Where is the US economy headed?

[Doesn't seem to stop you from predicting inflation in our near future though, based solely on the variable of our high debt.

Inflation fears are way overstated at the moment; in large part because individuals aren't very good at predicting inflation rates.

By Ezra Klein, Monday, May 23, 3:01 PM
Here’s what we should’ve learned from the events of the past decade: Murphy was right. What can go wrong, will go wrong — and we need to plan accordingly. Because terrorist attacks? They happen. Credit bubbles? They burst. Underregulated Wall Street banks? They fail. Poorly designed offshore drilling platforms? They explode. Overleveraged European economies? They can’t pay their debts. Broken-down levees in hurricane country? They breach.

But we haven’t learned our lesson. Forget preparing for the “black swans,” investor Nassim Taleb’s name for the unpredictable crises that disrupt and damage our lives. We’ve stopped preparing for what economist Nouriel Roubini calls the “white swans”: the crises we can predict, and could even prevent.


It’s been less than three years since the fall of Lehman. The financial crisis remains lodged in our minds, and in our jobless rate. And yet the Federal Reserve lacks a vice chairman for banking supervision. There’s no one officially in charge of the Treasury Department’s Office of Financial Research. The seat marked “insurance” on Financial Stability Oversight Council is empty. The Consumer Financial Protection Bureau has a leader but not a director. No one has been confirmed to head the Office of the Comptroller of the Currency. And Republicans are still saying Nobel Prize-winning economist Peter Diamond is underqualified to serve on the Federal Reserve’s Board of Governors.

Meanwhile, the House GOP is fighting to starve financial regulators of the resources they need to do their work. Both the Securities and Exchange Commission and the Commodity Futures Trading Commission needed extra money to scale up to their expanded roles under the Dodd-Frank law, but the Republicans’ 2011 budget proposal whacked them with sharp cuts — and then their 2012 proposal repealed most of Dodd-Frank, with no vision for what should go in its place. The irony? All this is being pursued under the guise of deficit reduction. And why do we have such a gaping deficit? The . . . financial crisis.

Cycloptichorn wrote:

[Doesn't seem to stop you from predicting inflation in our near future though, based solely on the variable of our high debt.

I believe inflation will come as do many others. As I outlined above this is NOT based solely on the level of our current debt. Other significvant factors include the fact that the debt has been rising at a rate much greater than that of the economy and there is no yet evident prospect that economic growth will accelerate enough to change that; and my perceptions that (1) the growing inclination of our government to interfere in energy development and increase labor market regulation will further inhibit economic growth; and (2) that the current political impasse will likely prevent us from taking sufficient action to curtail the growth of our debt.

Cycloptichorn wrote:

Inflation fears are way overstated at the moment; in large part because individuals aren't very good at predicting inflation rates.

You say they are overstated but you don't know the future any better than I. There's a real possibility you may be merely whistling in the dark. We have created huge increases in the money supply and have enormous balances of dollars in the hands of other countries - and we have little ability to control the dynamics of how these two excesses will play out. Fast growing inflation is a real possibility. Others have been surprised by this too.

May 24, 2011, 4:14 am
Debt Arithmetic (Wonkish)

The whole tone of current discussion about deficits is one of urgency: deficits must be brought down now now now or crisis looms. Where is this coming from? Not from the arithmetic.

The way the story is often told, deficits mean higher debt, which means higher interest payments, which can mean a spiral into bankruptcy. And qualitatively that’s not wrong. If you put numbers to it, however, for countries that are not facing huge risk premia, the spiral is very, very slow.

Here’s a sample calculation.

The latest IMF Fiscal Monitor predicts that general government in the US — that’s federal, state and local combined — will run a deficit of 7.5 percent of GDP next year, and that net debt will be 75 percent of GDP.

So how fast would the debt spiral be going?

You need to bear in mind that growth and inflation limit the rate of rise in the debt ratio. Suppose that we have 4 percent nominal GDP growth, which is actually low by historical standards. This shaves 3 percentage points off the rise in the debt/GDP ratio. So a year later, given those numbers, debt rises by 4.5 percentage points of GDP.

What’s the interest burden of that rise? At minimum we should correct for inflation, so use the TIPS yield. That’s currently below 1, but let’s be pessimistic and call it 2. Even so, the added interest burden is less than one-tenth of one percent of GDP.

So even with substantial deficits, the pace of long-term budget worsening is very slow. If it’s a debt death spiral, it’s a slooooowww motion death spiral.

But, say the critics, psychology can change suddenly, sharply raising those interest costs. The question then is why psychology should change. Investors can do the same arithmetic I’ve just done; why should they panic over a small rise in the interest burden?

Now, investors might well panic over signs of political deadlock — but that could happen regardless of the current year’s deficit.

Still, Serious People tell us that investors will turn on us unless we slash the deficit immediately — and they know this because, well, um …

As I’ve often written, we’re in a strange state now where people who actually take textbook economics and simple arithmetic seriously are seen as dangerously radical and irresponsible, while people who believe in invisible bond vigilantes and confidence fairies, who claim to know what the market will want even though there’s no sign of that desire in current asset prices, are viewed as Very Serious.

Anyway, the arithmetic of debt is much less scary than you might think.

I think you are wrong on both points. I don't think there's much objective evidence that 'interference in energy development' is holding our nation's recovery back. It's just a hobby-horse you like to ride. And from an environmental point of view, energy production is turning out to be one of the worst offenders possible, so I think it's fair to say that thes industries are being 'held back' for a reason. A good reason.

Secondly, political deadlock does NOT automatically stop action to curtail the growth of the debt, for one main reason: the Bush tax cuts are all set to expire after 2012. If we do nothing at all, our deficit will shrink by 70% or more within 5 years. Doing nothing at all would actually be a more effective plan for closing our deficit than anything the GOP or Obama has proposed.

I'll repeat what I said earlier - during Reagan's 'morning in America,' inflation was more than double what it has been for the last decade. We could see a doubling of inflation right now and be juuuust fine.