Politicians’ uncontrolled deficit spending: Kinda “like a crack addict”?

This just in from Chicken Little: “Deficit spending – it’s all the rage! But is something wrong with this picture?”

The sky-is-falling-in gang notes that, against the backdrop of the still-unfolding, still-very-serious, worldwide financial crisis, governments around the world are still spending, spending, spending wildly, falling deeper and deeper into debt. Or, more precisely, in order to be able to cover all that spending, they keep borrowing, borrowing, borrowing. Is there something, uh, maybe, just maybe, a little bit dangerous about this practice? At what point should – or must – it stop?

Kevin Lamarque/Reuters

February 4, 2008: White House Office of Management and Budget Director Jim Nussle spoke to reporters about the 2009 budget; at that time, the Bush gang predicted the federal-government budget deficit would more than double in 2008

The United Kingdom has just “posted its biggest six-month budget deficit since World War II as the slide into a recession hobbled tax receipts and government spending jumped. The 37.6 billion-pound shortfall [$61.7 billion] in the fiscal first half [of 2008] through September was the largest since records began in 1946….Last month, the deficit widened to 8.1 billion pounds [$13.3 billion]. 
With the economy next year facing its first full-year contraction since 1991, Chancellor of the Exchequer Alistair Darling has pledged to keep spending on job-creating projects such as building work.” Where is the money going to come from to fund such government-sponsored schemes? (Bloomberg in the Age)

Canada’s Globe and Mail reports that, in the United States, the U.S. Federal Reserve Board chief, Ben Bernanke, “has unambiguously endorsed another major injection of fiscal stimulus even though experts warn it could push this year’s [federal-government] budget deficit to a record $1 trillion….With a massive bank-rescue plan now working its way through the financial system, Congress has turned its attention from Wall Street to Main Street, and they’re eager for…Bernanke’s blessing to spend billions more.” Now, notes the Globe and Mail: “They have it.”

Brendan McDermid/Reuters

Putting a stop to “shop till you drop”: Recent news reports have indicated that, given current economic woes, many American consumers are starting to watch their credit-card spending; why can’t governments stop spending money they don’t really have?

Earlier this week, Bernanke told members of the House of Representatives’ budget committee: “Given the uncertainties about the near term and the risk that still exists, I think that it is appropriate for Congress to be thinking about a fiscal program at this time….” The Globe and Mail points out that he “played down the impact on the deficit.”

The deficit-spending fad appears to be catching fire.

Yesterday, Reuters reports, “Mexico’s Senate approved the revenue component of the [national government's] budget for 2009…, allowing for a small deficit to help withstand a feared economic downturn. The bill, already passed in the lower house, allows President Felipe Calderón’s government to let spending outstrip revenues next year by 1.8 percent of gross domestic product.”

In a separate, news-analysis article dispatched by Reuters, writer John Kemp notes that, “[e]ven before the Troubled Assets Relief Program…is put into effect,” the U.S. Treasury has been borrowing “unprecedented sums in the money market [and has] deposited $500 billion of surplus cash with the Federal Reserve….” This activity has “in turn enabled the central bank to extend more than $600 billion in special credits to commercial and investment banks, insurers and swap lines with overseas central banks.” Kemp writes: “In effect, Treasury has borrowed the money banks themselves are unable to raise at present, substituting the full faith and credit of the United States for the impaired credit of the banking system….[A]s the crisis [has] intensified, the Treasury’s issuance of management paper has soared from $66 billion in August to $320 billion in September and $270 billion so far in October. Some $499 billion of the proceeds has been deposited into the Fed’s new supplementary financing account. The problem with the Treasury borrowing program is that it is taking debt levels close to the statutory ceiling approved by Congress. The statutory ceiling has already been raised twice this year from $9.815 trillion to $10.615 trillion in July, and again to $11.315 trillion in October….”

Larry Downing/Reuters

For many American consumers, high gasoline prices are a constant reminder of just how bad the economic situation has become

More from Kemp’s analysis: “If there is even a scintilla of doubt, investors will start to demand much higher risk premiums, escalating borrowing costs for everyone. The Treasury bailout thus marks the end of an era. For eight years, the U.S. has observed a strong dollar policy and commitment to price stability in theory, but deviated from it in practice. The dollar’s role as a reserve currency created a gap between theory and practice that the US authorities have exploited to the hilt to pass stabilization packages and support growth by keeping interest rates low. But as the crisis bites and confidence in the US financial system weakens, the Fed’s and the Treasury’s room for maneuver is narrowing.”

Writing in the Winnipeg Sun, columnist Tom Brobeck observes that it is “lazy” politicians who “soften us up for deficits.” He writes: “It didn’t take long for Canada’s spendthrift politicians to abandon their long-term commitment to balancing the nation’s books. One by one, [provincial] premiers and finance ministers are now warning of impending deficits as Canada slides further into tough economic times.” Lately, these pols have been “falling all over themselves declaring, or at least hinting, that their governments may go back into the red.”

John Gress/Reuters

Are “under-water” mortgages, like runaway deficit spending, a sign of a real economic sickness?: Reuters reports that, today, many homeowners in the U.S. – nearly one out of every six – find themselves owing more on their mortgage loans than their properties are now worth

Borbeck adds: “I’d like to call it a defeatist attitude, but I think it’s more laziness than anything else. At the first sign of economic weakness, Canadian politicians are running for the taxpayer credit card, all too willing to plunge us further into debt….[L]azy politicians…refuse to make the tough decisions required to prevent deficits….Political parties of all stripes now appear eager again to take up the deficit-financing charge, using tough economic times as justification. They’ll argue, of course, it wouldn’t be a permanent condition. Deficits would be temporary, just to get us through tough times, they’ll say. Yeah, we’ve heard that one before….It sounds good in theory. But history has shown that politicians can’t handle the responsibility. Once in deficit – like a crack addict – they find it extremely difficult to let go. And taxpayers always get stuck with the bill.”

Posted By: Edward M. Gomez (Email) |
October 22 2008 at 09:00 AM