The Threat of Default on the Debt is from the Left not the Right

Posted by PITHOCRATES - October 10th, 2013

Politics 101

We have a Debt and Spending Problem as we are Spending so much that we have to Raise the Debt Ceiling

Contrary to popular belief the government doesn’t just borrow money.  They also raise money by taxing us and charging us fees.  A lot of it.  In this past fiscal year (October 2012 to September 2013) they raised $2,450,200,000,000.  That’s $2.45 trillion dollars.  Sadly, they spent $3,537,100,000,000.  Or $3.5 trillion.  Giving us a deficit of $1,086,900,000,000.  Or $1.1 trillion.  Which is why we’re having a debt crisis.

Interestingly, the left does not believe that we have a debt problem.  Or a spending problem. For they see no problem with these numbers.  The only problem they have is with Republicans.  Who do believe we have a debt problem.  As well as a spending problem.  And they want to do something about it.  Before the debt grows so big that it threatens the full faith and credit of the United States.

Now the Democrats, who don’t think we have a debt or a spending problem, are saying the Republicans are threatening the full faith and credit of the United States.  With their shutting down of government.  And their demand for spending cuts before raising the debt ceiling.  Which proves the Republicans point.  We have a debt and a spending problem.  Because we are spending so much that we have to raise the debt limit.

The Interest on the Debt is only 11.75% of the Available Revenue so there is no Danger of Default

Of course, this explains the $1.1 trillion deficit.  Out of control spending.  That the government is funding with more and more borrowing.  Which threatens the full faith and credit of the United States.  Because the more debt we accumulate the less likely we’ll ever be able to pay it off.

But are we risking default on the debt now?  With this battle over the debt ceiling?  No.  Yes, the debt is huge.  Currently it is in excess of $16 trillion.  About six and a half times total federal revenue.  To get an idea what that means consider you have the median household income which is approximately $51,000.  If you carried the same amount of debt the federal government carries you would have approximately $331,500 in credit card debt.  Any household with a median income of $51,000 with credit card debt of $331,500 has a bleak future.  And unless they win the lottery they will not escape bankruptcy.

So $16 trillion in debt is recklessly high.  And impossible to pay off.  But as bad as that is the amount of revenue the federal government collects via taxes and fees greatly exceeds the interest on the debt.  The interest on the debt is $415.7 billion.  This is the amount the government has to pay to avoid defaulting on the debt.  Which is easy to do with $2.45 trillion in revenue.  The interest on the debt is only 11.75% of the available revenue.  So even if the Republicans refuse to raise the debt ceiling there is no way in hell the government will be unable to pay the interest on the debt.  Unless the government chooses NOT to pay the interest on the debt.  Even when they have the ability to pay the interest on the debt.

The Democrats become Chicken Little whenever anyone ever Threatens their Spending Authority

So why all the talk of defaulting on the debt?  And ruining the full faith and credit of the United States?  Simple.  Democrats are liars.  And what do liars do?  They lie.  The interest on the debt is in no danger of going unpaid.  It’s all that other government spending that is in danger of going unspent.  That spending that makes people dependent on government.  And buys votes.

The left tries to frighten the people so they can keep spending.  And keep buying votes.  They try to scare Social Security and Medicare recipients.  Telling them they will lose their benefits if the Republicans don’t stop what they’re doing.  Even though they won’t.  First of all we pay into our own retirement account. At least that’s what the government tells us.  And there is a Social Security Trust Fund.  Full of our money just waiting to pay our benefits.  Or so they say.  But the Trust Fund doesn’t have money in it.  It has government IOUs.  Because the government spent that money.

So that’s why Democrats lie.  So they can keep spending and buying votes.  Which they won’t be able to do if they can’t borrow more money to spend.  And they’re spending so much that they can’t afford to lose their charging privileges.  This is why they warned the sky would fall if the sequestration spending cuts went into effect.  But as we all witnessed the sky did NOT fall with those spending cuts.  There was some discomfort.  But nowhere near the calamity the Democrats warned would befall us if they didn’t get their way.  Bringing us to their greatest fear.  That life can go on with a large spending cut.  And telling us that the government can cut spending even more.  Far more.  Which is a threat to their ability to buy votes.  And to their power.  Which is why they become Chicken Little whenever anyone ever threatens their spending authority.

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Deficits, Debt and Interest on the Debt 1988-2012

Posted by PITHOCRATES - March 26th, 2013

History 101

Congress printed so much Money that the Continental Dollar became Worthless

The American Revolutionary War lasted eight years.  And eight years of war ain’t cheap.  It took money to buy arms.  It took money to buy uniforms.  It took money to pay soldiers.  And paying for these for eight years required a lot of money.  Which the Americans didn’t have.  They were at war with Great Britain.  Who was their major trading partner.  And pretty much their only trading partner.  As the Americans were a British colony in the days of mercantilism.  Which meant the Americans sent raw materials to the mother country.  On British ships.  Through British ports.  Britain then transformed those raw materials into finished goods.  And exported them.  On British ships.  Through British ports.  Throughout the world.  And back to America.  Before the Revolution, that is.

Thankfully for the Americans there was a nation that hated the British.  And had been in a near perpetual state of war with them since about forever.  And they had just recently lost their North American territories to the British.  Which they wanted back.  So the French had other interests than American Independence.  But American Independence was a good opportunity to settle the score with their old nemesis.  And when the Americans defeated a British Army at Saratoga the French thought that just maybe the Americans could pull this off.  And if so they wanted to be in on the spoils of a British defeat.

