The Great Escape

There can be no more sobering illustrative example of these realities than today’s USA, where President Obama’s first budget unapologetically anticipated adding $10 trillion in deficits through 2017, led off by $1.5 trillion of excess spending this fiscal year. That’s a whopping 12% of GDP, or another thirteen-digit number to be added to a steeply-climbing national debt that already exceeds $11 trillion, or 70% of GDP.

A cartoon of Uncle Sam with upturned hat asking: “Brother, can you spare a trillion or two?” (Canadian Business - February 16) stays in my mind. There’s also the quip about the US becoming nothing more than a pension (and healthcare) plan with an army. Sadly, there could be a ring of truth to both.

If there is some accompanying comfort, it might be that the U.S. is not alone. Britain’s predicament, as I could realise at first hand, seems every bit as dire. The same is true for most other OECD members – and also for Canada. Though our fiscal position remains much stronger than most, there is widespread questioning of the federal government’s belief we can be back in balance by 2013. Regardless, this will take that much longer than the target recovery date if now-nationwide provincial deficits are also included. (STOP PRESS: Just extended to 2015 by Finance Minister Flaherty who has also revised this fiscal year’s budget deficit estimate to $55 billion from $50 billion.) Globally, add the transfer of the debts of troubled banks and others to a public sector launched on a well-intentioned and major supportive stimulus spending, and the burden of public debt becomes all the more formidable. Then add an extravagant era of private-sector debt overhanging almost all OECD economies, and you have an even more haunting spectre grippingly illustrated by an Economist front cover (June 13) of a baby chained to a massive ball of debt labelled “the biggest bill in history”.

The immediate risk emerges as disinflation, if not deflation, as wages shrink and energy prices fall from their peak levels of a year ago. I concede it may take years for these conflicting forces to play out, but I’m still troubled by the prospect of all that money chasing insufficient goods and services and our politicians succumbing to expediency. Agreed, raising taxes and cutting back on government spending are not usually the best way to win elections. (Not surprisingly, Gordon Brown and Stephen Harper are both apposed to such measures.) There are also finite limits to how much governments can borrow. Monetizing the deficits may sound the better solution, but this is simply a glorified word for inflating the system with cheapened money, thereby diminishing the burden of public debt.

Michael Graham, from his newsletter - The Great Escape

Jacoline Loewen