American Debt/Deficit Spending Crisis II (2 Viewers)

[Steve R.]

The budget crises continues to intensify. On Wednesday, April 13, 2011 the President provided a nice sounding positive rhetorical speech that was vacuous in real intent. The Washington Post in covering the speech ran this article: "Obama announces framework for cutting deficit by $4 trillion over 12 years"

The problem? Obama did not offer a real tangible implementation plan and the allusion to cutting the deficit by $4 trillion dollars is nothing more than smoke and mirrors. Jennifer Rubin wrote: "The president speaks, says very little".

Based on a website that tracks government spending (assuming that the website is accurate) Obama's budget proposals has (will) run-up an increase in the deficit by approximately $5.5 trillion dollars over four years. So in four years you can spend like a drug addict, but then you offer to only "reduce" (whatever that means) the deficit by $4 trillion in 12 years!

But let's go a step further, the phrase "cutting the deficit" seems undefined. Basically a misleading word play. When someone says that they are cutting the deficit that means, to me, an actual reduction in the deficit. According to the website, where I got my data, the US debt by the end of 2012 will be approximately $19.03 trillion dollars. So if Obama is being honest with this assertion of deficit reduction the US debt should be reduced to approximately $15.6 trillion dollars in 12 years.

Note that in 2009 the US debt stood at $14.5 trillion dollars.

Like most politicians, Obama assertion of actually "cutting the deficit" is fanciful. What he appears to be doing, in reality, is claiming that the proposed spending cuts and tax increases would result in a debt that is $4 trillion dollars less than was otherwise projected.

The website that I have been using only goes to 2016, essentially five years from now. $4 trillion dollars divided by 12 years would amount to annual $0.333 trillion dollars "reduction" in projected spending. Multiply that by 5 and we would have an approximate $1.7 trillion dollar "reduction". According to the website, the US debt, based on current projections, would be $24.3 trillion dollars. Obama's "savings" would result in an approximate debt of $22.6 trillion dollars.

For 2011 the projected debt is around $18.1 trillion dollars. By 2016 the debt with Obama's "savings" will rise to to $22.6 trillion dollars. A yearly increase in the debt of around $0.9 trillion dollars. One can hardly call this continued increase "deficit reduction" or even fiscally prudent spending. Obama in 2006 uttered these prophetic words, which he now conveniently "regrets".

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure."

So when are we going to see real leadership? To be credible Obama concerning his proposed budget, should have offered specific dollar revenue/expenditure figures for the remainder of FY2011 (which should have been passed by October 1, 2010 (another leadership failure)) and for Fy2012.

As an acknowledgement to Thales750 and Vassago; it is the US House of Representatives that actually passes the appropriations bill. Obama's budget proposal is a recommendation to the US House of Representatives.

This is a follow-up post to:
American Debt/Deficit Spending Crisis
Shutting Down the Federal Government

 

[Access_guy49]

If you run a company, and that company spends $100, and makes a sale of $90, you effectivly run a DEFECIT of $10. If this is done every day for 100 days, you have a DEBT of $1000.

If you then start making purchases of $92 and sales of $90 you have reduced your DEFECIT by $8, but your DEBT would still increase.

When you take into account what the words Debt and Deficit actually mean, then there isn't really any "smoke and mirrors"... sorry, no real deception here, just another conspiracy theory.

 

[Banana]

The real problem is that a business that is running a deficit is also risking insolvency. The business can opt to make a short-term loan to cover the deficit and thus increase the debt but that is not actually a better financial position. This depends on whether deficit ends and there's positive cash flow to not only cover the operating expenses but also to serve the outstanding debt. Otherwise, the business must close and liquidate its assets.

With government, it's magical. It can run deficit for years and years and rack up piles and piles of debt yet it doesn't have to go bankrupt. It behaves as if deficit spending and increased debt holding has no consequences whatsoever. But there are real consequences - when there's deficit, bonds has to be sold to cover the shortfalls. If one has to also sell bonds to service the outstanding debt, then that is indeed a vicious circle that normally ends abruptly in bankruptcy for private organizations.

If someone doesn't think there's something wrong with the picture and that government is somehow magically exempt from same budgeting principles that private organizations must obey, then it's going to be hard to discuss the issues. I sure as hell don't think government are exempt from the same principles that put insolvent businesses out of business.

