Beyond Stage One Politics

Here’s the explanation of Dave Ramsey – the guy who’s built a business helping people get their finances under control – putting the Washington debt debate in terms the average guy can understand:

If their household income was $55,000 per year, they’d actually be spending $96,500—$41,500 more than they made! That means they’re spending 175% of their annual income! So, in 2011 they’d add $41,500 of debt to their current credit card debt of $366,000!

And S&P was the only one of the three rating agencies to downgrade our debt?

Carolyn Phippen

Does anyone remember how just a few months back, the Democrats and the media kept referring to the Republicans as the “Party of No”? Democrats had been frustrated with the conservative ideal of limited government, translating into less government spending and fewer regulations. Now, frustrated with John Boehner’s unwillingness to continue the out-of-control spending of this administration that would increase the debt $4.9 trillion between 2010 and 2016, the president asked just yesterday if they (Republicans) can “say yes to anything?”

Of course, we all know that what everybody really wants is “new programs or the NFL season getting resolved,” but unfortunately for this president, somebody has to grow up and do the things that no one really wants – stop spending money we don’t have and can’t afford to borrow. That requires a whole lot of saying, “No!” to politicians who are accustomed to winning reelection by the very act of spending our money foolishly.

In 2009, 51% of American households paid no income tax; one out of every three dollars earned in the US goes to “pay for or comply with federal laws or regulations,” and this is before the implementation of new health care and financial services regulations; and “social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960.”

Maybe Steve Wynn has it right when he complains that Obama keeps making speeches about redistribution and punishing successful businesses that don’t do what he wants them to do. Maybe we need to slow down entitlement spending to a sustainable level, like that advocated in 2009 by Obama, when he said that long-term economic recovery couldn’t be attained without reforming costly entitlement programs.

Just last week Moody’s acknowledged that having access to more money by raising the debt ceiling will not assure a continuation of the AAA rating for the US; the deficit must also be reduced. In order to just get transfer payments down to pre-recession levels, “wages and salaries would have to increase $2.3 trillion, or 35 percent, to $8.8 trillion, or social welfare benefits would have to decline $500 billion, or 23 percent, to $1.7 trillion.”

The key is job growth and reduced spending. The party of Obama would like to raise taxes, thus stunting growth, and keep spending at record levels. It should be obvious at this point that the stimulus did nothing to change our fortunes or, as an economist at a liberal think tank claimed in 2009, to have “caused a sharp change in the path of the economy, which had been in steep decline.”

All we’ve done is to have kicked the can a little further down the road, something our president claimed would end with him. So yes, if the options are between supporting the Party of No Solutions or the Party of No More Spending, sign me up for the latter, along with the rest of the 49% who are paying the bill.

Carolyn Day

As I’ve tried to better understand the events leading up to the financial crisis of 2007-2008, I’m haunted by a comment made by Charles Gasparino in The Sellout. He stated that as corporate bond prices lost value in the rapidly declining market of June 2007, there was a dramatic “flight to quality of investors selling corporate bonds and snapping up supersafe Treasuries” (Gasparino, p 265), the bonds considered the safest available.

At about the same time, in June of 2007, the rating agencies (Standard and Poor’s, Moody’s) began downgrading mortgage-backed securities, despite the fact that they had been showing signs of deterioration for a year or two prior while still maintaining consistent AAA ratings.

One-and-a-half years earlier, in late 2005, AIG made the decision to no longer insure CDOs underwritten by US financial institutions because of the lax standards in US subprime lending (Gasparino, p 226). At about the same time, Bill Gross of PIMCO was warning about falling housing prices and defaults.

Now let’s jump to 2011. Over the past two years, the Fed has pumped nearly $3 trillion into the economy by purchasing US treasuries (QE1, QE2, and reinvestment of maturing treasuries). This in addition to all those purchased by private investors fleeing toxic CDOs.

In February, Bill Gross of PIMCO, “one of the largest investors in the Treasury market,” announced that he would be selling Treasuries and just one month later, with no holdings of US government debt, began shorting them.

In a major shift, China has begun pouring money into hard assets and away from US government debt.

A former advisor to China’s central bank, Yu Yongding, recently “likened the U.S. Treasury market to a ‘giant Ponzi scheme,’ arguing that Federal Reserve buying of Treasuries has artificially kept bond prices high, but that they would eventually fall to levels which reflected fundamentals of the U.S. economy.”

S&P just lowered the outlook on US debt from stable to negative, signaling the potential eventual loss of the AAA credit rating and “a sign that the ratings agency has doubts about prospects for taking effective action to curb deficits and debt.”

