I really have no idea how many people still read this blog. BUT, if you do, if you happen to be one of the faithful ten or so readers who still subject themselves to my rants regarding the utter madness that our economy has become, PLEASE email this blog entry to everyone and anyone you know. For those of you who know me personally, you can attest to the fact that although I am not always right, I am intellectually honest and will only present the facts when professing to do so. That being said, I have done my research and crunched the numbers and I am simply unable to remain quiet regarding this convoluted Desperate debt debate. So, being true to the nature of this blog, I will attempt to break the situation down in the accessible and simple manor in which it should be discussed.
First, let's define the terms. Default: Not paying all or some of a payment, in a timely and agreed to fashion, that one party is contractually obligated to pay to another.
Debt (as it relates to our government): Almost exclusively and entirely made up of bonds that are issued via the full faith and credit of the federal government to investors.
We are in no risk of defaulting on our debt. We just aren't. Our government brings in roughly (give or take a billion) $200 billion a month. Our interest payments on all bonds, social security, medicare and medicaid, military costs (including all additional war costs and veteran benefits), add up to about $165 billion. Now to be fair, our other costs that do include social programs and other entitlement programs do add up to more than the $35 billion remaining. Cutting back on these programs or not funding them does not equal a default. It actually would have the opposite effect. If we made hard and meaningful cuts into these social programs we would most likely preserve our AAA debt rating by reducing our long-term commitments and liabilities. For the record, I am not suggesting that this would be easy or even that it is the right thing to do. I am simply illustrating that we have no real risk of default unless our government consciously chooses to not pay our debt.
As far as the aforementioned cuts to social spending and entitlement programs, it is not something I support unequivovally. No matter your view on entitlement spending, making deep and meaningful cuts into social programs is a painful enterprise. One must approach the matter with a sense of sobriety, knowing full well that such cuts will impact struggling families and hungry children. At the same time, we must acknowledge that the tens of trillions of dollars that have been spent on social programs since the inception of LBJ's heralded Great Society programs, the poverty level in this country has risen from 14% to 14.3%. You can draw whatever conclusion you want to but the numbers don't lie. Is it possible that the more we spend to help the poor we simply create more poor? Is it possible that the more comfortable, palatable and dignified we make living in a state of poverty that we are simultaneously encouraging more Americans to join the ranks of the impoverished? I am not, and will never, suggest that we should end social programs. My wife and I are ardent believers in helping those less privileged, both with our personal monies as well as our tax dollars. Yet, when looking at the cold hard numbers, we must take a serious look at how we are spending the money and examine whether or not we have pursued the correct course and philosophy as it relates to helping out our fellow man.
The other aspect of this debt and spending debate that seems to get ignored by both parties is the unsustainable nature of our out of control spending. REGARDLESS of how necessary you believe that any or all of the innumerable amount of social programs are, you cannot ignore the cost. We must all wake up to the fact that the government is spending ACTUAL money. The government does not have access to some magical bank account with supernatural replenishing powers. Therefore, the governments first concern should always be taking care of and carefully managing its main source of funding, the taxpayer. It is immaterial what programs you believe to be necessary and moral if the money does not exist to fund them. Furthermore, how compassionate is to recklessly spend and borrow to fund certain social programs while simultaneously straining our tax and borrowing base to the point of endangering ALL government programs. Additionally, we must cease looking to the taxpayer, whether rich or middle class, to pick up the ever expanding tab. If that worked, the EURO zone and its 50-60% tax rates would be amply funding their social spending. The fires burning in Greece and Italy (Spain will be there shortly) would suggest otherwise.
Cutting budgets and spending is never fun. You have to be a sadist to truly delight in the slashing of social programs. But I find it to be a much more bizarre and sadistic practice to endanger the solvency and existence of this great republic by the fervent refusal to curtail spending. Should we include such things as military and law enforcement? As unpalatable as that may be to the majority on the right, the answer is simply yes. There is waste to be trimmed in all areas. But, we must keep in mind what the ultimate goal of this Union was upon its founding. This country was based on the aim of securing life, liberty, and the PURSUIT of happiness. As one of my favorite movies points out, this country is obligated to give you fair shot at happiness. Even in 1776, our forefathers knew that we could never make happiness a certainty. Therefore, our spending must always be dedicated, first and foremost, to the preservation of our union and the safety of her citizens. We absolutely cannot risk our future solvency and survival in the hopes of securing and guaranteeing the comfort and happiness of all our citizens. That would truly be the pursuit of destruction.
