Fiscal Discipline: Endorsed by All and Practiced by None

Has anyone noticed the correlation of “fiscal discipline” chatter to rising interest rates? Efforts by the Fed to manipulate rates lower through the outright purchases of treasuries and mortgage securities seem to be failing as the long end of the yield curve continues to steepen. Is the fiscal discipline talk simply an effort to calm bond investors or is the plan deeper?

Consider some recent comments by the President and the Fed Chairman.

Obama Urges Congress To Pass Law Enforcing Fiscal Discipline

(Bloomberg) — President Barack Obama said he is committed to imposing fiscal discipline on the government and called on Congress to pass a law requiring any new spending be matched by higher taxes or cuts elsewhere. Obama, in his weekly radio and Internet address, said that while his initiatives to confront the economic crisis have deepened the country’s debt,

“We need to adhere to the basic principle that new tax or entitlement policies should be paid for,” Obama said.

“We cannot sustain deficits that mortgage our children’s future, nor tolerate wasteful inefficiency,” Obama said.

Earlier this week, Obama was criticized as doing too little to confront the deficit when he ordered his Cabinet to cut $100 million out of the budget

And right on cue, Mr Bernanke followed up with sobering remarks on the perils of deficit financing and fiscal imbalances.

Fed Chief Calls For Plan To Curb Budget Deficits

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.

The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more.

Why Bernanke is Right to be Worried

Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”

These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns.

Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar.

It’s Your Problem, Bernanke Tells Congress

Congress and the people who elected it must decide how much government they want to afford, Bernanke said. Stating the obvious, he went on to say: “Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run.”

Unfortunately, Congress and the people have seldom gotten the balance right. We want the benefits of a large government without paying the costs, just as we wanted a loftier personal living standard than our income could support.

The current economic crisis — which demanded “strong and timely actions,” in Bernanke’s view — has accelerated the day of reckoning for our public and private debt…

Both Obama and Bernanke are intelligent men. I doubt that either one truly believes that unlimited borrowing or printed money create enduring economic prosperity. The bailouts, guarantees and deficit spending were necessary to prevent the economic crisis from turning into something much worse, but the cost has accerlerated the “day of debt reckoning”.

Now that the crisis seems contained and rates are rising, the emphasis by both Obama and Bernanke is on ‘balancing spending with revenues”. Since neither man mentions reduced spending, what exactly do they have in mind?

The way this plays out should be interesting. The President wants his numerous costly programs implemented and Bernanke, a “student of the depression” will be loathe to endorse tax increases on a still very fragile economy. Bernanke tells Congress that paying the bills is their problem and Obama states that new entitlements should be paid for. So what is the solution?

The solution is the only one it has ever been--defer any meaningful action to the next administration, defer the unwinding of the excesses to the next business cycle, and defer the debts to the next generation. The “solution” will keep on working until it doesn’t.

Comments

[The Geoffster:]

What is more important to BHO: fiscal discipline or implementation of his agenda? Invest accordingly.

Jun 09 08:56 AM

[bluesmoke:]

I know I'm beating a hollow drum, but no politician should receive a paycheck without first producing a balanced budget. Sadly, the politicians who need to pass this type of law are the very same who are so fiscally irresponsible.

Jun 09 10:27 AM

[greg weitzner:]

Politics and Economics do not mix its that simple. Politicians incentive is to please now and get reelected soon; the best way to do that is have lower taxes and more spending which can only be funded by a deficit. In an ideal world the tax rate should not be meddled with so constantly but should be at a consistent level and government can determine spending based on consistent tax receipts. Maybe the federal reserve needs more power because it is independent of the government. Either way counter-cyclical fiscal policy is needed and there is no reason at all that our government should be pursuing universal healthcare right now when our economy is in shambles.

Jun 09 11:38 AM

[Speedspirit:]

The title says it all. Its sad and true. Americans have to stand up and demand a balanced budget or the whole country will wind up like California. Nothing less then a revolt will accomplish this. A revolt will only happen when Americans are out of work,homeless and hungry and by then the policies that will be in place will consider motivated individuals a danger to national security.

Get active now and contact your congressman.

Jun 09 09:31 PM

[Moon Kil Woong:]

Truthfully the Fed has not practiced nor endorsed fiscal discipline since its inception. The blowing up of their balance sheet by Bernake is even more inflationary than the deficit because it's unrestrained by law. Likewise it's not transparent where the money is going or being used for. Nor is it transparent where the $8 trillion in debt instrument guarantees have gone not what risk is implied in covering them, nor who will pay. For Bernake to call on Congress for fiscal discipline after endorsing Congress and Obama's stimulus is disingenuous as well.

In respects to the Fed, the mouth keeps talking but the hand keeps printing.

As for Congress and the budget, Neither Republican nor Democrat seem to have any fiscal restraint at all. We have seen this under Bush and Obama now. Both are morally bankrupt in this respects. I suppose it's about time for another political party. One that doesn't believe in partying on the taxpayers money night and day for eternity.

Thanks for the article Bill Zielinski. Indeed we continue to sacrifice nothing and dump all our fiscal ills on later generations. The idea seems now more than ever to be all the rage.

Jun 09 11:23 PM

[Old Rick:]

One minor correction to the (mostly correct) observation of Moon Kil Woong; We had some measure of fiscal responsibility from 1995 to 2000 when a Bill Clinton and the Republican Congress produced budget surpluses. It took a divided government to achieve that. We saw the fiscal failure of one-party rule from 2001 to 2008 and we are also seeing it in spades today. Barack Hussein and the Dem Congress is the worst legacy of the Bush administration.

Jun 10 03:32 PM

[Moon Kil Woong:]

Old Rick: Yes Bush Sr. tried to cut spending after Regan and got a recession. And Clinton did a good job being a moderate with fiscal conservative leanings (thanks to a Republican check). Checks and balances do work I guess. If Clinton can do his work while getting special jobs from Monica in the oval office, it really makes you wonder what is occupying the other's President's time so much they can't perform their duties.

Well I guess I can surmise what happened with Bush Jr. He hardly even went to the oval office and has the worst attendance record in US history for a President. Maybe that's why he took over a week to reply to Katrina and took a few days to reply to 911. Perhaps we should learn not to elect a Presedent that went AWOL from his military service again. Past performance does indicate future behavior after all.

Jun 10 10:48 PM

[Marsden:]

Scottish historian Alexander Tyler:

“Democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years. Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage…”

Winston Churchill:
"The best argument against democracy is a five-minute conversation with the average voter."

Jun 25 01:04 AM

[Living4Divi...:]

too great quotes, marsden


On Jun 25 01:04 AM Marsden wrote:

> Scottish historian Alexander Tyler:
>
> “Democracy cannot exist as a permanent form of government. It can
> only exist until the voters discover that they can vote themselves
> largesse from the public treasury. From that moment on, the majority
> always votes for the candidates promising the most benefits from
> the public treasury with the result that a democracy always collapses
> over loose fiscal policy, always followed by a dictatorship. The
> average age of the world’s greatest civilizations has been 200 years.
> Great nations rise and fall. The people go from bondage to spiritual
> truth, to great courage, from courage to liberty, from liberty to
> abundance, from abundance to selfishness, from selfishness to complacency,
> from complacency to apathy, from apathy to dependence, from dependence
> back again to bondage…”
>
> Winston Churchill:
> "The best argument against democracy is a five-minute conversation
> with the average voter."

Jun 25 05:39 PM