Translation of recent comments of two Fed chairmen into Plain English

Copyright 2010 by John T. Reed All rights reserved
On June 9, 2010, Federal Reserve Chairman Ben Bernanke testified before the Committee on the Budget, U.S. House of Representatives. On June 18, 2010, former Fed Chairman Alan Greenspan published an Op-Ed in the Wall Street Journal.

Bernanke has been warning the president and Congress and the american people that we are spending ourselves into bankruptcy and it must stop yesterday. No one is listening other than a few like Congressmen Paul Ryan and Eric Cantor, the Tea Party guys, and NJ governor Chris Christie. Nevada Tea Party supported Republican senate candidate—Harry Reid’s opponent—Sharron Angle, also is in favor of cutting Social Security and Medicare—which are absolutely necessary for reducing deficits and the national debt.

Bernanke is raising his voice and getting more shrill—for a Fed chairman. They have to speak carefully and in code so only the elite understand, lest the world bond and foreign exchange markets panic and make a run on the dollar (everyone in the world who owns dollars or assets denominated in dollars like bonds, bank accounts, mortgages, and so on, tries to convert them to some other currency or asset simultaneously so they can buy hard assets like gold or real estate or canned goods, etc. instead of dollars.

Accordingly, I will attempt to translate the last five paragraphs of Bernanke’s 6/9/10 statement to Congress into plain English below. And below that, I do the same with Greenspan’s comments, although as you will see, former Fed chairmen are far less inhibited than current Fed chairmen and therefore require far less translation.

What Bernanke said What he means
Fiscal responsibility federal government living within its tax revenue means and not borrowing and spending far more than we receive, or will ever receive, in tax payments
Ongoing developments in Europe point to the importance of maintaining sound government finances. Most Western European countries are currently in severe financial difficulty and some are having their credit rating downgraded and are in danger of actually defaulting on their national government bonds—behavior usually only seen in Third World countries in Asia and Latin America.
In many ways, the United States enjoys a uniquely favored position. Our economy is large, diversified, and flexible; our financial markets are deep and liquid; and, as I have mentioned, in the midst of financial turmoil, global investors have viewed Treasury securities as a safe haven. We are only still going financially at this point because we are living on our past laurels.
Nevertheless, history makes clear that failure to achieve fiscal sustainability will, over time, sap the nation’s economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability. The U.S. government is a financial runaway train. If not stopped immediately, it is going to crash and throw us into a horrific financial crisis: either another Great Depression or hyperinflation
Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession. If you think things have gotten better since the 2008 stock market crash and TARP failures, you ain’t been looking at the deficit and national debt, baby. We have gone nowhere but down, way down!
The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets. We can use the recession as a partial excuse for the huge deficits and increase in the national debt, but not all.
As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years. If there are no more bailouts or stimuluses, at least the deficit will shrink a little, but not enough to make a damned bit of difference from a big picture standpoint.
Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path. But the projected slight shrinking of the deficit—assuming things get a little better in the economy—don’t mean nothing really. We have to end the deficits completely right now and start running surpluses right now to lower the national debt as a percentage of Gross Domestic Product.
A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time. You guys in Congress and the Oval Office are not only running us off a cliff financially, but you have the pedal to the metal accelerating our arrival at the cliff as much as you can. This is insane! Stop it right now!!
Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits. Social Security and Medicare alone are going to bankrupt us when the Baby Boomers start collecting in 2011.
Notably, this year about 5 individuals are between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, this ratio is projected to have declined to around 3. You would have to crush the young to financial death with taxes to get enough to pay Social Security and Medicare for the Baby Boomers.
In addition, government expenditures on health care for both retirees and non-retirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes. And it’s not just the Baby Boomers retiring, our crazy bureaucratic health care system costs grow far faster than inflation. We would go bankrupt even without the Baby Boomers; faster with them.
To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges. You have to cut federal government spending 40% across the board right now! Plus maybe raise tax revenues a little. That would probably require firing 40% of all government employees, both military and civilian, plus cutting entitlement payments 40% to retirees and persons receiving federal medical care benefits.
Achieving long-term fiscal sustainability will be difficult. But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth. You guys have no choice about whether to cut spending 40% right now. If you wait, it’ll have to be cut 50% then 60% and/or we will go bankrupt which will devastate incomes, asset values, and tax revenues down to some new, undreamed of, much lower standard of living and government services.
Thank you Have a nice freaking day you scum bag demagogues. I am now on the damned record for the umpteenth time warning you and the world about this so don’t try to blame me when the hyperinflation or deflation/depression hits the fan.
What Greenspan said What he means
We cannot grow out of these fiscal pressures. Unlike prior post-World War II recessions, mere economic growth will no longer reverse the national debt. Very simply, the ratio of the national debt to the nation’s Gross Domenstic Product has grown so large that the necessary growth rate would be mathematically impossible
The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the necessary real resources necessary to meet existing commitments. The post-Baby Boom Generations X and Y are too small to carry the Baby Boomers financially. Furthermore, their rate of becoming more financially efficient is not likely to compensate for their small numbers. [Efficiency gains stem mainly from high tech new start-ups, organizations that are not encouraged by Obama’s anti-business, anti-growth policies.]
We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficits indefinitely. Eventually, the world bond market will say, “No thanks” to the sales of U.S. bonds. Current account is the net of our exports minus our imports. It has long been negative which requires us to sell bonds or other assets to the countries whose imports we are addicted to.
Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. Like I said in my Bernanke translation, 40% cuts. I got some feedback that 40% is wildly exaggerated. Bullshit! This year, the federal government will spend $7 trillion and collect $2.1 trillion in taxes. If the bond market stops buying U.S. bonds, the U.S. government has to reduce is spending for the year to $2.1 trillion. The only way to do that is to default on the $3.25 trillion bonds coming due this year and to cut the $3.6 trillion of entitlement and government operating expenses by 40% (60% x 3.6% = $2.16 trillion). Q.E.D.
I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues. Tax increases would take money away from the private sector. The private sector is the source of all economic growth. The current U.S. tax base is less than half the population as lower and middle class taxpayers have gradually had their taxes decreased to zero other than Social Security. U.S. tax revunues have been about 18% of GDP regardless of which party is in power and what the maximum tax rates are at any given time. When rates are raised, taxpayers change their behavior so that they avoid the higher rates. The notion that raising tax RATES raises tax REVENUE is a Democrat myth. Tax rate increases more often actually lower tax revenue.
The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate. In the past decade, the U.S. has been unable to cut any federal spending programs of significance. Like I said, default on the national debt AND a 40% cut in spending, primarily entitlements. The problem is too big for 5% or 10% cuts in spending or minor adjustments in entitlements. The U.S. Congress and president have never made the sorts of cuts that are now required.

Bernanke is trying to call the alarm without causing a panic. I and Greenspan are more directly telling the American people and the Congress and President, as New Jersey Governor Christie recently told his constituents, “The day of reckoning is here.”

Since the Congress and president are going to do absolutely nothing to stop the “runaway train,” I highly recommend that you read my new book How to Protect Your Life Savings from Hyperinflation & Depression and follow its advice—fast —before it’s too late!

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