US lacks credibility on debt, says IMF

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    Apr 13, 2011 3:53 PM GMT
    http://www.ft.com/cms/s/0/dc1aadea-652e-11e0-b150-00144feab49a.html#axzz1JQ2IcLyp

    The US lacks a “credible strategy” to stabilise its mounting public debt, posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.

    In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing.

    The latest warning on the deficit was delivered as Barack Obama, the US president, is becoming increasingly engaged in the debate over ways to curb America’s mounting debt.

    To meet the 2010 pledge by the Group of 20 countries for all advanced economies – except Japan – to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960, the IMF said.

    In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.

    Carlo Cottarelli, head of fiscal affairs at the Fund, said: “It is a risk that if it materialises would have very important consequences... for the rest of the world. So it is important that the US undertakes fiscal adjustment in a way sooner rather than later.”

    At the moment, the US had outlined less than half of the tax increases and spending cuts necessary to bring its public debt down in the medium term, the IMF calculated. “More sizeable reductions in medium-term deficits are needed and will require broader reforms, including to social security and taxation,” the IMF said.

    The IMF said the US economy “appears sufficiently strong” to withstand greater austerity measures and tax increases, adding that the benefit of last year’s stimulus package “is likely to be low relative to its costs”.

    Having narrowly averted a government shutdown last week through a deal with congressional Republicans to cut $38.5bn in spending from this year’s budget, Mr Obama will on Wednesday unveil his plans to rein in America’s long-term deficits, which are driven by popular programmes like Medicare, Medicaid and social security.

    The debate over US fiscal policy is expected to intensify in the coming weeks and months, as the US hits its congressionally mandated debt limit of $14,300bn. Without approval by lawmakers to increase it, the US could face potential default as early as July, and so far Republicans and Democrats remain some distance from reaching a deal.
  • rnch

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    Apr 13, 2011 4:15 PM GMT
    perhaps, as one way to decrease it's mounting public debt, the USA should end all foreign aid to countries and organizations that are not within the borders of this country.


    icon_idea.gif
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    Apr 13, 2011 4:34 PM GMT
    This is a little distressing, but the IMF is such an arm of the US that it's probably without teeth.

    Further, austerity measures are only desired by bondholders. The American people do not support them.
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    Apr 13, 2011 4:38 PM GMT
    Christian73 saidThis is a little distressing, but the IMF is such an arm of the US that it's probably without teeth.

    Further, austerity measures are only desired by bondholders. The American people do not support them.


    What would the outcome be if bondholders stopped supporting the "American people"?
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    Apr 13, 2011 5:20 PM GMT
    riddler78 said
    Christian73 saidThis is a little distressing, but the IMF is such an arm of the US that it's probably without teeth.

    Further, austerity measures are only desired by bondholders. The American people do not support them.


    What would the outcome be if bondholders stopped supporting the "American people"?


    Probably military action. But given that the majority of US debt is held within the US, are those bond holders going to firebomb their own economy.
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    Apr 13, 2011 5:24 PM GMT
    Christian73 said
    riddler78 said
    Christian73 saidThis is a little distressing, but the IMF is such an arm of the US that it's probably without teeth.

    Further, austerity measures are only desired by bondholders. The American people do not support them.


    What would the outcome be if bondholders stopped supporting the "American people"?


    Probably military action. But given that the majority of US debt is held within the US, are those bond holders going to firebomb their own economy.


    Sorry, for clarification, you're saying that bondholders would raise an army to attack the US then over something less drastic / more probable like I dunno... not lend more money to the US? I'm curious how you would think they would raise that army anyway.
  • tongun18

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    Apr 13, 2011 5:44 PM GMT
    If the US Dollar was not the worlds reserve currency we would be in roughly the same position as Greece. We need tough austerity measures here in the US.
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    Apr 13, 2011 5:53 PM GMT
    tongun18 saidIf the US Dollar was not the worlds reserve currency we would be in roughly the same position as Greece. We need tough austerity measures here in the US.