So the French financed a large part of the American Revolutionary War.  But it wasn’t enough.  The Continental Army was poorly fed and poorly clothed.  Even leaving bloody footprints in the snow as the Continental Congress couldn’t put boots on their feet.  Nor could they pay them.  So they turned to printing money.  Unleashing a brutal inflation.  No one wanted the currency.  The inflation was so bad that it lost its value before they could spend it.  So no one wanted to accept the Continental paper dollar.  Giving rise to the expression ‘not worth a Continental’.  Everything had two prices.  A low price if you paid with hard currency (gold and silver coins).  And a very high price if you paid in Continental dollars.  They printed so much money that the money became worthless.  So the Continental Army just took what they needed from the people to keep their men from starving to death.  Leaving the people with an IOU.  That Congress would redeem one day.  Maybe.

The Percentage of Tax Receipts going to Pay the Interest on the Debt has fallen as the Federal Debt Rose

Today hard currency is a thing of the past.  It’s pure un-backed paper these days.  This paper money has no intrinsic value.  And you can’t exchange it for gold or silver that does.  But you sure can print it.  Well, the government can.  And they do.  They borrow and print money like there’s no tomorrow.  Allowing them to spend money they don’t have easier than ever before.  And it’s not just for feeding and clothing our soldiers.  But just about everything under the sun.  Causing the federal debt to soar.

Think of the growing federal debt like a credit card with a growing balance.  And these balances grow fast because each month they charge you interest on your past purchases.  And on your past interest charges.  Which is why if you let that credit card balance get too high it’ll grow beyond your ability to pay it off.  A lot of people who do find themselves filing a personal bankruptcy.  Because the interest charges just balloon their monthly payment.  With the interest in their credit cards consuming an ever larger portion of their paycheck.  As should the interest on the federal debt consume an ever larger portion of federal tax receipts.

Debt and Interest as Percentage of Receipts

(Sources: A History of Debt In The United States; Interest Expense on the Debt Outstanding; Historical Amount of Revenue by Source)

Interestingly, the percentage of federal tax receipts going to pay the interest on the debt has in general fallen as the federal debt rose.  Odd.  The more debt one has the greater the interest one pays.  That’s how it works on our credit cards.  When the debt was approximately $6.2 trillion in 1991 the percentage of total tax receipts going to pay the interest on the debt was 27.1%.  But when the debt soared to $16.1 trillion in 2012 the percentage of tax receipts going to the interest on the debt fell to 15%.  The federal debt grew to be 2.6 times what it was in 1991.  Yet it appears we are paying less interest in 2012 than in 1991.  Something doesn’t seem right.

Interest Rates will Rise as the Purchasing Power of the Dollar Falls, Raising Prices and the Cost of Borrowing

A couple of things could explain this.  And the first thing that comes to mind is tax revenue.  The reason why interest on the debt as a percentage of tax receipts has fallen while the federal debt grew is, perhaps, that tax revenues grew even greater.  So even though interest on the debt could be soaring along with the soaring federal debt the government could be awash in tax revenue.  And if the number you’re dividing by is larger than the number you’re dividing into it than you get a smaller percentage.  Simple arithmetic.  The driver of the federal debt is the annual deficits.  So let’s compare interest on the debt to the deficit.  To see if the interest on the debt rises with the deficit.

Interest on the Debt and the Deficit

(Sources: Interest Expense on the Debt Outstanding; Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (–): 1789–2017)

And it doesn’t.  In fact, the interest on the debt almost held constant when the deficit plunged into a surplus.  And when the deficit soared to a record high.  It seems like there was some other factor involved here.  Something actually keeping the interest on the debt down.  Even when the deficit soared after 2007.  What could do this?  Well, there is only one other thing to look at.  Interest rates.

Interest on the Debt the Deficit 10 Year Treasury

(Sources: Interest Expense on the Debt Outstanding; Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (–): 1789–2017; Market yield on U.S. Treasury securities at 10-year constant maturity, quoted on investment basis)

And we have our answer.  Interest on the debt has not kept pace with the debt because of bad monetary policy.  Keynesian economic policies introduced permanent inflation into the economy.  The Keynesians in government kept interest rates artificially low to stimulate economic activity.  Those low interest rates stimulated so much economic activity in the Nineties that it created a dot-com bubble.  And when it burst it created a painful recession in the early 2000s.  Also, President Clinton’s Policy Statement on Discrimination in Lending lowered lending standards in the Nineties setting the stage for a great housing bubble that burst into the subprime mortgage crisis in 2007.  And the Great Recession.

The Keynesians have been increasing the money supply (i.e., printing money) in a desperate attempt to pull the economy out of recession.  Which is why the market yield on a 10-year treasury has fallen as the deficit soared in the early 2000s.  And fell even more as the deficit soared even further after 2007.  With the yield falling to as low as 1.8% in 2012.  Even though the demand for so much borrowing should have raised interest rates.  Which would have happened had the government not been increasing the money supply.

And this is why interest on the debt as a percentage of receipts has fallen.  Despite record debt.  Some may look at this and think it’s a good thing.  As it lets the government borrow more money.  So they can give us more stuff.  But printing money causes inflation.  Which has been kept at bay for now thanks in large part to the Eurozone sovereign debt crisis.  As investors everywhere are desperate to find a safe harbor for their money during these uncertain times.  But that won’t last forever.  Eventually those interest rates will rise as the purchasing power of the dollar falls.  Raising prices.  And the cost of borrowing.  A lot.  Because of that record debt.  And when they start selling new treasuries at higher interest rates than the ones they’re replacing a very large portion of our tax receipts will go to pay the interest on the debt.  Just like when people charge too much on their credit cards.  Pushing the country closer to bankruptcy.  Just like people with overextended credit cards.  And like countries in the Eurozone.

