Moderator John Kissinger was a standout at the Friends of Boca Grande "Special Studies" series opener Nov. 10 at the Boca Grande Community Center Auditorium.
His intense discussion on the impact of the 2012 presidential election on the U.S. and global economic environment was not optimistic but he did offer solutions to avoiding plunging the U.S. economy back into recession.
Kissinger is part of the Boca Economics Group, a group of 10 island residents with various business backgrounds who meet regularly to review current macroeconomic issues. His main thrust was the need for the U.S. economy not to be led off the infamous fiscal cliff by petty partisan politics. Here are excerpts of Kissinger's remarks.
QUESTION: What is the biggest problem with the U.S. economy today?
ANSWER: To me it is inconceivable that we can effectively deal with the fiscal crisis we face in this country, with today's $16 trillion federal debt, and not tackle entitlements and specifically not tackle Medicare and Medicaid. The numbers are absolutely overwhelming. To me the 900-pound gorilla in the corner, that nobody seems to be focusing on, is the enormity of the Medicare payments going out in the future.
Q: Why has the federal deficit grown so fast in the first term of President Barack Obama?
John Kisssinger at a glance
Family: Married 47 years to wife, Lona, with two sons, two daughters and 16 grandchildren.
Hometown: Tenafly, N.J.
Residence: Boca Grande and Chatham, Cape Cod
Occupation: He was in corporate finance as a commercial banker in a variety of roles during 35 years at Chase Manhattan and at Sumitomo Mitsui. He was also head of the American Enterprise Fund in Slovakia after retiring from banking.
Education: bachelor's degree from Georgetown University and master's degree from Columbia.
Civic: Serves on the boards of the Boca Bay Master Association and Pass Club as well as The Friends of The Boca Grande Community Center. He is also on the Board of OBP Medical Inc., a medical products startup company.
Discovered Boca Grande: Resident since 2003
A: Since 2007, federal spending is up by more than $1 trillion per year yielding an increase in the federal debt of $5.2 trillion or increase per household of $55,000 in increased federal debt. The preponderance of the debt was issued to finance the federal deficit. It has been short-term in nature. This was intentional to take advantage of the historically low interest rates almost zero in nominal terms, which required increasingly frequent refinances. Over the past fiscal year, the Federal Treasury has refinanced almost $4 trillion.
Q: It's hard to comprehend billions, let alone trillions. Would you provide some perspective as to how much money that is?
A: Trillions get into lots of zeroes and it's very easy to confuse folks. But think in terms of 1,000 billion equaling $1 trillion. That gives you some notion of the enormity of the difference.
Q: Why is the rising ratio of U.S. debt to the gross domestic product such a concern?
A: Economists will often look at the debt owed to the public in relationship to the GDP as a good indication of the federal capacity of the country to comfortably meet its debt obligation or effectively equal its debt capacity. The United States is now at 74 percent public debt to GDP.
Q: When does the warning light come on for the U.S. debt ratio?
A: In two years, we are on track for the federal debt to reach a ratio of about 80 percent. This year the interest alone should run about $250 billion on the $16 billion federal deficit.
Q: Why not raise interest rates?
A: Every 1 percent increase in interest rates adds $160 billion to our financing requirements.
Q: What is the fiscal cliff?
A: Ben Bernanke, chairman of the Fed, describes it as the "many major fiscal events that could happen simultaneously at the close of 2012 and going into 2013 unless the president, Senate and Congress can come together to forestall these events."
Q: What are the "major" events" he is talking about?
A: (Pointing to chart behind him) Individual income tax rate (Bush tax cuts) and AMT indexing expire, $225 billion; temporary payroll tax cut expires, $85 billion; individual and corporate tax provisions expire, $65 billion; Budget Control Act spending cuts begin, $54 billion; and Affordable Care Act taxes enacted, $18 billion. Total: $487 billion.
Q: What does this mean?
A: It would mean a significant decline in our GDP. Our economy would likely go into a recession. The Congressional Budget Office has estimated the impact on growth in 2013 would be approximately 4 percent less growth than previously forecast (2 percent). This would lead to reduced dollar asset values and business leaders would be likely to postpone decisions on major investments and hiring.
Q: Can the U.S. economy pull back from the fiscal cliff?
A: Most economists are of the opinion that as our economy goes over 80 percent and approaches 90 percent debt-to-GDP the degree of difficulty in providing financing at a reasonable price declines. No one can predict when the market will begin to freeze up but the 90 percent number is clearly a flashing red light in terms of danger zones in exceeding your debt capacity.
Q: If Congress can get past its partisan gridlock, what solutions are available?
A: If there are no changes, if there is no Grand Bargain between the administration and Congress in terms of dealing with our financial problems, there is no question we are in a near out-of-control situation as we approach the 90-plus (debt-to-GDP) number.
Q: Can we get out of the fiscal cliff mess and how long will it take?
A: We're fundamentally at a crossroads. From the comments the president has made I certainly hope there is an implied commitment to a Grand Bargain, a commitment to a Simpson-Bowles Part II that will find its way to achieving a reduction in growth in debt of $4 trillion to $5 trillion in debt over the next 10 years. Absent that we are in serious trouble. If we get serious about achieving the Grand Bargain and dealing with the issues we face we can get to balanced economic growth. If not we will become Greece eventually.