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David Brooks' Apocalypse

Friday, 12 November 2010 05:35
"Elections come and go, but the United States is still careening toward bankruptcy. By 2020, the U.S. will be spending $1 trillion a year just to pay the interest on the national debt. Sometime between now and then the catastrophe will come.

It will come with amazing swiftness. The bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens, the shock will be grievous: national humiliation, diminished power in the world, drastic cuts and spreading pain"

I still like the biblical version with the four horseman and the rivers flowing upstream, but hey, it's the oped page of the NYT. No one expects that people will be reading this stuff 1500 years from now.

Anyhow, let's take a closer look at Mr. Brook's apocalypse. The U.S. will be spending $1 trillion a year just to the pay the interest on the national debt." Pretty scary, huh?

Well, first it is probably worth noting that Brooks is somewhat more pessimistic on this score that the Congressional Budget Office (CBO) which puts interest in 2020 at $916 billion. How scary is that?

Let's get out the GDP projections. CBO tells us that GDP will be $22.5 trillion in 2020 [thanks Jeff]. This means that Mr. Brooks scary interest burden will be equal to about 4.1 percent of GDP. Will that be the end of the world or least national humiliation, as Brooks promises? The interest burden peaked at 3.3 percent of GDP in 1991, so we would not be in hugely different territory than we were during the Bush I presidency.

But, there is a further complication. The Fed currently holds much of the federal debt and it is actually increasing its share. This is what QE2 is all about. Given the massive amount of excess capacity and unemployment, coupled with the trend towards disinflation, there is no reason that the Fed should not continue to hold this debt. (It can take other steps, such as increasing reserve requirements, to ensure that an increase in reserves in the banking system does not lead to inflation in future years.)

If the Fed holds the debt, then it poses no burden to the government. The Treasury pays interest on the debt to the Fed and then the Fed refunds the interest to the Treasury. Last year the Fed refunded $77 billion in interest to the Treasury, nearly 40 percent of the net interest paid out by the Treasury.

If the share of interest going to the Fed is the same in 2020 as it is today, then the interest burden on taxpayers in 2020 will be equal to about 2.6 percent of GDP, well below the levels of the late 80s and 90s. If the Fed increases the share of the debt it holds, as it is doing now with QE2, then the interest burden on future taxpayers will be even less.

This doesn't leave much for Mr. Brook's apocalypse story. Of course, if Brooks really wants to tell a story of national humiliation he just has to look around beyond the streets and restaurants that he and his friends frequent. The country has more than 25 million people who are unemployed, underemployed or who have given up work altogether. Tens of millions of people are underwater in their mortgages and millions face the imminent prospect of losing their home through foreclosure.

This might not be the apocalypse, but it should be humiliating to the nation, especially since this suffering is entirely due to incompetent economic policy and therefore was and is entirely avoidable. And, Brooks doesn't even have to wait for 2020 to talk about this picture.


Comments (11)Add Comment
written by Vince, November 12, 2010 5:52
I always like how the bond market is completely irrational and inefficient for these guys. I mean isn't Brooks a free-markets-are-the-end-all-be-all kind of guy? But, oh, no, not the bond market. It is the epitome of erratic, almost random, behavior.
written by izzatzo, November 12, 2010 6:09
Is the economic glass half full or half empty?

Half empty of course. It'll be completely empty shortly.

How do you know?

Because the half that was half full was filled with moral relativists who think everything is relative, like the deficit and the debt.

Because they have no absolute values, they believe government spending can go on forever with no limit to the debt incurred.

How about the employment glass? Is it half empty too?

Not at all. As a matter of fact it's actually full in absolute terms. The problem is not unemployment now.

The problem was over employment earlier during the years of Greenspanian irrational exhuberance spurred on by the moral relativists.

The excess supply of labor is just a myth caused by artificial demand that must be allowed to deflate to normal absolute levels in non-percentage terms.

That also explains why all the people out of work are structually unemployed. All those skills they acquired under artificial demand are now obsolete, as they should be.
Thanks, Dean
written by Jeff, November 12, 2010 6:20
As always, a great corrective to the mainstream hooey. I'd bet very few NY Times readers (or writers) know about the Treasury-Fed-back to Treasury interest path.

