What sacrifice?

With talk of an eight hundred and fifty billion dollar economic stimulus package, plus the seven hundred billion dollars already allocated for Mr. Paulson's buds in the financial industry, and trillion dollar deficits for the foreseeable future, one might well ask, Where are these trillions of dollars going to come from? Including the seven hundred billion dollars already allocated for the TARP, our national debt is rapidly approaching eleven trillion dollars.

We are not simply going to print money, which would flood the world with U.S. dollars and lead to hyper-inflation, which would further tank the economies across the world, and make our currency useless. The money to fund all this deficit spending, as Peter Schiff, writing in the Wall Street Journal points out, must be borrowed from sources who actually have the cash to loan us. These sources are primarily other governments, like China, Japan, and Saudi Arabia. Each of these countries already owns hundreds of billions of dollars of U.S. debt in the form of interest-bearing Treasury notes. The yield on these notes, according to Schiff, is a "paltry 2%-3%".

In his inaugural address, President Obama spoke of sacrifice, but one might well ask, as Schiff does in his article, who is it that our president is calling on to make sacrifices? It is certainly not anybody in the United States. Schiff notes that the U.S. accounts for less than 5% of the world's population, but we "account for more than 25% of global GDP". Our current economic situation will inevitably lead to this advantage shrinking dramatically and what GDP growth we achieve will be made possible only by massive infusions of foreign financial capital, but not through the financial markets as investment. Rather, the money will flow to our economy through the U.S. government, which, in turn, will borrow it primarily from these and other countries. I have written more about the effects of this over on Cahiers.

It bears noting that the money loaned to us by these countries is money they cannot use in their own countries to provide education, adequate healthcare, transportation infrastructure, etc. When the president of the U.S. himself is forecasting trillion dollar deficits he is doing so in the expectation that these countries will continue to buy Treasury notes, let them mature, take their 2-3% interest only to put the principal and likely the interest right back into low-yielding U.S. Treasury notes. So, it seems, that the expectation is for people in other countries to sacrifice in order for us to retain our disproportionately high standard of living. In the words of Peter Schiff, "We are planning to spend as much as we like, for as long as we like, and we will let the rest of the world pick up the tab."

I readily grant that this is no different than what was being done under the previous administration, even before the meltdown late last year, but this was an administration in which the vice president went on record as believing that deficits did not matter- I'm not sure what he thought mattered. This prompts the question, How is this change? We also need to inquire about the plan to get out of the hole we are in. All I hear is the sound of more digging. It bothers me that the economic team assembled by the new president are some the same geniuses who played key roles in getting us into this current crisis. Besides, like the repeal of the Mexico City policy, this policy cannot be very helpful in our efforts designed to re-build relations with the rest of the world.

A deep diaconal bow to Paper Clippings for bringing Schiff's article to my attention.