Of late we hear many politicians of both parties talking about running up debts that will be a insurmountable burden on our children and grandchildren. This is certainly appropriate given the scope and size of the proposed budget of the new administration. The numbers are truly staggering and almost incomprehensible due to their size. That budget is in addition to all the extra money that has already been authorized for the current crisis which if my math is right runs to over two trillion. I mean there is the 700 billion TARP money, the 787 billion stimulus money and then the over 800 billion of special funding from the Treasury and the Fed for asset purchases. The largest item on the budget will be the interest on the national debt. It will even exceed the defense budget; that is even with the extremely low interest rates prevailing at this moment in time. Those rates will change in the near future.
Surely you have heard the rumblings from China who holds a very substantial portion of our debt. First they argued about our stimulus Plan and the Buy American provisions, then they start talking about the value of our Treasuries and then they float out the idea of a new currency to replace the US dollar in international markets. They are concerned with good reason about not just our existing debt but about the fact that there is nothing in place to demonstrate when or how it will ever be reduced. The proposed budget is for a ten year cycle. That is a pretty long time and it makes no effort to reduce debt. Indeed it only projects very large deficits for the entire ten year period. That assumes that the budget is accurate as drafted which the CBO has questioned to the tune of over 2 trillion dollars–that is the deficits will increase by that much more than the administration’s budget projects. I suggest that the politicians quit worrying about our kids and start worrying about us in the here and now. Those numbers are so huge they can’t be shoved off that long. Those economic and fiscal chickens will come home to roost long before even the ten years have expired.
The question that isn’t being asked is how are we going to pay for this debt? That is the critical question and its answer or lack of one will affect our fiscal and economic well being now and over the next decade. Everyone keeps talking about an emergency and how something must be done now. I don’t accept that premise myself but that is of no moment since we are in the water now and we will be getting wet. If you run up large debts and go to the bank for more they will ask you how you intend to pay it off and when. They will want to see the numbers to justify your repayment plan. Those international concerns and nations that lend us money are just like a banker to the US right now. We in effect deal with a consortium of “banks” which includes China, Japan the Mid East nations and other large investors around the world. The budget assumes we will continue to be able to borrow from those folks on a regular basis ad infinitum without ever having to explain our repayment program. The question of dealing with the debt should be asked to the Presidend at every news conference and of all administration officials without let up until we have an answer. I don’t think we will like the answer and that is why they don’t want to give one.
Our lenders aren’t idiots and they know there is only three ways we can possibly begin a repayment program on this mother of all budgets–raise taxes substantially, which will deaden economic growth here and abroad; default on the debt in whole or in part, a la Argentina recently; or simply print up more money which will inflate the dollar and make them worth so much less that our creditors would not be excited about the thought of being paid in dollars worth less. Maybe they would almost be worthless dollars. They have a right to be concerned. The next thing to watch for will be a slow down in the purchasing of the US Treasury bills and notes. The sales of these items are held on a regular basis. Those foreigners buy them on a regular basis. They are selling well now because on a comparative basis our economy is still stronger than some others. But that is short term thinking. As the debt builds so will the international concern. One fine day some of those foreigners, probaby the Chinese, will not make a bid as expected for our debts. That will immediately raise the interest rates on our Treasuries and correspondingly reduce the exposure on our debt to them. Watch for it. Unless we get a sensible answer to the question about our intentions on the increasing deficits and debt it will happen. The only issue is when. That will put the kaboosh on government plans pretty quickly. The Government will print more money but folks won’t value it as before and the spiral will have begun. Higher interest rates which will mean even more debt, much slower growth because credit will be unstable, and at the same damn time we will have increasing inflation. That is your future world if this budget and others similar to it are passed in this term of the administration. There will be some short term improvement in the economy until the investors and trading partners realize we aren’t addressing the long term debt problems. The Chinese are clearly already sniffing around for alternatives to loaning us money. They have tremendous room to grow their internal economy for years to come even if their exports diminish. We don’t have the same room for internal growth because we are already developed.
A penny saved is a penny earned if you have the penny in the first place. A pretend penny you think you might have in the future that you don’t spend now is not earned. But the Feds don’t seem to get that.
The proposed budget of the new crowd in Washington calls for deficit spending in huge amounts for years to come. The lowest level of those deficits is over 400 billion and shows increases in the out years, climbing all the way to over 700 billion in ten years. A deficit of over 400 billion would be huge headlines anytime. Here we are contemplating deficits of much greater size without any end in sight or any coherent game plan to rein them. I know about the current economic crisis and the need for some action or inaction to get our economy moving again. Motion however does not equate to progress. These numbers are without even considering the need to stem the increases coming for Medicare and Social Securityd benefits. There is more blather in Washington about working on those matters but we have heard this story before. Excuse me if I think it is the little boy crying wolf again. We last did a major overhaul of Social Security about 25 years ago and that was after more than a decade of dithering and delaying the political pain of dealing with the problem.
