Debt Ceiling – Perspectives


 

DEBT CEILING – PERSPECTIVES

Economics501

January 17, 2011

Extending debt ceiling may be one major event that persuades our foreign investors to significantly decrease financing our debt.   

Many in Congress cannot or refuse to comprehend a financial balance sheet.  Our debt has increased from 9 billion to 14 billion or almost 100% of GDP in 3 years.  How much longer will China continue to finance our debt if we increase it?  China’s middle class and domestic economy is growing.  Will not China realize better returns investing internally? 

We have no choice other than to reduce our debt, grow our economy and increase Treasury revenues. Implementing the Fair Tax along with significant spending cuts are our best response to our increasing debt woes.

Urgent Action Items


Implement the Fair Tax of 2011 (already in Congress) – grow revenues, reduce our debt


Immediately a 1.5% to 3% GDP increase will result.  This is cost of compiling with complex tax policies, many of which do not spur GDP growth.  The Fair Tax eliminates the IRS in time as there is no need for them.  Bye also to many accountants.  How much do IRS agents or accountants contribute to GDP? Virtually zero.  We need GDP to generate revenue.  The Fair Tax will delete many special interest lobbyists pushing their complex tax breaks that really benefit only lawyers and accountants.  We have no choice.  We need more revenue.  Create a simple tax structure that provides incentives to investments that will grow our GDP.

The Fair Tax is progressive.  It provides rebates which can be adjusted for the poor.

FairTax – quick facts:

FairTax would establish a retail sales tax of 23% on all new goods and services.  Additionally, the FairTax includes a provision that would allow a portion of the sales tax to be returned, in the form of monthly tax rebates, to households with income below the poverty level and up to two times the poverty level.

FairTax will abolish federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replace them all with a simple federal retail sales tax where:

 
 

  • You keep your entire paycheck
  • Illegal immigrants would pay taxes
  • American companies would more strongly compete in the global market, resulting in more American jobs

 

In sum, a revenue neutral rate of taxation without the GDP reducing drag of 1.5 – 3%, will result in a fair system and grow the economy which will increase treasury revenues.  Fair tax rates can then be adjusted accordingly (with growing revenues due to greater economic growth – decrease in the 23% rate).  Keep all of your paycheck and invest in the US as an innovative entrepreneur.

Yes – a business and investor friendly environment results in greater economic growth.  Visit http://www.fairtax.org for more details, then write to Congress.  The Fair Tax Bill is there but needs a push for a vote.

So the Fair Tax will increase revenues; however we must also decrease government spending.

Cut Spending (specifics here!)

1 – Cut public spending significantly at all levels (Federal, State, Local). Many specific cuts can be proposed. Convinced the electorate, then legislate.

Simply reducing our budget to 2007 levels will jettison 900 billion or 2/3 of our annual deficit. Still in 2007, the ratio of public expenditures to GDP was at approximately 35%. It is now almost 45%. This is unsustainable and must be reversed quickly (months, not years). Why risk a Greece in the US?

Private corporations contract during tough economic times and at times even in expansive times in order to reduce waste, increase efficiencies, productivity, in essence to improve and compete. Why can not the government?

A recent Rasmussen poll reveals that a majority of citizens support a 10% decrease in public employees. I say we can safely go lower than this; let’s target 20%. I was a former US Government auditor for USDA Child Nutrition programs in 1979-83 before embarking on a Wall Street IT career (1983 – present). I witnessed firsthand bureaucratic productivity, fraud, abuse, waste of tremendous proportions of tax dollars for well intentioned programs. I doubt bureaucrats are more productive today. Witness Freddie Mac and Fannie Mae or the TSA. Also, target across the board 20% reductions in all government programs, even entitlements. Yes – reduce benefits by 20% in dollars while we can; avoid dire times that Greece is experiencing. This includes all social programs and defense. One exception can be catastrophic health benefits (after we repeal ObamaCare).

