Sunday, February 13, 2011

$100 Billion: A Good Start...No Where Near Enough

The Republicans in the house have come through with their $100 billion in promised cuts from the budget. That is a good start, especially in light that the Republicans having just taken the reins of appropriations and have but 7 months of appropriations in which to find the cuts. What has become more than obvious is that the President's scalpel approach will not work. Obviously, the Republicans have a long way to go but the time is now and massive budget cuts are in order.

The CBO has estimated the US will run a $1.5 trillion deficit in Fiscal Year 2011 alone. The $100 billion in cuts represents less than 3% of the total budget. Now the left in our country is going around claiming how "draconian" the Republican cuts are, but $100 billion is a drop in the bucket. More will be needed to bring America's fiscal house into balance. Without eliminating the budget deficits the government will spend the country into oblivion.

Unlike Paul Krugman, I do not believe perpetual deficit spending is going to make the economy stronger. Perpetual deficit spending is the casue of the economic chaos we are experiencing. Not only has the government been spending money they don't have but the States also spent money they didn't have to spend. The local governments not wanting to be outdone by the feds or the State also introduced deficit spending. Then when that was not enough money in the system the federal government mandated more individual borrowing. The Federal government encouraged individual deficit spending whether it was by lowering interest rates to ridiculously low rates so the irresponsible could borrow money, or also so responsible borrowers would use their homes as ATM's through equity loans. All American assets were leveraged to the hilt.

There are no more assets to leverage. Until the individual assets are brought back to normal the country will remain in dire straights. Homeowners are underwater, with 27% owing more than their homes are worth. Home prices are in steep decline. The individual consumer is no longer able to spend money to rescue the economy. This all started right after the great depression and we are on a collision course with another depression if it isn't already upon us.

The great depression of the 1930's was stubborn and wouldn't abate. Nothing in Roosevelt's "New Deal" got America back on her feet. While many Americans felt better about themselves and their country, the depression would not end. That is until America was dragged into World War II. The American economy swung into full gear in an effort to support the war effort. While many men wnet off to fight on foreign ground to protect and defend our honor, American industries hired women to fill the vacated positions. Women performed quite well in manufacturing plants and earned the jobs they intended to keep. The economy boomed.

When the American soldiers came home, many women enjoyed the work and did not want return to the homefront. Jobs were scarce for the vets unemployment was high. Then in the 1950's with various infrastructure projects (interstate highways) employment picked up significantly. There were more jobs which created more demand for products which kept the economy moving. However by the end of the 1970's inflation had taken hold and American households were beginning to be required to have two incomes in order to rasie a family. The prices of big ticket items such as cars and houses increased accordingly. By the mid 1980's, the dual incomes went as far as what one income would take a family thirty years prior. The federal government also began running extremely high annual deficits.

In order to keep the economy moving forward the federal government began approving legislation placing unfunded mandates on the States. This required the States to juggle theirs budgets and move their money around. In effect the Federal government, unable to raise enough revenue through the existing tax base, instead began leveraging the State's. While the State's complained they never the less provided the funding with the help of the federal government. This kept the economy humming along through the 1990's.

By the end of the 1990's, the States had begun to run out of money to pass around. They began to leverage the local governments. In many States the property taxes went through the roof (New Jersey for one). It didn't take long for the local economies to leverage what they had without looking for somewhere else for assets to plunder. With legislation passed and signed into law by President Clinton, the American government began to leverage the last assets they had available; the American consumer. America was sold a bill of goods based on providing everyone the American Dream. The American dream of home ownership would become a reality. It all sounded good. Banks were mandated to lower lending standards and provide loans to almost anyone that walked in the door searching for money. This worked out well as the economy was roaring and money was flowing between businesses and governments alike.

Then 9/11 struck. We were already in the midst of a mini recession. A recession that should have brought to light structural issues that undermined the American economy. The fact that the federal government was unable raise taxes to obtain more in revenues, the fact that the States no longer could afford anymore unfunded mandates, the fact that property tax increases were unsustainable, the fact that businesses could no longer afford to conduct business in the US, the fact that individuals could no longer afford to live off a single income and almost every family had to be a dual income family should have set off alarm bells. America was leveraged to the hilt.

The events of 9/11 brought us together. Americans started to spend their way out of the recession. Interest rates were lowered to almost nothing. More borrowers were encouraged to borrow even more. Americans were encouraged to leverage their future to live for today. Americans that bought a house for $50,000 in the early 1990's now took the equity out and owed 3-4 times more than the house was bought for. The housing bubble was created. Housing prices kept climbing, people kept leveraging their biggest asset, and Americans were enjoying the ride. However, the structural problems in the economy went by relatively unnoticed.

The recession bottomed out in 2001 and began its expansion. The main problem was jobs. In fact during the 2004 Presidential Primary season, the biggest complaint the Demcoratic challengers had economically was that the Bush administration had a jobless receovery. Now the jobs did eventually come back and Bush won reelection. However, no one really considered the fact that it took almost three years for the jobs to recover from a relatively shallow recession of 2000. This should have set off alarm bells throughout the economic community. Jobs are the engine of our economy. The consumers always lead the way out from the recessions and that is because they begin spending. Spending comes from those that have jobs and money. Without jobs there is no money to pass around.

The American consumer did pull us out of the last recession for perhaps the last time. See the American people leveraged their largest asset and were enabled to spend because their homes were falsely increasing in value at an unsustainable rate. Now that the government has leveraged everything in America it will take something more than spending more money.

The bottom line is America has nothing left ot leverage. The Federl Reserve is busy printing money in an effort to keep interest artificially low. That is not exactly working as intended as interest are higher today than they were before the Fed began priming the pump by printing money. There are increased calls for another market based currency as the FED is making the American dollar worth less every day.

Bottom line is the federal government needs to stop printing money and begin to roll back the government burdens placed on the citizens. If Obama wants to win the future it will take more than talk; it will take action. We need entitlement reform. The big four programs that have been untouchable have to be brought under control. Military spending needs to be cut and cut sharply. I would think a 20% cut in military spending is in order. That is only $130 billion. However, there is enough in the budget that could be considered low hanging fruit to reduce the budget that much. I am sure there is enough waste in defense to cut that much without hurting the troops. DoD doesn't even know how many contractors they have. Now we also need to cut medicare, medicaid, and social security. These are facts and are required to get our fiscal house in order. I don't want pie in the sky. I don't want words. I don't want the can kicked down the road. Ever notice how every President promises the budget will balance after they are out of office. Balance it now, lower the burdens placed on idividuals. Stop leveraging away the future and get real with spending. Start reductions now, $100 billion is a good start.....but it is no where near enough.

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