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Why the Deficit and the Debt Matter

Posted by PITHOCRATES - March 25th, 2013

Economics 101

Keynesian Economists say there is Nothing Wrong with Running a Deficit or a Growing National Debt

We had the sequester.  Before that it was the fiscal cliff.  Before that it was the debt ceiling debate.  We hear these things.  But it’s like water off a duck’s back.  It doesn’t sink in.  We hear but we don’t understand it.  In one ear and out the other.  In fact people are tired of hearing of how we go from one financial crisis to another.  Enough already the people say.  Enough.  Pity, really.  As there are some serious consequences to the decisions our politicians are poorly making.

Part of the problem is that these economic issues are difficult to relate to for average Americans just trying to take care of their families.  A trillion dollar deficit?  A debt reaching $16 trillion?  A lot of people don’t know the difference between the deficit and the debt.  Including many of our television news talking heads.  And then the sheer magnitude of the word ‘trillion’ is just difficult to fathom.  We know it’s big.  But no one uses it in their personal lives.  We know a $200 utility bill is expensive.  An $8,000 property tax bill is expensive.  A $40,000 car is expensive.  But a trillion dollar deficit?  It is hard to make a connection to the size of a trillion dollars.

Compounding the problem are all these Keynesian economists who say there is nothing wrong with running a deficit.  Or the growing national debt.  Despite the financial debt crisis in the Eurozone.  Where running a deficit and growing national debt have caused great problems.  But the Keynesians say that can never happen here.  Because our economy is so much larger.  And the U.S. can still print money.  So people don’t know what to believe.  The government and their economists sound like they understand this stuff.  While a lot of people don’t.  So the people who don’t are more inclined to believe those who sound like they understand this stuff.  Which makes it easier for the politicians who are making all of these horrible decisions to make even more of them.

Over time Interest Charges run up the Outstanding Balance on our Credit Cards

So to understand deficits and debt it would be better to bring it down to our level.  And once we understand it at our level then we can understand better what’s happening at the national level.  So let’s do that.  Let’s imagine a person earning $30,000 a year.  Or $2,500 monthly.  Let’s further assume this person’s earnings are not enough to support their lifestyle.  So they turn to their credit card each month for an additional $100 in spending.  Which is this person’s deficit.  The amount they spend over what they earn.  Or money they spend that they don’t have.  So they charge it.  For this example we’ll assume a credit card with a 24% annual percentage rate.  In the following table we crunch these numbers for 120 months.  Or ten years.

Personal Deficit Spending and Cummulative Debt R2

The columns in the table are fairly self explanatory.  Each month we start with $2,500.  We start borrowing money in month 1 so there is no interest in the first month.  We subtract the interest from the monthly income to arrive at income less the interest charge on the credit card.  Our spending budget each month is $2,600.  Requiring $100 in credit card purchases in the first month.  Each month this increases by the amount of interest charged each month.  The last column is a running total of the credit card balance.

Over time the interest charges run up the outstanding balance on the credit card.  Because we are paying interest on both our purchases and our interest.  So as time goes by this increases our credit card balance at an increasing rate. Soon the interest charges take a larger percentage of our monthly income.  So much so that we need to borrow more and more to maintain our current level of spending.  The interest charge on the 120th month equals 38% of our monthly income.  Chances are that it would never get this bad as we would be unable to make our monthly payment long before the 120th month.  And with an outstanding debt approaching our annual income we probably would have filed for bankruptcy protection long ago.  For at these interest rates it wouldn’t take long before that debt grew beyond our ability ever to pay it back.

Deficit and the Debt Matter because Income is Limited

We can see this better if we graph these numbers.  We can see the cumulative debt growing at a greater rate over time.  Just as does the percentage of our personal income going solely to paying the interest on our debt.  Truly wasted money.  Spending money for things we purchased long ago.  And if we spent it on restaurants and vacations we have nothing tangible to show for this.  Nothing we can sell to get our money back.  Just interest payments that seem to go on forever and ever.  For something that gave us a few hours or days of pleasure.  Which is the worst kind of debt to have.  As there is no way to pay it down other than with current earnings.  Meaning we have to make sacrifices today and tomorrow for spending we did long, long ago.

Personal Income Debt and Interest as Percent of Income R1

On the chart we have a horizontal line for monthly income.  And one for annual income.  We can see that it only takes 21 months for our credit card balance to exceed our monthly income.  Not even two years.  But only 1.9% of our monthly income is going to pay for interest on the debt.  Which doesn’t sound that bad.  So we keep charging.  Just after three years of doing this we break $100 in interest expense.  Requiring 4.2% of our earnings to go to pay the interest on the debt.  It only takes another 2 years to break $200 in interest expense (8.4% of earnings).  It only takes another year to bring the interest charge to $300 (12.3% of earnings).  In 99 months the interest charge breaks $600 (24% of earnings).  And the total outstanding credit card debt is now greater than our annual earnings. Making it very unlikely that we’ll ever be able to pay this balance down.

Anyone who charged a little too much on their credit cards knows what this feels like.  And what those phone calls from collection agencies are like.  Not good.  Anyone who charged anywhere near this example no doubt brought great stress into their lives.  They might have lost their house.  Their retirement savings.  Their kids’ college funds.  Or had no choice but to file a personal bankruptcy.  But when we run our debt up this high there comes a point where we cut up the credit cards.  Making a serious cut in our spending.  Because that’s all we can do.  We can’t just earn a lot more money.  And we can’t print money.  If we could do either we would not have a debt problem in the first place.

