We're at war. The WoT is expected to last for the next 50 years. When have we ever paid attention to deficit reduction during a war?

Sure, we have people who care about the issue, but for most it's a low priority.

And if you want to talk about reducing the deficit, you *can* talk about how you're going to make the economy go so well that the budget will be balanced if you just don't increase spending too much. There is a technical term in economics for plans like this, we call them "fantasies". or you can talk about how you're going to cut social security or cut military spending. In an election year....

Does that say enough?

Clinton came into office and declared deficits for 50 more years then raised taxes. Reublicns took over Congress, lowereed taxes and cut spending. Govt revenues rose and deficit decreased. Public had prosperity.

Show us the nation that has taxed its way to prosperity. Show us how behavior remains static when taxes are increased.

Kerry has promised $2.2T in new spending. This, plus the deficit will be paid for by taxes on those making over $200k. Even at the 70% rate there ain't enough of them to pay for the spending.

Looks like the Middle Class is gonna pay more. The bottom 50% of tax payers contribute 4% of all revenues. They ain't likely to pay any more.

Deficit during war is not unusual.

We could always cut some spending.

George W. Bush is responsible for increasing our national debt. John Kerry will almost certainly be worse. It is merely a matter of picking the lesser of evils. And yes, we are at war with militant Islamism. This explains some of our troubles---but not all of it. Politicians still want to curry favor with voters. The irony regarding President Bush is that he's gotten little in return for giving in to the congressional spendthrifts. Polls suggest that only the Democrats have benefitted from his capitulation regarding the senior drug benefits. He would be far better off politically if he had stood his ground. The President is lucky that he’s running against such a psychologically unbalanced clown as Senator John "Christmas in Cambodia" Kerry. A saner candidate might be able to beat him.

"The irony regarding President Bush is that he's gotten little in return for giving in to the congressional spendthrifts."

Gulp, let's try this again:

The irony is that President Bush has gotten little in return for giving in to the congressional spendthrifts.

When Kerry and the Dems start talking SPENDING cuts, instead of tax increases (on the rich! -- the ones who create new jobs!), then there might be some reduction.

The Dems need to lose and start being more concerned about excessive spending. Such a philosophical change won't happen easily, though.

Clinton started, a bit, but was led by the Rep Congress, not a change in Big Spending, Big Taxes in the Dems.

How can you support Dems on this issue?

I hear you talk about the Dems lacking credibility on government spending relative to Republicans, and I have to say that in the past I would have agreed with you.

But to my immense disgust recent history does not support your thesis, even factoring in the cost of Afghanistan and Iraq.

It seems like the only time we make progress on the deficit these days is when we have a Democrat in the White House and a Republican congress.

The good news is that the probability of this result has been steadily increasing.

Was George Bush born with some sort of silver E ticket in his mouth that prevents him from being held accountable for ANYTHING he does in his life? From the National Guard to Harkin Energy to the Texas Rangers to the deficit to the invasion of Iraq: no outcome of any decision George Bush makes in his life is his responsibility or (dare we say it?) his fault.

Right? Because I have a very hard time understanding how "conservatives" can say that, well, yeah, W ran up a 445 billion deficit (and more to come, since the costs of the Iraq war aren't fully known yet), but we have to elect him again because we don't trust the Democrats on finances. Personal responsibility for one's actions indeed.

Cranky

The "surpluses" were never anything other than "projected"... we've been in deficit mode for decades now. As to the current mess, it's easy to forget that we have allocated or spent some $300 billion on 911, Afghanistan, Iraq, economic boosts, etc., all of which followed a market crash and recession (both inherited) that were producing lower revenues. Also important to reiterate that the projected deficits are trending back to neutral as economic activity rises, in large part due to Bush stimulus.

As to Kerry's plan as listed on his website, note that he proposes to use tax revenues to create new government jobs which will produce even less in new tax revenues. Do the math here people -- we are spending our way into a growing hole when we increase the size of government payroll.

Gene Sperling was asked about this on ABC's This week. He said Kerry has pledged to sacrifice some of his spending proposals if that's the only way to reign in the deficit. Gene has been around this block before - when HillaryCare was sacrificed for Rubinomics. Deja Vu all over again?

