It’s a very special episode where we encourage you to feel the giving spirit of the holiday season and laugh at Tim Geithner. A lot.
Check out those eyebrows. Tim Geithner is definitely a Vulcan. Pretending to feel emotion. Unlike Spock, whose mother was human.
The research shows that spending cuts by far need to out-weigh tax increases for an effective fiscal consolidation. However, there is a good argument for tax increase (though, the focus on income tax rate is absurd).
Interest rate risk.
Despite interest rates being near zero, we are paying fantastic amounts of interest. With the Fed financing over 75% of treasury debt and foreigners financing the rest, interest rate risk is far greater than the historical data can suggest. IIRC, the Fed can finance debt at last years levels for ~10 years, but fiscal situation can’t deteriorate. It also assumes that foreigners will keep buying our debt. I don’t know what the elasticity of treasury demand is, and I don’t want to find out. A hiccup at the fed, an expectation that easing must increase and continue beyond that several year period the Fed can remain solvent, or a sudden outbreak of common-sense among foreigner buyers, could send our interest ballooning out of control.
Fortunately (or, unfortunately), it is still rational for some people to buy treasuries. They still offer security in that government is able to constrain its competition(ie, the private economy) so long we remain the reserve currency. It doesn’t even take active management; whenever the government looks to be running into a short-term fiscal crunch, rash of regulation and policy changes and uncertainty inhibits the rest of the economy.
Romulan. Definitely Romulan.
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