![\"Syriza](\"https:\/\/i0.wp.com\/www.dougsbriefcase.com\/blog\/wp-content\/uploads\/2015\/01\/credit-bbc.jpg\")
<\/a>Syriza par\u00adty leader Alex\u00adis Tsipras hopes to pre\u00advail in today\u2019s Greek elec\u00adtions, which could pro\u00advoke a show\u00addown between Euro\u00adpean lead\u00aders and Greece, which strug\u00adgles under a crush\u00ading load of debt. Mean\u00adwhile, U.S. gov\u00adern\u00adment deficits are improv\u00ading. Sort of. [Cred\u00adit: BBC<\/span>]<\/p><\/div>On Tues\u00adday morn\u00ading, the Con\u00adgres\u00adsion\u00adal Bud\u00adget Office will announce that the fed\u00ader\u00adal deficit con\u00adtin\u00adued to decline last year.\n The announce\u00adment will trig\u00adger an orgy of self-con\u00adgrat\u00adu\u00adla\u00adtion in Wash\u00ading\u00adton. The Admin\u00adis\u00adtra\u00adtion will claim that its poli\u00adcies have been vin\u00addi\u00adcat\u00aded. Repub\u00adli\u00adcans also will take a bow, tout\u00ading spend\u00ading con\u00adstraints they\u2019ve imposed since win\u00adning the House majority.<\/p>\n But you\u2019ll hear noth\u00ading from the Wash\u00ading\u00adto\u00adni\u00adans who most deserve cred\u00adit for reduced deficits: the Fed\u00ader\u00adal Reserve Board of Gov\u00ader\u00adnors. By hold\u00ading inter\u00adest rates near zero and lend\u00ading tril\u00adlions in free mon\u00adey to the Trea\u00adsury, the Fed has allowed the gov\u00adern\u00adment to reduce deficits even as it gorged on debt.<\/p>\n Deficits are not declin\u00ading pri\u00admar\u00adi\u00adly due to fis\u00adcal restraint or aus\u00adter\u00adi\u00adty. The fed\u00ader\u00adal gov\u00adern\u00adment spent more than $3.5 tril\u00adlion<\/a> dur\u00ading the fis\u00adcal year that end\u00aded last Sep\u00adtem\u00adber 30, accord\u00ading to the Trea\u00adsury Depart\u00adment (the fig\u00adures that CBO<\/span> releas\u00ades on Tues\u00adday will be slight\u00adly dif\u00adfer\u00adent). That\u2019s not quite an all-time record, which was set dur\u00ading the height of \u201cstim\u00adu\u00adlus\u201d spend\u00ading, but it\u2019s close. Gov\u00adern\u00adment col\u00adlect\u00aded a lit\u00adtle more than $3 tril\u00adlion in tax\u00ades (that is a record) and bor\u00adrowed the rest, putting the 2014 deficit at $483 billion.<\/p>\n That\u2019s a sub\u00adstan\u00adtial improve\u00adment over the $680 bil\u00adlion the gov\u00adern\u00adment bor\u00adrowed in 2013. But the fig\u00adure is a bit mis\u00adlead\u00ading. Though some of the improve\u00adment is gen\u00aduine \u2014 a bet\u00adter econ\u00ado\u00admy has pro\u00adduced more tax rev\u00adenue and dis\u00adcre\u00adtionary spend\u00ading has been restrained \u2013 much of it is an arti\u00adfact of mon\u00ade\u00adtary policy.<\/p>\n The Fed\u00ader\u00adal Reserve has become one of the Trea\u00adsury Department\u2019s lead\u00ading lenders<\/a> over the course of the past six years, as the chart below shows:<\/p>\n Since 2008, the Fed has been on a cred\u00adit-con\u00adjur\u00ading binge, and the Trea\u00adsury has been its chief ben\u00ade\u00adfi\u00adcia\u00adry. The result is that Trea\u00adsury now owes the Fed near\u00adly $2.5 tril\u00adlion, an unprece\u00addent\u00aded amount. Not to wor\u00adry. The Trea\u00adsury makes inter\u00adest pay\u00adments to the Fed on the loans and then the Fed returns the inter\u00adest pay\u00adments to Trea\u00adsury, along with prof\u00adits that derive from its oth\u00ader hold\u00adings. Last year, the Fed gave back near\u00adly $100 bil\u00adlion<\/a>. Absent that pay\u00adment, last year\u2019s deficit would have been around $582 bil\u00adlion instead of $483 bil\u00adlion and Tuesday\u2019s news would be less cheery.