07.08.2011
Countdown to Deficit Cuts – But Still a Deficit
original article written by Net Advisor™
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By August 2, 2011, Congress should have come to some resolution on the deficit. The only problem is the likelihood of Congress actually solving the deficit is close to zero, and any budget cuts are more than likely to still create deficits for years to come.
We may see some cuts in spending somewhere around $1 to $4 Trillion for 2011. This is a start in the right direction, but it is likely that these cuts will be made over many years. The result may only shave a $100 Billion or so off the deficit each year, but still creates more debt. This is not exactly government reform. It is more like placing another band-aid on a patient who has 8 severed arteries – the human apparently body has 10 major arteries.
Magical Trillion
If Congress cuts say $1.1 Trillion spending this year, the fanfare will attempt to make the public feel that Congress is tough on spending. This manta will be important rhetoric for the 2012 Presidential election.
The only problem is if Congress cuts deficit spending by say $1.1 Trillion, we will have achieved three things:
1. The Debt Ceiling will go up anyway.
2. The U.S. will still be operating in deficits in 2011, and 2012 until a better plan comes into play.
3. Congress will have to revisit raising the debt ceiling again probably by 2013, coincidentally AFTER the next Presidential election.
“Beginning in 2013 and for every year thereafter, the debt subject to the limit actually exceeds the value of every good and service produced in the United States.”
— Source: U.S. Rep. Elton Gallegly (R-CA)
A Deficit Anyway
There is a huge difference between a balanced budget (spending = revenue), and deficit spending (spending greater than revenue).
What is currently not being discussed in regard to the deficit
IF Congress cuts say $1.1 Trillion off the 2011 deficit, then we will still have +$500 Billion (or Half-Trillion dollar) deficit for 2011.
Why? Because Obama’s own budget shows the 2011 deficit is running at $1.6 Trillion (Source: Wall Street Journal). [Math: $1.6 Trillion 2011 deficit – $1.1 Trillion (proposed) spending cuts (for 2011) = <$500 Billion> deficit in 2011.]
Obama’s own 2012 budget will include another $1.1 Trillion deficit (Source: NewsMax). Congress needs to avoid these quick budget fixes by cutting spending for a short period, only to resume spending next year and beyond. Congress has been running this same game plan over and over since 1982 (Source: Federal Reserve Bank of Kansas, 1995 PDF Report).
Deficit Risk & Economic Assumptions
The government’s plan to cut (some) deficit spending would have to imply certain assumptions:
(1) That government does NOT include any new spending programs. Any new spending programs will reduce this August 2, 2011 “deficit cut.”
(2) Interest rates don’t go up. As the U.S. deficit goes up, the value of the U.S. Dollar will go lower, creating inflation in oil prices, other commodities such as food (soybeans, wheat, and corn) and imported consumer goods. I discussed this risk back in 2009. By 2010 we have clear signs of inflation. Higher interest rates will increase the interest costs on the debt.
(3) The U.S., Chinese, or overall global economy does not materially slow down. Yes, we are now dependent on the Chinese and other economies to help reduce our own economic risks. This is what happens when a country borrows and spends money it doesn’t have. The country (in this case, the USA) is then dependent on the success of its lender (i.e. China) to make more money to be able to afford to loan us more money. This is poor economic policy and I would argue a National Security Risk.
(4) That there will be no domestic or foreign aversive surprises that could negatively impact the U.S. economy. Risks include but are not limited to Greece, Portugal, Italy, Ireland, Spain, etc, all of whom are in borderline economic disaster, and could cause a domino effect on the global banking system that could make the 2008 housing-credit crisis look like a classic E-Ticket attraction at Disneyland.
(5) That the U.S. credit rating is not downgraded – ever. (References: Article 1, article 2, article 3.) Instead of taking responsibility for creating record deficits, one political ideology seeks to blame the credit rating agencies for warning of credit risks, and subsequent credit downgrades for technically bankrupt counties (Source: IB Times).
If the federal government continues net deficit spending, and does not properly address entitlement reform, the risk to the U.S. economy is likely to be severely impacted sometime during the next 0 to 9 years (References: Article 1, article 2, article 3). According to the Congressional Budget Office (CBO), even senior healthcare is at risk.
“The real threat to seniors’ health care is the fact that Medicare is going bankrupt. The current trajectory of government spending on health care is unsustainable. Without changes, according to the CBO, the Medicare program collapses in 2020.”
