Debt Default--Now Or Later

So reopening the government, narrowing our deficit spending, and raising the national debt ceiling is coming together in planned negotiations this week. 

Despite all the talk, we continue to spend beyond our national means and basically we must raise the debt ceiling or else the game of borrow and spend is over. 

Almost like insatiable gamblers, we use up our money at the table, head to the pawn shop to sell our watch and car to replenish for the next game, and then borrow against our credit card to fuel our addiction to the game some more. 

Eventually though the house always wins and the borrower must pay up (or they get their legs broken or something nasty like that). 

So while the question posed by the pundits this month is whether the U.S. will default on its debt now, the real question is whether a default is just a matter of time anyway--as we continue to spend more than we generate in revenue as a country. 

Sure can we raise the debt limit again--hey, why not borrow more, if others are willing enough to lend to us (and for little to no interest too)?  

And can we through sequestration or more surgical spending cuts, decrease the rate of our deficit spending--however actually balancing our budget is not even on the table anymore, as booming entitlements for Social Security and Medicare are expected soon with the aging baby boomers to drastically increase our spending again. 

The hope that we will somehow, magically grow our way out is fanciful thinking--almost rising to delusions of national grandeur--that just don't mathematically add up (since we have a median GDP growth rate over the last 80 years of just over 3%). 

Perhaps, we don't care if we can't pay our debts, because we are the superpower and what is anybody going to do to us about it anyway?  

Or perhaps, we rely as a backstop on our ability to print more money and pay off old borrowed sums with worthless new money galore?

Maybe it's not a default if no one acknowledges it or we just get away with it...but somehow, someway, no one and no country can spend more than it generates in perpetuity.

If you believe in the endless virtual cycle of borrow and spend, then the mind control program is working just great, indeed. ;-)

(Source Photo: Andy Blumenthal)

Debt Default--Now Or Later

Righting Our National Economy

We made it through he fiscal cliff--whew!  But the economic landscape remains a minefield. 

In terms of our national debt ceiling, we already passed the $16.4 trillion mark at the beginning of the year and are on borrowed time (no pun intended) until about mid-February when we exhaust accounting gimmicks and can no longer pay our national bills. 

Then there is the elusive government budget where we are on a "continuing resolution" that funds the government at the prior years spending levels until the beginning of March; there is no agreement on what the budget should be after that. 

Finally, there is the Sequestration that was delayed from the beginning of the year to March, which will produce across the board budget cuts to government--not surgically, but sweeping cuts that will hit almost all major government spending. 

All of these budgetary and debt issues are highly contentious and politicized and involve substantial policy decisions in terms of tax reform, spending cuts, and even income and wealth distribution. 

As difficult as it is to navigate a mine field, there is genuine fear that our national luck is running out and the sides are digging in such that even if we get over another one of these hurdles (likely by another delay) or even two of these, what are the odds that we get through all three unscathed economically and with our national image and strength intact?

Already in August 2011, S&P lowered the U.S. credit rating because of these unresolved issues and political stalemate around them, and Moody (in September 2012) and Fitch (this past week) threatened the same putting us at risk of higher borrowing costs, inflation, and even recession. 

Bloomberg BusinessWeek (3 August 2011) using game theory seemed to advocate for political compromise--that produces a "deal no one likes" but avoids pure political victory by one party over the other where one party gives in and the other holds out, and also avoids "financial Armageddon" where both sides hold out and can't get any deal done at all. 

In games of "chicken" both sides "entertain the option of killing everyone" until they finally realize this results in mutually assured destruction (MAD). 

In Washington "everyone, however, is playing a game called 'election'" and "the only possible goal in that game is to win the next one"--in this game, the real question--is there the leadership to rise above the politics, the short-term focus, and bring the two sides together in compromise to forge a path through a difficult economic road ahead. 

Truly, there is really only one way ahead and it is through national sacrifice that will spare no one, but may save the country and our ideals and make us stronger in the end. We are at a dead end for kicking the can further--next step must be to right the ship through cooperation and making the tough choices.

Just like the Washington Monument is one, we must become one. ;-)

(Source Photo: Andy Blumenthal)

Righting Our National Economy

Either Way A Fiscal Cliff

Okay, so here's the dirtly little secret...

The "Fiscal Cliff" that everyone is supposedly working on to avert--is really unavoidable!

Yes, the Sequestration that was put in place that eliminates the broad-based tax cuts from a decade ago and reduces spending across military and domestic government spending--can be replaced by more surgical tax increases and spending cuts. 

But with a National Debt of more than $16 trillion dollars and one which has been trending up over a trillion dollars a year, we have gorged ourselves and spent beyond our means for too long--and the time to pay up is fast approaching.

For example, critical entitlement programs like social security and medicare are running out of funds and will not be able to cover benefits by 2033 and 2024, respectively.

What is even worse though is that the money you have been paying into "the system" from your payroll taxes for decades hasn't been put aside in trust for you, but has been spent on other things--sort of like robbing Peter to pay Paul. And now what?

At a time when national competitiveness is suffering, jobs are going overseas, test scores in science and math are trending down, and we have the lowest percentage of Americans working in 30 years, we are saying that we've essentially spent our last dime decades ago and have been doubling down with more and more borrowing--that we don't really know if we can ever pay back. 

While we would like to "grow" our way out, by having more people working, earning more, and paying more into the system, our growth projections of slightly more than 2% next year and a historical average from 1947-2012 of just 3.25%--this seems more than wishful thinking. 

More likely, as the percent of our national debt to GDP continues to rise and our national credit ratings are are at risk of falling, interest rates will start to rise first slowly and then faster to elevated levels to compensate for the increased borrowing risks, and we will see inflation rear it's ugly head--it is ugly because inflation will mean your savings are worth less or potentially even virtually worthless. 

This will make the $16+ trillion deficit also worth less, so we pay it back through inflation as Germany did with hyperinflation after WWI, and the essential wiping out of our personal savings. Viola, deficit paid down, but pay attention to at what personal costs! 

Unfortunately, the fiscal cliff is here and will happen whether spending is cut here or there and taxes go up on some or everyone. This is just the negotiation of how to spread the pain and spin the tale. 

And either way the fiscal cliff is going to hurt, because you have to cut spending and increase taxes leaving people with even less money in their shrinking pocketbooks, and if you don't, the credit agencies will continue cutting our national credit rating leading to higher interest rates on the debt and higher inflation--so either way, our creditors will get their pound of flesh. 

In the E.U. now, we are seeing the effects with countries from Greece to Spain, Portugal, Italy, Ireland, and more reeling from the impact, but this is only the beginning, because the lending spigot instead of being turned off, has been opened up further to kick the can down the road. But who will be the lender of last resort, when there is no one that can reliably pay it back?

In the end, you can't raises tax or cut your way out of decades of financial mismanagement, overnight. In the corporate sector, we say Chapter 11--what do you say for Western civilization? And what do we tell our children and grandchildren?

(Source Photo: Andy Blumenthal)

Either Way A Fiscal Cliff