Privatize Freddie Mac and Fannie Mae. They held over $5 billion in subprime mortgages after the Housing and Urban Development (HUD) Dept mandated that by 2007 55% of their holdings be for subprime mortgages. Who created the 2008 financial debacle ? By far it was government policies especially forcing banks to loan to those who could not afford and then encouraging reluctant investment banks to package the risks via complex securities in the mid 90’s. Yes – go back to the NY Times and read about this. Bear Stearns was the first investment bank to agree. Community organizers protested on front lawns of bank CEOs calling them racist if they did not lower housing loan standards. Since 2003, Barney Frank repeatedly thwarted efforts to deleverage Freddie Mac and Fannie Mae. In July 2008 he emphatically stated that both were financially sound, freezing many investors who may have thought otherwise. They then faced the consequence of holding toxic securities when Freddie and Fannie went bankrupt and may now cost the US taxpayer as much as $1 trillion dollars (approx $200 billion so far).

And now Leftist legislators are encouraging Freddie and Fannie to again support risky mortgages. Enough of this insanity. Privatize both, if there will be any buyers. Rescind all risky loan requirements.

Eliminate or privatize the Post Office. They handle less volume now than before but are broke and are asking for more money to process their volume. With the internet and email rendering mail less relevant and private competition from Fed Ex and UPS , the Post Office should operate no more than 3 days weekly and really should be sold.

Defund and sell NPR. This is a no brainer.

Privatize Social Security, the largest Ponzi scheme in world history. Allow private citizens to make their own investment decisions with knowledge that the government will not steal their investments. Does this not sound like a 410-K or IRA? Yes and they can be very safe! Privatize social security now while one can still can derive some value from it. Fearful? When has the government ever turned a profit? In extreme cases for the elderly, we’ll have emergency financial aid and catastrophic health insurance. For all else – Privatize!

Eliminate the Education Dept. This is a local responsibility. Has this department increased our student’s test scores?

Eliminate the Energy Dept. Has this department produced an extra barrel of oil, any coal, or marketable alternative energy? No –it works in reverse – restricts oil, coal, advocates dream alternate energy solutions. Let Venture Capitalists fund dreams. They are much more in touch with the real world than bureaucrats.

In sum, the US government should fund only what is absolutely necessary. This means not much more after defense and intelligence, national safety, border security, food and drug safety regulation, catastrophic financial and health care.

2 – Repeal Obamacare

Already companies are eliminating insurance coverage, eliminating workers, even closing shop. All businesses are required to fill out IRS forms for any expenditure over $600. What does this have to do with health care? Doctors will pay extra if they refer more than 10% of their patients to specialists? Who knows best here? Many doctors say they will retire early or just quit because of the extra paperwork. Is your company challenged financially as result of Obamacare? No worries if you work for a union that contributed to Obama. Your company may get an exception; over 100 have already. If equal protection under the law was important to your Congressman or Senator, he or she may have missed this in the thousands of pages. We must repeal this for one more fundamental reason: Obamacare cost estimates were based on faulty logic. We can cover this at some other time in detail. Finally, even if the logic was hypothetically not faulty, when was a government program ever within estimate?

3 – Do not bail out state governments

This is a ticking time bomb. Meredith Whitney, Financial analyst who very accurately predicted the banking crisis, estimates that if no changes are made to state governments, they will require as much as $1 trillion in bailout. How did the states get to this point? Very easily – they spent too much. During 2000-2007 while inflation barely budged, many states increased their spending by over 50%. Many are now reluctant to cut even 5%.

Unions:

Governments (and companies) were very weak in dealing with unions. Many contracts therefore are insolvent and must be modified. Otherwise states will be broke. The unions must realize this and cooperate.

Whatever state does not restructure, the US government must not bail out a single state. Bankruptcy will be the best solution and provide the states adequate time to restructure. In the end, governments will be more productive. Perhaps then we will all hold bureaucrats in higher regard.

4 – Enforce existing Immigration Laws

US Government’s failure to enforce existing immigration law is significantly depleting many states revenues. This includes costs attributed to crime, policing, illegal aliens working and sending that money back to Mexico, education and health costs to illegal aliens.

What to do about the upcoming Debt Extension Vote?


Understand the seriousness. The increase in out debt from 9 to 14 trillion in 3 years makes us very vulnerable for foreigners ending their financing of our debt. For background read the following:

Read two analyses from experts who predicted the recent housing and financial collapse and what they predict will happen soon unless we get our finances under control – Aftershock by Robert Weidemer and The Great Super Cycle , the Coming Inflation Tidal Wave and Dollar Devaluation by David Skarica.

