Wednesday, May 26, 2010

Fiscal Commission Gives White House dose of Diminishing Productivity Reality…

Sounding like they have paid attention to the Diminishing Marginal Productivity of Debt chart (Chart of the Century), the “Fiscal Commission” gives both the White House and Congress a dose of reality. That is once debt saturation is reached, the velocity of debt collapses and growth diminishes as you place more debt into the system:

Unfortunately, their limited thinking in terms of solutions still can be found squarely inside of the debt-backed money box in which you either assume more debt or live with austerity. Neither is necessary unless you are a central banker who depends on debt to make your living… (ht Kevin)

U.S. debt reaches level at which economic growth begins to slow

By Walter Alarkon

The level of U.S. debt has reached a point at which economic growth traditionally begins to slow, a bipartisan fiscal commission making recommendations to the White House and Congress was told Wednesday.

The gross U.S. debt is approaching a level equivalent to 90 percent of the country's gross domestic product, the level at which growth has historically declined, said Carmen Reinhart, a University of Maryland economist.

When gross debt hits 90 percent of GDP, Reinhart told the commission during a hearing in the Capitol, growth "deteriorates markedly." Median growth rates fall by 1 percent, and average growth rates fall "considerably more," she said.

Reinhart said the commission shouldn't wait to put in place a plan to rein in deficits.

"I have no positive news to give," she said. "Fiscal austerity is something nobody wants, but it is a fact.

Gross debt is at 89 percent and will reach 90 percent by the end of the year, said Sen. Kent Conrad (D-N.D.), a member of the commission.

Another commission member, Rep. Jeb Hensarling (R-Texas), described the situation: "Essentially, the needle is hitting the red zone in respect to economic growth.”

Gross debt, unlike the public debt measure used by the Congressional Budget Office (CBO) and other economic forecasters, includes the money the government owes to all entities it supports, such as mortgage firms Freddie Mac and Fannie Mae, Reinhart said. The CBO expects public debt to grow from 63 percent this year to 90 percent in 2020, largely because of rising healthcare costs.

The bipartisan fiscal commission, which was created by President Barack Obama and contains lawmakers from both parties, is tasked with producing a plan to rein in debt by December 1. Leaders in both the House and Senate have said the commission's proposals would receive votes on the floor later that month.

Reinhart cautioned policymakers against seeing the strengthening of the dollar as a sign that investors can wait for the United States to show how it will deal with the debt.

"I am concerned about complacency," she said. "I am concerned that because the dollar has renewed its role as a reserve currency, we may wait too long."

To quote Kevin, “Ya think?”

Until their models incorporate the fact that we don't live in a linear world and that our money is backed by debt, economists, puppet banker underlings, and politicians will continue to misunderstand what's happening and will keep applying inappropriate solutions. Of course that's giving credit for good intent, that's certainly debatable.