To argue that deficits and debt can be reduced by raising taxes as opposed to cutting spending would be to ignore the realities of history. Regardless of marginal federal tax rates, revenue raised has always remained fairly consistent, at about 18% of GDP. In fact, raising capital gains rates could likely have the opposite effect, as more people have historically sold more assets during lower-rate periods than higher-rate, when taxes collected on gains have historically plummeted. Interestingly, lowering capital gains tax rates in a high-growth business environment has been one of the only ways shown to actually create outliers in this equation – increased percentages of revenue above the 18% norm.

All the while, President Obama’s budget would add $9.5 trillion to the debt from 2011-2021, a near doubling in just 10 years! Just as many of the major players on Wall Street spent the years leading up to their firms’ meltdowns playing golf and entertaining, we seem to have a president equally oblivious to the eventual destruction being sown all around him. While it looks like many of the American people have learned from the mistakes of the past decade and are willing to accept the changes that entails, the lack of foresight and leadership emanating from the capitol is the very essence of Nero fiddling while Rome burns.

Anyone competent enough to figure a few simple math problems must have already come to the conclusion that our government is headed down a road of utter financial armageddon. Recently, a friend mentioned to me that he thinks taking a long-term approach to analyzing our economic state as a nation can only lead to extreme conclusions, and thus not realistic for the United States. Just what is it that makes us so different from all the other nations that have defaulted on their debts over the years?

It seems as though Sheldon Finger, over at the Huffington Post (presidentially approved news source, BTW) is agreeing with me on the very conclusions I’ve drawn, and which were viewed by my friend as “extreme” – that we are being led down a path that is looking more and more like Zimbabwe or the Weimar Republic, and it’s time for hard choices.

The Onion has a solution to our debt problems and I think it might work better than the recently-announced policy of federal debt monetization, which is precisely the next step on the path to the aforementioned armageddon. Take a look and let me know if you agree or if you have any ideas for a better way!

U.S. Government Stages Fake Coup To Wipe Out National Debt

So, 36% of the American public thinks Obama is doing a good job on the deficit. In fact, 23% didn’t think the stimulus package added to the deficit at all. That level of miseducation is astounding to anyone even the slightest bit economically informed. The federal deficit for the 2010 budget is projected to be 10.6% of GDP, with an expected increase even higher next year. This, even though according to our President, we’re in the middle of recovery.

Federal discretionary spending increased over 80% from 2008 to 2010, thus resetting the baseline at an extraordinarily high level. Every new budget going forward starts at that point and goes upward from there; any reductions are considered cuts – something that almost never happens in Washington. What does tend to happen is that spending will increase each year, thus ensuring greater and greater deficits, and an exploding national debt as far as the eye can see.

Deficits under George W. Bush were in the 1-3.5% range until 2009, for which President Bush and President Obama were both responsible. Most of us believed spending was out of control under Bush, only exacerbated by the $800 billion (ten year) price tag on Medicare Part D.

President Clinton was elected to his first term in office with a minority of the popular vote, which had been split by Ross Perot with 19%. What was the issue that so divided fiscal conservatives and was the basis of Perot’s campaign? Concern over a deficit of approximately 4% of GDP.

A quick review of articles written during the Bush administration attests to the fact that liberals have been consistently concerned with out-of-control deficits during periods of time when they’ve been a fraction of what they currently are. I certainly hope this concern is genuine rather than political and we’ll soon see wide-ranging support for massive spending cuts in order to meet the historically consistent level of spending at 18-20% of GDP.

Politicians from both parties have been selling out the future of our country in order to buy votes in the here and now, and the rest of us just can’t afford this party any more.

In The Battle, Arthur C. Brooks outlines a consistent 70/30 split among the American population. That is pretty much what we see in this support for current policies dealing with budget and spending issues.

Nearly 70% of Americans agree that they’re better off in a free market economy than not, “despite its severe ups and downs.” Fifty-six percent of Americans believe their income taxes are too high, while 33% believe they’re just right. Astoundingly, while many Americans believe that the rich should pay more taxes, 69% believe that the top tax rate should be 20% or lower! Seventy-six percent believe the strength of America is based on the success of American business and 66% believe that when “big business” earns a profit it helps the economy; alternately, 18% believe it hurts (where did they go to school?) When asked if they would prefer larger government with more services and higher taxes or smaller government with fewer services and lower taxes, only 21% of Americans chose larger, more expensive government while 69% preferred smaller.*

There is a minority of the population, the 30%, who will, due to lack of understanding or pure ideological drive, charge ahead in attempts to completely redefine and transform this nation of freedom and wealth which was unimaginable in the world just a few centuries ago. It is the rest of us, the 70%, the mainstream of America, who stand in their way. It’s time for the politicians to represent us.

(Polling data excerpted from The Battle by Arthur C. Brooks, Basic Books, 2010, pp. 3-12)