This is where average Americans and the federal government differ.  Average people have no choice but to be responsible.  While the federal government can allow the problem to grow and grow.  For they can arbitrarily raise their income.  By raising taxes.  And they can print money.  Unfortunately for average Americans both of these options make life worse for them.  Raising taxes makes us cut our personal spending as if we ran up our credit cards.  Forcing us to get by on less.  And printing money causes inflation.  Raising prices.  Which, of course, forces us to get by on less.  This is why the deficit and the debt matter.  For income is limited.  Whether it’s ours.  Or the federal government’s.  And when you spend more than you have more money goes to paying interest on the debt.  Which is money pulled out of the economy and thrown away.  The ultimate cost of spending money you don’t have.  Money thrown away.  And, of course, potential bankruptcy.

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Only Obama can make the U.S. Default on its Debt Obligations

Posted by PITHOCRATES - July 15th, 2011

$172.4 Billion is a lot of Money

Still no closer to a budget agreement to raise the debt limit.  Obama wants more taxes and more borrowing.  The Republicans want a little fiscal sanity.  Because something is definitely wrong in Washington when $172.4 billion a month isn’t enough (see August Invoices Show U.S. Treasury’s Limited Choices by David Rapp posted 7/12/2011 on Bloomberg Government).

The U.S. government, whose legal authority to borrow money expires on or about Aug. 2, expects to take in $172.4 billion next month — enough to cover little more than half of its bills due then, according to a study for the Bipartisan Policy Center, a research organization.

The U.S. may not have to default on outstanding debts or withhold interest payments for that month; it may be able to cover $29 billion in anticipated interest due on Treasury securities with its cash receipts…

Jay Powell, undersecretary of the Treasury for Finance under President George H.W. Bush, calculated for the policy center that $306.7 billion in bills will come due after Aug. 2. They include Social Security benefits, defense vendor payments and military active duty pay, along with federal pay for every department and agency, in addition to the interest payments.

I think we’re missing the bigger picture here.  The government collects $172.4 billion but spends $306.7 billion.  That is, for every dollar it collects it spends $1.78.  In other words, the government’s spending is 78% over their cash budget.  Managers in the corporate world get fired for performances like this. 

That is either a big spending problem.  Or a big revenue problem.  So are taxes too low?  I don’t think so.  I mean, $172,400,000,000 is a lot of money.  How much?  It’ll buy 542 of the new Boeing 747-8 jetliners.  Or 149 Dallas Cowboys Stadiums.  Or 27 nuclear powered aircraft carriers.  It’ll even pay for the Apollo moon program with $41.3 billion left over.  $172.4 billion is an enormous amount of money.  You couldn’t spend this much money if you tried.  Even if you bought the best houses, cars, jewelry, clothes, island, etc.  And if you had the mother of all drug addictions.  It’s just a staggering amount of money.  And if you’re collecting in taxes more money than the cost of the Apollo moon program each month, guess what?  You don’t have a revenue problem.  You have a spending problem.

Bloomberg has a nifty little calculator on their website.  You can put checks on the things you want to pay.  And leave the things you don’t unchecked.  It’s an interesting list of bills coming due this month.  There’s a lot of stuff we can cut easily to save $47.1 billion.  Federal salaries & benefits ($14.2 billion).  Small Business Administration ($0.3 billion).  Education Department ($20.2 billion).  Department of Housing and Urban Development ($6.7 billion).  Energy Department ($3.5 billion).  Labor Department ($1.3 billion).  Environmental Protection Agency ($0.9 billion).  What taxpayer would miss any of these?  Cuts to Social Security and Medicare, on the other hand, will be a little more difficult.  For they actually do something.  And people will miss them.

Incidentally, interest on the debt is $29 billion.  Though a lot of money, it’s not too high for the $172.4 billion to cover.  So if the Obama administration doesn’t pay this and causes a downgrade in our credit rating, President Obama will have some ‘splaining to do.

Monthly Spending Equivalent to 1.3 Apollo Programs should be Enough

The president has no intention of cutting spending.  Their goal is to make Republicans look bad.  And to better position themselves for the 2012 election.  So the president will lie and spin misinformation in hopes that this stuff is just too complicated for the layperson to follow.  And that they only remember one thing.  That Republicans stopped Social Security checks going out because they’d rather give tax breaks to the rich.  And that they miss the fact that Obama and his Democrats gave us this crisis to begin with.  With the greatest spending orgy of any peacetime president.  So he threatens that if the Republicans don’t pay for his reckless spending, he’s going to tell everyone it’s their fault that the country defaulted (see Obama: Chance for ‘something big’ to calm economy by Jim Kuhnhenn, Associated Press, posted 7/15/2011 on Yahoo! News).

Obama urged Republican lawmakers to make tough calls, too. He attempted to turn their opposition to any tax increases back against them, warning that a government default caused by failure to raise the debt ceiling would increase interest rates, “effectively a tax increase for everybody.”

No, a failure to raise the debt ceiling won’t cause a government default.  Barack Obama will.  If and when he decides to pay something he thinks is more important than the interest on the debt.

Obama sternly rejected any plan of that size that did not include increases in tax revenue.

Apparently spending the equivalent of 1.3 Apollo programs a month just isn’t enough.  Obama gives new meaning to tax and spend liberal.  Pity Ted Kennedy didn’t live long enough to work with his kind of liberal in the White House.  Or see his pet cause, national health care, signed into law.  Then they both could have seen their policies destroy this country.  Don’t believe me?