<\/p>\n But this is only the most obvi\u00adous way that the Fed has helped mask the effects of fed\u00ader\u00adal bor\u00adrow\u00ading. Between Sep\u00adtem\u00adber 1995 and last Sep\u00adtem\u00adber, fed\u00ader\u00adal debt bal\u00adlooned from less than $5 tril\u00adlion to near\u00adly $18 tril\u00adlion (it crossed the $18 tril\u00adlion thresh\u00adold last month). But the fed\u00ader\u00adal gov\u00adern\u00adment actu\u00adal\u00adly paid less last year in inter\u00adest on its debt than it did in 1995.<\/p>\n The red line (right scale) traces the arc of fed\u00ader\u00adal debt. The blue bars (left scale) mea\u00adsure inter\u00adest pay\u00adments that the gov\u00adern\u00adment made each year on that debt. Annu\u00adal inter\u00adest pay\u00adments have remained rel\u00ada\u00adtive\u00adly flat and have exceed\u00aded $250 bil\u00adlion only once (in 2008). Gov\u00adern\u00adment inter\u00adest pay\u00adments have been con\u00adtained despite a 260 per\u00adcent increase in the debt load. That is like bor\u00adrow\u00ading mon\u00adey to buy two or three addi\u00adtion\u00adal homes with\u00adout increas\u00ading your month\u00adly mort\u00adgage payments.<\/p>\n How is that pos\u00adsi\u00adble? One rea\u00adson is that the Fed\u00ader\u00adal Reserve has tamped down on inter\u00adest rates. We are now in the sev\u00adenth year of the Fed\u2019s extra\u00ador\u00addi\u00adnary pol\u00adi\u00adcy of hold\u00ading the effec\u00adtive fed\u00ader\u00adal funds rate near zero. In 1995, gov\u00adern\u00adment inter\u00adest pay\u00adments amount\u00aded to around 6.3<\/a> per\u00adcent of debt held by the pub\u00adlic. Last year, those inter\u00adest pay\u00adments totaled just 1.9 per\u00adcent<\/a> of pub\u00adlicly-held debt. If Trea\u00adsury were forced to pay the same pro\u00adpor\u00adtion of inter\u00adest pay\u00adments on pub\u00adlicly-held debt last year as it did in 1995, the deficit would have swelled to more than $800 bil\u00adlion, a $320 bil\u00adlion difference.<\/p>\n The Fed\u2019s bond-buy\u00ading spree con\u00adsid\u00ader\u00adably changed the com\u00adpo\u00adsi\u00adtion of pub\u00adlicly-held debt. In the past, that debt was large\u00adly held by banks, pen\u00adsion funds, foun\u00adda\u00adtions, pri\u00advate investors and for\u00adeign enti\u00adties. Now the Fed accounts for near\u00adly $2.5 tril\u00adlion of the $12.7 tril\u00adlion of pub\u00adlicly-held debt. That means that near\u00adly 20 per\u00adcent of the mon\u00adey that the Trea\u00adsury has bor\u00adrowed from the pub\u00adlic is effec\u00adtive\u00adly interest-free.<\/p>\n But the Trea\u00adsury does not bor\u00adrow only from the pub\u00adlic. It also bor\u00adrows from oth\u00ader parts of the gov\u00adern\u00adment, incur\u00adring debts it can only repay by bor\u00adrow\u00ading more mon\u00adey from the pub\u00adlic in the future. The chart below, drawn from data<\/a> pub\u00adlished by the Trea\u00adsury<\/a> Depart\u00adment and the Fed\u00ader\u00adal Reserve<\/a>,<\/span> shows the major hold\u00aders of the $17.8 tril\u00adlion in total debt (the total amount that Trea\u00adsury owes gov\u00adern\u00adment and pub\u00adlic bond\u00adhold\u00aders) that the Fed\u00ader\u00adal gov\u00adern\u00adment had incurred through last September.