These comments must be a joke. The path to economic ruin started when FDR passed SS. It doesn't matter who the President is or what party. ANY pyramid scheme ends in ruin. You'll all get deficit reduction when the government fails to pay SS one month because there's no money in the till. If you really want deficit reduction, get a gun and storm your Congressman's office demanding an end to welfare (SS). Otherwise it's all hot air and BS.

Talk of tax cuts "costing" the government money is offensive. It doesn't cost anything to make do with less, as all of us who have budgets know. When is the Federal Gov't going to make do with less?

Since either Presidential candidate is likely to face a Republican Congress, Kerry still has the edge on defecit reduction. Kerry's $1.3 trillion is less likely to be passed that Bush's $1.3 trillion.

A pox on both your houses. The two parties are like a pair of corrupt, drug-addicted Hollywood lovebirds who distract their gullible fans with bogus spats over trivial issues.

Neither party will address the social security debacle or the financial burdens created by increased longevity and advances in medical technology. Neither party has any real, credible plan for expanding health insurance. Neither party will address out-of-control medicare spending. Neither party will give the public straight talk about the need to make hard choices about which elective medical procedures should be covered.

And each of our la-la-land lovebirds has its own filthy little addiction: the Repubs will not touch corporate welfare, the energy bill hogfest, or farm subsidies. The Dems will not touch the trial lawyers or public sector unions or the educationists (not to be confused with those who actually teach children).

Neither party will address openly and honestly the absurdity that is affirmative action or the atrocity that is the death penalty. Neither party has anything like an intelligent foreign policy strategy for an Asian Century in which we are stuck with an extraordinary dependence on Asian creditors and an Asia-centric security environment in which our European "allies" cannot help (or hurt) us in any meaningful way.

A pox on both your wretched houses. The sooner a fiscally-sane, truly progressive (in the proper sense of the word) and Asia-focused new party emerges, the sooner we can end the two parties' ridiculous charade.

Blogad: "Don't Pardon Big Tobacco"

You know, these guys are on Hit and Run, too. How goofy.

Dan -

You have seen what you get when you have a Republican congress and a Republican president- massive fiscal failure. To the commenters who blame the war for the deficit, you clearly don't know the numbers. This Republican-controlled government has gone crazy. Cutting taxes while growing discretionary spending at a monstrous rate. The best thing that could happen for us, fiscally, is to have a Democratic president and a split or Republican-controlled congress. Then, the Republicans will do everything they can to kill spending, but only because they want to tie the hands to the Democratic president and proclaim him/her a tax-and-spender. The Republicans have shown their true colors now. To ignore it is to choose to be willfully ignorant.

Do you think the Republicans in congress would have allowed spending to grow so much over the last 4 years if Gore were in the whitehouse? No way.

The reason we had something resembling a balanced budget in the 90s was not divided government. It was Ross Perot. The man successfully made the budget an issue and scared enough voters into believing it was in their best interests to do something about it. Clinton understood the voters cared about the budget and allowed it to be balanced.

Look around the country. Does it look like anyone gives anything about the budget? No. because nobody is out front on this issue.

If I were Kerry, I would ask the question -- has this administration really made us more secure? (Howard Dean is asking the right question, even if it is reported as just bitching about Iraq.) And then I would tie this admin's general recklessness and one big package. Because the same hive administration mind that allows budget irresponisbility, is the one that goes into Iraq with no concept of anything other than best case scenario, that does not protect our seaports and our borders..."Help is on the way" is a great slogan for this philosophy, by the way. Too bad the message has been muddled lately.

Bush is very vulnerable to a candidate who is willing to contrast his prudence, experience, and willingness to work and play well with others. Pity all we seem to hear from Kerry these days is that he served honorably in Vietnam, and anyone who says otherwise is a dirty stinking Karl Rove zombie toool.

Moderate,

Time to get serious about a third-party movement. Platform IMHO should be simple but bold and stress five key planks:

1) Fiscal sanity / reduction of our vulnerability to Asian creditors

2) Immediate expansion of health insurance to all by making individual coverage mandatory (like auto insurance)-- rates will become affordable to individuals when the pool's sufficiently large;

3) Immediate expansion in federal assistance with tuition, paid for with cuts in farm subsidies and corporate welfare

4) Lifting all immigration curbs (aside from security ones) for anyone with a college degree; overhaul of existing immigration law

4) A complete reorientation of our foreign policy toward the rising Asian (and Eurasian) powers and away from can't help, can't hurt continental Europe.