Forgive the politicians who got us there and also many of us who elected them. Let us not look back. Spend energy to prevent an economic Armageddon ; spend energy to grow the economy and cut costs thius decrease debt.

Here are 5 scenarios that can occur at time of debt extension vote:

1 – Immediate Cuts — Immediately ( now – this week or before March ) cut some spending significantly so we do not need to increase the debt limit from 14.3 billion come March/April. This could include a Fed Govt lay-off of 20% and pay cuts of 10% + elimination, in stages of the education and energy depts., sale of the PO, Amtrak, try to sell Fannie and Freddie, Defense Sept admin staff, etc … Pass the Fair Tax as means to immediately grow the economy, generate Treasury revenues, thus lessening the pressure for the most draconian cuts.

This is best scenario. Foreign investors would be most confident of this scenario. The probability they would continue to invest in the US would greatly increase.

2 – Slightly increase debt limit by approx 5% while implementing real cuts described above.

This is the 2nd best scenario and would still maintain investor confidence.

3 – No action on debt ceiling or cuts

This could buy time for the US to still act positively as the government would be shut down in order to pay our creditors. If this lasts more than a few weeks, this may be a catalyst that generates a financial melt down similar to what is described in #4.

4 – Increase debt ceiling 5% to 10% with only minor or insignificant cuts

This has the potential of being a catalyst that ignites a significant pullback in foreigners financing our debt. This could then cause a dollar and stock market collapse, massive inflation and unemployment – all rapidly – in 1-2 weeks, in essence a US and world economic panic. This could result in net creditor countries forcing the US to cut social services drastically and increase taxes similarly. The US would loose much if not a majority of control over its finances.

This scenario, although very severe, if implemented carefully could in matter of several years place the US economy back on solid ground and render obsolete a government that ignores balance sheets; no more reckless and profligate spending.

The most significant risk here is that if the international community does not confront the US and continues to allow the US to kick the can down the road and the US debt increases more (ex: 2 more billion in 1-2 years). Ultimately, more catastrophic international financial measures would result, ending life in the US as we know it for many years. Expect a new economic order with a single new global currency and world economic government. Read the two books referenced here (final chapters).

5 – Increase debt ceiling 5% to 10% with no significant, hence virtually no cuts, less than #4.

This has the potential of being a catalyst that ignites a significant pullback in foreigners financing our debt. This could then cause a dollar and stock market collapse, massive inflation and unemployment – all rapidly – in 1-2 weeks, in essence a US and world economic panic. This could result in net creditor countries forcing the US to cut social services drastically and increase taxes similarly. The US would loose much if not a majority of control over its finances.

CONCLUSION

We have a window of maybe a few months to implement option #1 above. The combination of Fair Tax (which will lead to more Treasury revenues) and spending cuts so we do not have to increase the debt ceiling clearly is in everyone’s best interests – Republicans, Democrats, and our foreign investors.

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About economics501

1 - free market Capitalist; 2 - Fitness Entrepreneur; 56 years old, VP at an Investment Bank in NYC, ex Venture Capitalist, happily married with 2 girls. Education: Rutgers and NYU. I allow Ted Hruzd, my friend to blog at will here. He has many posts here. I have known Ted since we were both students at NYU. Ted also works for an Investment Bank as a VP in Equity Global Markets. ------------------------- I was very very Socialist leaning as a 22 year old. I then strongly believed in Gov role in helping the poor. However, as a USDA Child Nutrition Programs, I personally accounted for millions of fraud, abuse, and waste of tax payer money. I came to believe that the poor would be best served with less Gov programs and more with direct aid via tax system. Then after 5 years I became a free market capitalist, was a venture capitalist in 2007 and helped start 2 high tech companies. I dedicate this site to champion free market capitalism as the best road to Prosperity. Please join in. If you disagree, fine, but please post with dignity and class and be civil. Argue with facts always.
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One Response to Debt Ceiling – Perspectives

  1. Charles says:

    Just let the food stamps be used for drugs and alcohol and gambling…. You tack that on the bill, the democrat’s base will go for your plan!!

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