<\/p>\n Treasury\u2019s biggest gov\u00adern\u00adment cred\u00adi\u00adtor is the Social Secu\u00adri\u00adty trust fund. Over the past sev\u00ader\u00adal decades, work\u00aders have paid far more in pay\u00adroll tax\u00ades than need\u00aded to cov\u00ader month\u00adly checks to the elder\u00adly. Trea\u00adsury spent the excess and left the Social Secu\u00adri\u00adty pro\u00adgram hold\u00ading IOUs. As the baby boom gen\u00ader\u00ada\u00adtion ages, the Social Secu\u00adri\u00adty Admin\u00adis\u00adtra\u00adtion will have to call in the IOUs in order to pay ben\u00ade\u00adfits. To come up with the cash, Trea\u00adsury will have to bor\u00adrow from the public.<\/p>\n In the mean\u00adtime, Trea\u00adsury has been cred\u00adit\u00ading the trust funds with inter\u00adest, which the trust funds record as an asset. Those two entries can\u00adcel each oth\u00ader out on the government\u2019s ledger books, in effect giv\u00ading the gov\u00adern\u00adment yet anoth\u00ader $2.78 tril\u00adlion in inter\u00adest-free cred\u00adit. The same is true for the $2.26 tril\u00adlion that the Trea\u00adsury owes var\u00adi\u00adous oth\u00ader fed\u00ader\u00adal enti\u00adties (e.g., Medicare, the high\u00adway trust fund, mil\u00adi\u00adtary pen\u00adsion fund). When added to the debt that the Fed\u00ader\u00adal Reserve has issued, 42 per\u00adcent of gross fed\u00ader\u00adal debt is interest-free.<\/p>\n These account\u00ading gim\u00admicks enable the Pres\u00adi\u00addent and law\u00admak\u00aders to have it both ways, dig\u00adging the gov\u00adern\u00adment more deeply into debt while boast\u00ading of low\u00ader fed\u00ader\u00adal deficits. Why not con\u00adtin\u00adue to bor\u00adrow when you can get all the ben\u00ade\u00adfits of debt and none of its consequences?<\/p>\n Those con\u00adse\u00adquences may one day come. Com\u00adbined fed\u00ader\u00adal, state and local gov\u00adern\u00adment debt has climbed to 108 per\u00adcent of GDP<\/span><\/a>,<\/span> plac\u00ading us eighth in the world in that cat\u00ade\u00adgo\u00adry. And that is just the cur\u00adrent accounts deficit. Gov\u00adern\u00adment at all lev\u00adels has promised its work\u00aders pen\u00adsion ben\u00ade\u00adfits with\u00adout set\u00adting aside mon\u00adey to meet those oblig\u00ada\u00adtions. Unfund\u00aded lia\u00adbil\u00adi\u00adties for pub\u00adlic work\u00aders exceed\u00aded $3.1 tril\u00adlion <\/a>in the third quar\u00adter of last year, accord\u00ading to the Fed\u00ader\u00adal Reserve, or an addi\u00adtion\u00adal 19% of GDP<\/span>.<\/p>\n Social Secu\u00adri\u00adty actu\u00adar\u00adies esti\u00admate that mak\u00ading the pro\u00adgram sol\u00advent for the long term would require an imme\u00addi\u00adate pay\u00adroll tax increase of 4 per\u00adcent<\/a> (to 19.3 per\u00adcent from the cur\u00adrent 15.3 per\u00adcent). Putting Medicare on sol\u00adid foot\u00ading would require hik\u00ading that tax by an addi\u00adtion\u00adal 0.6 per\u00adcent<\/a>,<\/span> to near\u00adly 20 per\u00adcent of wages.