You said $22.5 billion instead of trillion for 2020 GDP.
written by LSTB, November 12, 2010 6:52
The bond markets are with you until the second they are against you.

If bond markets are willing to lend the government money at low rates now, but tells us it thinks the gov't is a credit risk in the future, why not borrow 'n' bail out the economy?
written by Ron Alley, November 12, 2010 7:47
David Brooks is a story teller, a columnist and a shill for the Republican Party leadership. He is not interested in analysis and not terribly concerned with facts -- especially the inconvenient one.
written by skeptonomist, November 12, 2010 8:16
"The Fed currently holds much of the federal debt"

Not unless the Fed is stashing things somewhere outside its balance sheet:


The Fed currently holds about $840B in Treasuries, which is not much more than it held before the crisis, plus about $150B in agency securities. Most of the rest of the current $2.3T holdings is in Fannie/Freddy MBS's (as well as some other very questionable debt), which as far as I know are not counted in the National Debt. The Fed has said it will replace the MBS's with Treasuries, but don't look for it to throw a lot of MBS's back on the market for a long time.

This is not to question Dean's assertion that the Fed can buy up the debt - the Japanese have been doing this for some time and nobody is calling them bankrupt. But so far the Fed has only a small fraction of the debt, and the $600-800B it will be buying doesn't change things significantly. QE2 seems to be a token program, not really justifying the fuss about it in the media.
I guess Deano thinks seignorage is not a tax.....
written by pete, November 12, 2010 9:04
To swap, Bernanke's term, cash for bonds, does not change federal liabilities....just messing around with the yield curve. 0 maturity for 10 year maturity. Indeed, that is the QE2's defense as being noninflationary.

However, there is a large part of the debt that is held by agencies, which should be netted out, and that does amount to about 1/3.

And of course, it is really the debt held by non-US taxpayers that may ultimately matter. This is also still small.
written by fuller schmidt, November 12, 2010 10:28
Dean and Izzatzo - the mighty Mssrs.Outside and Inside.
Currently, Interest on the Debt is 3% of National Income (GDP)
written by Paul, November 12, 2010 3:57
If I went to a bank to get a loan, the banker would definitely want to know my interest to income ratio. If half my income was going to pay interest on my loans, I wouldn't qualify for any more credit.

But if I was paying 3% of my income for interest, obviously I would get a loan especially if I had NEVER missed a payment or been late on previous loans (perhaps because I can print money to make payments whenever I want to).

Yet Brooks imagines that the world's bankers will suddenly stop giving the U.S. loans for no reason whatsoever, albeit that hasn't happened over the past 2 years of record spending and money supply expansion. In fact just the opposite has happened and the U.S. is a "safe haven" for lenders.

WTF is Brooks smoking over there?
written by tom volscho, November 12, 2010 7:10
Thanks for this analysis Dean.

This is how the bondholding class feels about this (from the Nov meeting minutes of the Treasury Borrowing Advisory Committee):

"At this point, a member asked about the impact of the Fed's potential quantitative easing (QE2), expected to be announced at the November 2010 FOMC meeting. The question arose regarding whether the Fed and the Treasury were working at cross purposes, given that Treasury is extending the average maturity of the portfolio while the Fed is expected to purchase longer-dated securities. The member noted that from an economic perspective, the Fed's purchase of longer-dated coupons via increasing reserves was economically equivalent to Treasury reducing longer-dated coupons and issuing more bills.

It was pointed out by members of the Committee that the Fed and the Treasury are independent institutions, with two different mandates that might sometimes appear to be in conflict. Members agreed that Treasury should adhere to its mandate of assuring the lowest cost of borrowing over time, regardless of the Fed's monetary policy. A couple members noted that the Fed was essentially a "large investor" in Treasuries and that the Fed's behavior was probably transitory. As a result, Treasury should not modify its regular and predictable issuance paradigm to accommodate a single large investor."
David Brooks Hawks Newspapers
written by Scott ffolliott, November 12, 2010 8:17
David Brooks Hawks Newspapers. Hucksters for hire. Does anyone really think David Brook has anything worthwhile to say except good night?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.