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Obama Stimulus Consigns US to ‘Banana Republic’ Territory

The Washington Times reports:

The United States will “look like a banana republic” unless it gains control over its budget deficit and federal debt, economist Allen Sinai warned Congress on Thursday.

“The deficit and debt prospects under almost any scenario are daunting,” Mr. Sinai, chief global economist for Decision Economics Inc., told the Senate Budget Committee. “This territory is uncharted, with no real historical analogue to this kind of financial situation for a major global economic power.”

Asked by committee Chairman Kent Conrad, North Dakota Democrat, whether the U.S. government’s creditworthiness is at risk, Mr. Sinai replied, “Unequivocally yes.”

Richard Berner, chief U.S. economist at Morgan Stanley, told the committee one measure of America’s creditworthiness — credit default swap spreads — already shows some deterioration. The worse a nation’s credit rating becomes, the more its CDS spread rises. U.S. sovereign CDS spreads have widened to about 0.6 percent from 0.1 percent last summer, Mr. Berner noted.

“So the message is that you ignore global investors at your peril,” he told the committee…

A two-year, $800 billion economic-stimulus package, according to Mr. Sinai’s forecast, would generate a $1.8 trillion budget deficit in fiscal 2009 and $1.3 trillion next year. Measured as a percentage of gross domestic product (GDP), these deficits would be about double what occurred under the Reagan administration in the 1980s, Mr. Sinai said.

Budget deficits for the 2011-19 period would not be much different, averaging $1.2 trillion per year.

There is great pressure in Congress right now to expand the destimulus beyond the $825 billion that Democrats have already proposed. Smart analysts are predicting that it will rise beyond $1 trillion. How much spending is enough?

Congressional Republicans need to make clear that $2 trillion more in spending will not help the economy. We need a stimulus package built on long-term spending cuts and long-term tax cuts.

You can read the testimony from Sinai and Berner — or watch it — here.

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