 

[Access_guy49]

Banana, very good point.
In my experience, listening to the conservative party (Canada) You hear about decreasing the government debt.. so I would agree that government doesn't have the same immediate consequences as if a private person or business were to run a deficit, but I do believe that government realizes the consequences are still there for a country to run up debt.

That being said, there is a HUGE problem with the way governments decide to spend money. I have yet to hear of a government approach spending like a person would approach spending. (Which is how it should be thought of) This is to say that, when a person considers a purchase in which they must take out a loan, they consider the need of the purchase. Most people ask themselves a basic question, "Do I need this thing bad enough that I am willing to go into debt for it"
Most people look at what they can afford based on their income, and then their "Must pay" expenses, such as rent/mortgage, food, heat, hydro, car payment, car insurance, ect.. Once you have your list of "Must pay for" and your income, you can quickly see how much extra income can go towards "other" expenses.
Governments need to start taking this type of responsibility with their money. They roughly know how much they will be getting on any given year, its math, it's not a friggin tax fairy that picks random numbers.
They should focus on what they NEED to spend money on: Schools, Roads, Healthcare.. Whatever the priority is.. THEN with whatever is left, spend on other stuff. Then as your list of wants gets down you have to start looking at what's left and asking "do we need this bad enough to go into debt for it"
They don't do that. Just as Banana said, they behave as if deficit spending has no consequence....
That part needs to change.
People can change, it's not change that is the problem, it’s the rate of change. There is no quick fix for this. Cutting the deficit is a start.

 

[Insane_ai]

What the us government is doing now is essentially a huge payday loan scheme. It expects to receive revenue that it never gets and uses debt to cover the missing funds. When the cycle repeats, the government has to incru firhter debt to pay the interest on the original debt.

There is only one way out of this, spend less than you bring in and pay down the debt with the remainder.

The problem lies in the fact that the federal government has assumed rigths and responsibilities that it should not have. The recipient class will not stand for cuts in their subsidies nor answer the call to become self reliant. The politicians must stay in power to keep the money machines going for themselves so they cater to this class while pointing the finger of blame at the productive class.

This country will have to take its licks sooner or later. Sooner is better than later for two reasons:
1. Passing the debt to further generations who receive no benefit or have no choice in the matter is flat out wrong.
2. The longer we wait, the worse it will be when it happens.

The people of America must learn to operate on logic instead of reacting to emotion and percieved need. This will be a long hard road to travel; I am willing to travel it for my childrens' sake.

 

[Adam Caramon]

The problem lies in the fact that the federal government has assumed rigths and responsibilities that it should not have. The recipient class will not stand for cuts in their subsidies nor answer the call to become self reliant. The politicians must stay in power to keep the money machines going for themselves so they cater to this class while pointing the finger of blame at the productive class.

I agree. Those corporations in the recipient class, like GE, must learn to be self-reliant and pay their fair share of taxes instead of relying on subsidies from the productive class. We must hold politicians that cater to these corporations accountable and bring the money machines that fund their campaigns to a halt.

 

[Banana]

Of course. Everyone agrees with the sentiment, "Someone else should pay their fair share." As long the "someone else" isn't themselves and fair means "enough for me, too!"

Thus, the problem inherent in taxation.

 

[Thales750]

What the us government is doing now is essentially a huge payday loan scheme. It expects to receive revenue that it never gets and uses debt to cover the missing funds. When the cycle repeats, the government has to incru firhter debt to pay the interest on the original debt.

There is only one way out of this, spend less than you bring in and pay down the debt with the remainder.

The problem lies in the fact that the federal government has assumed rigths and responsibilities that it should not have. The recipient class will not stand for cuts in their subsidies nor answer the call to become self reliant. The politicians must stay in power to keep the money machines going for themselves so they cater to this class while pointing the finger of blame at the productive class.

This country will have to take its licks sooner or later. Sooner is better than later for two reasons:
1. Passing the debt to further generations who receive no benefit or have no choice in the matter is flat out wrong.
2. The longer we wait, the worse it will be when it happens.

The people of America must learn to operate on logic instead of reacting to emotion and percieved need. This will be a long hard road to travel; I am willing to travel it for my childrens' sake.

The federal deficit is not the cause.

