically held debt by stealing from the non goverment savers, is just incleasing the net liability side of the goverment owned pension funds that are falling behind on their assett side by an equal amount that the Goverment debt side gets reduced in real terms due to negative interst rates.

So to start our current issued debt is 100% of GDP.

Second it is "fundementaly flawed", to say that a debt burden that is unmanageble at normalized interest rates is not considered a "fundemental" problem because the normal (higher then negative intrest rates) are not yet present.
The current interest rates are artificially low (by a wide margin) by the simple measure that they exist only through goverment intervention of $2 trillion in debt purchases and an anchore on long term rates which is called the 3% spread (at 3% spread between overnight rates and 10yr rates it becomes too profitable for a 10-1 levraged bank not to put on the spread trade as they realize a 30% return on equity. No wonder the percentage US debt purchases by US comercial banks have been on the rise in the past 10 months).

If one considers the current US interest rates market rates then I would venture to say that the Chineese Yuan exchange rates is also a market rate. After all the chineese only used a little over $2 Trillion to intervene in curency markets (roughly the same amount the Fed used).

Couple that with the fact that the past 20 years have seen unusually low interest rates partially due to deflationary pressures from China and other Emerging markets. Those Deflationary driver have clearly reversed into Inflationary drivers (5 percent import price inflation over the past 12 months). To use unusually low interest rate figures from periods with deflationary pressures while projecting normalized revenue from economy that you project will see fully normalized imployment and call that a fundemental analysis of debt burden is fundementaly flawed.

Third the latest buget figures from the CBO project additional 12 trillion in new debt over a 10 year period based on solely current law. Of course this includes intitlement spending writen in current law.

I do not know where your CBO chart, that projects revenues to inclease from 18% of GDP to over 23% of GDP by 2025, is from. It has be assumeming a tax increase or a projection that all us minimum wage earners move to the top tax bracket miraculasly.

In short we have a very fundemental debt problem that is made worse by the fact that we and many funding sources baught into the believe that general rules of indebtness does not apply to the US $. This reminds me of the argument "NY real estate never goes down"). This religous like believe that can continue while the fed reinforces it with $100 Billion a month just means can blissfully continue digging the whole deeper and deeper.

The only law of indebetness that does not apply to the US is the IMF and G20 put.
While the IMF and the G20 can, without scarring themselves, can bail out any county facing a debt crises once they make peace with the moral hazard devil. No one is big enough to bail out the US.

So my friend we have a very fundemental debt crises, its called "denial".

And yes we will wake up and deal with entitlement but the question is how deep in we will be at that point and how many years (decades) of slow or no growth this will cost us. (Brazil took 24 years to climb out of their 1979 debt crises).

lev. d.

Is this some kind of sick joke? AMERICA HAS A FISCAL CRISIS, NAE CATASTROPHE! peoples!, your money has been mis-used and stolen...







I hope you will join in by slashing your spending as well - so we may lead by example - the village idiots running this country.

The Blog Fodder

Can someone tell me why all the talk is of cutting domestic spending, yet there is no talk of cutting military spending? Seems to me that the two unnecessary and illegal wars of the last 10 years have cost Americans a fair chunk of change and show no signs of slowing down. Along with American troops and bases all over the world "protecting" us from imaginary boogie men and creating them when none need exist. If America stopped trying to be an empire and was quite happy to be an ordinary country like the rest of the world, focusing on the welfare of her people, maybe it would work.


The answer is very simple - find the people/corporations who made a fortune from engineering this crisis and take it back from them. Morals really need to be brought back into the worlds of finance and commerce, it is the total focus on greed brought in by the Reagan and Thatcher years that have led the world to this impass.
And to start economies growing, immediately half the price of crude oil, and the UK should take off 80% of the tax it levies - such ridiculous prices are the real root of this crisis.


Year 1980: US$ = Aid = most welcome
Year 2010: US$ = AIDS = not welcomed

All events show that US, Japan and Western Europe indulged in round tripping post world war two and got it legalised by the Bretton Wood agreement.

Round tripping and financial meltdown

Background: The military buildup and world war two had destroyed wealth and the global economy was in danger of slipping in to major economic chaos – worst hit would be the nations that were deeply involved in world war two. This included USA, Europe, Russia and Japan. To leave growth on hard work would take the world a hell of a long time to even show signs of recovery. The only forward was short cuts.

The strategy: The US, Western Europe (primarily Germany, UK, France and Italy) and Japan (Famous Three) with the tacit support of Russia (USSR) decided to print money. But printing money by itself would have fueled inflation and caused more problems. So, they leaned in favour of round tripping.

Round tripping: As the words mean: the money goes on trips round and round and the practice that followed was that the Famous three would show trade between themselves and with actual funds flow. So, US bought from Japan, sold it to Europe who in turn sold it to Japan.

Then the same thing was repeated but at a higher price. Wonderful!! There was growth in trade and profits were also there for everyone. Funding the difference (margin funding), if not done from own sources, got dependent on credit build up.

