There have been dueling entries elsewhere in this forum about the need for cost cutting and the need for increased taxes, both in order to balance the federal budget and stop adding to the unsustainable level of national debt. I have said that we should look at Greece as an example of what will (not could) happen to the U.S. if our Congress doesn't begin to make some very difficult decisions relative to both cutting costs and raising taxes. Some here have alleged that any idea of raising taxes is nothing more than an extension of a typical liberal agenda. I've looked at our situation like a retired banker, from a purely financial perspective with no attempt to inject either political ideology or economic theory. Let me explain and give you a real example of what is likely to happen to the U.S. and our personal standard of living.

Greece's governing body finally made some very difficult decisions to cut their spending by an amount that approximates 2% of their gross domestic product. Other members of the European Union, who made the demands on Greece to take this difficult action, think this may be enough to stabilize Greece's debt and currency and preclude the EU from having to inject lots of money just to keep Greece afloat. There are no guarantees that this will be enough and the amount is certainly not enough to balance the Greek budget, but just enough to hopefully stabilize things.

If we were to apply this example to the U.S., that might suggest that those who could make such demands on our government, the holders of our debt--China, Japan and the oil exporting countries, principally Saudi Arabia--who between them hold 50.6% of our debt--would be the ones making the demands.

If they demanded that we cut our federal budget by 2% of our GDP, here would be the results...

-- Our $3.54 trillion federal budget would have to be cut by $276 billion, almost an 8% cut to the annual federal budget.

-- A spending cut of that magnitude would still come nowhere close to eliminating the annual budget deficit. The current U.S. budget will create a deficit of $1.41 trillion, which will be added to the national debt. Even with an 8% cut in federal spending, the annual deficit would still amount to $1.1 trillion, nowhere close to a balanced budget.

-- Where would the $276 billion demanded by our creditors come from? The current federal budget calls for spending of $3.518 trillion. Of that, 61% is defined as "mandatory spending" and includes payments for debt service, Social Security, Medicare, Medicaid, and various other programs such as VA insurance, etc. So, if the budget is to be cut, initially it will have to come from the "discretionary" portion of the budget, which amounts to only $1.15 trillion.

-- OK, so it looks like the discretionary portion of the federal budget must be cut by 24% to meet the demands of our creditors--not to balance the budget and eliminate further additions to the national debt, mind you, but just to satisfy the demands of our creditors.

-- So, what are those discretionary items that we need to slash? The largest discretionary item by far is the defense budget, $782 billion, or two-thirds of our government's discretionary budget. The other "stuff" will be all kinds of other spending that our politicians talk about all the time--school programs, fixing national highways, the national parks, public broadcasting, the FDA, NHTSA, FAA, air controllers, Homeland Security, and so on. What might a 24% cut to those budgets do?

Remember, the budget cuts I'm talking about come nowhere close to creating a balanced budget and eliminating further additions to the national debt. How can we accomplish a true "balanced budget"? I know the answer I'll hear from those that say that a reduction in taxes will kick start our economy and we'll grow our way out of the problem. Let's look at why that's impossible.

Some politicians, economists conservative bloggers and cable TV entertainers have argued that the U.S. can "grow its way" out of these fiscal challenges. Their argument is that economic growth (driven by tax cuts, productivity improvements, and borrowing) will generate sufficient tax revenue to offset growing entitlement spending. However, the General Accounting Office has estimated that double-digit GDP growth would be required for the next 75 years to create a balanced federal budget; GDP growth averaged 3.2% during the 1990s. Because mandatory spending growth rates will far exceed any reasonable growth rate in GDP and the tax base, the GAO concluded that the U.S. cannot grow its way out of the problem.

So, even after such unthinkable spending cuts, we're still left with a "deficit hole" of $1.1 trillion each year which would be added to our national debt. And we wouldn't be paying even one dollar against the reduction of that debt. Let's look at what might be necessary on the revenue side--tax increases--to balance the budget.

Last year, the U.S. had revenues of about $2.274 trillion. Those revenues came mostly from personal income taxes, with a smaller amount from corporate income taxes, and a tiny amount from sources like import duties and the like. As a percentage of our $13.84 trillion GDP, our combined tax rate was 16.4% (of GDP). To balance the budget, even after the dramatic spending cuts outlined above, that combined tax rate would have to increase to 23.6%. But still, we wouldn't have enough to pay even one dime against the $12.546 trillion national debt. If we set out to reduce our national debt from current levels to, say $5 trillion, and said we'd like to do it in 25 years--we'd have to further increase the total tax rate to about 25.8% (of GDP). Remember, all this is after those dramatic spending cuts talked about earlier.

So, folks, where do we go from here? How can we expect our lives to change when either our elected government or our creditors demand the obvious required changes to our federal spending? The choices are simple and will almost certainly include...

• Increased income taxes
• Maybe a VAT tax
• Dramatic cuts in our defense budget. Could we continue to fight 2-3 wars and keep major troop deployments in places like Germany, Korea, Kosovo, and Iraq? Not likely.
• Cuts in Social Security benefits (reclassification from "mandatory" to "discretionary")
• Cuts in Medicare and Medicaid benefits (reclassification from "mandatory" to "discretionary")
• And noticeable, lifestyle-changing cuts in all manner of services and programs currently funded by the federal government

If any of you refuse to accept my analysis on how and why our lives are going to change because of in ineptitude of our elected government--and we who elected them--please tell the rest of us how it's not going to happen. Tell me I'm wrong. Please, not only tell me I'm wrong, but show me how I'm wrong.

The clock is ticking.