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  #1  
Old 02-08-2011, 04:05 PM
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Default Did Anyone Notice?

The new Florida Governor made his proposal for the 2011 state budget. It included some fairly significant cuts to corporate taxes and $7.1 billion in spending cuts.

So let's see, if the Florida legislature passes this budget then Florida will have successfully cut it's state spending by about 11%. And it will modify the business taxes to be a much more attractive place for companies to expand and hire employees.

Let's contrast that with the budget proposal published by the leadership of the U.S. House of Representatives last week. They propose spending cuts of $32 billion. That's only about five times what the little ol' State of Florida cut. The whole of the federal government, even though it can print money to pay for spending, could only come up with $32 billion in cuts? A budget cut of .8%?

Rand Paul, a Tea Party leader, proposed $500 billion in federal spending cuts. That would represent about a 12% cut in the federal budget. But even if all of Paul's proposals were enacted, the resultant level of government spending would still produce a deficit in 2011 of about $1 trillion! And even Paul didn't have the cajones to propose any cuts to Medicare or Social Security!

When even the supposedly most fiscally conservative members of our Congress can only come up with budget balancing measures that only reduce the deficit by about one-third, I'm even more convinced that we're not far from having our federal budget and the amount that we're taxed dictated to us by the Chinese, or maybe a group of countries who lend us the money that we use to run our government and provide us with the entitlements we think we deserve.

I've said it here before--think Greece or Ireland. And it's going to be a lot sooner than later in my opinion.
  #2  
Old 02-08-2011, 04:29 PM
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I completely agree. Politicians in both parties have put us so far in debt, the only solution is printing money to pay the debt. The value of everyones assets will decrease substantially.
JJ
  #3  
Old 02-09-2011, 07:13 AM
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I only disagree somewhat with one part of your post. That is, the influence that China has over us. When you owe someone a LOT of money, YOU control things more than they do because you have the threat of default. China wants their money repaid. Think of a loan shark or bookmaker. They don't kill their marks when the mark has run up a huge bill. They don't get their money back that way.

It would be a sad day if that ever happened here but, make no mistake, it's an option that will (quietly) be on the table.
  #4  
Old 02-09-2011, 09:19 AM
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Default Not Quite True

Quote:
Originally Posted by djplong View Post
I only disagree somewhat with one part of your post. That is, the influence that China has over us. When you owe someone a LOT of money, YOU control things more than they do because you have the threat of default. China wants their money repaid....
As a retired banker I don't totally agree with you, but I do get your point. The difference here is the control China has by choosing not to lend us more money. That's already begun by the way, just keep an eye on the amount of total federal obligations held by China. China has been forewarning our political leaders and Treasury officials that they have little interest or capacity for buying more U.S. debt for almost two years. They have aggressive and expensive economic expansion plans within China and will have told us they intend to spend their surpluses domestically. China's holdings of our debt has been declining for almost a year. (In the last five years the value of the Chinese Yuan has declined against the US$ by about 25%. That means that anything that China buys that is priced in US$ costs them 25% more now than it did at the end of 2006...including our bonds and Treasury bills, and oil of course!)

Our Federal Reserve has a lot of power to react to a shallower market for our debt instruments--because the U.S. dollar is the world's reserve currency, our Fed can print more of it. That's an advantage that no other country in the world enjoys. Increasing the money supply (printing more money) worsens the inflation problem of course. It also lessens the value of the bonds and the dollars that those who lend to us already own and makes any new bonds we offer for sale more expensive.

The more important effect is increased domestic inflation--look at the headline in today's Wall Street Journal. Increasing inflation will quickly get the attention of the public, who will apply tremendous pressure on Congress to "do something". Printing more money makes inflation worse and renders U.S. bonds and bills even less valuable.

In relatively short order (a year or two), Congress will have only two choices, default on our obligations--an unthinkable alternative--or begin an aggressive program of balancing our federal budget and beginning to pay down the national debt. That will necessarily include massive spending cuts, including the "big four" as well as raising taxes. That's simply a matter or arithmetic, as we've discussed here many times before.

So, do we have a lot of control of our destiny because we owe China so much? I would argue that we do not. China can easily control our very way of life by simply refusing to lend us more money and demanding payment on the U.S. Treasury obligations they own when they come due. (As I suggested, defaulting on the payment of our obligations is simply unthinkable, even if we had to print more money and cause more inflation to do so.) China and our other lenders wouldn't specifically be telling us what we have to do, but by putting us between a rock and a hard place they would force our political leaders to make some very, very difficult and life-changing decisions for all Americans.

This process has already begun.
  #5  
Old 02-09-2011, 09:59 AM
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Default There is premise, of sorts for what is presented to remain true.

That would be the USA doe nothing different than it has to date to remedy the situation.
I use VK's last statement as a point of discussion:

"So, do we have a lot of control of our destiny because we owe China so much? I would argue no, that China can easily control our very way of life by simply refusing to lend us more money and demanding payment on the obligations they own when they come due."

To my point, we do not have any control as long as the trends of inaction to solve the spending/revenue problem continue. The controlling our very way of life assumes we continue to make no attempts to change our current mode of borrowing/paying to China. Unlike a bank that can foreclose on a home owner, as an example, China cannot foreclose on the USA.

China is also in sort of a catch 22 inasmuch as they need the US market to continue to ship product. They could threaten to stop shipping until the bill is paid, but that would be counter to their need to manufacture and export goods.

What does have to change and I am afraid those in Washington are not capable of doing so, is to STOP all non essential spending. They would take the next 5 years defining what is or is not non essential. Until such time as they take the same actions many companies have had to take to survive, we will continue to ask for more money....print more money.

Politicians can not/will not do anything that will affect their electability, affect their party, affect their special interest groups or their supporters.
They will cut only that which will affect we the people. Just like all the state and local governments that cut firemen, police, teachers, et al.

Zero based budgeting is the only way to stop the spiral. It is do-able!!! Unfortunately, it will not happen due to lack of capability/competence in Washington. Business as usual is the only order of the day.

At some point in the future, the riots will be in Washington and other US cities just as they have been in other countries.

btk
 

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