The overvalued dollar is the cause. The only way the deficit will be reduced is by fixing the trade imbalance, and one way or another that is going to happen.

With or without Congress doing anything about it.

Throughout the 20th century the US federal budget averaged 18% of the GDP. During that time the US was the most prosperous nation in the history of Mankind. Fully half of the entire world’s economy was American.

We are now at around 24% of the GDP. The only way to fix this is to stop the growth of government and grow the rest of the rest of economy, but most importantly the wealth producing portion.

Many conservative talking heads would have you believe 2 complete lies. One lower taxes on the rich will stimulate the growth, and second that shrinking federal spending will reduced the dept. Neither could be further from the truth. Lower taxes on the ultra rich encourages hording cash; by definition, out of the economy. Shrinking government will likewise shrink the economy, making it even harder to balance the budget.

Many believe that if the government spends money it’s money they don’t have. Wrong again, government spending has the same effect as the private sector as long as the money spent is not in wealth producing activities.


And in fact, any money spent on imports has the opposite effect, it reduced the size of the US economy. So actually, much of the money spent by government has the most multiplier effect on the economy.

Now we come to the overvalued dollar. In 1963, 30% of the US economy was in manufacturing. At that time we produced half of the global output. This is the important fact. Today only 11% of our economy is in manufacturing. Nothing we do to the federal budget will have any effect on that.

What has to happen is the currency rates around the world have to be adjusted to reflect the fact that we are no longer the only large exported in the world.

I’ll cover this more in depth later this week ,I have to get some works done.

 

[Access_guy49]

The federal deficit is not the cause.

We are now at around 24% of the GDP. The only way to fix this is to stop the growth of government and grow the rest of the rest of economy, but most importantly the wealth producing portion.

You say this... only to make the comment quoted below, which is... more or less the exact opposite statement
We need to grow the rest of the economy, but most importantly the wealth producing portions. (You know the rich people own the big businesses right?)

Many conservative talking heads would have you believe 2 complete lies. One lower taxes on the rich will stimulate the growth, and second that shrinking federal spending will reduced the dept. Neither could be further from the truth. Lower taxes on the ultra rich encourages hording cash; by definition, out of the economy. Shrinking government will likewise shrink the economy, making it even harder to balance the budget.

Many believe that if the government spends money it’s money they don’t have. Wrong again, government spending has the same effect as the private sector as long as the money spent is not in wealth producing activities.

You make a valid point, yes lowering taxes does promote saving.. but as does over taxation. Because then people want to save every penny they can and you loose spending in "luxury industry"

Lowering taxes for the rich often means lowering tax for large corperations. Which grows the economy.
Simply put, if you own a business, and you need to open a new factory, and mexico will give you a tax break and the US wont... where do you locate?? Easy answer...And in our currently global market, it's worth locating in the cheap spots and shipping elsewhere.

Government spending is good, unless the government doesn't have the money. I refer to my previous comment about how governments better assess needs and wants.
Government funding for things will stimulate the economy, there is no doubt, but if your going to BORROW money then you best make sure your NEEDS are covered. Not all spending is good.

 

[Thales750]

First it’s absolutely not true that the ultra rich invest in small business.

The average Angel Investors makes 90K per annum and has a net worth of 700K, Angel Investors provide the startup capital for most successful small businesses.

The average venture capital fund (the second round of small business funding) is 151 million dollars, not exactly the ultra rich, although much of that which is invested into the venture funds comes from wealthy individuals. But this is peanuts compared to the massive amounts of cash in the ultra rich pools. In 2009 the entire venture capital holdings totaled 179 billion. Exxon alone made 40.1 billion in 2008. I’m not picking on oil companies; they actually pay higher than average (for multinationals) taxes and employ millions of people in living wage earning jobs. In most cases they are good for the economy. The caveat is that substantially high, gas and diesel, prices slow the economy.



