Study: White House & CBO Projections Cook the Books

Guest post by Eric Zuesse, investigative historian and the author, most recently, of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.

An influential economics paper from four economists including Frederic Mishkin (Ben Bernanke’s former right-hand man) was presented at a forum in NYC on 22 February 2013, “Crunch Time: Fiscal Crises and the Role of Monetary Policy,” and it notes 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: 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%, even as the Government’s debt, and debt/GDP ratio, soar.

In other words: Beyond 2018, the U.S. is likely to face “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, 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 pay a 10% interest-rate, as compared with the CBO-projected constant 5.2% rate after 2018.

Even this projection is optimistic: “We have assumed the U.S. current account deficit holds at 2.5% of GDP – a level that matches the best result seen in the past decade. … If, instead, we assume that the current account deficit reverted to the 3.7% of GDP average seen over the prior five years, then the projected debt burden would reach 180% in 2037,” about the time that long-term Treasuries would probably pay interest-rates around 10%. This study notes the likelihood of a “Lehman moment” occurring soon in the EU, but says, “The Euro area’s overall fiscal path looks a good deal more benign than that of the U.S.” And, “The US federal fiscal picture is bleaker than Europe’s.”

Most of the establishmentarian opponents of this study (and you can find them on the Web, at places such as The New York Times, and from Fed  officials) cite the case of Japan, which has sustained low interest rates for decades despite stagnation. However, as the Mishkin et al. study itself points out, “In comparison to the Fed, the Bank of Japan and ECB, both of which have expanded their balance sheets [i.e., bought the aristocracy’s toxic assets] to several times their pre-crisis levels, have kept the duration of their portfolios much lower – on the order of three years,” as compared with the Fed’s average 10-year maturities. The U.S. economy is thus much more brittle than Japan’s was.

So, basically, another Great Depression is predicted here.

A good summary of this paper has been presented in Britain’s Telegraph on February 24th; Ambrose Evans-Pritchard headlines there “Trade Protectionism Looms Next as Central Banks Exhaust QE [monetary explosions and ZIRPs].” He closes: “The four years of QE have given us a contained depression.” However, unfortunately, the longer it is “contained” in this way, the worse it will be. (Those average 10-year maturities in the U.S. mean that once inflation starts here, it could become uncontrollable faster than in the other developed countries.)

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