Just look at this so-called "debate" we're having. The problem ostensibly on the table is the deficit. But, without any context, the raw deficit number is meaningless. If the country's debt were, say, $50 million, that wouldn't be a big deal. If some average American suddenly found himself $50 million in debt, well, that would be a big deal. And that's because the country's GDP is a lot bigger than the average person's income. So what we're talking about is really the debt-to-GDP ratio.
Well, yes and no. We're talking about two things:
That's two things, not one. And both are important.
See, Debt-to-GDP matters as a point in time, but what matters even more is which direction you're going, and how quickly. More to the point, so long as you're going to the wrong way the rate is secondary and so is the absolute value.
Unfortunately in order to get the ratio to go the right way we would have to add GDP faster than we add debt, assuming we're going to add debt at all (that is, assuming we're going to spend more than we make.) When was the last time we did this? Here's a hint - this is the chart of how we've done at that since the early 1950s:
This is total systemic debt, incidentally - not just Federal Debt. But it makes clear that a couple of quarters of ~5% improvement do nothing to make up for 30 years of idiocy. And that's what we've had - 30 years of idiocy, and more to the point, the imbalance is not new, it in fact goes all the way back to the late 1950s in that until the small corrective movement over the last year or so we hadn't had one year with a positive GDP/Debt balance!
Yet the debate is concentrated almost entirely on the debt side of the equation and barely at all on ways to increase the GDP side. How has the playing field of what is acceptable in this debate been so shrunken that the only two competing proposals still allowed on the field are the president's cuts and the House GOP's draconian cuts?
Arianna, it's simple: You can't point to any ability, by any administration on the left or right that has done anything other than play Ponzi with debt-to-GDP levels for the last fifty years.
I realize that there's a profound lack of understanding of the exponential function among the public, even among those who claim to be "smart" and have "advanced degrees." But that lack of understanding borders on criminality since this is a mathematical function that is taught (at the latest) in the first Algebra class. There should thus be nobody who graduates from High School that does not have a complete and full understanding of it.
Yet virtually nobody does, including apparently you.
Oh, for what its worth, that chart is actually wrong and understates the problem, because it does not count as "debt" the approximately $4 trillion in Social Security and Medicare IOUs. Yet those IOUs are going to turn into real debt real fast when the trustees try to cash them, and that has already begun.
There are many who point to the GDP growth over the last fifty years and say "see, we can do it!" They're lying. We can't do it. The reason we can't do it is that we didn't do it over the last 50 years either - we faked it by pulling forward demand. Every dollar of GDP advancement and more from 1951 onward was bought not with actual output being recycled back into the economy but rather with more promises to pay tomorrow for goods and services consumed today.
It's been a fun ride but the mathematical facts don't care how much fun you've had, they only care about whether you can make the interest payments on ever-increasing debt loads. It's not just federal government debt, it's all debt in the economy. It all sums to the same thing - no matter who is owed for each debt someone has to produce output not for themselves but to pay the interest first. Then, and only then, can they produce for themselves.
The ever-increasing leverage in the system produces an illusion of prosperity that is funneled to a smaller and smaller group of people. The "wage disparity" and "wealth disparity" you and other "progressives" decry is not caused by an unfair system per-se - it is caused by the mathematics of allowing the abuse of leverage. There is nothing wrong with lending capital and being paid interest for doing so. The problem comes in when you try to prevent the natural consequence of making unsound loans - both the lender and borrower go bankrupt.
That's what recessions are. That's their purpose. They serve to clear these unsound practices from the books by punishing those who were foolish. They lose their capital and the ratios come back into balance.
But it hasn't happened since the 1970s. Since that time every recession has been met with more and more bailouts and more leverage. Since Continental Illinois banks that made bad lending decisions have had their bondholders - the source of their funding - bailed out by the FDIC and other arms of government. This tiny group of people are not at the "top" of the heap in terms of intellectual prowess - they're just thieves who have infiltrated the government and either bribed or extorted the ability to steal when things go wrong.
We can't grow out of this Arianna. It's not mathematically possible. We have to literally kill all the unsound institutions. Every one of them. They must be broken up and their bondholders and shareholders must take the heat of all the unrecognized losses. They must die. We must stop supporting people who don't work and don't produce. We must cut not from 12% of the Federal Budget, but from all of it, and we must cut it by 40% or more.
Yes, the tax package passed in the waning hours of 2010 was idiotic. The payroll tax cut was particularly stupid, in that it added some $380 billion per year to the deficit for the next two years - money we cannot afford to borrow.
There is no candy-crapping Unicorn Arianna. Many like you still believe in it, but he doesn't exist. We have lied, cheated and stolen our way through life in America for more than 30 years and the check is now on the table and has to be paid.
"Borrow more to grow more" was tried in 1980, 1990 and in 2003. It didn't work. Look at the graph yourself. That three times the same mantra was uttered, three times it was done, and not once did we manage to drive growth above the amount of new leverage taken on in the system.
Here's the ugly little reality: We have a year, maybe two. Perhaps to the 2012 elections. By then we had better convince the world - not just the US, but th world - that we're going to run a primary surplus. Not ten years hence, then and now.
That's about how long we have, in my opinion, before the world decides that we're never going to pay.
If that happens then we get Greece. Our borrowing rate goes parabolic. The government has to roll some quarter of the total debt every year - that's about $3 trillion, more or less. They won't be able to at a rate they can afford to pay, and that's when the entire game comes crashing down on our heads.
See, the Federal Government takes in about $2 trillion a year in taxes. If we cut spending by 40% to reflect that today it will have a nasty effect on GDP and employment in the short term. We could balance that with changes in tax policy (e.g. The Fair Tax) and import policy (e.g. protective tariffs for wage and environmental-cost parity.) This would kill a lot of US corporate stock prices, but in the intermediate term they'd come back - and so would the jobs.
This is a true "difficult choice." But what's worse is what happens if we don't do it. If rates shoot the moon then we won't be able to pay. Our $200 billion (roughly) in interest could quadruple or more nearly overnight, given that the current rate is about 1%. That would leave us with only two options: Cut spending by 75% instead of 40%, or default.
But if you default then you can't borrow any more. Now we get an immediate 40% Federal spending reduction without warning or negotiation, and we also get the collapse in GDP that folds back into tax receipts, but without the ability to craft policy responses (like tax and tariff reform) to deal with it.
This is reality Arianna. I know you don't want to hear it and neither does anyone else, but it doesn't matter what you want to hear. These are the facts. We do not have five years, or ten. We do not have the choice to accept a very severe recession or mild Depression. That option expired in 2003 when we made the previous set of choices.
We now have the option of either a severe Depression or a government funding collapse, which is likely to lead to a collapse of both civil order and the government.
Those are the only choices Arianna. We can take the first option and mitigate it to our best ability, but we cannot avoid it. Just as in 2003, if we choose not to take our medicine now the less-severe option will be removed from the list of choices, leaving us with only more-severe ones down the road. And "down the road" is not very far.
Exactly how far we will get before the national and international community decide we're going to screw them is not possible to know in advance. We will only find out when they decide. But we cannot, as a nation, survive that declaration in our present form.
We must not, therefore, allow that to happen.
You're arguing for a knowingly-bankrupt policy Arianna. You're either doing this because you're unaware, or you're doing this because you're part of a political machine that is hell-bent and determined to crash this nation into the wall.
If the former, it's time to change your spots.
If the latter, it's time for you to leave the stage along with the rest of the clown-car brigade.
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