The US Deficit Nightmare

The first thing I would like you to do is to fix in your mind how much your yearly income is. Got it? Good.

Now I want you to imagine that you owed the same amount of money on your credit card. Getting a bit concerned?

Finally, I want you to discount any thoughts you have about your mortgage (if you have one). Think about having this credit card bill as well as having a mortgage.

Not a good feeling is it? Would you like to be in that situation? I didn't think so.

But here's the bad news - it is precisely the situation that the United States Federal Government will likely be in within the next two years.

The BBC has reported that Congress has approved measures to increase Federal Debt levels to $9 Trillion. That's $9,000,000,000,000.00.

But, according to the CIA world factbook, America's estimated GDP in 2005 was $12.37 Trillion.

I realise that I'm comparing different figures from different dates here, but the current 2006 debt increase is around 73% of America's total 2005 output. Of course, by the end of the year America's GDP will be greater than $12.37 trillion - but the debt levels are rising faster than GDP.

It would be the same as seeing your credit card debt increase faster than your income.

The reason why I asked you discount your mortgage is to put things into perspective. If you have a mortgage, then likely you owe many times your yearly income to the bank. This is balanced, however, by the fact that your property is a saleable asset - you may owe money to the bank but you do actually own something that is quite valuable. And if you're lucky to own a house that is increasing in value, then the chances are that your net debt levels are actually decreasing (assuming, of course, that your house retains its value).

But what we have with the US Federal Budget deficit is different. The American government does not have a mortgage that it can borrow against. It is precisely like having a massive credit card debt - with levels increasing even further the less interest you are able to pay back.

The problem is that, eventually, investors will start to get a bit worried. Rather than seeing America's economy as strong, they will see it as increasingly weak.

The amount of money that the American government will owe will increase faster than the economic growth rate. Eventually debt and GDP levels will be on par. The closer America gets to this point, the more nervous the market will become.

Eventually, the market will decide that lending money to the US government is too risky, and will begin selling off US treasury bonds. The resulting drop in the value of the US dollar and the inflation that this will undoubtedly cause will force the Federal Reserve to hike up interest rates. The Dollar will retain its value, but the cost will be too great. With higher interest rates, American businesses and consumers will find it more difficult to borrow money, and a recession will result.

And the reason? Because George Bush decided that the rich needed massive tax cuts. Another blow to America's standing in the world, courtesy of the worst US President in history.

From the Osostrian School Department

© 2006 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/

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Craig Schwarze said...

How much did the tax cuts cost? What would you do if now if you were in the White House to fix the situation?

One Salient Oversight said...

If I were President Bush I would resign. And that is actually a serious answer.

To fix the situation and return the budget to at least being balanced, it would be a case of either raising taxes, cutting spending, or both.

I would:

a) Completely reverse the tax cuts that Bush pushed through congress.
b) Increase taxation on the top 25% of earners.
c) Completely cut every single agricultural subsidy the federal government gives to US farmers.

Craig Schwarze said...

Hmmm...not a platform that is likely to get you elected!