Please add to a debt crisis proposal

Please respond to this site with your recommendations regarding how to resolve our debt crisis.

I especially ask those who responded to my 2 recent letters that the Daily Record published (below). The topics were Tax Reform / Fair Tax (July 16) and impact of tax cuts – labeled by Daily Record as ‘Socialist economies are bound to collapse’. The 1st generated 51 comments, the second 27. Most comments, both those in agreement and those disputing, were from bloggers who supported their points of views with pertinent facts.

We especially need this sort of debate for the debt crisis.

In earlier parts of my blog I argued what parts of the Federal Govt can and should be eliminated. However there has not been any action on any real cuts. The House cut, cap, balance bill was rejected by the Senate. At resent the Gang of 6 still vague proposal may be the most promising given commitment to cut $500 billion immediately and to cut $3.7 billion over 10 years and to generate some revenue by closing tax loopholes (crony capitalism or corporate welfare).

With time running out perhaps Gang of 6 may be way to go – add details, compromise more, generate a vote late this week.

There are some unknowns, though. One is how will our creditors react. Are we fooling ourselves that by increasing the debt limit by 2 trillion that our creditors will buy US treasuries? I think not in full and I predict QE3 if we increase our debt by 2 trillion.

A better approach may be:

Increase the debt limit by $300 billion for 1 year. Why? because that is 2% of our GDP growth. we have been growing our debt too fast. Just 11 years ago it was well under 50% of our GDP. Now it is over 90%. Even if creditors would want to buy our debt they may not be able to given a world economic slowdown.

What then may be safest approach?

Again – increase the debt by $300 billion. Then cut 1.3 billion in 1 year out of the federal budget. Yes – that is approx 33% ‘haircut’. But better now than a 66% haircut 2 years into the future. WIth time running out, across the board cut 33%. Adjust for special circumstances favoring Medicare and Medicaid.  Why 1.3 billion?  Because after 1 year our debt would be 14.6 trillion a 2% increase in a year, at our GDP growth rate.  This would be a strong signal to our creditors that we do indeed intend to pay back our debt.  Increasing the debt limit by over 10% as many propose may be the last straw by our creditors.

The sooner we stop kicking the can down the road the quicker we can recover.

No pain no gain. Too much pain and you cannot train for a long time. As a part time personal trainer that is one of my motto’s to clients.

Our US economy is near collapse. Take a hit now to recover.|mostcom

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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