Good Advice for Debt Limit Increase

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.

Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion.That is “trillion” with a “T.” That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President’s budget will increase the debt by almost another $3.5 trillion.

Numbers that large are sometimes hard to understand. Some people may wonder why they matter. Here is why: This year, the Federal Government will spend $220 billion on interest. That is more money to pay interest on our national debt than we’ll spend on Medicaid and the State Children’s Health Insurance Program. That is more money to pay interest on our debt this year than we will spend on education, homeland security, transportation, and veterans benefits combined. It is more money in one year than we are likely to spend to rebuild the devastated gulf coast in a way that honors the best of America.

And the cost of our debt is one of the fastest growing expenses in the Federal budget. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.

Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities.

Sen. Barack Obama, Congressional Record, S.2237-8, 3/16/06

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What Could Possibly Go Wrong?

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New CBO Budget Projections

The Congressional Budget Office released its projections over the next decade for the federal budget deficit and the overall outlook of the economy in general. The data and summary can all be found at cbo.gov. Remember that sustained budget deficits lead to larger and larger national debt.

Budget outlook for 2009-19:

The dramatic expansion of the deficit in 2009 (up from 3.2 percent of GDP in 2008) results from a projected rise in outlays of 24 percent (the largest percentage increase since 1952) and a drop in revenues of 17 percent from last year’s levels (the largest percentage drop since 1932). Those changes have largely been the result of the severe economic downturn and the fiscal impact of federal policies enacted in response.

On the long term outlook:

Over the long term (beyond the 10-year baseline projection period), the budget remains on an unsustainable path. Unless changes are made to current policies, the nation will face a growing demand for budgetary resources caused by rising health care costs and the aging of the population. Continued large deficits and the resulting increases in federal debt over time would reduce long-term economic growth by lowering national saving and investment relative to what would otherwise occur, causing productivity and wage growth to gradually slow.

I recommend again for everyone to watch I.O.U.S.A. which can be found here in Part I and Part II. Also check out this "Fiscal Wake-up Tour" slide presentation.

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Health Care Reform Ideas

Here are some common sense ideas for the health care reform debate, from the CEO of Whole Foods. Let's hope some of them make it in any bill that's finally cobbled together and attempted to be rammed through Congress.

Some highlights:
- Medicare/Medicaid reform
- Make individual health insurance tax deductible just like employer-provided insurance
- Tort reform
- Cost transparency so consumers can make informed decision about their own health

Health care reform is important - the costs really are skyrocketing. However, the government should take a real long hard look in the mirror and actually address the sources of the increases. Shifting the costs around only makes the problem worse.

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Peter Schiff on The Daily Show

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Peter Schiff
thedailyshow.com
Daily Show Full Episodes Political Humor Newt Gingrich Unedited Interview

More Peter Schiff here and here.

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Is California Too Big To Fail?

Who is up next for bailouts? How about California?

Preliminary returns on Tuesday night show that voters soundly rejected ballot measures calling for higher taxes, meaning that the not-so-Golden State's politicians are likely to take hat in hand and head to Washington begging for a bailout.

Republican Gov. Arnold Schwarzenegger floated that idea months ago, as did Assembly Speaker Karen Bass, a Democrat. Schwarzenegger's visit to the White House on Tuesday surely didn't harm its prospects.

California does have enough cash to survive through June 30, but the state controller estimated in March that another $10.6 billion would be necessary to last the summer.

Where does this stop? How many other states have budget troubles? If you want to have government spending, you must have sufficient tax receipts to pay for it. The moral hazard of a federal bailout of individual states is staggering. Why would any state balance its budget?

An article in Tuesday's Bond Buyer newspaper reported, citing congressional sources, that the U.S. Treasury and Federal Reserve are considering loan guarantees and "other assistance" to state governments. A House of Representatives committee is holding a hearing Thursday on a bill to provide federal guarantees; House Speaker Nancy Pelosi, a San Francisco Democrat, is in a position to make that happen.

Now, it's true that California's fiscal woes are serious, but they're the result of politicians' poor decisions over many years. No matter how it's concealed, a bailout could jeopardize the nation's AAA credit rating - and invite 49 other governors to queue up outside the Treasury building. (The incentive is perverse: The worse shape your state is in, the more cash you get from the Feds.)

