Experts say curb US debt or suffer a dollar crisis
* US is on unsustainable fiscal path
* Dollar crisis looms if government fails to act
* Hold national debt to 60 percent of GDP
By Alister Bull
WASHINGTON, Jan 13 (Reuters) - The United States must soon raise taxes or cut government spending to curb its debt, and failure to act will risk a crippling dollar crisis as investor confidence ebbs, a panel of experts said on Wednesday.
"It has got to be done. It will be done some day. It may be done with enormous pain. Or it may be done more rationally," said Rudolph Penner, a former head of the nonpartisan Congressional Budget office who co-chaired the 24-strong Committee on the Fiscal Future of the United States.
President Barack Obama's administration will present his budget for fiscal 2011 early next month amid intense pressure to live up to election campaign promises not to raise taxes on middle class Americans, while confronting a record deficit.
As a result, Obama is expected to focus on long-term fiscal discipline, while maintaining policy support for an economic recovery in the near-term as the country rebuilds after its worst recession since the Great Depression.
The two-year study by the panel, assembled by the highly respected National Research Council and the National Academy of Public Administration, said that the White House had some time on its side to restore growth, but must then act.
"In the next year or two, large deficits and more borrowing are unavoidable given the severity of the economic downturn. However, action ought to begin soon thereafter," they said.
The national debt has risen above 50 percent of GDP (gross domestic product) from 40 percent two years ago, and within 20 years will blow past a previous record above 100 percent of GDP set after World War Two without stern official steps.
Mounting debt could sap investor confidence in the economy, and the nation's ability to honor its obligations, pushing up interest rates and causing a steep fall in the value of the dollar as international creditors seek safer returns elsewhere.
CUT HEALTHCARE
The committee identified curbing Medicare, Medicaid and Social Security spending as the top challenge, and had a lukewarm assessment of cost containment in healthcare reform currently before Congress that Obama hopes to sign soon.
Committee co-chair John Palmer said the reforms might lay the foundation for improvements in the future, but he was skeptical about presumed saving levels and said that "passage would not change in any substantial way our analysis."
The committee, which included three former heads of the CBO, outlined a range of options to lower the ratio of the national debt to 60 percent of the size of the economy.
The 60 percent threshold of debt to GDP, a target that is also used by the nations sharing the euro common currency, was a "judgment choice", said Penner, who is a senior fellow at the Urban Institute, a Washington think-tank.
He said it was deemed to be the most that could be borne without incurring debt levels that would drive up long-term interest rates, and the least that was politically feasible in terms of reductions in government spending.
At one end of the options, the committee reviewed a policy mix based on low spending and low taxes. This envisaged payroll and income tax rates staying as they are, around 18-19 percent of GDP, but healthcare and retirement program costs sharply curtailed and defense and domestic spending cut 20 percent.
The other end of the scale looked at a high spending/high taxes policy mix that would maintain the projected growth in Social Security and allow higher spending on federal programs.
However, this would see taxes rise above 40 percent of GDP, or in the neighborhood of Denmark or Sweden, in order to hold the national debt to 60 percent, unless a value added sales tax was also introduced to augment government revenue.
Between the two were several intermediary solutions relying on a blend of higher taxes and lower spending. The committee made no recommendations but warned there was no time to waste.
"If action is taken soon, the country has a wide choice of options to help achieve fiscal sustainability. All are difficult; but if action is postponed, the options will be fewer and the choices even more difficult," they said.
(Editing by Cynthia Osterman)
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Obama is the worst president in a half a century. He is going against the will of the people and his vow of transparency and non-partisanship have turned out to be outright lies. VOTE THEM OUT!!!
The financial problems we are facing now have been slowly accumulating over many different presidencies. Both parties do not have the motivation to fix it. The current administration has added to the debt. Bush added the Medicare prescription liability with zero way to pay for it.
Obama cannot achieve bi-partisanship when the republicans have fully embraced fundamentalist thinking. They are uncompromising and unwilling to participate. He tried. They balked.
The following is my solution to get the economy moving. I also enclude a solution to the over leveraging by consumers,businesses and investors.
If you would like to discuss the Zero Inflation Taxation Policy I am available. Go to my web site for more info. www.economysflaw.wordpress.com/
We have vacant homes and low rental occupancies because people are moving in on each other. It happens in every recession. It’s just worse this time. Also kids are staying home until they reach their mid 20s and some times older. A lot of the boomers have not down size yet and have spare bedrooms. It rough out there guys. A person or family starting out can’t pay the rent and all the other expenses that go along with setting up a new household.
