A great article about systemic instability, financial markets, and the the deficit. Here is one taste:
The Obama administration tells us that the government deficit is going to be well over $1 trillion a year for at least ten years. And that does not take into account the outlier years in the 2020s when the really heavy lifting of Social Security and Medicare kicks in.
There is a truism that goes a little like, “If something can’t happen, then it won’t.” Let me make a prediction. We won’t have a trillion-dollar deficit in ten years. Why? Because it can’t happen. The market will simply not allow it.
Just as I was writing in 2006 about the potential for a crisis, and yet the party went on for quite some time, I think the party can limp along now. But there will come a point when the party is over. Interest rates on the long end will rise precipitously, forcing mortgages up and making the deficit even worse. It will be an even worse crisis than the one we have just gone through. And there will be fewer options for policy makers, and none of them will be good or pleasant. And it will take most people unawares. They will see the current trend and project it into the future. And they will be hit hard.
Can we avoid this calamity? Yes, we can wrestle the US budget deficit back under some kind of control, close to nominal GDP or on a clear trajectory to get there within a reasonable time (say, a few years). As noted above, we can run deficits close to nominal GDP almost forever. But there is no political willpower to do that now. And so, the market will at some point force the hand of the political class. That investor in St. Louis, or China or (????) will decide not to buy government debt at such low rates. The avalanche will start. And everyone will be surprised at the ferocity of the crisis. Except you, gentle reader. You have been warned.
This rings very true. I would add that I think the next crisis will be a simultaneous financial and political one. In this crisis, policy makers stepped in put the financial markets on life support. But now that their destinies are tied, their destinies will rise and fall together through the next crisis.
There will be no change now. Our current leadership has shown their true colors for too long. Hopefully, after the next crisis, we will have leaders and a leadership structure that puts a premium on effective action.
On the flip side, the article also points out how there are some positive changes that could happen — it’s just a bit scary to think we have to keep our fingers crossed that the good outweighs the bad. We are used to dealing with this sort of uncertainty from nature, but human built systems are supposed to minimize the down side and maximize the upside. Maybe man made things don’t defy nature as much as we think.