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Public Statements

The President's Budget for Fiscal Year 2005

By:
Date:
Location: Washington, DC


HEADLINE: HEARING OF THE HOUSE BUDGET COMMITTEE

SUBJECT: THE PRESIDENT'S BUDGET FOR FISCAL YEAR 2005

CHAIRED BY: REPRESENTATIVE JIM NUSSLE (R-IA)

LOCATION: 210 CANNON HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: PANEL I:

JOSHUA B. BOLTEN, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET;

N. GREGORY MANKIW, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS;

PANEL II:

PETER R. ORSZAG, PH.D., SENIOR FELLOW, THE BROOKINGS INSTITUTION

BREAK IN TRANSCRIPT

REP. COOPER: Thank you, Mr. Chairman.

When you run a deficit, that means you have to borrow money from somebody to fund the deficit. And in absolute dollar terms we are running the largest deficit in American history. In percent of GDP terms they're not quite as large-the largest in American history, but they're still pretty sizeable. Nothing changes the fact that you have to borrow the money from somebody, and you can sell these bonds either to U.S. folks or you can sell them to foreign folks. So with a $500 billion deficit, doesn't that mean we have to sell $500 billion worth of bonds? Is that right?

MR. MANKIW: That is correct.

REP. COOPER: And there are 365 days in the year so that's over a billion dollars a day that we have to borrow from somebody. Many of our bond buyers are foreign, right?

MR. MANKIW: That is correct.

REP. COOPER: Non-U.S. citizens. Do you have an estimate of about how much we depend on foreign bond buyers every day?

MR. MANKIW: The Treasury Department does have those numbers. I don't have them in front of me, but there are sizeable purchases of U.S. Treasury bonds overseas.

REP. COOPER: Was it on the order of 30-40 percent of the total?

MR. MANKIW: That could well be right.

REP. COOPER: So a sizeable number. And when the value of the dollar fluctuates, that can affect the return of the foreign bond buyer, right?

MR. MANKIW: That is correct.

REP. COOPER: And recently I think we've had a softer dollar than some years, and that can hurt the return that a foreign bond buyer receives.

Correct?

MR. MANKIW: That is correct.

REP. COOPER: And that could affect their willingness to lend us more money in the future?

MR. MANKIW: Well, in principle it could. But so far the U.S. bond market has held up quite well, even though there have been fluctuations in the dollar. The dollar is very much the world standard and continue to be able to borrow at quite low rates because of the confidence in the American economy.

REP. COOPER: So far so good and we all pray that good news will continue. But in your own deficit-or in your own budget you say that the current path of deficits is unsustainable over the long run. My good friend the Wall Street Journal columnist Alan Murray has a little three-part question in today's paper. He says, "Who says that deficits are unsustainable: John Kerry, Barbra Streisand, or Josh Bolten?" And the answer is all three. You know, it's one of the few things they probably agree on. But it's on page 191 of your analytical supplement and it's pretty scary reading, for anybody who wants to get on the web and read that part of it.

MR. BOLTEN: Congressman, it's very scary for me to be lumped in with --

REP. COOPER: I bet it is. (Laughter.) I don't want to further ruin your reputation, but every day when you run a deficit you have to depend on somebody to loan you money: U.S. citizens, who are presumably more willing to do that, and also foreigners. What guarantees do we have that these nice foreign folks are going to be willing to continue to loan us money in historically high amounts? Or, as David Stockman used to say, as far as the eye can see? What guarantees do we have that they're going to be interested in loaning us this money in the future?

MR. MANKIW: As I said, the U.S. dollar remains sort of the standard-a standard and a place of safety. It's often a place where people put-when they want a very safe asset, and that continues to be true and it reflects large confidence in the U.S. economy. But it's probably true that over time the trade deficit will shrink and that will affect our-how we finance the deficit. It's one of the reasons why one would want to get the budget deficit down. I think we share your concern. The issue is not goals. I think we share the goal of reducing the budget deficit and I think the difference of opinion may be over means.

REP. COOPER: The U.S. dollar is not the only store of value in the world. The euro in recent years has depreciated substantially, a relatively new upstart currency.

MR. MANKIW: That is true.

REP. COOPER: It's gone from, what, 80 cents to a $1.20 or something. So if you had invested in euro bonds you would have gotten an appreciation that might have exceeded your return on having invested in U.S. paper. So it would have been wiser, if you're a savvy world investor, to have invested in their debt than ours if you're just looking at rates of return, which is the heart of the capitalist system, right?

MR. MANKIW: But you know despite that appreciation of the euro, the United States has been growing faster than Europe and is expected to continue growing faster than Europe.

REP. COOPER: But in terms of dollar returns or money returns on your --

MR. MANKIW: Well, interest rates have been higher in Europe, and that's in part a decision of the ECB relative to the Fed in setting interest rates.

REP. COOPER: I see my time has expired. But the core issue is if we run a deficit, someone on this Earth has to be willing to loan us money, over a billion dollars a day. And you haven't told me any guarantee or any reason, you know, other than historical paths, which we all appreciate, that they're going to be willing to continue to loan us this money in the future.

MR. MANKIW: I think because they believe, correctly, that the U.S. government will honor its debt obligations.

REP. COOPER: I see that my time has expired, Mr. Chairman.

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