Thursday, September 6, 2012

Off-Topic: Election

How about a quick non-partisan opinion on the upcoming election:  we're kind of screwed either way.

A lot has been made about the US cumulative deficit surpassing $16 trillion this week.  That's $16 with twelve zeros!


Here's a site tracking all manner of debt statistics:  US Debt Clock

The upcoming election will provide this country with two candidates who may appear to have very different plans, but the reality is that neither is offering much in terms of a solution to this country's overspending.

This year, the US government will spend a bit north of $1T more than it takes in from taxes.
Candidate A has a plan to get that annual deficit to about $500B per year in three or four years while Candidate B projects that annual deficit to be about $700B in three or four years.  There are a lot of differing assumptions and there's never enough detail, but you can be certain that those numbers aren't a "pessimistic scenario".

Here's a great picture:

Mish at Global Economic Trend Analysis has a great interactive chart where you can compare debt, spending, interest, etc

Again, there are a lot of assumptions in all of these numbers, and in no way am I trying to say that the Ryan budget (not the same as the Romney budget) is the better alternative.

So What?
That's the hard part.  For years, fiscally conservative pundits have decried the annual budget deficits and said that a "day of reckoning" is coming as the deficit surpassed $5B, $10B, and so on.  The US's credit rating was officially downgraded last summer - the stock market fell, but the downgrade had perhaps the opposite effect on the interest rates the US government pays to borrow.

Since the US government can't fund all of its spending from the taxes it takes in from its citizens, it borrows from the rest of the world.  Luckily, the rest of the world is in a real mess of its own right now.  Greece, Italy, Spain, and others are in such poor fiscal shape that they are paying 6% (on 10 year debt) or more to borrow from the rest of the world.  Investors see the US, Germany, and a few other countries as being safe havens so they are willing to lend to them at 1% or 2%.

The downgrade of the US should have made investors more cautious on the US and led to the government paying higher rates.  It hasn't happened - yet.

What will happen, at some unknown point in the future, is that investors will demand higher rates to loan to the US if our deficits continue to grow as they will fear our inability to pay them back.  Like what is happening in Europe right now, this tends to happen very quickly.  If the US government then has to pay 4%,  5%, or more, then more of the income from taxes will go to simply paying off the interest on the borrowings form the past decades.

The ultimate end scenario is a default or devaluation of the currency which has happened in many countries throughout the world, most noticeably/recently in Latin America.  The US could one day simply say "we're sorry, but we we don't have the money to pay back our loans so we won't" which would end the flow of money into the country.  The other form this could take would be through hyper-inflation.  The US government has promised to repay its loans in dollars - well we own the printing presses, so we can always print however many dollars we need.  This would be problematic because the economy is global and when you go to the pump to buy a gallon of gas, if no one trusts the value of the dollar, that gallon could cost $10, $100, $1,000 or more.

The Solution
Spend less than you earn.  So simple, but probably impossible.

The last time the government earned more than it spent was during the mid-1990s due to the internet fueling global economic growth.

I'm not trying to be preachy, but if you want to solve for the deficit (which means not focusing on making life better for everyone):
Defense - a huge annual outlay to protect our interests globally, defend against terrorism, etc.  I am a big supporter of our troops and their hard work, but we simply can't afford it.  The trade-off would be China or someone else growing into the #1 military super power and our country not being involved in global conflicts (this can be good, but you do have situations - Syria- where someone needs to step in when civilians are getting slaughtered).  This would also mean leaving Iran or North Korea to develop weapons if they so desire - again, tough to say we're better off in that situation.

Social Security - those in their 20s and 30s should assume that they will never see one cent from the deduction taking from each paycheck for social security.  We'd probably need to raise the retirement age too, but that'd affect a key demographic that actually votes.

Healthcare/Medicare/Medicaid - medical care is too expensive and we can't afford to provide even basic services to our citizens.  Ain't that sad?  Both parties have talked about reforming the system to bring down costs - ObamaCare versus the Republican plan to privatize/create exchanges.  Neither solution is enough.  Perhaps we should require all high schoolers to take some basic training in medicine?  Your friend gets a big cut, hand him a beer and stitch him up rather than going to a doctor.  The problem in the long run is that while we are making real advances in medicine and technology that can help people live longer, most can't afford it without government assistance.  So do you want healthcare for all that the country can't afford or allow only the rich to be able to afford modern medicine?

The recent healthcare debate also talked about "Death Panels" - the reality is that an immense amount of spending on healthcare comes at or very near the end of someone's life.  My grandmother spent most of the last months of her life in the hospital getting treatment.  In some cases, treatment can save a sick person and add decades to their life.  In others, millions of dollars are spent to maybe add a few months.  How do you ration spending?  Who should make the decision whether it makes sense from a fiscal standpoint to operate on your grandparent to add a few more years to their life?

I would like to end this little rant with some serious decisions/solutions, but I don't really have them.  I think this is also perhaps the core of why our Presidential candidates are quite similar.  If you want to win an election, you can't take out-of-the-box positions (see Ron Paul).  If you want to change the way our country spends, you have to upset a lot of people and make this country "suffer" for the long-term good.

Therefore, I think we need a Dictator, and I am ready to toss my hat in the ring.

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