Bernanke worries about deficits

Fed Chairman Ben Bernanke discussed the economic outlook before House Committee this morning. He conceded that the unemployment rate is likely to keep rising for a while but also believes the worst is past. I detail some of his remarks in my article, Fed Chief Bernanke Believes Worst is Over.

In this post, I wanted to key in on one of his final remarks. Given that the recession has drastically reduced revenues at a time when government spending is soaring, the federal deficit has exploded.

The current administration sees red ink of:

• $1.8 trillion in fiscal 2009
• $1.3 trillion in fiscal 2010
• $900 billion in fiscal 2011

Let's do the math: $4 trillion in just three years! That's sobering and leaves one in a daze as it seems incomprehensible. Sadly, it's not.

Bernanke said this will take the ratio of federal debt held by the public to nominal GDP from about 40% before the onset of the financial crisis to about 70% in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

Keep in mind that after WWII, Social Security was still in its infancy, and we did not have the massive social programs that are now in place. In addition, universal health coverage is looming without a clear way to pay for it.

Bernanke did specifically mentioned Social Security and Medicare and warned, "With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands."

Let me repeat: We will not be able to continue borrowing indefinitely.

The Fed, along with central banks around the world, were able to avert a financial catastrophe late last year. But the problem now is more like a slow boil. We know where we're headed and action on the spending front must be taken.

Recognizing that both political parties have done a poor job holding the line on government spending, I must ask, "Where are all the political pundits who decried the 'massive' Bush deficit's now?"

Any comments are appreciated.