Looking at the proposed by Obama new budget draft, we can tell nothing else than “madness”. The government does not even think of balancing its spending. There is no year planned in next 10 years to have an income equal to expenses. The only difference between years is exactly how much will be the deficit. In “good” years it will be “only” $500 billion, while in “bad” years it will reach $800 billion. Simply said, USA will continue being in debt-spiral that can lead nowhere else than in a heavy default.
It is interesting to point that current situation is mostly due to accumulated in the past debt. I.e. due to excessive spending in past that now must be repaid with interests added. In last years the biggest spending areas were meaningless wars in Iraq and Afghanistan, and generous bailouts for defaulted banks after 2008. With current debt size of $17,5 trillion, only the interest owed by government is $350-400 billion per year. And this is with current artificially kept low interest rates. If interests are to become at market levels, they will be at least 3 times higher.
But even at current level it is obvious that the main share of the deficit is interest payment for old debt, plus the inevitable repayment of some of the principal.
Seeing this, it would be logical to expect the government to try to stop this practice, instead of leaving the next governmnet even a worse situation. Instead we are seeing a consecutive postponing the problem to the future. The debt that now is 108% of GDP will continue to rise, along with interests on it. It is possible even the interests to rise additionally if at some time the government decide that the inflation risk is too high. So with such type of policy we are reaching the moment when interests and principal payments may account for most of the tax income. In a bad scenario it is possible even the debt-payments to surpass the tax income.
This type of policy means only one thing – a total economic destruction. Not only because of government default or hyperinflation. But also because of the ruining the confidence in US economy. Global investors will avoid investing money in USA and in dollars when seeing they can lose it in an inflation fire or in a default of the government. A default that will crush the connected with it leading banks and corporations. The thing that investors require is called “profit” and real money. Very soon a profit in dollars will not be counted as real profit. Or at least will be devalued.
It is funny that Obama’s draft includes some tax increases and canceling some deductions. I.e. even this catastrophic budget is based on increased squeezing of taxpayers. But current tax level in USA is impressively high, they are de facto a socialist country. Additional increase may lead to economic decline, i.e. to less tax income. In fact the government must think in the opposite direction – making the taxes lower, as a part of stimulating the economy. This price must also be included in the budget. I.e. it must be entered as an additional cost or tax-income decrease.
Current government is gathering the unpleasant results of postponements of previous governments, along with its own postponements from the previous mandate. It is obvious that every new postponement leads to increased sacrifices in next period. It is like a snow-ball. You cannot postpone forever. If today you have to cut pensions and Medicare 10-20% to balance the sheet, tomorrow you will have to cut 30-40%. And one day – even 100%. Yes, it is not a joke. And even if you do not do it formally, the same will be done by the inflation. I think it is better 20% lower pensions now, instead of 80% in future with methods like $20 per gallon.
Dobri B.
April-17-2014