Spending/Debt so bad it’s bringing back the Gold Standard

Then ask the Chinese communists.  Though their economy is rife with cronyism and will no doubt collapse as the Japanese economy did in the Nineties, they know too much debt when they see it (see Return of the Gold Standard as world order unravels by James Quinn and Ambrose Evans-Pritchard posted 7/16/2011 on The Telegraph).

Xia Bin, an adviser to China’s central bank, said in June that the country’s reserve strategy needs an “urgent” overhaul. Instead of buying paper IOU’s from a prostrate West, China should invest in strategic assets and accumulate gold by “buying the dips”.

Step by step, the world is edging towards a revived Gold Standard as it becomes clearer that Japan and the West have reached debt saturation. World Bank chief Robert Zoellick said it was time to “consider employing gold as an international reference point.” The Swiss parliament is to hold hearings on a parallel “Gold Franc”. Utah has recognised gold as legal tender for tax payments.

A new Gold Standard would probably be based on a variant of the ‘Bancor’ proposed by Keynes in the late 1940s. This was a basket of 30 commodities intended to be less deflationary than pure gold, which had compounded in the Great Depression. The idea was revived by China’s central bank chief Zhou Xiaochuan two years ago as a way of curbing the “credit-based” excess.

So the Chinese, the World Bank, the Swiss, Utahans and a dead John Maynard Keynes agree that the U.S. has a spending problem.  A spending problem that is racking up debt to saturation.  So bad that the once invincible U.S. dollar should no longer serve as the world’s reserve currency.  A sad development indeed.  And painful to hear.  Especially coming from a commie.

Tax Hikes First, then Broken Spending Cuts Promises

And yet the president is in denial.  He doesn’t see a spending/debt problem.  He sees a revenue problem.  Because high taxes and high debt are okay in his world.  As long as they pay for liberal government spending.  That’s why he’s dead set against spending cuts only.  He wants those tax hikes.  He needs those tax hikes.  And will promise almost anything to get those tax hikes.  Because once he does, and mark these words well, he will break every spending cuts promise he made to get them.

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President Obama Submits his 2012 Budget

Posted by PITHOCRATES - February 14th, 2011

Deficit Reduction without Touching Medicare, Medicaid or Social Security?

President submits his 2012 budget.  The president says it’ll cut the deficit.  Make America more competitive.  Create jobs.  Restore vigorous economic activity.  And make America dominant again.  Two years of his policy have failed to do any of this.  But it’ll be different this time.  Why?  I haven’t the foggiest idea.  I can only guess that the president is counting on a bunch of poor memories.

Deficit reduction.  Really?  Well, here’re the numbers (see Budget Plan Marks Start of Long Fight on Spending by Corey Boles posted 2/14/2011 on The Wall Street Journal).

Mr. Obama’s budget offers up more than $1 trillion in deficit reductions over a 10-year period—three-quarters coming from spending cuts and the balance from tax increases or the elimination of existing tax breaks.

That’s $100 billion per year.  That sounds like a lot.  But in the first year when we cut $100 billion from the deficit, we’re still adding another $900 billion to the national debt.  That’s more borrowing.  And more interest to pay.  Sort of like living on your credit cards.  And just like the balance on your credit cards never seems to get smaller, neither will our federal debt.

And the proposed Obama budget reductions don’t come close to the $4 trillion in savings recommended by a White House-appointed deficit commission. This is largely because the president’s budget shies away from pushing for any substantial changes to the entitlement programs Medicare, Medicaid or Social Security. Nor does it include a specific outline for overhauling either the corporate or individual tax codes.

Just under half of the federal budget covers the big three: Medicare, Medicaid or Social Security.  Add in interest on the debt and you’re at about half of the budget.  Defense spending is at about 20%.  Discretionary spending (the kind of spending that the law allows us to cut) is at about 20%.  In other words, we’re making small cuts in about 40% of the budget.  While the 50% that is currently growing out of control (Medicare, Medicaid, Social Security and interest on the debt) we’re not cutting at all.  In fact, this 50% is growing.  And Obama is increasing spending still.

“My budget makes investments that can help America win this competition and transform our economy, and it does so fully aware of the very difficult fiscal situation we face,” Mr. Obama said in his budget message.

His budget would boost funding for the Department of Education to $77 billion from the $64 billion it received in fiscal 2010. The money would be used to increase education competitiveness and increase the number of science, engineering and math teachers in schools by 100,000.

More of the same.  Tax and spend.  And for what?  The kind of spending he’s proposing has never paid the dividends promised.  If it has there would be no need to include it in the 2012 budget.  Because they would already have delivered those promised dividends.  But they haven’t.  Just like they never have.  And never will.  Government spending has never caused the great economic expansions in our history.  Cuts in the tax rates triggered those expansions.  And less government spending.

History doesn’t include any success stories of tax and spend Keynesian economics.  But that is exactly what this budget is.

Baseline Budgeting makes Spending Increases Spending Cuts

And what about that deficit reduction?  Is it real?  No (see President Obama’s Budget – Increased Spending and Taxes by Brian Darling posted 2/14/2011 on REDSTATE).

The fact of the matter is that the President is using fuzzy math to create an inflated budgetary baseline (in other words he has inflated projected spending over a 10 year period) so that he can claim cuts that don’t exist.  Today is the President’s day to pitch his plan, but the Obama Administration has to answer why his baseline is so inflated and why he is planning to raise taxes at a time of economic pain.

