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Tuesday, April 12, 2011

Debt Ceiling: Armageddon?

As a follow up to yesterday’s article, I wanted to comment on the first few things coming down from the Hill regarding the upcoming debt ceiling vote.  Everyone concerned with this country’s future needs to be concerned about this vote and future related legislation.
First, we all need to acknowledge (regardless of party or position) that raising our debt ceiling is vital at this moment.  That debt ceiling is our “credit limit.”  Without increasing it, we will no longer be able to sell bonds or pay our bond debt.  Go ahead and say “so what?”  This is what.  China owns about $3.5 trillion of our debt of $14.3 trillion.  Each day we don’t pay China (if the ceiling isn’t increased) is a day where they feel that their national security is threatened.  China’s recovery has slowed, so they would experience an increase in the value of their currency as the value of the US dollar suddenly drops around the world (remember that failing to increase the debt ceiling would devalue our currency instantly because our bonds would collapse and the bond rates would have to be raised to offset).  The US dollar is the world’s reserve currency (nearly every country’s money is tied directly to the value of the US dollar, other than the Chinese Renminbi, which has a relationship with the dollar but isn’t tied to it) and so the international currency markets would begin wild fluctuations, not to mention the fact that the price of gold would skyrocket, together with all traded commodities as traders and countries scurry to protect their people and trade.
Get the idea?  No reliable reserve currency means chaos in the world’s markets, exchanges, trade relationships, etc.  And I mean chaos.  We couldn’t pay our troops, our teachers, our police, or, in fact any other public employees.  Banking would collapse, and we could enter into a new Dark Ages which could make the Medieval world look positively like Shangri-La.
So, what do we do?  We do what must be done, starting with lots of good ideas which are now circulating:
Cut spending:
Military is the big one.  The public is broadly opposed to all of what we are doing in Afghanistan, Iraq and Libya (useless and unaffordable, not to mention tragic).  We have more than 800 bases overseas, and, based upon the international response to Libya, the US is viewed as the world’s police force (absurd to be that).  Close those bases, bring home the troops, and use the $700 billion or more saved to pay off our debt.
We have so many people (30 million + unemployed and their families) who need help here, shouldn’t we help them first?).  Tax subsidies and other subsidies to oil companies, corporate farmers, pharmaceutical companies, etc.
Increase spending:
Mostly on infrastructure (we are in really bad shape), education, employment retraining, small business stimulus, etc.
Increase taxes:
When we were recovering from WWII, we taxed higher incomes at 90% or more from 1946 for more than two decades.  Do not tax corporations (or close all tax loopholes so that GE and others actually have to pay tax).  Of course, my preference would be to completely throw out the current 23,000 page tax code (Attorney and Accountants Relief Act as it is affectionately known), and go to a flat tax with no deductions and no exemptions, except for children and the disabled.  A flat tax could be comfortably set at such that the first $50,000 would not be taxed, the next $50,000 at 20%, and everything above that at 30% (ask Russia, they’ve had a flat tax for more than five years now, and balance their budget even though the average citizen there makes much less than our average worker).
To give you some idea of just how poorly we are being governed, when Congress agreed to tax cuts late last year, those cost us nearly a trillion dollars.  Now they can’t even agree on a spending reduction amounting to less than 5% of that amount.
In the next month or so, we will be able to tell a lot about our future as a nation.  Can those we voted to represent us actually represent 350,000,000 of us effectively, or will they continue to actually only represent the richest few thousand?  Sadly I have no faith at all in what they will do.
Lastly, I encourage you to spend about 20 minutes doing the budget exercise available online.  When I did this, I was able to get a surplus of $278 billion.  Try it and see.  It’s simple and very educational:

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