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Why Our Budget Cannot Be Balanced
Perspective on the News
Monday, June 18, 2012
Ed DeShields

Here’s a startling fact:  Congress cannot balance the budget.  It cannot do so even if it had the desire or even if it were to entirely shut down the government and send everyone home.

It could close every office, decommission every war ship, close the postal service and the IRS.  It could eliminate every department of the government and still, the budget cannot not be balanced this year, or in any other year going forward.

In case you’re not a budget wonk, our budget “deficit” is how much the government over-spends each year.  Our national “debt” is the accumulation of its over-spending over many years.

Here’s the core problem as explained on page 210 of the President’s 2013 Budget:

  • The government projects revenues of $2.5 trillion. 
  • The government spends $3.8 trillion. 
  • The government has a shortfall of $1.3 trillion.

Mathematically (as expressed in elementary school math), it looks like this:

  • $2.5 Revenue
  • -$3.8 Spending
  • -$1.3 Deficit (shortfall in trillions)

Now, the startling fact is that the government is in a spending trap it cannot escape.  Why?  Let’s break down the spending numbers: 

Remember, the government spends $3.8 trillion.  It spends it in three categories:

  • $0.22  Interest on our debt (that’s $220 billion)
  • $2.25  Mandatory Social Programs (like Social Security, Medicare)
  • $1.31  Government operations and Defense spending
  • $3.8     Total spending (trillions)

The dilemma has grown so large that the government has nowhere to cut spending.  

Take a closer look.  Did you notice that just two categories (Interest and Mandatory Social Programs) in the table above EQUAL ALL REVENUE, leaving no money to run the government including Defense spending?  Said another way, the government must borrow every dollar it needs to run the government including the entire defense of the U.S.

Again, it must borrow every dollar needed to run the entire government; every government payroll, every office rent, every ship, plane and all the expenses of Congress.  It must borrow all the money it gives to states to support teacher and firemen payrolls, the forest service, the highway department, airports and so on, and so on.  It must borrow all the money needed to build the bridges to nowhere.  All borrowed.

We can’t eliminate interest on our debt (it’s only going to balloon soon).  And, we cannot cut the social programs because they are mandatory.  Since there is NO money left from which to make a payment on the national debt, it is projected to rise annually for many years – even decades ahead. 

Did you know that except for a brief period in the 1990’s the country has NEVER made a debt payment? Never. 

The CBO says the national debt will double by 2026 and reach 200% of gross domestic product (GDP) by 2037 unless firm action is taken soon to stem America’s annual trillion-dollar deficits.  (Greece collapsed when debt-to-GDP in that country hit 130%.  The U.S. sits at 100%.)  It escapes me as to how this is even possible.

There is no doubt that tax increases and radical spending cuts are needed to reduce the national debt.  The CBO notes that, if congress allows the tax increases and the removal of spending programs on January 1, 2013—the “fiscal cliff”—then it will be the important first steps in reducing the budget deficit and thus the national debt.

However, if congress does allow these tax increases and removal of spending programs to occur on January 1, 2013, it will send the U.S. economy further into recession.  Recessions reduce revenues.  A reduction of revenues is not considered in the President’s Budget. 

Does the elected government want to be responsible for sending the economy into a recession after just being elected in November?  Not a chance.  You can pretty much bet that we’re headed for an accelerated decline of our underlying economic stability. 

The expanding national debt must be addressed, now.  Given our current path, our economy will be worse than that of Spain or Greece by the end of this decade.

And, we’re not alone.  The Japanese, and most of Europe, and China are in the same horrible fiscal policy traps.

It is inevitable that a rebalancing will be forced upon us.  It’s time to prepare. 

Europe’s currency is tumbling off a cliff.  A couple of years from now (or much sooner), it probably won’t even exist.  European countries will take back their national currencies, the D-mark, the French franc, Italian lira, Greek drachma and more.

And while the U.S. dollar might gain in value against the euro in the short-term, it’s up against the battle of its life against Asian currencies, in particular, China’s yuan.

A global economic slowdown is the reality of the world today.  However, with no country looking to take the lead to get us out of this slump, will the economic contraction lead to a global recession?

It is a very serious question with very serious consequences for stock markets, and jobs around the world. But that’s where I believe we are headed again.

In 2011, I said many times I was worried about 2012, because I thought it would be a very difficult year for the economy.  Now I’m worried about going into 2013, because I think it will be a time where a forced rebalancing of the world’s economies will occur. 

Look ahead.  Be hopeful but be prepared.

About Ed DeShields

Last article: Fearing Japan



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