The Failure of Barack Obama's Presidency

After intensive and multi-year-long negotiations with congressional Republicans, the President told George Stephanopoulos on ABC's "Good Morning America," Wednesday, March 13th, that, "Ultimately, it may be that the differences are just too wide. It may be that ideologically, if their position is, "We can't do any revenue,' or, "We can only do revenue if we gut Medicare or gut Social Security or gut Medicaid' -- if that's the position, then we're probably not gonna be able to get a deal."

What he had produced, from all of his years of wrangling with Republicans, were the sequester on March 1st, and the fiscal-cliff deal on January 1st -- that being the deal by which wage-earners saw their tax-cut on Social Security earnings eliminated, and by which millionaires saw their annual incomes that are in excess of $450,000 lose the benefits of the George W. Bush tax cuts they'd been enjoying for ten years.     

So, Obama's modest elimination of tax-breaks on both the top and the bottom (but not on the middle), and in addition, what he himself was calling "meat ax" cuts to government spending via the sequester, seem likely to be his fiscal epitaphs, for what will turn out to be an eight-year Presidency in which the nation struggles unsuccessfully to recover from George W. Bush's economic crash.

Obama was able to restore the finances  for America's aristocrats,  but the masses will face only harder times ahead: the numbers of homeless rise even while the economy "recovers"; the average person's income now is even lower than it was when Obama came into office; and, though the aristocracy's corporate-stock-based wealth is considerably higher than when Obama came in, the house-values and pensions that constitute the basis of ordinary people's net worth have remained little, if any, improved since Bush left. 

Obama justified his failure to Stephanopoulos by saying, "We don't have an immediate crisis in terms of debt. ... In fact, for the next 10 years, it's gonna be in a sustainable place."

He knows that that's not true. Both the White House Office of Management and Budget (OMB), and the Congressional Budget Office (CBO), have cooked the federal books by assuming that the long-term interest-rates that the U.S. Treasury will need to pay investors won't exceed 5.2% or 5.3% for at least the next ten years. Yet neither federal agency has given any reason for this outlandish assumption. The OMB's  "Fiscal Year 2013 Budget of the U.S. Government"  projects (on page 244) that long-term (10-year Treasury bond) interest rates will stay below 5.2% until 2020, and will be 5.3% in 2022, but provides no estimates at all beyond that time. The Congressional Budget Office's  "The Budget and Economic Outlook: Fiscal Years 2013 to 2023"  projects (e.g.: pages 5, 41, 42 & 48) that 10-year Treasury bond interest rates will rise gradually to reach a level of 5.2% in 2018 and then suddenly and forever afterward will remain constant at that level for at least the following five years.

Without such a basic assumption, of stable continuing low rates, the entire federal budget would simply collapse. However, from 1970 to 2000, these rates varied  generally between 6% and 15% . From just 1978 to 1981, they went from 8% to their high of 15%. These rates aren't necessarily either stable or low.

This is why an influential recent paper from four economists is sparking concern in Federal Reserve circles. Titled  "Crunch Time: Fiscal Crises and the Role of Monetary Policy,"  its authors include Frederic Mishkin, Ben Bernanke's former right-hand man; and they point out that, "The CBO's baseline estimates (and similar projections produced by the White House Office of Management and Budget) assume that long-term interest rates rise gradually to reach a level of 5.2% in 2018 and then remain constant at that level despite an assumed continued escalation in the amount of public debt outstanding."

In other words, they (Mishkin, plus David Greenlaw, James D.Hamilton, and Peter Hooper, all highly respected economists) openly point out that the Federal budget has no clothes.

Thus, the U.S. Government is basing its forecasts upon an unrealistic assumption that the U.S. Government's long-term interest-rates can never rise above 5.2% or 5.3%, not even as the Government's debt, and debt/GDP ratio, soar (from $16 trillion, to a CBO-projected $20 trillion during just 2018-2023). 

Since U.S. Treasury bonds have sometimes needed to pay far higher than a 5.2% or 5.3% interest-rate, in order to be able to attract investors, why would the world's investors not demand increasing interest-rates from a decreasingly-solvent debtor like this -- rate-hikes after 2023, when the federal debt will be soaring?             

Thus, beyond 2018, the U.S. is likely to face, as these authors put it, "an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe."

Rumbling in the background of this study is their warning of "tipping-point dynamics" that could produce runaway and uncontrollable inflation. Their model, however, lacks any such "tipping point," and simply produces a smooth graph (below), which shows that "Actual and Projected 10-Year Bond Yields Under CBO Assumptions and Our Baseline Assumptions" diverge radically from 2018 onwards, so that by 2040, 10-year Treasuries will need to be paying a 10% interest-rate, as compared with the CBO-projected constant 5.2% rate after 2018. Their study is based upon very conservative (optimistic) assumptions, such as that Washington will quickly resolve its fiscal battles, and that unemployment will increase again, which will drive inflation down and therefore help prevent the need for the U.S. Treasury to increase above 5.2% the interest-rate it offers on its 10-year bonds. Here is their chart showing their model, as compared to the CBO and White House model, under these favorable assumptions: