President Barack Obama

As the United States national debt reaches parity with total annual GDP, President Barack Obama continues to preside over a record level of deficit spending by the federal government. He has just sent to Congress a proposed $3.73 trillion budget for FY 2012, while forecasting a record $1.65 trillion deficit for the current fiscal year. Earlier, the Congressional Budget Office projected that the current deficit would reach at least $1.5 trillion. These figures mean that America remains trapped with unsustainable structural mega-deficits,  and that more than 40 percent of everything the U.S. federal government spends is financed with borrowed money.

As I have commented on before, this level of government indebtedness just cannot be sustained, and will lead to catastrophic repercussions. While the politicians in Washington, particularly in the Obama administration, pay lip service to the need to “rein in” this profligate public spending, nobody believes that they are serious. The president’s claim that he “plans” to reduce the deficit cumulatively over ten years by just over a trillion dollars is an utter farce, since even by the most optimistic forecasts this would leave a combined deficit over the decade of more than ten trillion dollars.

The problem, however, is not uniquely one of the Obama administration and the Democratic Party. The Republicans, who left for Obama as an inaugural present in 2009 a first-ever annual deficit to exceed a trillion dollars, are as intellectually bankrupt as are their adversaries on the other side of the aisle. The GOP is equally bereft of ideas on how to control this raging fiscal train wreck, offering little more than worn-out cliches such as reducing taxes, as though that would not further exacerbate the federal government’s structural mega-deficit.

What we are witnessing is not only an economic and fiscal calamity in the making. It is as much a display of political dysfunctionality and moral cowardice as it is of inept fiscal policy. Which leads to the melancholy conclusion that it will not be the political echelon in Washington that ultimately  imposes budgetary discipline on public spending. Increasingly likely is a doomsday scenario, in which the bond vigilantes, well practiced already with their punishing assaults on the credit ratings of Greece, Ireland and now Portugal, unleash the full fury of the market place on Uncle Sam. When that fiscally apocalyptic moment arrives, not even the impressive weight of political inertia that resides in Washington DC will be able to impede a sovereign debt crisis in the United States that will not only cripple the nation’s economy with devastating effect; it will likely dispossess the next generation of Americans  of their future.

Ten years ago, the Clinton administration submitted to Congress a proposed federal government budget of $1.9 trillion. Now, the Obama administration has released  a proposed budget for the upcoming fiscal year. It is a whopper: more than $3.8 trillion. As inflation has been low over the past decade, if official U.S. government statistics are to be believed, the great majority of this doubling  in federal spending over the past decade has been actual increases in real terms.

More disturbing than this explosion in federal outlays has been the projected record deficit that is being projected, following on the heels of previous record deficits. The red ink being forecast for FY 2011 is an eye-popping  $1.56 trillion. Yet, President Barack Obama claims that this is a first step towards deficit reduction.
 
I beg to differ with the president. Far from being a move towards fiscal responsibility, this massive spending fest, with a projected deficit that is the equivalent of more than three quarters of total federal government spending a mere ten years ago, is the clearest indication yet that U.S. government spending is out of control, and has entered the fiscal twilight zone. As I project in my new book, “Global Economic Forecast 2010-2015: Recession Into Depression,” this dangerous path is unsustainable. The ultimate consequences will be frightful

Only a few weeks ago, the cheerleaders from the financial community and Obama administration were preaching the gospel of “green shoots,” those supposedly subtle indicators that the U.S. recession was bottoming out , and a recovery was just around the corner. However, amid a flood of dire economic and financial news, not the least being the bad unemployment numbers for June, there is increasing talk in Washington that a second dose of deficit-driven stimulus spending  will be required from Washington if the nation’s severe economic contraction is to be reversed.

Not surprisingly, the Republicans are already labelling President Obama’s economic recovery spending package a failure. They point out that Barack Obama’s economic team had envisioned the unemployment rate stabilizing at 8% during 2009, as the impact of nearly $800 billion in borrowed money being unleashed by the Federal government would arrest the free fall in employment numbers. The June statistics released by the Labor department reveal that nearly half a million Americans lost their jobs in June, a significantly higher number than was posted in the previous month, taking the official U3 unemployment rate to 9.5%. However, the disastrous economic performance of the George W. Bush administration, aided and abetted by a  Congress under Republican domination for most of the previous president’s term of office, undercuts the credibility of the GOP’s criticism of the Obama administration on economic policy. Of far greater significance is that much of the criticism is now coming from the left-of-center of the Democratic Party.

Many neo-Keynesian economists  were critical of the original Obama stimulus package for allegedly being too small. Their position was that the  contraction brought on by the Global Economic Crisis required governments across the world, but especially in the United States, to borrow massively in order to compensate for the diminution in private sector economic activity. In a recent op-ed piece in The New York Time, economist Paul Krugman represented this point of view forcefully in labelling the current stimulus package as being  totally inadequate, and emphasizing that a second stimulus spending bill of sizeable dimensions was essential if the U.S. was to avoid slipping into an even worse economic crisis. He drew parallels with the economic downturn that occurred in 1937, when the Roosevelt administration pulled back from New Deal pump-priming in order to bring the Federal budget back under control.

While the Obama administration has been hesitant thus far in committing to a second stimulus spending bill, the combination of growing calls for more deficit spending combined with political realities, namely the 2010 mid-term elections, will likely create accelerating momentum towards another so-called “economic recovery act.” No Democrat wants to run in 2010 with unemployment continuing to rise.

Putting aside political factors, is a second stimulus spending bill a wise course to follow? In my view the answer is no. Just as I disagreed with the wisdom of both the original $800 billion spending bill and the $700 TARP Wall Street bailout package of last fall, I fail to see how the at best short-term enhancement of certain economic indicators outweighs the massive liability of further damaging the already frail fiscal health of the country. The neo-Keynesian economists fail to understand that the United States no longer has the luxury of engaging in counter-cyclical economic policy when its bank balance is mired in red ink. The global bond market is already providing early warning signs that  profligate borrowing needs on the part of the U.S. government are simply unsustainable in the long-run. Not only would another stimulus spending orgy  probably not improve the nation’s long-term economic health; the further deterioration in the fiscal viability of the U.S. government will inevitably create its own negative feedback loop, further exacerbating the underlying weaknesses in the American economy.

The fiscal catastrophe  underway in America’s largest state, California, should serve as a brightly-lit red warning lamp for the entire nation. Endless debt by the sovereign does not guarantee long-term economic equilibrium. It is a roadmap to financial and economic Armageddon.