We will be spending lots more money than we will be collecting. Firstly, tax revenues will drop in the immediate future because the economy has weakened and personal and business incomes will be lower and thus the tax revenues. That can’t be denied; only the amount and duration of the revenue loss can’t be speculated. The new budget also calls for increases in taxes. People generally don’t like to pay taxes especially if they don’t believe them to be fair or that their use is for purposes that they don’t support. With these increases now looming on the horizon and coming closer with each passing day people will start making plans on how to lower their taxable income. The changes in the deductible items will also dramatically affect how people spend their money. The fellow who could maybe make 265,000 a year might take a hard look at the numbers and decide he is better off making only 230,000 because the bulk of the extra income goes to the IRS. I remember when the rates were so high before Reagan and I did the same thing every year. I looked for every conceivable deduction and spread my income over the years at every opportunity to reduce my tax rate. Millions will be doing the same thing now. Sadly, all the special interest groups and lobbyists will be beating the walls down in Congress looking for deductions or exemptions for all those groups, industries or unions. You see it has already started with the charities. It will only accelerate.
As an aside I have often thought that we would be more willing to pay our taxes if we were allowed to designate the use of the money on our tax return. Just like they have designated gifts to Churches and charities where the donor can specify how the money will be used. It has to be used for that purpose and no other. Some folks will give money to their church for the music department. That money can only be used there. Be interesting to see how the money would be allocated if the Government provided a form on the back of the tax return with all the Government departments and their numerous agencies listed there so you could allocate percentages for each one or none at all. I wonder how much would be allocated for HUD for example or snail darter research in the EPA. Would the EPA get enough to function? What exactly does the Commerce department do that makes your life better? By the way it employs 65,000 government workers doing whatever the hell it is they do all day long. Yes, I know they do the census. Do they need 65,000 full time for that chore once every ten years. They hire a couple million extra for that anyway.
These deficits will be funded by issuing more Treasury notes and bonds. So far we have buyers because the rest of the world is also facing difficulty. That won’t last forever and the worlds’ governments probably won’t run deficit spending forever like we are projecting. Not to worry we are told because if there is not enough demand then the Federal Reserve will buy the notes when foreign demand wanes. It will wane at some point or else the interest rates will soar on those notes and that will make the deficits even worse, much worse with the increased interest cost. You should note that the so-called bell weather 10 year Treasury notes have already soared to 2.88% from 2.07% in the last 2 months. That is a huge leap in that time frame. Those notes are normally a sleepy backwater in the financial markets and moves are normally a few basis points in a week at most. That move is a harbinger of things to come. Yes, something wicked this way comes. When the Fed buys the Treasury notes it does so by printing up the money and it is the most blatant of fraudulent dealings imaginable. I mean can you loan yourself money? Wouldn’t it be nice to loan yourself a million dollars and put that on your balance sheet as a real asset? It is not real and that is the problem. Printing press money only dilutes the value of the dollar. Sure the dollar is ok right now and even moving up against some currencies but that is due to weakness around the world not because of great confidence in the dollar as a resevoir of value. It is higher now only by comparison and again that condition will not prevail for as long as the deficits are projected to extend. Those Treasury notes bought by the Fed will only stoke the flames of inflation and I worry that the Dems will return us to those glorious days of Carter all over again. We’ve seen this movie before. It is “stagflation”. High tax rates, very high inflation, shortages of essential commodities and a floundering economy and high unemployment. Inflation plus the unemployement rate was called the “misery index”. Never forget it is people with more money than you that hire you as an employee or give your small business a contract for work. I promise you will never work for someone poorer than you.
If the budget is passed as is and the future budgets in the near term and so many programs become entitlements that weren’t before, we face a difficult and sagging, limping economy for years to come. There will be an economy. Just nothing that will make you happy. It is not morning in America right now but a long evening we face unless our course is changed. We better change it. We’ve let the inmates take over the institution. It is crazy enough with sensible people running the place.
This is the week that Texas celebrates its declaration of independence from Mexico and the Alamo fell. That band of about 185 men indeed became immortal with their stand. It matches the heroics of the Spartans at Thermopilae and is a story known literally by peoples around the world.
“The ancient insanity of governments: the mania of wishing to govern too much”. Robespierre. We need to listen to that butcher. Even a villain can have a good thought.