This is just a symptom of our greater national problems. We are spending more money than we make on nearly every personal and governmental level. This cannot continue.

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Ten Trillion and Counting

The latest Frontline examines the massive US National Debt, focusing mostly on its political history. This is a story that must be absorbed by the American public. We must allow our politicians the political leeway to make the hard choices, and hold them accountable if they do not. We are literally mortgaging our country in order to live beyond our collective means. It certainly will not last forever, the question is: Will we stop before irreparable damage is done?




See also:
I.O.U.S.A. Part I and II
Squanderville vs Thriftsville

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Key Concept - Quantitative Easing

Quantitative easing is basically a term for "printing money". It refers to a central bank essentially creating new money and using it to reduce interest rates and thus encourage lending. It can accomplish this "easing" by: buying debt in the form of government bonds, buying assets from banks, directly lending to deposit-taking institutions, or any combination thereof.

Central banks normally use interest rate cuts to stimulate lending. Quantitative easing can be used when this strategy is not working or interest rates have already been cut to 0%. It can be used to combat deflation, but if the money supply is increased too much, it can create inflationary pressures. The ultimate risk is hyperinflation.

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Key Concept - Ricardian Equivalence

Ricardian Equivalence is an economic theory that postulates debt-financed government spending will leave demand unchanged. It suggests that it does not matter whether a government finances its spending with debt or a tax increase, the effect on total level of demand in an economy will be the same.

According to the theory, the public will save any excess money received to pay for the inevitable future tax increases. In an extreme case, current generations will save the money and bequeath it to future generations to pay the bill.

The theory, developed by the 19th century political economist David Ricardo (who also was a pioneer in the description of comparative advantage), rests on several key assumptions:

1. A perfect capital market - all players can borrow or save as much as is required at a fixed rate which is the same for all persons at a given date
2. Fixed government spending path
3. Inter-generational concern - The increased taxes may not be paid by the current generation. Current individuals would need to have concern for their descendants.
4. Rational citizens

Obviously these are assumptions that are on shaky footing in our current world, which tends to cause the theory to lose some validity. Since the theory doesn't hold up completely, government stimulus plans can affect the economy, and may explain standard Keynesian theory where bond financed spending has a bigger effect than tax financed spending.

However, while perhaps not perfect, it certainly can explain some behavior that will temper the effectiveness of government stimulus programs. Many people use their stimulus checks to pay down debts, thus leaving more ability for payment of future tax increases.

It also brings up moral issues about financing current spending by writing debt to be paid by future generations that have no say in the process. Even if issuing debt does give an increase in demand for the economy, the recipient of the benefit and the payer of the debt should both be willing participants.

Refs:
wikipedia, investopedia

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US Budget Quandary

Here's another look at the troubles that we face...there are no easy answers.

"It's not as easy as it sounds. Every president tries to [scrub the budget]. But there's not much low-hanging fruit," said Charles Konigsberg, a former assistant director at OMB in the Clinton administration and now chief budget counsel at the Concord Coalition, a deficit watchdog group.

Here's what Konigsberg means: Roughly two-thirds of the federal budget -- about $2 trillion in 2008 -- is considered mandatory spending. That's money that Uncle Sam has committed to pay out in entitlement programs such as Social Security and Medicare, in interest owed on the national debt, and on other programs for which budget authority is written in stone.

The federal tax receipts for 2009 will barely cover the "mandatory" spending.

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Peter Schiff Was Right

These clips come highly recommended from a coworker. Up first...Peter Schiff Was Right:



While past performance is no guarantee of future results, he certainly has my attention after that demonstration of prescience...extra credit for taking Ben Stein to school. Next, check out what he says about the impending stimulus package, if you dare.

The fiscal stimulus bill being debated in Congress not only won't help the economy, it will make the recession much worse, says Peter Schiff, president of Euro Pacific Capital.

The problem, he says, is the government is trying to perpetuate a "phony economy" based on borrowing and spending. With the U.S. consumer tapped out, the government is "now taking on the mantle" of consumer of last resort, he continues, predicting the bond bubble will soon burst - if it hasn't already - ultimately leading to a collapse of the dollar and an "inflationary depression worse than anything any of us have ever seen."