— Source: Congressional Budget Office. March 2011 Medicare Baseline (Ref: Budget.House.gov)
How the debt problems could easily become an even bigger issue
Only a fraction of the $1.1 Trillion+ in proposed budget cuts are to be applied toward the 2011 deficit. President Obama slated these cuts to come in over 10 years, not fully this year, not next year, but over 10 years. This was discussed in detail back in February 2011.
If Obama’s deficits continue as his own budget projects, this will make Bush’s deficits look like the economy was in an economic boom. Please see chart below:
An editorial published in the New York Times on February 14, 2011 called Obama’s alternate $3.7 Trillion “budget” (deficit) “encouraging” (PDF Copy). The result of these proposed spending cuts will still more than double the U.S. deficit over 10 years since Obama came to Office in January 2009.
The Obama Administration’s own budget numbers project that the National Debt is expected to INCREASE to $24.633 Trillion by 2021, up from $10.7 Trillion when President Bush left office. This is a 130% or $13.933 Trillion increase in the National Debt in just 10 years.
— Source: WhiteHouse.gov, PDF, P171. [Bush Deficit]
Obama is spending at twice the rate as Bush did and in just half-the time.
Does this Obama “budget” sound “encouraging” to you?
The Republican budget goes further in spending cuts, but we are sorry to report that the overall Republican plan just does not go far enough to reduce government deficit spending. Here is the 2011 bi-partisan statements (original link at speaker.gov) prepared by the Office of the Speaker in regard to deficit cutting. This report was updated on 04-12-2011 (our local PDF copy/ original link at speaker.gov).
How to Save an Extra $1 Trillion
In our 2010 Afghanistan Report we pointed out that the ArmyTimes suggested that if the U.S. pulls out of Afghanistan and Iraq more quickly, that alone could save $1.1 Trillion off the budget deficit over the next 10 years.
“A speedier withdrawal of U.S. troops from Iraq and Afghanistan would shave $1.1 trillion off the budget in the next decade, a new congressional budget projection says.”
— Source: Army Times
Coincidentally, $1.1 Trillion is the same number that President Obama had been floating around as the 10-year “deficit reduction” figure. It makes one wonder if much of the deficit cuts are coming from the eventual ending wars in Afghanistan and Iraq and not so much to real cutting of government spending? The costs of U.S./NATO involvement in Libya is not factored in this equation.
Latest News
Talks on deficit reduction now range from $1.6 to over $2 Trillion, but over 10 years (Source: PBS). This is still deficit spending. No political party is suggesting that there will be a balanced budget at ANYTIME in the future. Voters also seem to be upset over the direction of the country.
“Sixty-eight percent (68%) of voters say the country is heading down the wrong track, showing no change from the previous survey.”
— Source: Rasmussen Reports (Poll) (as of 07-06-2011)
Whatever happens by August 2, 2011, the probability is the U.S. will raise the debt ceiling, then raise it again and again, and again until real leadership comes in and makes the necessary change to get government to live within their means. The current political and fiscal ideology does not support long-term economic growth, but rather is laden with debt.
Political Ideology of the Past:
“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”
— Thomas Jefferson (1743-1826)
Political Ideology of the Present:
“I think when you spread the wealth around it’s good for everybody.”
— Barack Obama said during the 2008 Presidential Campaign (Video Link)
Clearly the political ideology needs to change to where proper and fiscal constraint is balanced. More taxes won’t solve our deficit problems either in fact; it could make problems worse as it did during the Great Depression. Government doesn’t have a revenue problem, government has a spending problem. Giving government more money means that government will just spend more of your money.
“We don’t have a trillion-dollar debt because we have not taxed enough…we have a trillion dollar debt because we spend too much.”
— Ronald Wilson Reagan said to the National Association of Realtors in Washington on 03-28-1982
The question is, will the current Administration offer real reform to control government spending; or will the current Administration seek to keep deficit spending and raise taxes during a recession or what some also call the “fragile recovery?” Stay tuned.
| The Gross National Debt: |
UPDATE II: Continues HERE
Credits:
Modified parody color image NetAdvisor.org staff. Original image owner: unknown or public domain.
Deficit chart: Heritage.org
Real-time debt clock courtesy: zFacts.com and may be subject to copyright.
Original content copyright © 2011 Net Advisor™
Revised copyright © 2015 NetAdvisor.org® All Rights Reserved.
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