Holdings of the Largest Banks

1. Bank of America ($1.740 trillion)
2. UBS ($1.593 trillion)
3. Morgan Stanley ($1.508 trillion)
4. Wells Fargo ($1.218 trillion)
5. Credit Suisse ($775 billion)
6. JP Morgan ($636 billion)
7. Royal Bank of Canada ($379 billion)
8. HSBC ($379 billion)
9. Deutsche Bank ($272 billion)
10. Pictet & Cie ($243 billion)

Corporate taxes are not figured the same way that personal taxes are, corporate taxes are computed on the net earnings. So the opposite of conservative thinking, higher corporate taxes encourage investment to defer tax liabilities to higher future earnings. And the myth that corporations will move away to avoid taxes is overstated. If a corporation is going to have access to the largest consumer market in the world they will necessarily choose the higher tax rate, over the loss of revenue. An example of this is all of the foreign car makers setting up assembly plants in the US at a time when American companies were downsizing.

We have to learn to look at historical data and find our own solutions instead of listining to people that have a fiduciary responsibility to their funding sources.

Now back to my original assessment that the real problem with the US economy is the exchange rate. Once again historical data tells the story. First we must look at two other major industrial powers, Japan and Germany. After WWII their economies were devastated. At that time the US economy was in full production. So if you wanted to buy anything made in America you were required to use US Dollars. That, and the fact that US intelligence and military might kept the Soviets at bay, led us to better relationships with the oil producing nations. These two factors set the condition for the Dollar to be the reserve currency for the entire planet. Hence the high price of the dollar.

When the economies (in this case industrial output) in both Japan and Germany, and later South Korea grew, their currencies naturally rose to reflect their industrial output. The opposite has occurred in the 21st century. China has eclipsed both Germany and Japan, yet their currency has not risen to reflect the current output.

In the last 25 years Japan has seen a prolonged stagnation of their economy, this is a direct result of the artificially low Chinese currency, and an inflated Yen.

I guess in closing the real travesty here is that conservative talking heads would have us believe that unions, tree huggers, and high taxes have created this debacle. The reality is much more complicated than that.

There is much more to discuss, like the fact that corporate America has two trillion dollars in cash, and that in many cases they make more off of financial services, or that our government give them substantial tax rewards to move their operation overseas.

In future installments we can explore some more myths, for example why we aren’t building any new refineries, hint: it has nothing to do with what you have been told. And who actually paid for all these “entitlements” that are at risk.

 

[Thales750]

Are you folks bored with this?

 

[Access_guy49]

Are you folks bored with this?

Oddly Enough, my subsribed threads didn't have this highlighted as having a new post... hmmm.. anyways..

"....So the opposite of conservative thinking, higher corporate taxes encourage investment to defer tax liabilities to higher future earnings. And the myth that corporations will move away to avoid taxes is overstated"

In your first half of this part, you basically state higher taxes is good. (Which if were the case, one would assume all companies would then move locations to the highest tax locations in the world...)

The second part can't be "overstated" if it's not true at all...

I guess my question can be boiled down to:
If taxes are not such a bad thing in corporate eyes... why do they all move operations to China, Mexico, India.. ect...
(Cheap workforce... and low taxes)

the cheap workfoce is because they don't have unions. And if you look at GM, you can see how Unions suck the life right out of the company sustaining them... There is no need for unions anymore work conditions are not harsh enough to justify the use of unions. And it seems that unions for the most part get greedy. NO ONE needs to be getting 75,000 per year to sweep floors! Not to mention, from every story I have ever heard, unions hinder productivity.... (but that's almost another thread)

 

[Thales750]

The CEO of Caterpillar was on CNBC

He said exactly what I have been saying.

Taxes, regulations, and wages are not problem. Currency exchange rates are the solutions.

By the way they (Caterpillar) are building a new facility in Texas. The talking head ask him about taxes and wages and regulations. He answered being close to the market and a high skilled work force.

Conservative talking heads are rotting the brain of America.

 

[Vassago]

It would still be nice to switch to the Fair Tax proposal. You pay taxes when you spend your money, not when you make it. Drug dealers and illegal aliens would then have to pay their fair share of taxes. It would also make the IRS almost redundant. No one would be able to easily scam on their federal taxes.

Of course, some things could still be tax free or have lower taxes. Most foods and water, medical supplies, etc... could have less or no taxes. More expensive "luxery" items would have higher taxes. It makes so much sense. Would you rather pay your taxes when you spend your money rather than when you make it?

 

[Thales750]

It would still be nice to switch to the Fair Tax proposal. You pay taxes when you spend your money, not when you make it. Drug dealers and illegal aliens would then have to pay their fair share of taxes. It would also make the IRS almost redundant. No one would be able to easily scam on their federal taxes.

