Tags: Wien | Wake | Up | Congress | Debt

Byron Wien Gives ‘Wake-Up Call’ to Congress on Debt

Thursday, 08 March 2012 07:56 AM

Raging debt is poised to swallow the economy whole, warns Blackstone Vice Chairman Byron Wien, adding that he believes it would take interest rates well above nominal GDP to “wake up” the powers that be in Washington.

Wien identifies four events that led to the currently enormous U.S. debt load of greater than 100 percent of GDP. Those were:

    • The loss of our manufacturing edge to the Japanese in the 1980s. “We should have responded to this challenge with an industrial policy emphasizing energy independence or infrastructure, but we did not,” Wien writes in a commentary for Blackstone. “We also should have begun upgrading the skills of manufacturing workers.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

    • The rise of the “Me Decade” that emphasized consumerism over thrift and led to accumulation of debt.

    • Soon after, China and the Soviet Union moved away from command economies, and India opened its economy to the world, he writes. “Initially we viewed this positively, thinking there would be 3 billion new customers for American products, without recognizing that these countries would be competitors first,” Wien writes.

    • Finally, the housing boom, while well-intentioned, put many people into properties they could not afford. “This worked until 2007 when real estate prices started to decline, and many found themselves in a house with high monthly payments and a declining value, if it could be sold at all. We all know what happened to the banks and the whole economy then,” Wien writes.

As the new millennium dawned, debt boiled under the surface as we launched into expensive Middle Eastern conflicts. U.S. debt rose 2.5 times over in 12 years while nominal GDP rose by just 50 percent.

“The question is what to do about this now,” Wien writes. “Everyone agrees that government expenditures need to be reduced because we cannot keep accumulating debt at the present rate. We must, however, be careful not to cut government spending too quickly because it represents 25 percent of GDP and is, in effect, a huge subsidy for the economy.”

The “wake-up call” to Congress, Wien believes, is when the cost of debt, as expressed by rising interest rates, begins to outpace GDP growth.

“When America only has to pay 2 percent to borrow for ten years, legislators have a sense of complacency. If the cost of borrowing exceeded nominal GDP growth (2 percent to 3 percent real plus 2 percent to 3 percent inflation), they might have a greater feeling of urgency,” he concludes.

Higher inflation might be arriving sooner than most expect, say Fed watchers. Federal Reserve Chairman Ben Bernanke seems to considering letting inflation exceed the official target for a period in order to goose up employment numbers.

Officially, the Fed’s mandate in setting monetary policy is to seek maximum employment and to maintain stable prices, that is, low, predictable inflation. Some now see Bernanke allowing prices to rise a bit faster in order to bring jobless rates down more quickly.

The Fed’s inflation target is 2 percent and it seeks an unemployment rate of between 5.2 percent and 6 percent. Currently, the jobless rate is 8.3 percent.

The current consumer price index is 2.3 percent excluding food and energy costs, or 2.9 percent counting those volatile categories.

Bernanke recently told Congress that the Fed would adopt a “balanced approach” toward its goals. “The chairman seemed to suggest they will tolerate a misdemeanor on inflation as unemployment continues to fall toward their goal” over several years, Mark Spindel, chief investment officer at Potomac River Capital, told Bloomberg News.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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