Target voters include

-- military families and veterans (ca 25% of voters-- aim at 40% of this vote)

-- college-educated non-military moderates and independents (ca. 15% of voters-- aim at 60% of this vote)

-- Asians and latinos (ca. 10% of voters-- aim at 70% of this vote + some new voters brought into process)

The above would sum up to 26% of the national vote + some new voters from the Asian-American and latino communities attracted by a serious outreach effort and a focus on immigration, health insurance and the Asia-centric foreign policy. So add another 1-2% for these voters.

Additionally, if this party can attract maybe 10% of the 50% of the electorate that's not college educated, military, or Asian or latino, then add another 5% and you get to 32-33% of the popular vote.

Now here's the compelling part: immigrants, military and educated independents are disproportionately concentrated in the largest and the fastest-growing states: CA, TX, FL + AZ, CO, NM, NV + WA, OR. This coalition has a very strong chance to win a plurality in the above states = va. 150 electoral college votes. If it can swing immigrant-rich New York and NJ and yuppie/independent-rich NH and ME, then we're looking at another 60 or so electoral votes, which in a 3-way race might just be a plurality.

Even if we lose, the nation wins due to a renewed focus on the deficit and a new focus on powerful ideas such as mandatory health insurance, immigration reform and expansion, and an Asia-centric foreign policy.

timshel has it right. George Bush's record on the deficit is bad, and has accelerated in badness over time. This is in contrast to what he said he would do in the 2000 election; his promises then were tissue paper thin lies, and they've been played out, and paid out.

Meanwhile, for an example of fiscal sanity in Washington, we need only cast our memory back to the late 1990s in order to see that Democratic president-Republican congress is the perfect formula for spending policies that don't wreck our future. And with the post primary GOP Senate candidates coming on strong in places like South Carolina and Colordao, all chances are that the Republicans will have control of both houses come January.

There is a way to get a good policy. And that's by structuring government so that the impulses of a single party cannot run roughshod over the check book.

One other point. Part of the reason Kerry hasn't made spending control a bigger part of his campaign (other than the fact that it IS a campaign, after all) is that Clinton's sterling record and Gore's not completely made up proposals got him just about nothing in the way of votes in 2000. I saw a study that most Perot voters chose Bush. So if even they didn't notice or didn't care about Bush's trainwreck policies, we can conclude that there just isn't a constituency for balanced budgets.

Warren Rudmann and Gene Sperling are chopped liver next to "Candy for Everyone."

But reducing the deficit is only one of several core planks that would support a third-party candidacy. The deficit is a core issue for the educated independents and moderates, but the real electoral gold is to be found by focusing on health insurance and the needs of military families and latino and Asian immigrants located in the West, southwest and Florida.

Obviously, health insurance is a huge issue for Americans-- arguably, the domestic issue. Just as obviously, the two parties have failed to deliver a serious, realistic plan for universal health insurance. Making it mandatory would make it affordable and also workable.

Secondly, no constituency has been worse treated in this country than military families. Of course they're proud to serve, but they deserve significantly higher wages and more benefits and, above all, a coherent foreign policy and a roadmap for Iraq. Focus on treating the military and the vets with the respect and care they deserve and you can win a large bloc of votes easily.

Thirdly, the other large group that's practically invisible politically-- and seriously misunderstood-- is the new immigrant groups from Asia and Mexico. The parties don't take them seriously. Immigration policy is a mess. The two parties' foreign policy ignores the obvious fact that the world is no longer Euro-centric and our domestic policy ignores the fact that Americans of non-European origin will soon be a majority. Get serious about asians' and latinos' concerns and you have a party that can sweep the fastest-growing part of the population (they're already >25% in Calif, southwest, and Texas).

Jack,

Why is it that those who advocate violence generally lead from the rear? If you feel so strongly about storming your congressman's office, well then you first. Until then, shove your talk of guns.

DT,

The simple fact is that if Thomas Jefferson were running against GWB the RNC talking points that you would be repeating would accuse him of having out of wedlock black children. If Abraham Lincoln were running against the RNC, the story would be that his history of depression made him psychologically unbalanced and unfit to be President.

As a matter of fact, both sets got used against McCain in 2000. Push polls were done suggesting that McCain had out of wedlock black children and the Bush campain openly spread the rumor that his temper made him too unbalanced to be President.

You sold your soul a long time ago DT, I hope you got something decent for it.

> Kerry is more believable only because he
> doesn't even feign interest in spending
> discipline.

How about, Kerry is more believable because Bush has failed in every possible way in regards to the budget, whether you are a liberal or conservative? And therefore it isn't possible for for any candidate (McCain, Dole, Nader, Dean, Kerry, Jefferson Davis) to have less credibility than George W Bush?

Until I hear some of the "fiscal conservatives" take on this topic I am afraid I have a difficult time taking any of their nuanced economic analysis very seriously.

Cranky

I'm very surprised to read the partisans on this board dragging out all the same, tired old weapons against each other. The article was pretty clear about the lack of difference from either side on this topic. This should, but won't, be a meaningful election issue.

With political polarization so high, issues like the CBO report on the tax burden shift to the middle has had less impact than one might expect in other election years. With voters so stubbornly entrenched, candidates probably feel the need to bribe them with expensive promises, and ignore deficit reduction.

Lex, your cause is noble - mine is not. I'm calling for all-out tax evasion (just as soon as I change my e-address).

Oldman - DNC proxies are now playing the same game. Less of the southern gothic tinge, more of the left's version of black helicopters ("cooked up in Texas", blood-fer-oil etc).

All's fair by me. But if spitball outrages you, are you willing to call TeddyK, Mikey and MoveOn et al. on their own slime game?

Oldman:

I'm not sure anyone would sell their soul for the opportunity to put up multiple posts on personal websites.

To the commenters who blame the war for the deficit, you clearly don't know the numbers.

Convienantly ignoring the democratically controlled Senate from mid 01-early 03.

The best thing that could happen for us, fiscally, is to have a Democratic president and a split or Republican-controlled congress.

So you are supporting republican candidates for Senate and Congress while supporting Kerry? Even the ones who voted for those "monstrous" increases in spending & cuts in tax rates?

I would split my ticket willingly: Bush for pres. + hawkish liberal Dems for Congress. Trouble is, can't find the latter anymore.

Oh and, thanks to the two corrupt parties' gerrymandering, my district's now overwhelmingly Republican. Oh well. Little did I know that to vote Democratic in my town you have to be a gentrifying racial pioneer.

Now I know what Gore means by saying my vote "doesn't count." He just got the cause of it wrong, 's all.

hOmi,

So you are supporting Republican candidates for Senate and Congress while supporting Kerry? Even the ones who voted for those "monstrous" increases in spending & cuts in tax rates?

This is exactly what I'm doing, and the only sensible thing I can recommend. Try to knock off Republican borrow and spenders in the primary if you can (too late now, but remember in '06), but vote Kerry for President and straight Republican for everything else. We can at least knock the deficit in half if we make sure the government can't agree to do anything.

Lex - that's great news. If your district is no longer "in play", you'll likely be spared the ceaseless reels of misleading campaign puke.

wuz - I don't think the media have yet managed to figure out how to segment their product and advertising to the congressional district level. I still get puked on every time download the Times or tune in to CNN or NBC.

- a pox on both your houses

homi -

So you are supporting republican candidates for Senate and Congress while supporting Kerry? Even the ones who voted for those "monstrous" increases in spending & cuts in tax rates?

I will do just that, if I'm convinced that Kerry will win. If not, I'll try to weaken the Republican 'mandate' by voting Democrat across the board. If Kerry looks strong to win, I'll vote for Kerry and then Republican for everything else. When Republicans face a Democratic president, they start to behave more like what they say the party represents. At the end of the day, I want gridlock and a president who is not afraid to use the power of the veto.

Go to the govt site that details budgets. Look at the budgets for the last quarter century. Then figure out if the budget is more responsible during democratic or republican presidencies.