Boom: All that was required a pin prick and whole thing would explode. Lehman was the prick. And that is where it all started before the meltdown 0f 2007-2008. It threatened to unravel all the spin that the series of round tripping had piled up.

Life support: The developed economies went on life support with ‘stimulus’ packages. Countries (like China) which were dependent on the Famous Three also had major problems. China recovered fastest due to the huge savings it had pile up but countries like Spain, Portugal, Greece, Latvia etc who had a huge proportion of external debt compared to their GDP and their growth had become structurally damaged.

The stimulus packages by the big three is causing a fresh set of liquidity related problems in the emerging markets. Since there are lack of investment opportunities in the developed countries, the funds are moving to the emerging markets. This brings about an appreciation in the investee country’s currency and the fear of money rushing back to the country of origin at a moment’s notice. The currency war is already started and it threatens to stop the globalization process.

Life support again and again till death: After being hit in the guts, having a damaged heart and lung, the life support system gets extended till the eventual collapse.

Whats’ in this for India: There will be minor hiccups since India also gets affected due to the collapse of Famous three. Gandhijis theory of ‘Swadeshi” now bears wisdom. India will have to take care that it’s growth does not bring in liquidity. It is for sure that money will move from the slowing Famous three to growth areas like India, china, Malaysia, Indonesia, Africa (amongst other MEs) The test will be telling NO to portfolio funds that will seek to come in to the Indian Stock market because FDI will be most welcome.

Future of hedge funds and Mutual funds: No one would want them when the life support system of the Famous three start failing!!

So, what does the US do: Allow investment based immigrations. This will bring in money, population and jobs.

Lesson: There are no short cuts



Kishore Nair from Mumbai


Trade deficit and consequent fiscal deficit are two connotations highly popular in American economy case. But there is no fear from such macroeconomic imbalances because US is known for deficits because that's how they propagate their policies. 1982 type pf debt crisis seems irrelevant and dollar hegemony will remain because volatile oil prices will provide new impetus to it.

Anyway....let's see how the world's brilliant minds are able to combat the challenges posed by present economic conditions with trillion dollar budget scenarios...though.

Virgin Mary come here

If the Middle East‘s riot continue and new riots happen on other places, debt crisis in the euro zone continue, US will become a aharbour of refuge, a biggest beneficiary, dictators and oil billionaires’ money transfer will save the American. In fact, US is benefitting from riots, the foreign market need of US bonds has a significant increase since Egypt’s riot.

World WarⅡ has help US out of the crisis. So I hope that a series of recent riots around the world isn’t a part of CIA’ plan. Otherwise, new riot, Conflicts even medium and small wars around the world will constantly happen in hot regions such as the Middle East ,Southeast Asia,Caucasus region and so on.


Dear Sir
Too many ifs and hopes about US political "wizardness" to handle such possible threatening sistemic national fiscal crisis , I wonder.But if the "ifs" turn out "unfortunately" , well , wide unemployement rates among the less qualified citizens and US streets uphoars are in sight.


**America is in a constant, continuous and growing fiscal crisis for the last century, Technically the Treasury is bankrupt.

cs farrar


You argument is logical, but it rests on fragile assumptions.

1) The CBO envisions the revenue-to-spending gap - today at 50% - closing by 2015 on the back of sustained growth, higher tax receipts, and declining need for fiscal stimulus. However, with quantitative easing still in place, not to mention significant fiscal and monetary stimulus, it's by no means clear that the U.S. economy is on a self-sustaining growth trajectory that will attain the CBO goal.

2) The average post-war business expansion lasts a little over four years. Yet the CBO graph assumes no significant economic contraction before 2015, or any time thereafter.

3) The CBO graph indicates that non-interest, discretionary spending will actually shrink slightly after 2015, presumably to make room for the demographically driven surge in Medicare costs. Should we assume this will be politically feasible in 2020? More so than now?

4) The CBO assumes that we can increase Federal spending (and taxes) from a pre-crisis baseline of 18% to 30% of GDP with no significant decline in economic growth, productivity, or competitiveness.

In short, with a few minor miracles the CBO deficit predictions may come true in the short-to-medium term. However, what about the next big financial crisis or recession? What debt-to-GDP ratio can the U.S. economy handle? At what point do rising yields, debt servicing, and a rising tax burden drag the economy into a deficit spiral? Your linear, trust-the-CBO-and-pay-your-taxes argument appears to be based on Platonic assumptions. However, the real world is less predictable, and with 70% debt-to-GDP and blossoming entitlement costs, the United States has little margin for error.


I think the United States is playing out, and other nations are playing upon it as well, in patterns that began thousands of years ago and became ruts. They were not caused by the planets, sun and Moon, although people tended to rely upon several of them for timing the inflictions of wars and other suffering.

Distinct 30 year cycles exist: the War of the Roses, the Thirty Years War, the War of Independence from the English Crown, and the long war from 1914 to 1945. Alarmingly, these Saturnine cycles occur at just about 165-year intervals, the orbital period of Neptune.

