Wednesday, June 22, 2011

Wrong.

The CBO is wrong. These arguments are artifacts of commodity currency systems, which we have jettisoned since Nixon abolished the Gold window. What crisis had Japan witnessed since its debt/GDP levels approach 200%? Zero interest rates and an appreciating Yen coupled with pervasive and growth-killing deflation. The economic model to describe this situation is false. The U.S. is not some household borrowing in a currency that it does not issue. It is not Greece borrowing in Euros to meet the obligations of its Euro-denominated debt. This kind of grandstanding is counter productive.

The report said the national debt, now $14.3 trillion, is on pace to equal the annual size of the economy within a decade. It warned of a possible "sudden fiscal crisis" if it is left unchecked, with investors losing faith in the U.S. government's ability to manage its fiscal affairs.

Democrats and Republicans have been stepping up budget talks aimed at averting what could be the disastrous first-ever default on U.S. government debt. A bipartisan group led by Vice President Joe Biden tasked with reaching an agreement has not made the politically difficult compromises on the larger issues, such as changes in Medicare, or tax increases.

The study reverberated throughout the Capitol as Biden and negotiators and senior lawmakers spent several hours behind closed doors. The talks are aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to generate enough support in Congress to allow the Treasury to take on new borrowing.

Biden made no comment as he departed, except to say the group would meet again on Thursday and probably Friday as well.

The CBO, the non-partisan agency that calculates the cost and economic impact of legislation and government policy, says the nation's rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax increases.

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