Baseline budgeting.  That’s the fuzzy math that says how we can count a spending increase as a spending cut.  Here’s how.  I project I’m going to spend $250,000 for a new house next year.  That’s $250,000 in new spending.  Then I change my mind.  Instead, I decide to spend only $175,000 on a new house.  In the real world, that’s new spending of $175,000.  In baseline budgeting, that’s a cut of $50,000.  Because I’m cutting the increase in the amount I’m going to spend.  And the 2012 budget is full of this stuff.

More Obama math.  Add in a $3.3 trillion in program adjustments and $642 billion in debt services on adjustments.  Add in all of these projections to the baseline and you have adjusted the baseline from $5.5 trillion to $9.39 trillion in debt from 2012-2021.  That is how you adjust debt upward to make it look like the President’s budget is cutting spending.  You inflate projected spending over the next 10 years then increase spending at a lower rate than the baseline, you can create a “cut.”

This is smoke and mirrors.  To count huge spending increases as spending cuts, you just say that spending was originally ‘baselined’ at some ridiculously higher number.  And then you sneak in a big tax increase.

On taxes, the President has hidden a massive increase in the gas tax.  There is a line item in the President’s budget summary tables titled “Bipartisan financing for Transportation Trust Fund” that adds up to $328 billion from 2012-2021.  In the President’s Bipartisan Debt Commission Report, they recommended a 15 cent increase in the gas tax.  The President’s budget seems to assume that his commission’s report is implemented by Congress and send to his desk.  This is an implicit endorsement of a massive increase in the price of gas at the pump in the form of increasing the federal gas tax from $18.4 cents.  If this idea does not pass, then you have a $328 billion shortfall in the projected transportation budget.

Hello $4/gallon gasoline.  And when Republicans try to prevent this tax increase from being implemented, the Democrats will call it an irresponsible tax cut.  For the rich, of course.

Tax and Spend, over Promise and under Deliver 

It gets old.  The same old politics.  Tax and spend.  Over promise.  And under deliver.  Banking on Americans having poor memories.  And that a lot of young new voters who haven’t heard the lies before show up at the polls.  Because the ‘get out the vote’ crowd will tell them “yes they can.”  And they will.  Breathe new life into failed, Keynesian economics.  And make the final reckoning ever worse.

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FUNDAMENTAL TRUTH #51: “The longer you wait to balance your books the harder it will be to balance them.” -Old Pithy

Posted by PITHOCRATES - February 1st, 2011

Compound Interest and ‘Usury’ Rates Keep Credit Card Balances High

You ever get those checks from your credit card companies?  Write yourself a check at 0% interest for 6 months?  And then in the fine print they note that if you don’t repay the money within that 6 month period you will be charged interest from the day you cashed that check at something like 30% APR.  Compounded monthly.  So if you write yourself a $5,000 check and pay it back the day after that 6 month period ends, you’ll find that you’ll have to pay back close to $15,000 for that $5,000 loan.  That’s the miracle of compound interest.  Working against you.

So, in 6 months time, it will be much harder to balance your books than it would have been before you borrowed that money.  This is the worst thing about credit card debt.  High interest charges that are rolled into your outstanding principal.  This makes the outstanding balance grow faster than a lot of people can pay them off.  Car and house payments, on the other hand, have fixed balances and lower interest rates.  We usually can pay those off.

People will say that credit card companies are charging usury interest rates.  They think that we should have laws to force them to lower their interest rates.  If car and house loans can be under 10%, why can credit cards charge interest rates as high as 30%?  Well, in a word, collateral.  If you fail to pay your house or car payments, the bank will take your house or car.  They will then sell them to try and get their money back.  Credit card debt is unsecured.  It’s pretty hard to take back restaurant dinners and hotel stays and sell them to get your money back.  So when people default, the credit card companies get nothing.  So they have to charge higher interest rates to cover these losses.

Living beyond our Means Despite our Parents’ Wise Advice

So using credit cards to make up for a spending deficit is not a good thing.  Granted, there are emergencies where some have no choice.  But a lot of us just seem to spend more than we earn.  Or take bigger debt risks.  We may like the bigger house better than the more affordable one.  We may like a new car better than a good used one.  Of course, those things come with bigger monthly payments.  And we may have no problem paying for these things.  Unless a spouse loses their overtime.  Or their job.  Or the ARM on your mortgage resets to a higher interest rate.  All of a sudden, then, those monthly payments begin to hurt.

But not everyone gets into trouble because of a change in income or interest rates.  For some it just happens.  Gradually.  Money’s good.  You take some vacations.  Eat out a few times.  Buy some nice things for the house.  A home theater.  A nice patio with a twin BBQ and some nice furniture.  Next thing you know you’re living beyond your means.  You notice that your credit card balances are growing larger.  And your monthly payments are growing smaller.  Which in turn makers your balances grow larger.  All of a sudden, you have trouble paying your bills.  And you can’t understand this because you were making such good money.

Parents are often critical of their children’s spending.  Go back some 20-30 years and they were very critical.  Those parents who grew up during the Great Depression and went without during World War II know the value of not buying anything until you saved the money for the purchase.  A lot of kids got tired of hearing this.  “You shouldn’t be spending your money on that.  You should be saving it.”  But a lot of us wouldn’t listen.  Because we wanted things and we didn’t want to wait.  So we bought them. Spent our money.  Ran up our credit cards.  Got ourselves into trouble.  And went back to Mom and Dad for help.  Why?  Because they saved their money.  Lived well within their means.  Were able to retire comfortably.  And can now afford to help bail you out of your troubles.