    Depends on how you define austerity... but it's an issue that's fixable:
    http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html (though for the record, I don't think some of their measures go far enough)
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    Apr 13, 2011 6:27 PM GMT
    riddler78 said
    Christian73 said
    riddler78 said
    Christian73 saidThis is a little distressing, but the IMF is such an arm of the US that it's probably without teeth.

    Further, austerity measures are only desired by bondholders. The American people do not support them.


    What would the outcome be if bondholders stopped supporting the "American people"?


    Probably military action. But given that the majority of US debt is held within the US, are those bond holders going to firebomb their own economy.


    Sorry, for clarification, you're saying that bondholders would raise an army to attack the US then over something less drastic / more probable like I dunno... not lend more money to the US? I'm curious how you would think they would raise that army anyway.


    Oh no. I meant the US would invade someone/somewhere, or turn the military on the populace if they can.

    I'm curious if you think bondholders will actually fuck with the US economy, which would no doubt lead to their NOT getting paid.
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    Apr 13, 2011 6:30 PM GMT
    tongun18 saidIf the US Dollar was not the worlds reserve currency we would be in roughly the same position as Greece. We need tough austerity measures here in the US.


    That's not true because we mostly owe money to ourselves.

    Further, austerity without increased revenues doesn't work. Most of the EU countries that have embraced austerity measure are in worse economy shape than they were before (e.g. higher unemployment, stagnant growth, lower tax receipts, etc.)
  • tongun18

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    Apr 13, 2011 6:31 PM GMT
    riddler78 said
    tongun18 saidIf the US Dollar was not the worlds reserve currency we would be in roughly the same position as Greece. We need tough austerity measures here in the US.


    Depends on how you define austerity... but it's an issue that's fixable:
    http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html (though for the record, I don't think some of their measures go far enough)


    Going through it real quickly, this is what I did:

    http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?choices=xp1tplp9

    Though I would make adjustments here and there as I did not fully agree with every option. The surplus should then be split, say 70-30, with 70% going toward paying down the debt and 30% being placed in some sort of rainy-day fund (even doing it this way, it's going to take a very long time to pay down the debt.)

    How would you work it Riddler?
  • tongun18

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    Apr 13, 2011 6:36 PM GMT
    Christian73 said
    tongun18 saidIf the US Dollar was not the worlds reserve currency we would be in roughly the same position as Greece. We need tough austerity measures here in the US.


    That's not true because we mostly owe money to ourselves.

    Further, austerity without increased revenues doesn't work. Most of the EU countries that have embraced austerity measure are in worse economy shape than they were before (e.g. higher unemployment, stagnant growth, lower tax receipts, etc.)


    Who we owe our debts to is irrelevant, we owe a metric-ass-load of money. It acts as a destabilizing force to our economy, it erodes confidence (as the article indicates), and at some point it will catch up with us.

    Austerity measures includes increasing taxes. I agree that the debt problem will not be solved without looking at both sides of the balance sheet. But the increased taxes should not be used to avoid cuts in spending, but rather in tandem with them.
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    Apr 13, 2011 6:39 PM GMT
    Interesting exercise.

    Here's mine:

    http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?choices=n398d5nk
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    Apr 13, 2011 6:44 PM GMT
    tongun18 said
    Christian73 said
    tongun18 saidIf the US Dollar was not the worlds reserve currency we would be in roughly the same position as Greece. We need tough austerity measures here in the US.


    That's not true because we mostly owe money to ourselves.

    Further, austerity without increased revenues doesn't work. Most of the EU countries that have embraced austerity measure are in worse economy shape than they were before (e.g. higher unemployment, stagnant growth, lower tax receipts, etc.)


    Who we owe our debts to is irrelevant, we owe a metric-ass-load of money. It acts as a destabilizing force to our economy, it erodes confidence (as the article indicates), and at some point it will catch up with us.

