Sunday, November 11, 2012

(102) The Choice in the National Debt Crisis: Sink or Swim Together



Published in the Gallipolis Sunday Times Sentinel December 30, 2012
The Crisis in Numbers. Our Country is headed towards a real cliff beyond the so called “fiscal cliff” that approaches on January 1 as automatic deep cuts in government spending and increased taxes kick in…… $500 billion in tax increases and $109 billion in defense and program cuts.  This would drag the whole economy down, unless an agreement is made before or shortly after that date.  A quick fix to avoid the fiscal cliff would not solve the problem because still looming would be unsustainable budget deficits and debt which has increased more than a trillion dollars ($1000 billion) per year or 51% in the last four years from $10.7 trillion to $16.2 trillion or about $150,000 per family.    ObamaCare, as now formulated, won’t help the deficit or the economy because of the expansion of Medicaid for the poor.  Under George W. Bush, it increased 88% from $5.7 trillion in his eight years.  So both parties are at fault.

This year’s budget deficit is about $1.1 trillion (1/3 of the total budget of $3.5 trillion which is a very high 22.4% of GDP (gross domestic product = total value of all goods & services produced in a year = total national income of $15.6 trillion).  The interest alone on the federal debt is $258 billion per year, making up 10.8% of federal revenues.  It will be much higher once interest rates go up again when the economy recovers and higher yet when increased government demand for loans starts to crowd out private sector demand for capital.  We owe 2/3 of the debt to American holders of treasury securities including the Federal Reserve Bank and 1/3 of it or $5.4 trillion to foreign creditors, especially Communist China ($1.2 trillion = 7.1%), Japan ($1.1 trillion = 6.8%), and the oil exporting countries ($262 billion = 1.6%). (www.debtclock.org, http://www.skymachines.com/US-National-Debt-Per-Capita-Percent-of-GDP-and-by-Presidental-Term.htm, and http://www.guardian.co.uk/news/datablog/2011/jul/15/us-debt-how-big-who-owns.  Clearly,, this situation is unsustainable for more than a couple of years.
     
The Fed. We just can’t keep borrowing one third of the federal budget indefinitely.  It’s impossible!  Something has got to give.  Yes, the U.S. Treasury can borrow from the Federal Reserve Bank by selling it bonds (IOUs) in exchange for printing up more money so to speak (also IOUs – “Federal Reserve Note” is written on every dollar bill).  So the Federal Reserve Bank’s Balance Sheet has Treasury bonds (IOUs) as assets backing up our currency as liabilities (Federal Reserve Notes…….IOUs).  But more money chasing after the same amount of goods is a formula for eventual inflation, i.e., higher prices.  We’ve already done too much of that which increases the money supply……creating money out of nothing as the dollar bill buys less and less.
 
Ultimate Consequences. Sooner or later, the credit of the U.S. Government will disappear.  Already Standard & Poor downgraded the credit rating of the U.S. Treasury securities from its top AAA rating…….an ominous danger signal.  Our creditors will lend the Government less and less money and won’t renew their treasury securities that mature.   After all, they know that the dollar will go down in value because of increased inflation and it will be worth less and less on the international markets.  Can any family survive by rolling up credit card debt equal to a third of its income year after year, borrowing from one credit card to pay off the other?  Of course, the family has to cut back drastically and do without things they are accustomed to having.

At this rate we are headed toward financial collapse which would mean runaway inflation and an almost worthless dollar that will be brutal toward everyone with savings and fixed income through pensions and annuities.  It happened to Germany twice in its history.  To stabilize such an economy severe austerity measures (a big shock) would be necessary, leading to much higher taxes and deep cuts in government spending……much less in defense, government programs, entitlements and health care for the poor, etc., low investment, business bankruptcies, and a deep recession if not a depression with massive unemployment and perhaps social chaos.  Italy, Ireland, Spain, Portugal, and especially Greece are hurting.  Austerity programs in the latter, for example, have caused riots.
 
