Friday, November 19, 2004

Who'll Stop The Rain?

There is frequently a delay between the time that you see lightning and you hear the accompanying thunder as a storm front approaches your location. The gap in sensory perception is a result of the difference between the respective speeds of light and sound. By counting the seconds in between the illumination and the peal of thunder, you can determine how many miles away the storm itself is - but I forgot the exact metrics.

No matter. I speak of this phenomenon as a way of drawing an analogy to the current warning signs appearing regarding our economy and such programs as Social Security, and the eventual storm that will descend upon us. The question is, will people pay attention to the lightning flashing before our eyes, or will we act surprised when the thunder and the rain comes?

Zeus himself, better known as Alan Greenspan, was busy hurling lightning bolts from high atop Mount Olympus
today, casting warnings about trade deficits, budget deficits and profligate spending:

This is not the first time Mr. Greenspan has warned about the risks of a spiraling current-account deficit. In testimony before Congress last February, he said "foreign investors, both private and official, may become less willing to absorb ever-growing claims on U.S. residents."

As he did last winter, Mr. Greenspan said today that his preferred remedy would be for the Bush administration to bring down both the current-account and budget deficits. That would encourage household savings in the United States, which are also at extraordinarily low levels.
But in typical Greenspan fashion, he rejected any notion that even a portion of Bush's reckless, revenue draining tax cuts be sacrificed at the altar of fiscal sanity and Social Security solvency:

But analysts did not interpret Mr. Greenspan's remarks as a rebuke of the White House, which has indicated it will seek to make the deep tax cuts of its first term permanent. If anything, they said, his speech had a laissez-faire tone - leaving events in the hands of the market.
Once again, he is advising that we reduce benefits for retirees, and push back the retirement age in order to accommodate the requirements of Social Security - the whole time preserving every facet of Bush's tax cut regime. But now he offered this kernel of wisdom that only someone so well-versed in economics could elucidate: Our deficits pose risks for the valuation of the dollar, not just the future viability of entitlement programs. Thanks Mr. Greenspan. I had no idea.

Brad Delong weighs in on the subject, citing evidence from currency markets abroad over recent weeks:

The dollar is weaker than ever, and could start dropping like a stone if America doesn't get its fiscal acts together. Of course, that must mean it's time for another tax cut, right? Let's expand our deficits, and play chicken with the global economy. This could all get ugly, and all too soon.
Brad also offers this citation for those that desire a more in depth technical analysis (warning: highly wonkish):

The U.S. now borrows from abroad to allow the government to run a large fiscal deficit without crowding out private investment, even as growing consumption (and necessarily, very low private savings) reduce the United States' ability to finance the fiscal deficit and private investment domestically.

This relatively positive state of affairs, however, is likely to change. The limited cost of the existing U.S. debt reflects unusually low U.S. interest rates, and external investors' willingness to continue to finance large U.S. current account deficits at these low rates.
The layman's translation, if I may venture an attempt, is that we are borrowing so much abroad, to fund our out of control deficits, that foreign investors are beginning to get skittish about the value of our debt which we need them to invest in. Furthermore, if Greenspan doesn't raise interest rates, they might be less inclined to invest in our debt but if he does, it could negatively affect many Americans with floating rate mortgages and other personal debt. If the market bottoms out on our debt, the dollar goes into a free-fall, and then it's time to don the khaki pants because it's third world banana republic time.

What will happen when the perfect storm arrives? What "tough choices" will our selfless leaders ask us to make as the dollar sinks, interest rates climb and the deficits become an untenable albatross? The thunder will be the sound of Thor's hammer (aka Tom Delay) crashing down on
Social Security and Medicare leaving them, and the rest of the administrative state, in shambles. Its just about counting the seconds in between the sights and the sounds.

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