Of course, some things could still be tax free or have lower taxes. Most foods and water, medical supplies, etc... could have less or no taxes. More expensive "luxery" items would have higher taxes. It makes so much sense. Would you rather pay your taxes when you spend your money rather than when you make it?

The risk to “consumption” tax is that it has a profound negative effect on economic growth. It creates great pressure to save money, by both corporations and individuals. Some encouragement of savings is necessary, but by definition spending money is the economy.

Tax laws need to be engineered to promote domestic investment.

How do you suppose a national sales tax would promote that?

 

[Rabbie]

It would still be nice to switch to the Fair Tax proposal. You pay taxes when you spend your money, not when you make it. Drug dealers and illegal aliens would then have to pay their fair share of taxes. It would also make the IRS almost redundant. No one would be able to easily scam on their federal taxes.

Of course, some things could still be tax free or have lower taxes. Most foods and water, medical supplies, etc... could have less or no taxes. More expensive "luxery" items would have higher taxes. It makes so much sense. Would you rather pay your taxes when you spend your money rather than when you make it?

The drawback with taxes on expenditure is that they fall heaviest (in percentage terms) on the lower paid. They also tend to depress expenditure which can mean reduced economic activity and loss of jobs in the retail and manufacturing sectors.

 

[Adam Caramon]

It would still be nice to switch to the Fair Tax proposal.

The Fair Tax proposal sounds good on paper, but after reviewing it at Factcheck.org, I wouldn't care for it much. Sounds like middle class families take the hit and poor and rich families benefit.

Axeing the IRS and tax returns definitely sound appealing, though.

The risk to “consumption” tax is that it has a profound negative effect on economic growth.

They also tend to depress expenditure which can mean reduced economic activity and loss of jobs in the retail and manufacturing sectors.

Interestingly enough, Fact Check came up with the opposite.

 

[Thales750]

The Fair Tax proposal sounds good on paper, but after reviewing it at Factcheck.org, I wouldn't care for it much. Sounds like middle class families take the hit and poor and rich families benefit.

Axeing the IRS and tax returns definitely sound appealing, though.




Interestingly enough, Fact Check came up with the opposite.

This is a great opportunity to do some original thought. The real challenge now days is to sort out diametric opinions given; which are always based on whose being paid by whom.

I started having conversations about exchange rates being the big problem 4 years ago. Everyone looked at me like I had absolutely no brains left in my head.

Now people are starting to say, “hmm it might be the exchange rates”.
Well yeah! It is the exchange rates.

Another thing we should do is start using the strategic oil reserves to reduce the price of fuel when the spot and futures traders get super greedy. Once or twice of dumping a few million barrels on an overcharge market will certainly make them think twice about unsupported run ups of oil prices. If all of the major oil using nations did that at the same time the greedy traders would lose billions of dollars in a few minutes. It’s bit like a sharp stick in the eye.

The plan would be to dump oil on the market when it heated up and buy it back when it’s low.

 

[Rabbie]

Another thing we should do is start using the strategic oil reserves to reduce the price of fuel when the spot and futures traders get super greedy. Once or twice of dumping a few million barrels on an overcharge market will certainly make them think twice about unsupported run ups of oil prices. If all of the major oil using nations did that at the same time the greedy traders would lose billions of dollars in a few minutes. It’s bit like a sharp stick in the eye.

The plan would be to dump oil on the market when it heated up and buy it back when it’s low.

The oil producing countries (OPEC in particular) have a vested interest in high oil prices. They need to fund their arms purchases to maintain their grip on power somehow.

Given the high oil usage of modern industrial countries I wonder if the reserves are large enough for this strategy to have a chance of working

 

[Access_guy49]

Another thing we should do is start using the strategic oil reserves to reduce the price of fuel when the spot and futures traders get super greedy. Once or twice of dumping a few million barrels on an overcharge market will certainly make them think twice about unsupported run ups of oil prices. If all of the major oil using nations did that at the same time the greedy traders would lose billions of dollars in a few minutes. It’s bit like a sharp stick in the eye.

The plan would be to dump oil on the market when it heated up and buy it back when it’s low.

Wouldn't work, Lower prices just mean the short makes the money on the futures.. Either the seller makes the money, or the buyer does....