The Debt Ceiling, Federal Reserve and the National Debt

Posted on February 11, 2013. Filed under: Politics, Taxes | Tags: , , , , , |

fiscal cliffOne of my sisters sent this to me over the weekend. Here’s what it says in the photo:

“Fiscal Cliff” put into a much better perspective.

Lesson #1:

  • US Tax revenue: $2,170,000,000,000
  • Fed budget: $3,820,000,000,000
  • New debt: $1,650,000,000,000
  • National debt: $14,271,000,000,000
  • Recent budget cuts: $38,500,000,000

Let’s now remove 8 zeros and pretend a household budget:

  • Annual family income: $21,700
  • Money the family spent: $38,200
  • New debt on the credit card: $16,500
  • Outstanding balance on the credit card: $142,710
  • Total budget cuts so far: $38.50

Got it??…..OK now

Lesson #2:

Here’s another way to look at the Debt Ceiling:

Let’s say, You come home from work and find there’s been a sewer backup in your neighborhood…..

And your home has sewage all the way up to your ceilings.

What do you think you should do……

Raise the ceilings or remove the shit?

It’s a decent enough explanation of the Debt Ceiling, but has little to do with the Fiscal Cliff. It’s point is very valid, however. Instead of continuing to max out the credit card, and raising the borrowing limit, cuts need to be made, as painful as they may be, and I’m not talking the 1/10th of 1% shown above. I’m talking substantial cuts.

There are those who believe that getting out of debt is as easy as printing more money.

They should ask the Weimar Republic (the German Republic that collapsed and ushered in the era of Nazi Germany) or Zimbabwe how that’s worked for them.

“This has the benefit of creating more jobs if handled responsibly. If handled irresponsibly it has the effect of creating inflation.”

The Fed Funds Rate has been held at or near 0% for the last four years! The unemployment rate maxed out at 10% shortly thereafter, and has fallen as low as 7.8%, only to tick back up to 7.9% with the last jobs report. We’ve given the banks free money for the last four years, and we get a 2% drop in unemployment in the same time frame?

The response above is typical Keynesian thought, and it isn’t working!

The printing presses over at the Federal Reserve have been printing money overtime, and it isn’t producing jobs. They have tried adding fiscal stimulus, and it hasn’t worked. It has been such an abysmal failure, that the Federal Reserve has tried four times to pump more money into the  system, and growth contracted during the last quarter.

Easing the Federal Funds Rate, or printing more money as it is colloquially known tends to stimulate economic growth, but it has a harmful side effect; inflation and deflation. Print too much money, and prices start experiencing inflationary pressures. Keep printing, and the economy will start to experience hyperinflation, and the country will inevitably collapse.

The Federal Reserve plays games with the inflation numbers it reports. Typically, they remove food prices and energy prices from the equation, because they are supposedly too volatile, and concentrate on things like the price of cars, electronics, and other stuff that we buy.

When Obama took office, gas prices were under $2 a gallon. The Federal Reserve had just set the Funds rate to 0%. Over the next 4 years, gas prices have doubled. You can’t buy as much food as you once could a few years ago. People are struggling just to eat.

Who gives a damn if the price of the latest TVs are stable? The cost of me going to work has doubled, and it is costing me at least 50% more to eat each month, mostly due to the increase in fuel prices. My electric bill is up, and my heating bill is up.

But inflation is negligible.

My ass!

As long as the Fed continues to print money and devaluing the dollar, there is another danger on the horizon.

Other countries are not happy with what is going on with the dollar. We haven’t had a President pursue a strong dollar policy since Clinton. Right now, the dollar is the world’s reserve currency. Every commodity, such as oil, is purchased in dollars. One of the benefits to being the world’s reserve currency is that we get many of these commodities cheap. There has been talk of switching the Reserve Currency to the much manipulated Chinese Yuan, or even a basket of currencies, including the dollar, the yuan and the Euro. You think gas is expensive now? If the dollar is replaced, gas prices will double, if not triple.

What does this have to do with the debt ceiling? It all interacts together.

Contrary to what the President says, and what he will say tomorrow night, the economy is still foundering. The unemployment rate is not coming down fast enough, and the Bureau of Labor Statistics is virtually ignoring the number of people who continually give up and leave the work force, because they can’t find work. Most of our jobs have been moved overseas where there are fewer taxes.