Wednesday, July 27, 2011
Monday, July 11, 2011
The Budget Battle in Washington: A Synopsis of the Issue
I have been absolutely amazed at the misinformation and contradictory summations of what exactly is going on in Washington regarding the budget and the debt ceiling. So, I'm going to keep all opinion out of my explanation and deliver only the facts. I believe it is imperative that every citizen of this country understands exactly what's going on and what the ramifications are for all proposed solutions. But, let's first take a look at what has been going on in the markets.
I WAS WRONG. There. I said it. I have been opining for months about how this market is overvalued and we are headed for a big sell off. Well, that hasn't exactly happened. Don't get me wrong, the economy is still a disaster. Record unemployment, houses still in free fall, and bad consumer spending are still dogging this so-called recovery. However, Wall Street is in full rally mode and keeps pushing ever higher. This has absolutely confounded me until my recent epiphany. I grossly underestimated the effect of the stimulus and the mountains of free money that the Fed has pumped into the system. Companies have been able to refinance their debt at essentially zero percent, make capital investments they previously could not afford, and use the free money to purchase short-term investments and essentially fabricate profits. Did you know that many investment banks that were bailed out on your tax dollar are borrowing money from the Fed to purchase short-term government bonds? This means that the big banks are using government money to purchase government debt, stripping off the interest payments and pocketing the profit, and then paying the Fed back with the proceeds from the sale of said government bonds!! So, they are borrowing your money to purchase investments that pay interest with YOUR tax dollars. Now, this is obviously unsustainable and is not without its consequences. All of this free money floating around is going to be a millstone around the neck of the dollar's value for years to come. Anyway, my point is simply that at least in the near term, Wall Street will continue to be able to post profits as long as the Fed keeps interest rates artificially low. So, barring any unforeseen events, my position now is that this market will probably keep floating higher. Yet, I am not changing my investment approach as the party has to end at some point and nobody knows when that will be.
Now to the budget. We have discussed the budget crisis at great length in previous posts so I will try to stick to the current debate and not digress to previous discussions. First off, this is not a partisan or politically based issue. People are trying to make it a political issue but it is simply an economic issue. Both parties have been spending more than we are bringing in for some time. Now, our debt has surpassed our entire gross domestic product. We currently do not have enough revenue coming in to cover all of our obligations. So, the President is advocating that we raise the self-imposed debt limit in order to issue more government debt (sell more bonds) to pay our bills. Republicans are refusing to raise the debt limit unless the government cuts spending that at least equals the amount that the debt will be increased. Democrats are advocating that taxes be raised in order to pay for the debt increase. Republicans will not sign on to the debt increase if tax hikes are included and the Dems have vowed to nix any plan that doesn't include tax increases as well as any reductions to entitlement programs like Welfare and Medicaid. We are at a bit of a stalemate.
What's the answer? As much as I hate to say it, we must raise the debt limit, TEMPORARILY. As for raising taxes, we do not have a revenue problem. What other company or organization in the world confronts a budget crisis without making cutting costs an absolute priority? We can no longer pay for programs that we BELIEVE government should provide without considering whether or not we can afford them. As for raising taxes, it's just not a good idea in a recession. First of all, the assertion that raising tax rates equals more tax revenue is ridiculous. Tax hikes may result in a segment of society paying more money, but large corporations and the wealthy will simply move the equivalent amount of capital or business offshore to counteract the tax increases. This equates to less jobs and money here at home. This is best illustrated by the fact that GE profited nearly $14 billion last year and didn't pay a cent in federal income taxes. They simply routed the profits through international channels and absorbed the costs here at home. In short, tax increases are dead weight on an economy and many on the Left refuse to accept it. What we need to do is cut spending and incentivize businesses to do more business here at home. For example, does the government make more money if 100 people are paying 35% of their income in taxes or if 120 people are paying 30% of their income taxes? You don't have to have a mathematics degree from Harvard to realize that more people paying a lower percent will yield more revenue for the government. We need to create more jobs and get this economy cranking again as well as cut government spending in order to pay off this ridiculous debt and avoid fiscal calamity in the future. Let's hope reason wins out in Washington. Well, that may be a bit naive!