I just can't get worked up over the deficit, and I think this position is shared by most voters. Fiscal discipline is nice, and I'm in favor of it - In fact, I don't know anyone who is against it. The problem is that fiscal discipline takes a back seat to so many other issues. For me, what matters most is the WoT. My probability of voting for Bush is p = .9 because he is the best candidate on that issue. I don't really care where he stands on the deficit because if whatever happens to the national debt can be fixed later; problems with the war have a greater and more immediate impact.

Can anyone think of a reason to commit political suicide by cutting spending? We are caught between "Man the deficit is high" and "as long as they don't touch mine". Politicians know the public is hooked on mainlining money, so, why stop? I know what the practical reasons are but...well, you know the rest.

Here's why fiscal discipline's so urgent. I'm not a currency or debt spec ialist, but I do know that

-- something like 50% of our public debt is owned by the central banks of Japan, China and South Korea.

-- those bankers need not invest in Treasuries. They can earn good yields now on euro-denominated public debt whose credit risk isn't worse than Treasuries';

-- euro instruments do not have the same degree of currency risk offered by US instruments, owing to persistently high oil prices.

The above create risk of a perfect storm for US public finances in which oil prices keep rising, causing the dollar necessarily to fall and inducing the Asian central banks to switch out of increasingly depreciated Treasuries, thereby driving interest rates higher and yields lower. Which causes still more redemptions of US Treasuries, and down we go.

Yes, it can happen here. Best to reduce our risk now by reducing our dependence on Asian capital.

http://afr.com/articles/2004/06/10/1086749836166.html

Bill Gross, superstar bond fund manager for PIMCO, shows how Treasuries are way overvalued, propped up mainly by the Asian banks:

http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2004/IO_04_04.htm

Exhibit II displays a comparison of 10-year government yields as a function of their “current account balance as a % of GDP.” The straight line is a PIMCO drawn “best-fit” regression line, which defines the statistical correlation between the two as of year-end 2003. The logic here is that a country running an annual “deficit” with its trading partners should be required to pay higher interest rates relative to those that run a surplus. While geopolitical and currency reserve status considerations ultimately affect the number, the correlation is a good one, not just for 2003 but for the past several decades as well.

If so, the attractiveness of a country’s bonds can be viewed by the “distance” from the best-fit line. Germany, as represented by “E.U.” is smack on top of where it should be given its mild current account surplus. The U.S. on the other hand trades at yields approximately 100 basis points less than where the model suggests they should. For those wanting to play the reserve status/geopolitical “get out of jail free” card, let me point out that U.S. yields as of March 2004 were at near historically negative spreads using this methodology as shown in Exhibit II’s right hand chart.

There seems little doubt to me that Japanese and Chinese buying of Treasuries, combined with the Fed’s historically low interest rates which pay no respect to currency support mandates normally required of a current account debtor nation, are the key culprits. Should either of these conditions change, U.S. yields move higher. In Germany and the U.K. on the other hand, value is much more apparent and future bear markets less likely.

lex-- must be a cold day in hell because I actually strongly agree with your first two comments abouta pox on both parties.
Sorely needed Smart Independents (+) -- for three to four decades.

Lex & Alex -

Your idea for a Smart Independent party is not an absurd idea in theory; however, in fact. . . . I would be surprised if your independents won a single election. Deficits MIGHT be problematic at some point in the future (how far out nobody can say). This can't possibly compete with Republicans saying "we need more spending on defense in a time of war" and Democrats saying "Granny needs help paying for her presctiption drugs."

It is said that politics is the art of the possible. I suggest that everyone who is frothing at the mouth about deficits remember this.

Arguing about deficits is like talking about the weather - it accomplishes nothing.

Fact of the matter is, everyone - including the voters - are responsible for deficit spending.

Democrats have no interest in deficits beyond their political value, to wit, they see them as reason to increase taxes or oppose proposed tax cuts.

If deficits mattered to Democrats, they'd favor reductions in spending on programs other than the Defense Budget.

Sadly, my party - the Republicans - have no interest in deficits either. Oh, they'll talk about cutting spending, but since 1994, they've become far too comfortable being in the majority to do anything which risks that status - and they clearly see cutting budgets as threatening their majority.

