Why Cutting Deficits Now Is (Literally) Psychotic
"Psychosis" is a mental illness whose sufferers can't differentiate between fantasy and reality. In that sense, the president's speech, like the vast majority of mainstream reporting on the deficit debate, is nothing short of psychotic.
Most Americans probably don't understand the theory by which high deficits can hurt the economy. It goes like this: you run high, sustained deficits, and investors lose confidence in your ability ro pay them back. Because they view your debt as riskier than they did before, you then have to raise interest rates in order to entice them to buy your bonds.
The higher interest rates, in turn, make it more expensive for businesses in the private sector to get the financing they need to expand their operations and hire more staff. So, what started with a high level of public debt effectively "crowds out" private investment and hurts job creation. That's the theory, and it is a valid one in certain circumstances.
In Washington, there is now a mass hallucination that this process is currently threatening to derail our economy. In reality, however, the Fed's discount rate -- the interest charged to financial institutions -- now stands at 0.75 percent. A year ago, it was 0.75 percent. The prime rate -- the basis for setting the amount of interest charged for mortgages and consumer credit -- stands at 3.25 percent. A year ago, it was 3.25 percent.
Among a number of reasons for these low rates is that the global economy took a major hit, and other countries' bonds are not exactly islands of stability in a sea of chaos. US treasury bills are still considered the safest investment on the planet, and there's no reason to believe we'll need to jack up interest rates in the near-term to attract buyers. The connection between the deficit and this lackluster recovery is therefore a fantasy.
Do hefty deficits sustained over an extended period pose a threat to our economic wellbeing? Absolutely, but the claim that we should address the deficit by cutting public spending now, while the economy is in the crapper and private, consumer spending is in the tank is a delusion. Clinton didn't balance the budget in the middle of the most painful recession in 70 years, he did it with a roaring economy behind him.
Our political and media elites are in the grip of a psychotic delusion that concerns over higher interest rates, tax increases that might potentially come down the road in the future and new regulations are keeping businesses from hiring. It's a delusion because every business survey conducted over the past few years has drawn the same conclusion: in the real world, businesses' greatest domestic problem is a lack of customers. That's because American households lost around $14 trillion in wealth during the crash, the economy shed millions of jobs, and, as a result, consumer spending -- which accounts for about 70 percent of our economic activity -- has been in a trough.
That's the reality. And what we're talking about in this age of austerity is cutting "transfer payments" that put spending money in the pockets of the unemployed, the poor and the elderly, and sending more government workers to the unemployment lines. They will, in turn, cut down on their spending and some will be unable to make their mortgages, adding to the foreclosure crisis nobody's talking about anymore.
It is the worst thing to do now, even if the deficit is something that we have to address at some point. But that's just reality, which is very hard to discern for people suffering from psychosis.