Some musings on the deficit, Treasuries
"Being Santa Claus is fun. Delivering the credit-card bills later is much less fun. And so it will be for U.S. President-elect Barack Obama. He will get to play Santa Claus at the outset of his term, telling people they can spend hundreds of billions of dollars in the name of stimulus. Later, of course, he'll have to play Scrooge, telling the country that the bill has come due.
"The challenge for the Obama team is making sure Americans in general, and Congress in particular, remember that both roles lie ahead for the new president. The task, in the words of one senior Obama aide, is to make sure that people don't think the model for stimulus spending in coming months is "backing in the Brink's truck and opening up the door."
"More broadly, Mr. Obama's team needs to figure out whether there are steps it can take at the outset to build its credibility on fighting deficits in the long run, even as it accepts them in the short run. Such measures are possible and would help calm financial markets as red ink spreads."
So how much red ink could we be looking at as a country? Again, from the Journal ...
"The $455 billion deficit for the fiscal year that ended Oct. 1 already is the largest on record in dollar terms. As a percentage of gross domestic product, though, it amounts to 3.2%, less than at the peak of the 1980s downturn.
"But the deficit will be a lot worse next year, likely reaching between $750 billion and $1 trillion, depending on how costs of the financial-sector bailout are accounted for. The only real question is whether the deficit, as a percentage of GDP, cracks the postwar record of 6% set in 1983. If the red ink hits $900 billion or so, it will."
We keep being told not to worry about the surge in the deficit and U.S. borrowings (Treasury is selling $28 billion in 3-year notes tomorrow and $16 billion in 10-year debt on Thursday). We keep being told this is no big deal. And so far at least, the Treasury bond market has not rebelled against Washington's profligacy. But just because it hasn't happened yet, doesn't mean it won't.