The insanity of the US budget in a nutshell

The Times provides the Cliff Notes.

Because only 20% of the budget is discretionary spending, and so much of that is corporate welfare, but soaring deficits require genuflection to the goddess Prudence, the ax falls on on programs that are penny-ante in relation to the overall $2.7tn budget, but screw the bejazus out of thousands of low-income folks.

(The Medicaid cuts in S 1932 being a recent case in point.)

The only way to start to move to budgetary sanity is a complete A-Z review of military programs (with all contracts for duff, inappropriate or overpriced kit being cancelled) and a swift movement to a single-payer universal health care system.

(As was discussed ad nauseam during the Bush social security circus last year, the real long-term runaway spend comes with Medicare, not SS.)

Of course, neither will happen in this universe. Certainly not until there's a credit crunch precipitated (probably) by Uncle Sam's Asian financiers, and there's no more money for anything. And then only after a great deal of financial pain is suffered, most acutely by those least able to bear it.

Tags: budget, Defense, Discretionary Spending, Health care, Medicare (all tags)


1 Comment

Re: The insanity of the US budget in a nutshell

How Bankrupt Are We?  

A short 15 months ago, Congress rescued the government from breaching its legal debt ceiling by raising our ceiling by $800 billion. On January 24th of this year, it crashed through that new debt limit, with nary a peep from anyone.

Some analysts predict the collapse of the United States; the need to declare bankruptcy. Yet while a few elected representatives say they care, most act unconcerned. When former Treasury Secretary Paul O'Neill stated the tax cuts for the wealthiest rich elites was a danger to our long term economic well being, Vice President Dick Cheney said "Reagan proved deficits don't matter. We won the (2002) midterms. This is our due." Our?

Recent Technical Default

In November 2004, Congress passed legislation allowing for an additional $800 billion more debt and thus the debt ceiling was not breached. A short year and two months later, the new borrowing limit has already been surpassed. On January 24, 2006, the government of the United States was actually in technical default. The U.S. Treasury Department website openly stated that the national debt has surpassed $8.1853 trillion when the legal debt limit mandated by congress was $8.1840 trillion.

When the debt ceiling was exceeded, nary a peep was chirped by our politicians or the press. This is surprising; especially since the amount and rate of debt increase is unprecedented. Government debt no longer seems to carry any stigma for politicians. According to Texas Congressman Ron Paul, "The original idea behind the debt limit law was to shine a light on government spending, by forcing lawmakers to vote publicly for debt increases." However, increases have become so commonplace (over the past 40 years, the debt ceiling has been raised 50 times) that the media scarcely reports them and there are no political consequences for those who vote for more debt. On March 17th, the ceiling was raised another $781 billion, to $9 trillion.

The Growing Deficit and Debt

Responding to President George W. Bush's Fiscal Year 2007 speech, Republican House Budget Committee Chairman Jim Nussle made this claim, "As we continue our efforts to control spending and reduce the deficit, the president's proposal provides a solid starting point for this year's budget by focusing on our most pressing needs: sustaining our strong economy and job creation, and ensuring the strength of our national defense and homeland security." Under this spending plan, they suggest we will incur and additional $423 billion deficit (the amount we will go further into debt this year), but that this will be whittled down to $183 billion by 2010. While this sounds positive, the accumulative effect of having a deficit each year means that we are sinking further into debt. All previous forecasts from the Treasury Department, the GAO and the OMB have proved inaccurate with an unfounded bias toward optimism.

On top of the reported deficit is the cost of the wars in Iraq and Afghanistan, which for political reasons are not accounted in the budget. Over $100 billion in war money is included in "off budget" emergency appropriations. If congress reported the actual 2006 deficit, it would be approximately 25 percent higher. But a $100 billion increase in this year's deficit is a tiny two-tenths of one percent of our unfunded Medicare, Medicaid, Social Security and government pension obligations. Chairman Nussle is clearly uninformed or intending to deceive, because when examined, the 2007 spending plan underreports the increased borrowing for next year, falsely denies the additional debt it creates, and like Global Crossing, Enron, World Com, and Adelphia, does not account for the "off balance sheet obligations" we must pay for Social Security, Medicare and Medicaid.

Our collective indebtedness has soared since 1957, the last time the federal government paid down any of its debt.  Then, the U.S. paid less than $2 billion of the $276 billion it owed in 1956. The $1 trillion in federal debt that President Ronald Regan declared "incomprehensible" in 1981 when elected to office has grown nearly 900 percent to $9 trillion today. The government has borrowed more money from foreign governments and banks during the past 5 years than during the previous 211 years combined.