My solution to get the economy growing again is as follows. I have also proposed a solution to the excessive leveraging by consumers, investors and businesses.
Solving The Unemployment and Foreclosure Crisis
The US economy has a major unemployment and foreclosure crisis. Millions of people are in the process of losing their homes or are going to be losing a home in the future.
The foreclosure prevention programs the government has created are very expensive and have failed miserable. With 75 billion dollars allotted only 26 thousand homes mortgages have been permanently modified. Unemployment is at 10% and may be rising. Something different must be tried. What the government is doing is not working!
I want to discuss with you, a different approach to economic recovery.
Normal capital markets cannot solve this economic crisis because collateral values have decreased so much and so many homes have underwater mortgages. It cannot be provided by the capitalist entity because it is still healing and will experience a relapse if interest rates continue to rise.
To solve the unemployment and foreclosure crisis and stabilize mortgage interest rates, we must start by doing two things.
First, we need to create a mortgage with terms that fit the current economic conditions; it must reduce foreclosures and improve employment by increasing total economic demand in the economy. The new mortgage I am proposing would improve the economy and the financial condition of Fannie Mae, Freddie Mac and the banks. I call it the 30 yr. 2010 STABILITY MORTGAGE. It would have a starting interest rate of 3% and increase 1/4% a year. (3% is currently more than 300% above the inflation/deflation rate. Mortgage rates have been historically 100% above the inflation rate. The current mortgage interest rate is over 500% above the inflation rate). The interest rate would cap out at 5%. The borrower would have to qualify at the 5% interest rate. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 20 to 30% of their monthly payment amount each month for 10yrs or until the mortgage equals the current possible sale price of the home. (Reducing the mortgage monthly by a small amount would be less of a loss than by reducing the mortgage by foreclosure or a short sale. It would also be better for the banks, investors and the homeowner.) If FNM, FRE and the Fed said they would buy a mortgage with a 3% starting rate, the banks would offer it to the public.
Temporarily, if necessary the US Treasury would buy the GSEs bonds. (Treasury would receive the money back when the Fed bought the MBSs from the GSEs) The banks would earn the fees for arranging and servicing the home mortgage. FNM&FRE would have less loses from foreclosures. They would be collecting interest on a larger mortgage than if they foreclosed or short sold the home.
The securities the Fed currently holds would go up in value and should be sold to investors to reduce the Fed’s balance sheet. The Fed would buy the new mortgage backed securities and sell them to investors, after home prices stabilized and the mortgage interest rate, on the new mortgage, had risen above the 10yr T-Bill rate.
The new Mortgage would stabilize home prices and eliminate the foreclosure inventory. After the foreclosure inventory is eliminated homes should appreciate slowly when the Zero Inflation Taxation Policy in enacted.
Enacting the ZERO INFLATION TAXATION POLICY is the second thing we should do. This policy will help prevent another economic crisis similar to the one that we are currently experiencing. It would also create a stabile market for thirty year fixed rate mortgages.
In the last decade we have had the dot com bubble. The real estate bubble, the commodities bubble (corn and oil) and almost the leveraged buy out bubble. The Fed was not able to do anything about these bubbles with the tools they have, without disrupting the US and world economies, as they did in the early 1980s by raising interest rates to 17%.
The excessive use of credit in business, investment and consumption got us into this economic crisis. Our income tax system encourages credit use and investing with credit. This is fine as long as the economy needs more credit use but when the economy is showing signs of excessive credit use, such as economic bubbles and inflation, credit encouragement should be curtailed and money investments (savings and bond investments) should be encouraged to maintain balance in our economy.
If we first use the income tax to guide investors and consumers before the Fed raises interest rates this will maintain the lowest possible interest rates and maintain the value of existing bonds and securities. Enact the Zero Inflation Taxation Policy
Conclusion: Foreclosures should decrease if the mortgage reduction plan is put into effect and the mortgage starting interest rate is reduced to 3%. The homeowner purchasing power will increase by 50% of their monthly interest payment if their current mortgage interest rate is 6% or more the first year and then slowly decrease the following seven years. With increased consumer purchasing power, total demand would increase, there by employment would increase. The banks would become stronger because their customers would become financially stronger and the collateral for small business loans would be stabilized.
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