<\/p>\n That won\u2019t hap\u00adpen. Nor will any sort of enti\u00adtle\u00adment reform, pub\u00adlic pen\u00adsion reform or fis\u00adcal reforms of any con\u00adse\u00adquence. Why make tough choic\u00ades when deficits are going down?<\/p>\n There are those who argue that mon\u00ade\u00adtary incon\u00adti\u00adnence and debt are dri\u00advers of eco\u00adnom\u00adic growth and that fis\u00adcal rec\u00adti\u00adtude and mon\u00ade\u00adtary restraint would spoil an econ\u00ado\u00admy that seems final\u00adly on the mend. They believe we should con\u00adtin\u00adue bor\u00adrow\u00ading while cred\u00adit is abun\u00addant and cheap and leave the con\u00adse\u00adquences to anoth\u00ader day.<\/p>\n This view will car\u00adry the day. As the Greeks are remind\u00ading us, democ\u00adra\u00adcies shun tough choic\u00ades in good times and bad. The wheels are com\u00ading off the Greek bailout that Euro\u00adpean lead\u00aders first approved in 2010. Greece needs more hand\u00adouts but its peo\u00adple are revolt\u00ading against the tax hikes, spend\u00ading cuts and labor reforms on which their financiers insist.<\/p>\n With an elec\u00adtion occur\u00adring today, politi\u00adcians have under\u00adstand\u00adably aligned them\u00adselves with the vot\u00aders and not their Euro\u00adpean cred\u00adi\u00adtors, though it is not clear what would become of Greece with\u00adout fur\u00adther cash infu\u00adsions. If the rad\u00adi\u00adcal Syriza par\u00adty wins enough seats today to form a gov\u00adern\u00adment, they have vowed to push leg\u00adis\u00adla\u00adtion that would default on a por\u00adtion of the Euro\u00adpean loans and use the sav\u00adings to increase spend\u00ading and cut tax\u00ades. Such a move would force a con\u00adfronta\u00adtion with Greece\u2019s lenders that could result in the coun\u00adtry going off the euro. Even if Syriza falls short gain\u00ading a major\u00adi\u00adty, a new gov\u00adern\u00adment will have a hard time meet\u00ading its cred\u00adi\u00adtors\u2019 demands. With\u00adout addi\u00adtion\u00adal assis\u00adtance from those lenders, the gov\u00adern\u00adment will face insol\u00adven\u00adcy this sum\u00admer when a 7 bil\u00adlion euro<\/a> ($7.9 bil\u00adlion) bond held by the Euro\u00adpean Cen\u00adtral Bank comes due.<\/p>\n Years of prof\u00adli\u00adgate bor\u00adrow\u00ading and spend\u00ading have put the Greek gov\u00adern\u00adment in an impos\u00adsi\u00adble posi\u00adtion. They must choose between keep\u00ading promis\u00ades to their peo\u00adple and promis\u00ades to their cred\u00adi\u00adtors; but they can\u2019t ful\u00adfill the promis\u00ades to their peo\u00adple with\u00adout more mon\u00adey from their creditors.<\/p>\n For\u00adtu\u00adnate\u00adly, that could nev\u00ader hap\u00adpen here.<\/p>\n","protected":false},"excerpt":{"rendered":" On Tues\u00adday morn\u00ading, the Con\u00adgres\u00adsion\u00adal Bud\u00adget Office will announce that the fed\u00ader\u00adal deficit con\u00adtin\u00adued to decline last year. The announce\u00adment will trig\u00adger an orgy of self-con\u00ad\u00adgrat\u00adu\u00adla\u00ad\u00adtion in Wash\u00ading\u00adton. The Admin\u00adis\u00adtra\u00adtion will claim that its poli\u00adcies have been vin\u00addi\u00adcat\u00aded. Repub\u00adli\u00adcans also will \u2026 Con\u00adtin\u00adue read\u00ading <\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\n