Debt, Default And Dementia

We are awash in predictions, warnings and twisted numbers in the current debate about our debt ceiling and how to deal with it and the budget issues that cause the debt to rise continuously.   The smartest guys in the room often make this more complicated than  it is.  Yes, we do have a very large and complex economy with many moving parts but even the most complex of systems will response to a few rational and basic anchor points if they are clear and predictable in the future years.

The debt is enormous at over 14 trillion but it could be managed with prudent financial planning.  The Feds do have a substantial income stream and will have.   Anyone who has passed 6th grade math, at least in the old days, can calculate a method to reduce the deficits which will in turn reduce the debt.  Yes, that means that the Feds will have less money to spend on some programs.  Other than Defense, the Treasury and the Dept. of Justice how many of the other departments of the Federal government are necessary to the well-being of the nation?    There should be no sacred cows.  The question should be asked if the benefits (if they exist at all) couldn’t be delivered more effectively and cost efficiently by the respective States.  

We need to quit allowing the politicians to propose a budget with a 10% increase in spending and then later reduce that budget amount by 5% and call that a “cut”.  A cut in common understanding is when you spent $100 last year on something and then this year you only spend $90 for the same purpose.   That is a cut.  The world will notice those reductions and the increased strength of the Federal balance sheet and fiscal policy.  When the Federal Reserve quits buying so much of the Treasuries in another month it is far from certain who will step in to loan us money by buying our bonds.   It is one thing to say you will borrow money to fund the operations of the Federal government but quite another to find someone who will actually loan you the money.  There are quack conspiracists out there already who think we went to war in the Middle East to get our hands on oil and soon they would be postulating that we are forcing other nations to buy our bonds at the point of a bayonet.  China has cut back its buying, Japan will be slowing down due to the earthquake and the need to spend their money at home.  Markets may not always act rationally but individual investors usually do.  They will assess their risk of repayment and our future ability to service debt is clearly on a decline.  That decline cannot be seriously disputed.

We continue to bailout of AIG, Fannie and Freddie and Government Motors and Chrysler with borrowed money.  All of this against a background of off-the-books liabilities of trillions more for Medicare, Medicaid and Social Security.   Such phoney accounting would put a private person in prison for fraud.  Does anyone really believe we can borrow our way to prosperity?   Are there those who believe if we borrow enough we will make money?    Because of our fiscal dishonesty with the markets and imbalance between collections and expenditures we will face default at some point and sooner rather than later.  Long before the next generations that so many say will bear the burden.   Those debts chickens will come home to roost within 10 years.  That is hardly the time span to talk about the next generation.

Raise the eligibility age for both Medicare and Social Security by a couple of years.  We live longer which is a testament to our medical sector and to our generally rising and high standard of living.  I am willing to even raise taxes. Increase the taxes for those over $500,000 income by 2% but, but, but at the same time reduce the capital gains rate to 10%  and eliminate the estate tax entirely, and totally reform the tax code by eliminating all deductions over a ten year period.   Reduce the Federal payroll by 5% of existing employees; reduce their pay by 5% and make their pension plans defined benefits so they get whatever is there when the retire rather than some guaranteed amount and make them contribute more.  All other Federal departments would have a 5% real cut in budgets and the only increases allowed would be for real inflation not union demanded increases.   Full disclosure none of this  would affect this writer. I am not a big earner anymore nor a big time investor.  But that extra money for the investors of the US and the lower capital gains rate would put a real fire under the economy.  That will produce a new round of investment in new businesses and enterprises and thus jobs–millions of new jobs which we badly need.   Yeah, cut the Pentagon budget too but make it heavy on the paper pushers and civilian personnel.  Make them take the same 5% cut in non-uniformed personnel.

There is one compromise.  Those who want the Federal government to control and run everything will not like it. It takes away their power and ability to do their social engineering and buy votes.  So be it. Here’s hoping they are not the majority.

Exactly what benefit have we gotten for the billions of foreign aid spent around the world?  Why are we funding almost 20% of the IMF budget to aid mostly countries that aren’t really that friendly?  www.olcranky.wordpress.com

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