I WAS WRONG. There. I said it. I have been opining for months about how this market is overvalued and we are headed for a big sell off. Well, that hasn't exactly happened. Don't get me wrong, the economy is still a disaster. Record unemployment, houses still in free fall, and bad consumer spending are still dogging this so-called recovery. However, Wall Street is in full rally mode and keeps pushing ever higher. This has absolutely confounded me until my recent epiphany. I grossly underestimated the effect of the stimulus and the mountains of free money that the Fed has pumped into the system. Companies have been able to refinance their debt at essentially zero percent, make capital investments they previously could not afford, and use the free money to purchase short-term investments and essentially fabricate profits. Did you know that many investment banks that were bailed out on your tax dollar are borrowing money from the Fed to purchase short-term government bonds? This means that the big banks are using government money to purchase government debt, stripping off the interest payments and pocketing the profit, and then paying the Fed back with the proceeds from the sale of said government bonds!! So, they are borrowing your money to purchase investments that pay interest with YOUR tax dollars. Now, this is obviously unsustainable and is not without its consequences. All of this free money floating around is going to be a millstone around the neck of the dollar's value for years to come. Anyway, my point is simply that at least in the near term, Wall Street will continue to be able to post profits as long as the Fed keeps interest rates artificially low. So, barring any unforeseen events, my position now is that this market will probably keep floating higher. Yet, I am not changing my investment approach as the party has to end at some point and nobody knows when that will be.
Now to the budget. We have discussed the budget crisis at great length in previous posts so I will try to stick to the current debate and not digress to previous discussions. First off, this is not a partisan or politically based issue. People are trying to make it a political issue but it is simply an economic issue. Both parties have been spending more than we are bringing in for some time. Now, our debt has surpassed our entire gross domestic product. We currently do not have enough revenue coming in to cover all of our obligations. So, the President is advocating that we raise the self-imposed debt limit in order to issue more government debt (sell more bonds) to pay our bills. Republicans are refusing to raise the debt limit unless the government cuts spending that at least equals the amount that the debt will be increased. Democrats are advocating that taxes be raised in order to pay for the debt increase. Republicans will not sign on to the debt increase if tax hikes are included and the Dems have vowed to nix any plan that doesn't include tax increases as well as any reductions to entitlement programs like Welfare and Medicaid. We are at a bit of a stalemate.
What's the answer? As much as I hate to say it, we must raise the debt limit, TEMPORARILY. As for raising taxes, we do not have a revenue problem. What other company or organization in the world confronts a budget crisis without making cutting costs an absolute priority? We can no longer pay for programs that we BELIEVE government should provide without considering whether or not we can afford them. As for raising taxes, it's just not a good idea in a recession. First of all, the assertion that raising tax rates equals more tax revenue is ridiculous. Tax hikes may result in a segment of society paying more money, but large corporations and the wealthy will simply move the equivalent amount of capital or business offshore to counteract the tax increases. This equates to less jobs and money here at home. This is best illustrated by the fact that GE profited nearly $14 billion last year and didn't pay a cent in federal income taxes. They simply routed the profits through international channels and absorbed the costs here at home. In short, tax increases are dead weight on an economy and many on the Left refuse to accept it. What we need to do is cut spending and incentivize businesses to do more business here at home. For example, does the government make more money if 100 people are paying 35% of their income in taxes or if 120 people are paying 30% of their income taxes? You don't have to have a mathematics degree from Harvard to realize that more people paying a lower percent will yield more revenue for the government. We need to create more jobs and get this economy cranking again as well as cut government spending in order to pay off this ridiculous debt and avoid fiscal calamity in the future. Let's hope reason wins out in Washington. Well, that may be a bit naive!
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