Another kind of cycle emerges from ancient doctrines or semi-doctrines - originating, to the divine eye of Nature's God, as the Yin and Yang cycle of light and darkness in the phases of the Moon.

Just now, the United States is becoming inured to cycles of darkness, in which the black appliances flooded the market, police uniforms went from blue to black, black clothing became prevalent among the poor, black cars and black houses became more numerous. The nation is divided into halves repeatedly. The Red and Blue states, the Tea Party and the not-Tea Party.

Along with the massive debt United States debt, absolutely equivalent to bankruptcy in any other view than that of the United States Treasury itself, the rampant and bizarre valuation of houses is completely out of the dimension of actually being houses for living human families and persons. Money rules and does not care what happens to the human beings or the houses either.

It seems like the United States Treasury is in danger of being taken over by black forces exactly as happened in Germany, and the United States itself goaded, lured or seductively led down the primrose path of deceit until war begins to unveil the deceit. In Seattle it is always hoped that we have avoided another Korean War, but every so often new events emerge that make it appear more complex than predictable. In the Pacific, one plays Go game, not Chess. North and South Korea constitute two 'me' or eyes on the Go board.

Differences between the extremes of wealth and poverty, race and culture are increasing, only more finely and decisively as the differences between rejection and acceptances are digitized and diluted into millions of bits of silicon information. It shows in sporadic outbreaks of violence of bizarre and unpredictable kinds, each event giving rise to prolonged periods of concern.

The vast and massive Eurasian meteorological dynamic is nothing like that in the United States, where the Atlantic and Pacific both are evident in only a four hour time span, and the continuity of the oceans over America is routine. In the vast Eurasian primary land mass, the Pacific is only a memory, a half day in the past before the Atlantic is anticipated.

Now, with the world understood through engines, technology and space flight, thousands of years of wars should have ended like a door slam, flat. But habits die quickly. It will take powerful moves by more prudent, sensible persons to insist on terminating war. Yet more war is absolutely senseless. There are no enemy space aliens to fight or train for. There are no worlds to inhabit or fight over anywhere within realistic distances. No other world in the Solar System is inhabitable, despite England's lovely hope that Jupiter's moon Europa holds the life for which Britain longs-and could find in the rest of the world if it did not hold itself so superior.

If the world gets through the coming two centuries without another massive global conflict it will be a miracle, even with the successful conclusion of five thousand years of construction and wars for the Moon.

International Gypsy

Its very simple - if USD was not the worlds reserve currency, US would have gone through a mcuh severe fiscal crisis than Greece and Ireland. If China, Japan and Korea stop or significantly reduce buying US treasuries, there would be a default in days. The world however remain unipolar and there are no alternatives. Euro which emerged as an alternative is going through an existential crisis and Yen is a distant third with no promise. Eventually, the fact remains that US doesnt need to default - it only needs to open up its printing press and the world would bear the cost of Americans over indulgence.
US banking system is still broke except for hedge funds and investment banks which are again indulging in speculative leveraged bets.
Debt ceiling have become symbolic as it needs to be enhanced frequently.
Economy remains subdued and cost of living stubbornly remains at much higher than sustainable levels. America needs a deeper reform than just fiscal correction. It needs to overhaul healthcare, carry out dramatic tax reforms and simplify business regulations.
American corporates are happy keeping billions of dollars in surplus cash abroad rather than bring it back and use for investment or pay back to the shareholders.
American politic is in shambles - corruption, lobbying and ineffective leadership is visible almost everyday. Even the US Supreme Court is now no longer unbiased. Corruption seems to be taking over the supreme authority expected to uphold the constitution.
I have no solutions but only hope that this country does what it has always done - come out from a problem better. This time though, it would be a much harder and longer process.


Gold without a Standard Solution

America's has a gold reserve of 8,133 tons with a commodity value of $369 billion, at $1,400 per ounce. Monetized, with a 10% cover ratio, the gold stock yields 3.6 trillion inconvertible gold notes. These gold notes would be kept separate and apart from federal reserve notes in general circulation [un-tethered to a standard] and utilized to amortize or re-purchase foreign creditor U.S. debt holdings totaling $3.2 trillion.

This balance sheet repair would reflexively increase the store of value and unit of account functions of federal reserve notes, subtituting a payment in lieu of a promise to pay; consequently bolstering U.S. soft and hard power.

Of course, if gold should rise to $2,000 per ounce, the gold reserve of the U.S. would yield 5.2 trillion gold notes; a fine surplus for fiscal management and key public investments, including a Sovereign Wealth Fund (SWF). This extra dividend will be forthcoming since the gold remains in U.S. vaults snd the gold notes are inconvertible.

This approach, based upon simple arithmetic and basic accounting, certainly alters the vector of inter-generational economics from the onset.


America is in a crisis already there're millions and millions of americans without a job, and if they have a job they're getting very little hours at work.This crisis is like a virus its spreading slowly and its becoming more and more evident to people in the US.What the US will ultimately need to do is spread the wealth because as of right now all the wealth belongs to a small percentage of people.

About our guest

Professor of Economics at U.C. Berkeley
United States
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