Our Grandkids Will Owe Their Grandkids

I've written in depth about the US deficit & rapidly increasing debt. Now in case you missed some of the nuances of those previous articles, let me summarize this series of blog articles in the simplest possible way...

Massive US debt means our grandkids...


will be supporting their grandkids...


by paying higher & higher taxes and experiencing a lower standard of living here in the US as we devote a major part of tax collections to make gigantic interest payments on the US debt to the Chinese (and other US government bondholders)--as a result of massive spending by their grandparents, ie, you & me.

What Would Milton Say?

Milton Friedman was one of the greatest economists of our time. He was the grandmaster of free-market economic theory in the postwar era and a prime force in the movement of nations toward less government and greater reliance on individual responsibility.


Milton was brilliant. He was a recipient of the Nobel prize in economic science. He was enjoyable to listen to. He passed away at age 94 in 2006.

In my series of articles about the size of government and the exploding deficit & US debt, one wonders what Milton would have said about this. I'm sure he would have commented on how quickly our presidents & Congress have inserted themselves into the picture in the past twelve months, such as:

• Bail out of Fannie Mae & Freddie Mac mortgage companies
  
• Bail out & significant ownership of insurance giant, AIG
• The $700 billion Troubled Asset Relief Program (TARP)
• Bail out & stakeholder ownership of General Motors & Chrysler
• The $787 billion economic recovery package
• Congress (and now the President) intent on controlling executive compensation
• The Obama administration's insistence that the GM chief executive, Rick Wagoner, step down
• An onerous cap & trade bill that was passed by the House
• An effort by the federal government to gain significant control over health care in the US, even it is means going $1 trillion further into debt over the coming decade
• Appointment of about 30 czars (and the expense of their staff & budgets) by the White House for about every government intrusion imaginable
• Ongoing "pork barrel" spending by Republicans & Democrats alike
  

In this interview, Milton explains the dynamics that naturally lead toward collectivism---and away from the far preferable state of individual liberty.

Milton's point about power-hungry politicians couldn't be more poignantly illustrated than last fall when now current White House chief-of-staff Rahm Emanuel said regarding this current series of massive government interventions that You don't ever want to let a crisis go to waste: It's an opportunity to do important things that you would otherwise avoid. It appears that he wants to use a temporary crisis as a pretense to engineer a permanent increase in the size of government.



In regard to Milton's very last point in this video segment, one significant example this year has been the Tax Day Tea Parties that have aroused the interests of so many American citizens.

What Would Warren Do?

Warren Buffett is sometimes called the Oracle of Omaha. He was born and still lives in Omaha, NE. He graduated from the University of Nebraska-Lincoln where he earned a degree in economics.


I, too, attended UNL and have a degree in economics. I one-upped Warren, however. I was in the University of Nebraska Cornhusker marching band, where I played the sousaphone and marched in two Orange Bowl parades. The Huskers won back-to-back national football championships in those years.

Warren on the other hand (side by side with pal & bridge partner, Bill Gates) are the two richest people in the world. Warren one-upped me there!! Ha.

Recently in the New York Times, Mr. Buffett warned of the dangers of the U. S. government taking on too much debt. Doing so could lead to hyperinflation and a devaluation of the American dollar that could transform the United States into a banana republic economy.

Unchecked greenback emissions, he says, will certainly cause the purchasing power of currency to melt.

The U.S. economy appears to be on a slow path to recovery but enormous dosages of monetary medicine continue to be administered, creating an annual deficit more than twice any since 1920 aside from war-impacted years of 1942-46.

Congress, Buffett says, must end the rise in the debt-to-GDP ratio and bring U.S. growth in obligations back in line with U.S. growth in resources.

With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes.

In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

We don’t want our country to evolve into the banana-republic economy described by Keynes.

Mr. Buffett is a key economic advisor to President Barrack Obama. Some have credited his endorsement of candidate Obama last summer with giving the former Illinois senator the credibility he lacked on economic issues. Warren has said, you couldn't have anybody better in charge of the economy.

He enthusiastically endorsed Mr. Obama's stimulus package in February and as recently as last month was calling for a second round of stimulus spending.

Now to help you fairly evaluate points of view, I invite you to watch a counter-point video from Peter Schiff, a regular on CNBC & FBN business cable channels.

More from the CBO on the Federal Budget

In my last article, I summarized the Congressional Budget Office's (CBO's) long-term outlook regarding the massive federal budget.

This topic is of crucial interest to all Americans, and our offspring. Because of its importance, I want to provide a concise summary of the CBO's comments on this matter.

The federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run.

The following graph illustrates the US debt as a percent of Gross Domestic Product (GDP).


Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly.

Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt.

Keeping deficits and debt from reaching levels that would cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two.

For decades, spending on the federal government’s major health care programs, Medicare and Medicaid, has been growing faster than the economy (as has health care spending in the private sector).

The CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035 and to more than 17 percent by 2080. That projection means that in 2080, without changes in policy, the federal government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

Spending on Social Security is also projected to rise over time as a share of GDP, albeit much less dramatically. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level through 2080.

CBO’s long-term budget projections raise fundamental questions about economic sustainability.

If outlays grew as projected and revenues did not rise at a corresponding rate, annual deficits would climb and federal debt would grow significantly. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States. Over time, the accumulation of debt would seriously harm the economy.

Alternatively, if spending grew as projected and taxes were raised in tandem, tax rates would have to reach levels never seen in the United States. High tax rates would slow the growth of the economy, making the spending burden harder to bear.

Policymakers could mitigate the economic damage from rapidly rising debt by putting the nation on a sustainable fiscal course, which would require some combination of lower spending and higher revenues than the amounts now projected.


There is only so much the US can put on credit before we change the economic face of this great nation...and place ourselves a great strategic risk, economically, politically and defense-wise, in the world community.