Paul Krugman’s nemesis, Harvard professor Niall Ferguson, again opines that the U.S. and President Obama are steaming toward their demise.
Massive, ballooning public debt.
The public intuitively knows that debt is bad, Ferguson says–perhaps because consumers now have it coming out of their ears. This is why so many Americans disapprove of Obama’s handling of the economy. And it’s why his future is threatened…
Niall Ferguson, FT: According to the polls, voters disapprove of Congress by 61 per cent to 31 per cent. What’s more, the two parties would be neck and neck if the midterm elections were held today. The reason is clear. While the stimulus package had a sound macroeconomic rationale, the growing structural imbalance between federal revenue and spending scares the hell out of voters. A recent USA Today/Gallup poll showed that 59 per cent of Americans think government spending is excessive. Mr Obama receives his lowest approval ratings for his handling of the federal budget deficit.
Voters have good reason to disapprove. The deficit this year is likely to be $1,800bn (€1,270bn, £1,090bn). The gross federal debt is just about to bust the $12,100bn limit set by Congress. According to the Congressional Budget Office’s alternative fiscal scenario, public debt could rise from 44 per cent of GDP last year to 87 per cent by 2020. Spending on healthcare alone could rise from 16 to 22 per cent of GDP. The gap between spending and revenue in the latest House healthcare bill would be $65bn in just over a decade. The administration itself has no plan to balance the budget. Its own budget forecasts a trillion-dollar deficit as far ahead as 2019.
Mega-deficits as far as the eye can see are bad politics. They could be even worse economics. The nightmare scenario is that mounting fears over US creditworthiness push up long-term interest rates, thereby choking off the nascent recovery. After all, the great deleveraging still has a very long way to go. In relation to GDP, household net worth has slumped back to where it was 20 years ago. But household debt is still close to record highs at about 130 per cent of disposable income. Anyone expecting private consumption to bounce back is dreaming; real personal spending actually fell in June. Moreover, the property crisis is far from over. The number of prime borrowers behind on mortgage payments rose 13.8 per cent between March and June. The business default rate is already above 11 per cent and is heading towards 13 per cent. The contribution of the stimulus to growth (monthly spending as a proportion of GDP) has now passed its peak and by January 2010 will be zero. The public-private partnership to buy toxic bank assets has flopped. The official jobless rate conceals a surge in long-term unemployment to a postwar record.
Remember: this remains a global crisis. Any big external shock (for example, a European banking crisis) could abort economic stabilisation just as surely as the 1931 failure of Creditanstalt gave the world two more years of depression…
Six months in, Mr Obama still has the look of a lucky, two-term president. But that could change if voters become even more disenchanted with the legislative branch and start blaming the president for the looming fiscal train-wreck. The scariest possibility for Mr Obama is that the runaway deficit could leave him with the worst of both worlds: exploding debt and flat-lining growth.
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