Artificial Discipline
Wednesday, July 20, 2011 at 6:00AM 
Thinking about the chart I posted Monday has led me to rethink the current deficit troubles of the government. If a $2 billion cut in next year’s spending is the most Obama will agree to, then maybe we do need the discipline of a government shutdown. This does not need to lead to default as the government can still borrow money as its various bonds mature in order to replace them. It can also prioritize and make interest payments first. If the government defaults, it is because Obama has chosen to default.
We may discover if the Social Security trust fund really exists as a "lock box." There are government bonds in that lock box. They can be sold back to the government to pay the deficit that occurs right now in the tax receipts the government receives in Social Security taxes versus the amount it sends out. This money could be then be re-borrowed to pay the benefits. If Obama does not send out Social Security checks it will be because he chooses not to do so.
The same situation occurs with Medicare. If medical bills are not paid, it means that Obama chooses not to pay them.
The downside is that this will cause dramatic cuts in all other government programs. Or maybe that is the upside. Interest, medical payments, and pensions are about 50% of our spending. If these parts of the budget can not be touched, and since we are running a 40% deficit, that means a cut of 80% everywhere else if the government is forced to balance the budget by being unable to borrow-note that the military is in this category. Is this the only way to end our wars? I am overwhelmed by the irony of an anti-war candidate becoming a war president. Military salaries can continue to be paid as the troops are brought home. The ending of our wars is enough by itself for me to want a government shutdown, even though it will hurt me financially as it will make selling houses impossible for a while as the government is providing most financing right now.
Finally, I have heard many times from the administration that the government has never defaulted before. While the government does not need to default now, in fact the government has defaulted many times in the past. Here is a list:
The Continental Currency Default of 1779
The Default on Continental Domestic Loans
The Greenback Default of 1862
The Liberty Bond Default of 1934
The Momentary Default of 1979
The government also defaulted in 1973 when Nixon closed the gold window. The lack of the discipline that the gold standard brings is one reason we are in this mess. This is because under a gold standard if a country overspends gold leaves that country and the money supply drops. This allows industry to be more competitive as prices drop and deflation sets in. This forces austerity. It is a very painful process.
We are rapidly approaching the point of no return. Michael Barone in his column had this to say:
In the process, the national debt as a percentage of gross domestic product has increased from a manageable 40 percent in 2008 to 62 percent this year and an estimated 72 percent in 2012. And it's headed to the 90 percent level that economists Kenneth Rogoff and Carmen Reinhart have identified as the danger point, when governments face fiscal collapse.
Eric Anderson at Universe of Lies points out that Barone has underestimated the problem:
Barone is minimizing the problem here, counting only US marketable debt. The bonds issued to government trust funds are just as important, and we can’t ignore unfunded liabilities, either. The unfunded liabilities can be adjusted somewhat by changing the laws governing those entitlements, but the unmarketable Treasury debt is still debt, in precise dollars and cents.
Current debt is $14.2 Trillion. Estimated 2011 GDP is 15.2 Trillion, so we are already at the 90% critical level.
Barone must read Eric's column as he updated his column and agreed that we were already at the danger level.
A time will come where the government is unable to "kick the can down the road." Artificial discipline will be forced on the government either by the government reaching the point where it can not sell bonds or by a government shutdown.. A government shutdown is preferable to not being able to sell bonds. I see the tipping point for the government not being able to sell bonds as 3 to 8 years away if current trends continue.
If a government "shutdown" is the only way to introduce fiscal discipline, then bring it on.
Reader Comments (1)
"Barone must read Eric's column as he updated his column and agreed that we were already at the danger level. " ROFLOL. It's about time they started listening to me!