The Federal Government is borrowing more than 40c of every dollar it spends. Some states, such as California, Illinois and New York are also running huge deficits. At some point, the capital markets are going to say that they need higher interest rates if they are to continue lending. That point is rapidly approaching. When it does, the Federal Government has limited choices:
- It could default, which would have some unpleasant consequences, such as rendering the US dollar almost worthless.
- It could attempt to raise revenue by increasing taxes, which history has shown, results in reduced revenue.
- It could devalue the dollar.
- It could cut spending.
The Obama administration, oblivious, as always, to ECON 101, is trying to take choice 2. The Fed is pursuing choice 3. But the magnitude of the problem eludes them. Dickens’ Wilken Micawber said:
Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Let’s update that quote to 2011 and scale it up to the Federal budget:
Annual income $2.228 trillion, annual expenditure $2173 trillion, result happiness. Annual income $2.228 trillion, annual expenditure $3.708 trillion, result misery.
How can the Federal government cut $1.482 trillion from its expenditure? Here’s a hint. Cut everything that doesn’t contribute to the income side of the equation. Sarah Palin, almost alone among contemporary politicians, grasped the prolem:
We must prioritize and cut. Cancel unused stimulus funds, and have that come to Jesus moment where we own up to the debt challenge that is entitlement reform. See, the reality is we will have entitlement reform; it’s just a matter of how we’re going to get there. We either do it ourselves or the world’s capital markets are going to shove it down our throats, and we’ll have no choice but to reform our entitlement programs.
Its coming; that come to Jesus moment is coming, and all those politicians who kicked the can down the road will pay the price. The good news is that balancing the Federal Budget would unleash the private sector. The EPA would be gone along with every other federal barrier to economic expansion. I’d be very happy to see the residents of the richest counties in the USA, the ones surrounding DC, asking for Food Stamps and finding the program was defunct. That would be delicious. I can dream. But Micawber will have the last word.