Rising Immigration and Birth Rates Encourages Entitlement Spending

What’s true for people is true for governments.  Earlier governments knew the value of not spending money they didn’t have.  Thomas Jefferson slashed the federal budget when he became president.  He feared that a perpetual federal debt only empowered a federal government.  If the debt became permanent, then so must the government.  Alexander Hamilton liked debt for that very reason.  Not Jefferson.  Hamilton wanted to create an American Empire to give the British Empire a run for her money.  Jefferson just wanted people to own and farm land.

So in the beginning, and through the middle, Washington operated on a shoestring budget.  Kept its spending manageable.  And it’s debt minimal.  Lincoln exploded spending to pay for the Civil War.  And subsequent presidents did likewise for the two world wars.  But things really started to change in the 20th Century.  First with Wilson’s Progressives.  Then FDR’s New Deal.  Then Johnson’s Great Society.  Federal spending grew at an alarming rate.  Because America came into her own in the later 19th/early 20th century.  We became a rich nation.  A world leader.  And there was a lot of other people’s money to spend.

Thus the era of entitlement spending had begun.  Immigration was swelling the U.S. population.  We were having lots of kids.  All of us were working hard.  And paying our taxes.  America was like that 2-income couple working lots of overtime and buying lots of things.  The good times looked like they would just go on forever.  So America was ‘buying’ Social Security for everyone.  And Medicare.  Medicaid.  And lots of other stuff.  But then a strange thing happened.  Our population stopped growing.  We closed Ellis Island.  Immigration was down.  Birthrates plummeted.  Neighborhood families didn’t have 10 and 12 kids in their houses.  A Baby Bust followed the Baby Boom.  Or, more accurately, a taxpayer bust.  For the aging population was growing at a greater rate than the taxpaying population.  Which meant fewer and fewer people were paying for more and more people collecting Social Security, Medicare and Medicaid.

Are Social Security, Medicare and Medicaid Unfixable?

And this is a problem.  And the problem grows greater with every day that goes by.  Because with every day that goes by, more seniors start collecting Social Security, Medicare and Medicaid benefits.  While fewer new people enter the work force to pay for these programs.  And despite raising taxes and cutting benefits, costs continue to exceed revenue.  So the government takes out its ‘credit card’ to finance this deficit.

Of course, we call these programs ‘third rail’ programs.  That is, if a politician threatens to cut any of these programs they can kiss reelection goodbye.  So they don’t.  They just kick the can down the road.  And the problem grows ever more costly to fix.  Both monetarily.  And politically.  Which makes them just want to keep kicking that can down the road to let someone else worry about them.

But like our credit cards, we keep running up our outstanding debt.  The debt is so high now that the interest on the debt is a major budget item.  We have to fix this problem.  We can’t keep kicking it down the road.  Greece tried.  And look what happened to them.  The European Central Bank (ECB) had to bail them out.  And Greece is still not out of the woods.  Now Greece is a great nation.  A lot of history there.  But it’s not quite as big as the United States.  Being small has its advantages, though.  It’s easier for others to bail you out.  We don’t have that luxury.  There isn’t anyone big enough to bail us out.  Except, perhaps, an old enemy.  Communist China.  Imagine that.  One of the last communist nations in the world having to come to the rescue of the most powerful (and once most capitalistic) nation in the world.  If that ain’t a fine how do you do.

We should have listened to our Founding Fathers.  Because our parents always knew best.  Pity we don’t learn that until after we make a mess of things. 

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LESSONS LEARNED #48: “Government benefits aren’t from the government. They’re from the taxpayers.” -Old Pithy

Posted by PITHOCRATES - January 13th, 2011

Defense Spending is in the Constitution, Entitlements Aren’t – And it’s Entitlement Spending that’s Growing

People like to bitch about defense spending.  And I can understand why.  It’s a lot of money.  Just to kill people and break things.  People would rather see that money spent on education.  Health care.  Food assistance for the poor.  Entitlements.  Those nice, generous, government benefits.  The kinder, gentler side of government spending. 

People like the free stuff.  They want to get something for all those taxes other people are paying.  And it just kills them to see it spent on the military.  Because they’d rather see that money spent on them.  Of course if you read the Constitution, you’ll find defense spending in there.  It’s in the preamble (provide for the common defense).  You’ll find it in Article I.  In Article II, too.  Defense spending is pretty conspicuous in the Constitution.  Conspicuous by their absence, though, are entitlements.  Did the Founding Fathers overlook this?  No.  It was the whole point of federalism.  They designed the central government to do only those things that the states couldn’t.  To establish credit for the new nation, to treat with foreign nations, to coin money, etc.  And, of course, to provide and maintain a military force.  Alexander Hamilton wanted it to do more.  And he stretched the “necessary and proper” clause in Article I for some of the things he wanted the central government to do (to try and make the nation rich and powerful like Great Britain).  Pity, too.  For the Left has been stretching that clause ever since.

All right, defense spending is a constitutional requirement of the federal government.  Entitlements aren’t.  So how much are we spending on these?   In 1962, defense spending was 49% of all federal spending (see Federal Spending by the Numbers 2010).  Social Security and Medicare (the two biggest entitlements) were 13%.  Current baseline projections show that, in 2020, defense spending will drop to 14%.  And Social Security and Medicare will rise to 36%.  Medicare is the real cost driver here.  In the decade from 2000 to 2010, Medicare spending has jumped 81%.  It is outgrowing Social Security and Medicaid.  The runaway costs of Social Security, Medicare and Medicaid (the Big Three) are projected to equal total current tax revenues in the year 2020.  That means the total federal budget today will only pay for the Big Three in 2020.  Concerned?  You should be.  Especially if you’re a taxpayer.

You can pay Uncle Sam with the Overtime.  And will.

