It is only 3 days to the sequester, and lets hope it will happen. It will not the best, but will be a move in the right direction.
Lets make a small calculation. Where is the deficit financed from? At current moment it is financed mostly from FED in an endless money-print adventure. But what does the money-print means? It means the same GDP will be served by much bigger quantity of money. I.e. with the money print and inevitable inflation, all the money in economy will lose some value. So is it worth to keep these expenses the same and print money, when this will mean the entire economy will pay much higher price?
If you look at the balance of FED, you will see that for the last 5 years it has almost tripled. The real GDP growth in this period is no more than 10-15%. This means that in some time the average prices of all goods and services must triple. So is it worth to make all the people 3 times poorer?
If at current moment we erase the deficit entirely, this will mean about 30% poorer government officers. So even for these people it is better the spending cuts to happen, instead of making the same people 3 times poorer via inflation.
So in fact the sequester is better even for the beneficiaries of the money that is to be cut. If the expenses are not being cut the same people will lose more via inflation.
Formally Obama is also fighting the deficit. He does not want to push the country bankrupt. But in fact he works exactly for this. His strategy is a 50:50 system of spending cuts and tax increases. But the expected tax income is just an illusion. The government can not collect this money. So when this happens the government will just borrow again. So the only working way of lowering the deficit is by cutting the spending.
The problem with the printed money is very simple. This money is used once by the government, but after that continues to circulate in economy and creates inflation and bubbles. Next month the government will need newly printed money, but the old dollars are still here. And while the deficit is existing, this must continue. Or at least will continue until the people lose the confidence in money itself.
Eternal deficits are phenomena of the paper-money world. With real gold money this can not last forever and endless. The government would have to pay higher interests, or will simply go bankrupt at any moment. And the cuts will happen naturally.
But it was a question of the sequester. What is better to be or not to be. Obviously to be. Better even for the sequestered.
Feb 25th 2013