1 Reply Latest reply: Nov 4, 2009 3:23 PM by Paul Hodges RSS

Huge deficit?

Samuel Toba

Without major US economy restructuring medical and social security costs will cause huge deficits due to unacceptable inflation and currency devaluation. The the deficit level will rise from $6trillon now to 50T by 2030.  What to do?

  • Re: Question from Malcolm Watts - Huge deficit?
    Paul Hodges

    what to do indeed!  governments shouldnt have allowed the reckless lending that went on in the banking sector in the run-up to the current crisis.  but neither should we all have borrowed money that we knew we could never repay.  it was all an illusion, as I wrote in the Financial Times some two years ago, before the current crisis began (http://www.ft.com/cms/s/0/93973cae-5a7f-11dc-9bcd-0000779fd2ac.html).  however, if governments hadn't then bailed out the banks last year, we would have entered a long depression, as a modern economy cannot exist without a working financial system. this money will have to be paid back over time, and so we will all have less money to spend on other things.  therefore, i do not particularly worry about inflation at the moment, as i think our problem is more a lack of demand rather than a lack of supply.  there is plenty of capacity in manufacturing (and in financial services), therefore i worry more about deflation cf Japan since 1990.  i also worry that the financial crisis is not yet fully resolved - the Fed seems to think the issue is liquidity, but i fear it is more about solvency - loans made to the consumer and corporate sectors that will never get paid pack, and which will eventually have to be written off.