Friday, February 20, 2009

Bad weather ahead

From the abstract of the new Auerbach-Gale article, The Economic Crisis and the Fiscal Crisis: 2009 and Beyond:

"In 2009, the federal deficit will be larger as a share of the economy than at any time since World War II. The current deficit is due in part to economic weakness and the stimulus, and in part to policy choices made in the past. What is more troubling is that, under what we view as optimistic assumptions, the deficit is projected to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years.

"The longer-run picture is even bleaker. We estimate a fiscal gap – the immediate and permanent increase in taxes or reduction in spending that would keep the long-term debt/GDP ratio at its current level –about 7-9 percent of GDP, or between $1 trillion and $1.3 trillion per year in current dollars.

"Recent trends in credit default swap markets show a clearly discernable uptick in the perceived likelihood of default on 5-year U.S. senior Treasury debt, a notion that was virtually unthinkable in the past. While it is difficult to know exactly how to interpret these results, it is clear that – although fiscal policy problems are usually described as medium- and long-term issues – the future may be upon us much sooner than previously expected."

As Margo Channing (Bette Davis) put it in All About Eve: "Fasten your seatbelts. It's going to be a bumpy [ride]."

1 comment:

snarkydoodle said...

Hi Dan. I too found this article on and posted it on my facebook "blog" page. What I want to know is... what is the fallout of default on 5-year U.S. senior treasury debt? The article states " While it is difficult to know exactly how to interpret these results,..." That's really not good enough for me and as I am not an economist, nor are my facebook friends, a little dumbing down would help me get the word out that the sky is truly falling.