Steve Coll on Worst-Case Scenarios

Reminding us that Obama will likely be the first President to lord over $1 trillion deficits regardless of what he does, Coll notes the irony of the R’s having rented all the deficit hawk costumes in D.C.:

Republicans are already signaling the first post-election tactics off their shattered ideology—harping on the deficit. This is beyond ironic, of course, since the Bush Administration will have left office having overseen a rise in total U.S. public debt to its highest levels since the Truman Administration. The Republicans have left the Obama Administration considerably less fiscal running room than would be ideal at the outset of a severe recession, and now they intend to complain about the consequences of their own legacy.

And no wonder.  Coll’s dour friends at the New America foundation are talking serious Keynesian jack to put the economy on an even keel:

Meanwhile, back in America, the jobs report last Friday is the latest indicator that we may face a very deep and perhaps very long recession. Let’s hope not, but how bad might the worst case be? During some internal discussions at our think tank last week, about the upcoming debate over a stimulus bill to be taken up by the lame-duck Congress, I was startled to hear some colleagues who had been prescient about earlier aspects of the crisis suggest gloomily that a stimulus as large as five or even ten per cent of G.D.P. might be required before this mess is over. The economy is about $14 trillion in size, so that’s potentially more than a trillion dollars beyond what has already been expended on rescue measures.

My first thought, was “nfw,” or at least the less familiar construction of “plnfw” (please, lord, nfw).  But then I thought of David Rosenberg’s thoughts I posted a couple of months ago.

Think of it this way:  at some point, equilibrium requires the household savings rate to return to its very consistent, historical, pre-Reagan level of 8%.  Let’s say hh savings is up from its recently slightly negative levels to 2% today, almost all of the recent stimulus checks having been banked or used to pay down credit card debt. 


Let’s also (aggressively) say it takes only four years to get there, and that much of this is done via an Obama initiative to cap credit card rates.  That’s an average of 2.5% of real economy funneled out of play and into savings accounts..  If the consumer is half of $14 trillion GNP, that’s $700 billion over four years, roughly double the size of the lame duck and Blinder packages put together.


Additionally, that’s before the wealth effect of falling home prices (which are *still* 30% above their pre-bubble level on a real basis) and falling equity values.  So an extra trillion of Keynesian stimulus doesn’t seem that far-fetched.  This is particularly true because the High School USA class of 2028 is substantially underrepresented in Congress, on account of the fact they haven’t been born yet.  After all–this is ultimately their problem to hot-potato to their kids.  Isn’t that how it works?


All this has made me very fixated on gold.  Even though it’s down 20% or so in the last month, I have serious doubts as to whether these really pretty secular and *really* deflationary forces are factored in.  I’m tempted to pair a GLD short with OIL long, which I never again thought I’d be able to buy with crude below 60.


One Response to Steve Coll on Worst-Case Scenarios

  1. John in Austin says:

    A cap on credit card rates? First time I’ve heard that. Has Obama’s team floated that idea in public? Cardholders will like it, but wait ’til the bankers get hold of that idea. Hold that thought- we are the bankers now, right?


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