Taxpayer, beware.  The government is feeling especially generous.  With your money.  By 2020, Washington will be spending $35,604 per household.  That’ll take almost $5,000 in additional taxes per household for the Big Three alone.  That is projected to jump to $12,636 in 2050.  And that doesn’t include Obamacare.  When that is factored in, it’ll cost you as much as paying cash for a new car each and every year.  And a nice one, not a subcompact with a sewing machine for an engine.  Can you afford that?  I hope so.  Because you won’t have a choice.  You’ll be buying it.  But not for yourself.  No.  That nice beautiful car you’ll be buying each and every year?  You don’t get to drive it.  It will be for someone else.

The entitlement spending is getting so out of hand that we have record deficits.  Compounding this problem is the 2008 recession corresponding with a huge jump in entitlement spending.  It’s opened a rather large gap between revenue and spending.  And that gap isn’t going anywhere soon.  Unless they cut entitlements.  Or raise taxes.  And you know they won’t be cutting entitlements.  So, guess what?  You can pay Uncle Sam with the overtime.  Because that’s all you’ll get for your money (borrowed from Billy Joel’s Movin’ Out (Anthony’s Song)).  So get used to it.  Paying Uncle Sam.  Because Sam is going to raise your taxes.  He has no choice.  Because he won’t cut entitlements.

And they’ll have to raise taxes.  Because we’re running out of creditors to borrow from.  I mean, the Chinese only have so much money to lend.  And we can’t keep printing money.  They’ve been doing that.  Quantitative easing, they call it.  But they can’t keep doing it.  Anyone alive during the Seventies will know why.  Or anyone who has done some reading outside the public school curriculum.  In a word, stagflation.  That’s a phenomenon where you have both high inflation and high unemployment.  It’s usually one or the other.  The normal rules of economics don’t allow both to happen at the same time.  Unless you’re printing money like there’s no tomorrow.  Which they were in the late Sixties and Early Seventies.  To pay for the Vietnam War.  NASA’s Apollo program (to the moon and back).  And, of course, entitlement spending.  The biggest to date was a group of programs we called the Great Society.  Inflation was so bad that they joked about it on Saturday Night Live.  Dan Aykroyd played President Jimmy Carter, joking about the pleasure of owning a $400 suit.  And how easy it was to just call the treasury to have them print off another sheet of hundred dollar bills.  (Or something like that.)

The Reagan Deficits were Bad, but they Make the Obama Deficits look Good

The Seventies were a bad time.  Economically speaking.  Printing money was bad.  Quantitative easing was bad.  Easy money was bad.  So Paul Volcker started tightening monetary policy.  And Ronald Reagan cut taxes. And the Eighties were like a glorious spring following the bleakest of winters.  But you can’t teach an old dog new tricks.  The liberal Democrats weren’t going to roll over and cry ‘uncle’.  For they knew there was more spending left that they could do. 

So the spending continued.  Reagan had a Democrat Congress.  They fought him tooth and nail.  But he spoke directly to the American people and got his tax cuts.  And Reagan’s tax cuts resulted in a windfall of revenue.  And the Dems in Congress couldn’t spend the money fast enough.  Actually, they could.  They spent it so fast that surpluses soon turned into deficits.  They blamed Reagan’s defense spending.  So he made a deal.  He agreed to increase taxes.  If they would cut some of their entitlement spending.  To get the deficits under control.  So they did.  Increased taxes.  But they never cut spending.  Which just goes to show you that you can’t trust liberal Democrats.

You youngsters probably have no memory of these times.  But Ronald Reagan was attacked more than George W. Bush.  Hell, he was attacked almost as much as Abraham Lincoln.  The Seventies were the high-water mark of liberalism.  Then it went head to head with Reagan’s limited government supply-side economics in the Eighties.  And lost.  The hatred for Reagan knew no bounds.  For he was the man that repudiated liberalism.  So they attacked him ruthlessly. Screamed about his defense spending.  And yet his deficits were only around $200 billion.  Obama’s, on the other hand, are around $1,500 billion.  But they’re okay with that.  It’s no big deal, they say.  Just raise the debt ceiling.

It’s Spending, not Tax Cuts, that’s Causing those Record Deficits

But they can’t just raise the debt ceiling to keep spending.  Because spending is the problem.  Our debt is approaching 100% of our GDP.  When you’re borrowing money at record levels, you’re doing this because you just can’t raise taxes anymore.  You put the two together and it’s destroying the economy.  Taxes kill economic activity.  And the interest on the debt is soaring.  It’s projected to be approximately $760 billion in 2020.   That’s more than 70% of the projected budget deficit.  That means that most of the money we’ll be borrowing will go to pay the interest on the money we’ll be borrowing.  At that rate we’ll never pay down our debt.

Revenue averaged 18.0% of GDP from 1960-2009.  During the same period, spending averaged 20.3% of GDP from 1960-2009.  Not good.  But not too bad.  That’s a small, somewhat manageable deficit.  But spending takes off in 2010.  It’s projected to rise to 26.5% of GDP.  Meanwhile, revenue is projected to rise only to 18.2% of GDP.  That’s a projected deficit of 8.3% of GDP.  That’s fricking huge.  And that’s all runaway spending causing this mammoth deficit.  It ain’t tax cuts causing this.  It’s those entitlements.  Those fat, generous government benefits.

By this time there won’t be anything left to cut from the defense budget.  So they will have to turn to the generosity of the taxpayers.  And hope they enjoy personal sacrifice.  Because they’re going to be doing a lot of that.  To pay for these generous benefits.  These benefits for other people.

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