Urgent is a well thought out long range strategy.  The current fiscal cliff pales in comparison to the big cliff.  To avoid the latter, it is crucial that we formulate a long range strategy and have the discipline to carry it out year after year, such as gradually increasing austerity or a long series of mini-shocks so that the economy can adjust while forming an environment in which big and small business can grow and prosper, thus producing more jobs.  A quick fix band aid won’t cut it.  It only postpones the day of reckoning and kicks the can of worms down the road to the next generation…….many more fiscal cliffs until that becomes unsustainable and we face monetary collapse with hyperinflation and a worthless dollar.   Thus we’ll create bigger problems in the long run, much more difficult to solve…….perhaps a monster incapable of solution.

Cooperation and Sacrifice.  There’s no way that the people of the United States will ever be able to pay back the debt, but balancing the budget with a small surplus for the debt would stabilize the economy.  It’s a huge task in our entitlement society to balance the budget, let alone have money left over to pay off the debt.  To prevent our country from going over the precipice, the victors and the vanquished in this election must reach out to each other, compromise, and work together for the common good.  If the ship of state sinks, Democrats and Republicans, all of us will go down with it.

To prevent the worst everyone, conservatives and liberals, must work together wherever possible for the good of the Country.  As they should, liberals care about the poor, but expect Big Government to do it all.  Responsible conservatives also care about the poor, but through the churches & faith based charities, community organizations, state & local governments, individual and business social responsibility. 

There’s still time to right the ship.  Republicans and Democrats in Congress must stop the rigid gridlock and be objective & flexible.  To solve our debt problem, a lot of sacrifice will be required.  We’ll have to drastically cut spending and social programs.  There are agonizing choices as to where to make cuts…….damned if we do; damned if we don’t.  People with different interests will scream: “not my benefits; not my program; not my tax deductions (as for charitable donations); not my tax credits”.  There’s a limit to how much spending can be cut (i.e., discretionary spending); most is fixed (interest on the debt, Social Security, Medicare, pension payments, etc.).  So, let’s face it…….the T word. 

We’ll have to sacrifice and pay more taxes like Americans did before 2003.  In 1944 during World War II the top rate was extremely high at 94%, but taxes were reduced in subsequent years as in 1946 (top rate – 91%), 1965 (top rate – 70%), 1982 (top rate – 50%), 1987 (top rate – 38.5%), and 2003 (top rate – 35% as is today) (see http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets).  My brother John, formerly a vice-president of an investment banking firm in Chicago, claims that after each tax cut, tax collections actually increased because people did not resort to tax shelters as much.  Any tax increase should be tempered by tax credits for investment in new businesses that provide new jobs and initial public offerings of stock (IPOs) for new job creating enterprises.  Both sides must yield to compromise.

With cut government programs for the poor, we can’t leave the needy hanging out to dry.  We’ll have to do much more as individuals and businesses with our time, talent, and treasure.  We’ll have to give more of our time to the church and community in volunteer work.  We’ll have to be more generous in donating to charities.  Churches will have to do more.  Community organizations will have to do more.  Businesses will have to be more involved than ever with the community and give back more of their resources.  

         Private and public sector entities can sponsor paid or unpaid internships (a form of job training) for the unemployed to help them acquire a variety of job skills and build a resume.  “Give a man a fish and he eats only once; teach him how to fish and he eats for the rest of his life.” (Kuan Siu).  After all, the citizens of the community are the life blood, support, and sustenance of every business as employees, customers, lenders through their bank savings, and as investors.  Yes……it’s all about sacrifice for the common good…...all of us. 

We can alleviate the debt crisis if we as individuals and as a nation make sacrifices now.  The longer we wait, the worse it will get.  Austerity, when a financial collapse is imminent, would be much, much worse.

Pray for wisdom in solving this problem for the good of the Country and that these fears will not be realized.  We must right the ship of state before it goes over the falls.  He won; we lost, but we can help him to become a successful president for the common good of the country.  It’s not important who gets the credit.

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