The midrange estimate of our total reported and off-the-books debt is $62 trillion (some estimates range as high as $107 trillion). It requires interest payments and the refinancing of the ever-mounting principal owed.  With a population of nearly 300 million and roughly 2.5 persons per household, this is $500,000 owed by every American family. With average household savings of $5,000, the average family is now on the hook for $495,000. We are collectively bankrupt, but this technical bankruptcy continues to be "restructured" as our debt holders and trading partners continue to lend us money from their own productive economies. The hole we are in, due to our waning productivity and insatiable appetite to consume imported oil and consumer goods, is being dug deeper every minute.

Forestalling Our Default

Awash with trillions of trade dollars, and trillions of dollars worth of our bonds, foreigners exert enormous influence on us.  Desiring safer alternatives they have begun seeking other investments than our bonds. Meanwhile, trade barriers have already been enacted by congress to scuttle investments by the Chinese National Oil Company (to purchase Unocal) and Dubai Ports World (to buy port leases in the U.S.). With rising protectionism, these foreign dollars will be invested elsewhere. To avoid default as our treasury obligations come due, we must offer higher interest rates to compete with other investments. It has already begun. Fifteen FED determined rate hikes have occurred since 2004 with more to come both to fight inflation and to attract enough lenders to forestall the specter of the looming default on our current obligations.

Even the most well concealed bankruptcies are revealed by cash flow problems and evolve from recognition to restructuring to reorganization. In the worst cases they are finally resolved through liquidation. If you are concerned about how you will be "reorganized" as you pay your obligation for our debt, you are right to be worried. While they aren't saying, many in this administration know how you will pay for it--as it's been done over and over again, for several thousand years, every time a nation borrowed more than it could repay. Inflation. Deflation. Depression.

Wringing Out the Debt

Based on the Federal Reserve's past proclivity to expand the money supply every time there is a potential default or share market crisis (S&L fraud, foolish loans by elite banks to South American, Asian and Russian governments, NASDAQ bubble, etc.), they will take the way out that leaves the fewest fingerprints: increase the supply of money to repay the debts and promised entitlements. This is crony capitalism's acceptable socialism: socialize the debt by watering down the purchasing power of everyone's money, while running up the debt burden for the vast majority (and their children, grand children and great grandchildren) to pay in the future. Nearly all of us are saddled with this debt, while the top 1% have already accumulated vast wealth via the income, investment and estate tax cuts they wrote into law for their personal benefit. While we wait for the promised trickle down effect, they prop up the facade of a healthy economy with us having to pay the debt and promised benefits with devalued dollars.

This is a short-term delaying tactic, because a rapid erosion of the value of the dollar will prove catastrophic and will destroy the nation's wealth.  Imagine the economic equivalent to being drawn and quartered. This was a method of putting a person to death by tying a horse to each arm and leg and then whipping the four horses to run to each point of the compass.

Here is the predictable scenario. Treasury rates will climb to attract investors. This will remove capital from share markets, as well as other competing investments and enterprises. Share markets will sag further to make margin calls or to cover short positions. Additional waves of selling will hit the markets as borrowers with rising variable rate home loans sell shares to avoid mortgage default. Housing prices will continue to soften as variable rate borrowers sell homes to payoff mortgages teetering on default, or worse, walk away from homes in which they have no equity. Reserve ratios will grow negative and a liquidity crisis will strike the banking system as foreclosures replace loans on their balance sheets and capital deficits become common.

Waves of depositors will learn again that banks do not maintain but 5% of the deposits they hold in cash. Banks will fail and the FDIC will bail out depositors with cash, freshly printed and backed by only paper. As share market and housing price deflation accelerates, the FED will lower the elite banks borrowing rate to zero trying desperately to pump money into the economy. Once again, we will all know the total futility of trying to push a rope: after sixteen years of near zero percent central bank rates, only now has Japan's economic depression begun to recover.

The Treasury will be compelled to pay ever higher interest rates to attract foreign investors. Here at home, as concern turns to fear, people will reduce spending and producers will reduce excess capacity in a steady downward spiral. With no economic reserves with which to prime the pump, the government will be powerless to halt the terrible slide. The deep, dark shadow of depression will be cast as unemployment grows along with hunger and desperation. Keep in mind this will all occur as we struggle to contend with rising oil prices, diminished water resources, increased air pollution, rising international competition, and religious and sectarian warfare.

I wish I was sending this last Saturday and could tell you it's only a joke.

by David Sternfeld 2006-04-07 01:19PM | 0 recs


Advertise Blogads