Congress deserves its share of the blame because they do nothing to reduce spending; President Bush deserves his share of the blame because he's refused to demand reduced spending & issue vetoes to back up that demand.

There are extenuating circumstances for Bush - it's quite likely that he figured some time ago that he'd get enough grief from the left for fighting the War on Terror & decided not to spend any of his political capital on veto fights.

Fat lot of good it's done him - the Democrats are getting pretty close to the spending they want & complaining as if real cuts have been made.

All in all, though, Democrats complaining about deficit spending is really laughable, given 40 plus years of absolute indifference to budgetary discipline when they controlled one or both branches of Congress.

When Democrats complain about deficits, read "We can't stand tax cuts; that's our money & we want to spend it."

There was an interesting survey done some years ago (I don't remember when or by whom) which showed that every tax increase was offset -- by an even bigger spending increase. The author of the study tracked tax increases and found that for every dollar of increased taxation, spending increased an average of $1.16. Apparently Congress felt compelled in these instanaces to mollify voter anger at higher taxes by increasing spending. A politician's seriousness in deficit reduction can be measured by his position on spending - only those who call for substantive cuts in programs "where the money is" (not just defense or "waste, fraud and abuse") are really serious about the deficit.

BradDad is right - we are all responsible for the National Debt. My prior comments stand: The deficit / debt will not be "fixed" until there is political will to do so (and don't expect that until there is a crisis).

One day, I'm sure Dan will present to us his theory of accountability and presidential politics. Of course it will probably be after the election, but oh well.

I was thinking during Arnold Schwarzennegger's run to the California state house about the old saying that most modern political trends in this country start in California. For a while I thought this might mean more prominent actors running for public office with their last hit movie still in the theaters, or more politicians smoking cigars.

But I think what it really means is that Californians' attitudes toward government are where the rest of the country is heading. Where it is heading is that the American public expects and demands much more government than it is prepared to pay for.

There are people, it is true, who would gladly do away with Social Security and Medicare, while refusing to consider tax increases, and other people who think big tax increases (usually on someone else) would be just great as long as we cut no spending programs. But the great majority of the public wants neither tax increases or spending cuts, and gets very upset at the thought of either.

You can blame the politicians for this -- and I do -- but at bottom they are where the public wants them to be. The problem with this is that the public is wrong; it does not appreciate the risks of our current fiscal position and does not trust any public figure enough to believe warnings about those risks or endorse measures to avoid them.

American politics today is focused on getting through the next election and worrying about what happens afterward, afterward. George Bush has made it abundantly clear he has no intention of challenging public attitudes toward spending; John Kerry promises to spend every cent of his tax increases and then some. They could be challenged, as the deficit spending of the 1980s was challenged however imperfectly by a group of mostly Republican Senators. But that group of Senators is withered by age and retirement, and nothing has replaced it.

Campaigning against the deficit in the 1980s was never a big vote winner for most politicians. Until prolonged deadlock between the Republican White House and Democratic Congress made it seem that the government couldn't get anything done and gave Ross Perot his opening, the best most anti-deficit politicians could hope for was to not lose too many votes. Some of them still took risks then, risks the current generation of American political leadership is unwilling to take or even think about. I don't see that changing, not until we experience the first of the inevitable crises our fiscal situation will produce, and perhaps not even then.

Oldman - up yours. Reread my post. My point is that there has NEVER been a balanced budget since SS was passed. If you really care about the balanced budget and deficit reduction the ONLY way it will happen is at the point of a gun. Ain't gonna happen any other way. And shame on all of you who think the budget was balanced during the 90's. Never happened.

Ben, here's an analogy to your "tax increase/spending increase" scenario (exposing my geek factor).

As better designed computer hardware improves speed and performance, software writers add more features and services, essentially countering the hardware improvements. The resulting suffocation is referred to as "bloat". Hardware designers then set out to build around these new performance hindrances. Users never really experience the maximum advantages of either.

No customer mollification there - just an uncontrollable urge to utilize available resources. More analogous to congressional behavior, I believe.

> One day, I'm sure Dan will present to us his
> theory of accountability and presidential
> politics. Of course it will probably be after the
> election, but oh well.