Nothing like watching a guy call the current situation to the letter, and then have him warn us we are headed to a Weimar Republic.

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I.O.U.S.A. on CNN: Part II

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I.O.U.S.A. on CNN: Part I

Thanks to an anonymous tip, here are video files of the showing of I.O.U.S.A. on CNN. I strongly believe every American should watch this documentary.



(Source)

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Squanderville vs. Thriftsville

In I.O.U.S.A., Warren Buffet makes a cameo appearance to lend us a parable of the dangers of a severe trade imbalance. Squanderville vs. Thriftsville, taken from his 2003 Fortune magazine article, is a simplified look at the difference between spenders and savers. He then relates the story to our worsening situation...and his plan to turn things around.

A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo -- but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off -- or simply service -- the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat -- they have nothing left to trade -- but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

...

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce -- that's the trade deficit -- we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.

To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth. Those comparisons show that what's already been transferred abroad is meaningful -- in the area, for example, of 5 percent of our national wealth.

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I.O.U.S.A on CNN This Weekend

Editors Update: Video files here: Part I and Part II

In this post, I highlighted former US comptroller David Walker's, "Fiscal Wake Up Tour". This is featured in the documentary I.O.U.S.A. as well. A synopsis:

Wake up, America! We're on the brink of a financial meltdown. I.O.U.S.A. boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions.

Throughout history, the American government has found it nearly impossible to spend only what has been raised through taxes. Wielding candid interviews with both average American taxpayers and government officials, Sundance veteran Patrick Creadon (Wordplay) helps demystify the nation's financial practices and policies. The film follows former U.S. Comptroller General David Walker as he crisscrosses the country explaining America's unsustainable fiscal policies to its citizens.

With surgical precision, Creadon interweaves archival footage and economic data to paint a vivid and alarming profile of America's current economic situation. The ultimate power of I.O.U.S.A. is that the film moves beyond doomsday rhetoric to proffer potential financial scenarios and propose solutions about how we can recreate a fiscally sound nation for future generations.

Creadon uses candid interviews and his featured subjects include Warren Buffett, Alan Greenspan, Paul O'Neill, Robert Rubin, and Paul Volcker, along with the Peter G. Peterson Foundation's own David Walker and Bob Bixby of the Concord Coalition, a Foundation grantee.

Pointedly topical and consummately nonpartisan, I.O.U.S.A. drives home the message that the only time for America's financial future is now.

I have been meaning to rent this for some time, but have yet to see it. It has been rumored to be airing this weekend on CNN. Supposedly it will be on Saturday, January 10 at 2:00 p.m. EST and on Sunday, January 11 at 3:00 p.m. EST. I say supposedly because my DVR listing was less than descriptive. If I am able to catch it, I'll follow up with a review. Otherwise, I'll still have to rent it sometime. Anyone see it yet?

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GAO Report: U.S. Financial Condition and Fiscal Future

With all the news about government bailouts recently, I have been doing some research on U.S. government spending.

I found an interesting presentation on the Government Accountability Office (GAO) website. This was part of former Comptroller General David M. Walker's "Fiscal Wake Up Tour". It remains to be seen if anyone in Washington (or anywhere else in the country) has awakened yet, but the presentation has some interesting nuggets of information.

Some highlights:

- The Fiscal Burden numbers on page 18: $175k per person, $455k per household
- We face large and growing structural deficits largely due to known demographic trends and rising health care costs
- GAO’s simulations show that balancing the budget in 2040 could require actions as large as:
• Cutting total federal spending by 60 percent or
• Raising federal taxes to two times today's level
- Closing the current long-term fiscal gap based on reasonable assumptions would require real average annual economic growth in the double-digit range every year for the next 75 years
- During the 1990s, the economy grew at an average 3.2 percent per year
- As a result, we cannot simply grow our way out of this problem. Tough choices will be required.

Keep in mind this was given in January - well before any of the latest financial obligations (and those that have yet to be promised) were on the books.

The bottom line: current entitlement programs and tax levels are inherently unsustainable.

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