Some would argue that it is because labor is cheaper, but at least in the tech sector, wages are on the rise. Labor is no longer the cheap component, it’s that taxes here are too high.

The Congressional Budget Office announced on Friday that Federal Revenues will be at a record high of $2.7 Trillion dollars in 2013, yet we still have a $1.3 Trillion deficit. This is an outstanding argument for higher taxes, right? Revenues took a hit during the Great Recession, but have been recovering over time, while taxes were lower, but spending has been climbing during the same period.

President Obama and Nancy Pelosi continue to insist there isn’t a spending problem. If revenues are at a record high, and we still can’t cover all of our spending, there is a spending problem.

In order to get this under control, the Debt Ceiling needs to be raised and hard capped. By this I mean, it is a line in the sand that forces Congress to get spending under control, because it won’t be raised again.

We currently owe the Chinese $1.2 trillion, and it’s true that China is the largest foreign holder of our debt, and you would be very surprised to discover who the largest holder of American debt is.

It’s the American government that owns the vast majority of the debt issued by the American government. You didn’t really think that FICA actually paid for Social Security and Medicare taxes actually paid for Medicare, did you? Both are full of IOUs from Federal debt. This is the primary reason people think these programs will ultimately fail. The government constantly robs Peter to pay Paul, and we will all suffer for it.

The President, back in 2008, said he would cut the deficit in half. The deficit is the difference between our revenues and what we have to borrow to cover our expenses. Instead, he increased it to a record level of $1.4 Trillion. Right now, it is projected to be $900 billion, which is a step in the right direction, but that projection is based off the mandatory Sequestration cuts that still loom on the horizon.

If the Sequestration cuts don’t happen, expect that number to balloon.

We are still told that the deficits are a good thing, because they were necessary to kick start the economy, which started back in 2009. To give Obama the benefit of the doubt, I looked at GDP growth per quarter starting in 2010, because if I started in 2009, some would complain that that was Bush’s economy. Here is Obama’s economy, with trendline:


Obama's Economy

Obama’s Economy

There are two things to see in this graph. The first that jumps out is the trendline sloping downwards. That shows growth has been steadily contracting under Obama’s watch. The other is that generally, growth has hovered around 2% each quarter.

Compare this with Clinton’s Presidency. To be fair, I did not start this graph until 1994, and ended it with 2001. 2001 was the last year Clinton would have had any effect on the economy:

Clinton's Economy

Clinton’s Economy

Clinton kept growth around 4% on average, but the economy tended to grow during his terms. However, while growth was strong at times, it also had a tendency to fluctuate wildly, especially after his term had ended. Clinton had a balanced budget, and a surplus by the time he left office.

Compare both of these to Reagan (same rules apply):

Reagan's Economy

Reagan’s Economy

Growth steadily increased, but settled down and stabilized the further we got into his Administration. Both Reagan’s and Clinton’s economies grew at about 5% a quarter, twice what Obama’s has, and now there is the threat of the dreaded “double dip”. Oh yeah, Reagan and Fed Chief Paul Volcker raised interest rates to kill inflation in 1981-82, meaning they contracted the money supply. Look how the economy reacted to that.

Today’s real unemployment (U-6) is still well above 14%.

Recovery, anyone?

These graphs show that “massive” government spending is not good for the economy. In fact, the only example of massive government spending ever working was during the Second World War. Don’t thank FDR and Truman for that, thank Monsieur’s Hitler and Tojo.

Clinton showed us that lower taxes (he moved them very little) and a balanced budget (with surpluses) can do wonders for the economy.

Obama wants  a “balanced approach” to reduce the deficit, but so far his balance seems to be a whole lot of more revenue and sticking it to the rich, than it is about cutting his cherished entitlements and wasteful programs.

Printing money won’t solve our problems, and neither will the continued out of control spending. We have been printing massive amounts of money over the last 4 years, and it has done nothing. It’s failed, but Ben Bernanke is too proud to admit failure. He’ll keep piloting the ship straight into the iceberg. The Fed now owns $1.7 Trillion in Federal debt, more than China.

For those concerned about this country being owned by China, here is proof that it is actually owned by the banks, and they will foreclose if the government can’t get it’s spendthrift ways under control. We’ve complained about it for years, now we need to stop complaining and take action.


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