US government spending is unsustainable
鈥淧anel will tackle national debt,鈥� says a headline in this week鈥檚 Washington Post.
Would anyone like to bet?
Who writes these headlines? What are they thinking? Are they thinking at all?
While the bi-partisan group of bumblers may do something; tackling the national debt 鈥� or even slowing it down 鈥� is not one of them. It would be going against the tide of modern financial history, which rolls debt into bigger and bigger piles and turns small problems into huge ones.
Let us look back. What has been the major trend of the entire past 50 or so years? Government has played a larger and larger role in the US and most western democracies. Only in the formerly (and for many, still) communist countries has government been rolled back.
The communists learned their lessons. They proved that government spending does not make people rich. But now鈥hat鈥檚 this鈥�? The US and other countries are greatly increasing the percentage of GDP spent by the government.
The communists proved that central planning didn鈥檛 work. But again, the US and others are now planning their economies more than ever 鈥� managing interest rates, directing capital to one industry while denying it to others, raising taxes on this鈥ubsidizing that鈥egulating everything that moves鈥�
The communists also proved that state ownership of industry was a bad idea. But the US and others now own banks, insurance companies, almost the entire mortgage business, and one of the world鈥檚 largest automakers.
Perhaps most importantly, almost all the 鈥榦ld鈥� democracies 鈥� notably the US 鈥� are taking on much more debt. Bankers do stupid things 鈥� the feds take over the debt. Homeowners do stupid things 鈥� the feds give them more low-cost credit. Politicians do stupid things 鈥� and the feds run up even more debt.
And it鈥檚 killing them. They can鈥檛 raise enough money through taxation to fund their spending plans, so they have to borrow. And borrowing exposes them to big risks.
In a few days, America鈥檚 first time house buyers鈥� tax credit program expires. It鈥檚 been a great success, say supporters.
Let鈥檚 see, how did it work? According to the news reports, the government gave away $12.6 billion in tax credits. Of course, some people would have bought a house anyway鈥苍诲 could have afforded one without the tax credit.
Wait鈥hat means that the only additional sales came from people who 1) didn鈥檛 really want to buy a house or 2) couldn鈥檛 really afford one. According to economists鈥� estimates, each one of these people cost the feds $30,000 worth of tax credits.
And according to the results of an audit, $139 million was paid out to people who hadn鈥檛 bought a house at all. And one of the people who got the credit was only 4 years old.
A perfect federal program 鈥� it accomplished nothing at great expense鈥�
And it adds to the debt!
Yesterday, the Dow sold off 213 points. Gold rose $8. In the aftermarket it soared even more.
What鈥檚 bugging the markets? Debt. Specifically, the debts of Greece鈥苍诲 Portugal鈥苍诲 Spain鈥�
Last Thursday was 鈥淏lack Thursday鈥� for Greece. News reports told the world that Greece鈥檚 budget problems were bigger than people had thought. Traders dumped Greek bonds.
Greece鈥檚 debt is now 鈥榡unk鈥欌�he rating agencies say that if the country is forced to reschedule creditors could get back only 30% of their money. Naturally, lenders are nervous. And investors fear that Greece鈥檚 problems are not limited to the Hellenes. Sovereign debt problems are as 鈥榗ontagious鈥� as HIV. All it takes is a little hanky panky of the wrong sort鈥苍诲 you鈥檝e got it!
Greece鈥檚 budget deficit is 8.7% of GDP.
Portugal鈥檚 deficit is the same.
Spain鈥檚 is higher 鈥� at 10.4%.
Where鈥檚 the US deficit? Last time we looked it was projected to be as high as 12% of GDP.
By many measures, the US is actually in WORSE shape than Greece. And the rating agencies have already warned about a possible downgrade of US debt too.
And by all measures, the US has the biggest pile of debt in the world鈥� Just wait until the sparks hit it. You鈥檒l see the world鈥檚 biggest blow-up!
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