Washington, D.C. is another world. Today the company newsletter, otherwise known as the Washington Post, had an article entitled “U.S. Debt Expected to Soar This Year: $2 Trillion Increase May Test Federal Ability to Borrow” on page one. It explained:
With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world’s appetite for financing U.S. government spending.
For now, investors are frantically stuffing money into the relative safety of the U.S. Treasury, which has come to serve as the world’s mattress in troubled times. Interest rates on Treasury bills have plummeted to historic lows, with some short-term investors literally giving the government money for free.
But about 40 percent of the debt held by private investors will mature in a year or less, according to Treasury officials. When those loans come due, the Treasury will have to borrow more money to repay them, even as it launches perhaps the most aggressive expansion of U.S. debt in modern history.
With the government planning to roll over its short-term loans into more stable, long-term securities, experts say investors are likely to demand a greater return on their money, saddling taxpayers with huge new interest payments for years to come. Some analysts also worry that foreign investors, the largest U.S. creditors, may prove unable to absorb the skyrocketing debt, undermining confidence in the United States as the bedrock of the global financial system.
While the current market for Treasurys is booming, it’s unclear whether demand for debt can be sustained, said Lou Crandall, chief economist at Wrightson ICAP, which analyzes Treasury financing trends.
“There’s a time bomb in there somewhere,” Crandall said, “but we don’t know exactly where on the calendar it’s planted.”
The government’s hunger for cash began growing exponentially as the nation slipped into recession in the wake of a housing foreclosure crisis a year ago. Washington has since approved $168 billion in spending to stimulate economic activity, $700 billion to prevent the collapse of the U.S. financial system, and multibillion-dollar bailouts for a variety of financial institutions, including insurance giant American International Group and mortgage financiers Fannie Mae and Freddie Mac.
Despite those actions, the economic outlook has continued to darken. Now, Obama and congressional Democrats are debating as much as $850 billion in new federal spending and tax cuts to create or preserve jobs and slow the grim, upward march of unemployment, which stood in November at 6.7 percent.
Congress is not planning to raise taxes or cut spending to cover the cost of those programs, because economists say doing so would further slow economic activity. That means the government has to borrow the money.
Some of the borrowing was done during the fiscal year that ended in September, when the Treasury added nearly $720 billion to the national debt. But the big borrowing binge will come during the current fiscal year, when the cost of the bailouts plus another stimulus package combined with slowing tax revenues will force the government to increase the debt by as much as $2 trillion to finance its obligations, according to a Treasury survey of bond dealers and other market analysts.
To normal people, that suggests the federal government ain’t got no cash to spend. But no matter. On page two of today’s Washington Post is an article entitled: “Governors Call for $1 Trillion Stimulus to Offset Budget Cuts.” Explained the Post:
To help offset state budget cuts, a group of Democratic governors urged the federal government Friday to pass a $1 trillion economic stimulus package, significantly larger than the one under discussion in Congress.
The package would help states compensate for cuts to education spending that could cause long-term economic decline, as well as bolster infrastructure projects and benefits programs for the poor, the governors from New York, New Jersey, Massachusetts, Ohio and Wisconsin said in a news conference.
Congress is reportedly considering $675 billion to $775 billion in stimulus spending, but the governors suggested the package must be larger to have psychological and economic impact.
“The scope of it needs to be substantial,” and it must “include this education piece,” said New Jersey Gov. Jon S. Corzine.
The governors recommended that the stimulus plan include $350 billion for infrastructure, including transportation, wastewater and broadband projects; $250 billion for anti-poverty programs such as Medicaid, unemployment insurance, food stamps and child care; $250 billion in flexible education spending to maintain funding for programs from pre-kindergarten to higher education; and middle-class tax cuts.
The money, disbursed over two years, would offset cuts needed to balance state budgets and would serve as a “bridge” until 2011, by which time the governors hope the economy will have recovered, said Massachusetts Gov. Deval L. Patrick.
President-elect Barack Obama‘s transition team has been talking with this group since a bipartisan gathering of 49 governors and governors-elect in Philadelphia last month, said a transition official. Some of the group met with senior transition staff members before developing their formal proposal, the official added.
At least 41 states and the District face budget deficits totaling $42 billion this year, according to the Center on Budget and Policy Priorities.
So, the feds, who have no money, should borrow more money, even though they already have to borrow a couple trillion dollars, in order to underwrite states and localities, which have spent the last few years spending wildly.
This makes no sense. But no matter. It’s Washington, D.C. The budget isn’t supposed to make sense!