Jor,
There is a famous paper in the world of management education called (approx) "On the folly of rewarding B while hoping for A".

That pretty much sums up the surreal nature of these discussions on the conservative and libertatian economics blogs. The Bush Administration came to power claiming to be "adults" who would return "prudence and accountability" to the White House. They have been in office 4 years, and the results of their prudence are in evidence for all to see.

Yet our economic betters presume to tell us that there is "no difference" between Bush and his opponents, and with no other choice they will be forced to vote for Bush.

Here is a hint: when you are at sea level, pretty much the only lower place on earth is Death Valley.

Cranky

Of course deficits matter. Sooner or later, a nation with a low savings rate and massive deficits will be forced to pay significantly higher interest rates on its foreign debt, which will of course cause a sharp increase in domestic interest rates as well.

So let me try to make the scenario a little more graphic. Spiraling oil price = decline in value of dollar (see 1973). Major oil producer nations (beginning with Russia and Norway) cease denominating oil price in dollars and switch to euro. Euro gradually becomes world's reserve currency, putting further downward pressure on the dollar.

As the dollar sinks to its natural level of about $0.50-0.60:1.00 EUR, three developments hammer the American voter:

1) gas prices, in dollar terms, soar. Note that this price increase is not felt worldwide, only in the dollar zone, and therefore does not stimulate the usual boomerang reaction that sends oil prices sharply downwards.

2) US inflation kicks up again, causing rapid and successive increases in Fed reserve rates.

3) mortgage rates soar, causing coastal housing market prices to plunge and coastal homeowners' equity to drop.

4) consumer spending, which currently drives 2/3rds of US economic performance, drops sharply, causing recession.

We've already seen the beginnings of #1. What is not apparent-- but soon will be-- to most Americans is that there is now a credible reserve currency alternative to the dollar. High deficits mean a weak dollar means outflows of Asian capital means higher interest rates and high inflation. Is that a little clearer?

Does the record perhaps suggest that divided government does tend to restrain spending? After all, Clinton faced an increasingly Republican Congress, and brought about a surplus!

Yes. PQuincy, but that was *100%* due to the GOP Congress. As seen by the fact that, when the Demonocrats took over Congress in 2000, they immediately passed insane budgets.

So we are back to a lesser of two evils choice on government spending: and that makes it easy.

http://www.hathaby.net/weblog.php?id=P2234

Arnie, it's only easy for those voters camped out at AEI (like yourself).

The American Enterprise Institute for Public Policy Research is a Bushie tank. They're one of the chief architects of his foreign policy, where Bush critics draw their harshest comments.

Try another source.

There are many arguments on why the deficit needs to be trimmed, but, unfortunately I have yet to see anything that weans the taxpayer off spending on him/herself. I do not think that anything will be done until the house falls down.

Added: Agree re current account deficits remarks made by lex.
One key difference with lex = I don't believe in outsourcing /sharing technological knowledge unless citizens or sign on as staying here to become citizens. He thinks should take in share and persons can then exist to their countries to use it.

I think and have thought so for a long time that we need to be paid a form of "tribute" for military protection of countries. I think we're fools not to and to factor a percentage into treasuries. That would alter some of the deficit figure.

Lex, I'm interested in your ideas about asian banks. This is only gradually becoming the common wisdom.

Here is a question -- could any of that be happening as part of a conscious diplomatic policy on the part of china or others? That is, perhaps they are doing things that do not maximise their income but that might work as economic warfare?

How much would japan have been willing to pay before WWII to cripple our economy? To some extent the chinese can do that by supporting the dollar. Every industry we lose because the dollar is strong is -- when the bad things you list happen -- an industry that we not only can't build exports with but also that we must still do imports at high prices. Computer chips, anyone? And it wouldn't be the very best time to raise capital to start new industries, unless foreigners see the great opportunity and choose to do so.

We've been claiming we're the last remaining superpower. But if the time comes that we can't afford to pay for a dinosaur of a military, then we'll be just another regional power.

If asian banks are holding the bulk of our dollars it's because they want them more than the europeans etc, isn't it? Could they be ready to take a loss on dollars to get other goals that are worth the price?

Is there any objective hint that might tell us whether they're doing something like that? Or is there a way to tell that it wouldn't work?