Friday, February 20, 2015

My View

Random ruminations from your resident curmudgeon...

In 1971, then President Richard Nixon took the United States off the gold standard. When the U.S. was on the gold standard, every new dollar printed by the Treasury Department had to be backed by an equivalent amount of gold. This constrained the growth of dollars- and debt- and forced our country to live within its means.

Once off that gold standard, U.S. dollars became a "fiat" currency, simply meaning that the dollar was backed solely by the creditworthiness of our government and it was worth whatever we, and the markets, said it was worth.

More importantly, the growth in dollars was no longer tied to growth in our national economy but instead how fast we could print new dollars.

These new dollars, brought into existence out of thin air and at the whims of those in power in Washington, have been used to expand the entitlements offered by the federal government, on defense spending, and on numerous wasteful projects.

In essence, our government has spent well beyond the revenue it takes in from all taxes and fees it collects. Our government is no different than a person that spends beyond his income and makes up the difference by using a credit card.

How bad is it?

From the 1950's through the latter part of the 1990"s our debt as a percentage of our Gross Domestic Product (GDP) stayed fairly steady at 140%. With the advent of unconstrained printing of dollars and the corresponding spending of those dollars, debt to GDP stands at 300% today.

Where has that money gone?

With essentially unlimited dollars to spend, the federal government has spent to make sure everyone has a house and car (sub-prime loans backed by the government); fought numerous wars; overseen an explosive growth in entitlement programs; and the list goes on.

It is estimated that the excess dollars created since the 1970's to the present is $35 trillion. That means we as a nation have overspent our income by an enormous amount. In essence, we have run up a credit card bill of $35 trillion.

But that doesn't paint an accurate picture. According to Dr. Laurence Kotlikoff, Chairman of the Economics Department at Boston University and former Chair of the Council of Economic Advisors under President Ronald Reagan, our actual debt should factor in our future obligations that we have promised to pay under entitlement programs such as Social Security, Medicare, and Medicaid. If we add those obligations, our real debt is closer to $220 trillion according to Dr. Kotlikoff.

Those numbers are staggering.

And Kotlikoff says that to pay this indebtedness would require a permanent tax increase to 59% and a cut in federal spending of 38%.

Neither of which are going to happen.

But something will happen, even if we do not not enforce fiscal discipline on ourselves.

Just like an individual that gets overextended on their debt, our country has gotten overextended.We can survive as long as other countries are willing to continue to loan us money by buying our bonds. Just like an individual can continue to survive as long as they can get another credit card.

When that credit runs out, it can be financially disastrous for that individual

And it can be for our country as well.

While our debt is being ignored by our leaders in Washington, we need to pay attention to the dire fiscal straits we are in, and we need to demand that our leaders in Washington begin to address our profligate spending.

If we as a nation don't exact some real fiscal discipline, it will be ugly and will be life changing for all of us.

And that, my friends, is my view.

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