    Austerity measures includes increasing taxes. I agree that the debt problem will not be solved without looking at both sides of the balance sheet. But the increased taxes should not be used to avoid cuts in spending, but rather in tandem with them.


    I think it matters in terms of our ability to renegotiate said debt.

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    Apr 13, 2011 8:38 PM GMT
    tongun18 saidThough I would make adjustments here and there as I did not fully agree with every option. The surplus should then be split, say 70-30, with 70% going toward paying down the debt and 30% being placed in some sort of rainy-day fund (even doing it this way, it's going to take a very long time to pay down the debt.)

    How would you work it Riddler?


    http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?choices=xz5rf00t

    I don't think it would be wise to raise marginal rates but I think that effective tax rates should be made flatter and to close loopholes/reduce tax credits. I would however go even further with something like the Purple Health Care Plan which would substantially reform the system. I would get rid of the the Veterans Affairs department to replace it with something a lot more flexible and given the elimination of the overlapping bureaucracies, a gilted private plan that gives veterans access to better private facilities (though this might not necessarily save a lot but it would improve quality of care). Complete elimination of the Farm Services Agency would net another 15B on top of what they list in the survey.

    I would also go so far as eliminating the employer tax deduction for healthcare pushing responsibility in selecting insurance on individuals and employees and not a disproportionate benefit for employers.

    For more views here:
    http://www.foreignpolicy.com/articles/2011/04/08/and_keep_it_shut

    Of course, these are things that I'd wish the Canadian government do itself in its own cost cutting exercises. Regardless, everything should be fair game - and there should be a greater grand discussion of what government is and what it should do.
  • tongun18

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    Apr 13, 2011 10:38 PM GMT
    You and I aren't too far off Riddler. There are a few spots I think where I could be persuaded to change from my position (like increasing the Medicare/Social Security eligibility age to 70 instead of 68.) I gotta say though, I'm a little surprised to see you support eliminating tax loopholes while keeping the rates slightly higher. Your plan does raise nearly $1 trillion in surplus by the end of 2030 though, with that kind of scratch we would be able to start putting a serious dent in the debt.

    Christian, your plan does create budget surpluses but not enough to really address the debt issue. Based on your proposal, how would we handle that?
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    Apr 14, 2011 12:53 AM GMT
    tongun18 saidYou and I aren't too far off Riddler. There are a few spots I think where I could be persuaded to change from my position (like increasing the Medicare/Social Security eligibility age to 70 instead of 68.) I gotta say though, I'm a little surprised to see you support eliminating tax loopholes while keeping the rates slightly higher. Your plan does raise nearly $1 trillion in surplus by the end of 2030 though, with that kind of scratch we would be able to start putting a serious dent in the debt.

    Christian, your plan does create budget surpluses but not enough to really address the debt issue. Based on your proposal, how would we handle that?


    I think some tax increases inevitable and necessary given the deficit - and pay downs sooner rather than later would be better - not to mention the fact that some of these measures really don't go far enough... On the principle of some of the loopholes there are out there, I think they should be closed, the tax code entirely reformed and given how large the tax code is now.

    In fact, you could argue that a small increase in tax rates made the rates flatter and simpler, would reduce overall costs for tax payers given the complexity and costs in reporting and filing. From a political standpoint however, I think in the short term, the wholesale cuts to services only if there are some real moves to showing shared sacrifice.

    Incidentally, I think the arguments of the phased increases to age limits in Medicare/Social Security are pretty simple. When they were originally implemented I think under Roosevelt, life expectancy was well below 65. Today they're above 75. I mean it was a great benefit for the government to offer back then since practically everyone was dead by that time. I would even argue it should be raised even further to ensure that the fund stays solvent AND relevant (presuming this is an important criteria).

    I think any phase in if it's such a high jump should be over say 20-30 years where people have the ability to save and plan for it.