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:  http://public-consultation.org/exercise/

Monday, April 11, 2011

Averting Catastrophe: The Looming Debt Crisis

Ah, a chance for more strutting kabuki!!  Sadly, we are about to witness a needless meltdown in the world financial climate.  Think about the potential tsunami.  So, on day one, the vote comes in.  No one wants to raise the debt ceiling.  Sadly on day two the cascade of events starts.  First, the leadership (both parties) goes on camera and says they’re opposed to increasing the debt ceiling because it would be “irresponsible.”  Ok, good so far, right?  But, as day two wears on, guys like Geithner start a scream, backed by Bernanke.   They say, rightfully, that unless the debt ceiling is raised, there are massive consequences:  we won’t be able to pay our debts (the dollar starts sliding on international money market exchanges and China’s US ambassador calls the White House to find out what is going to happen), threats of reduction in the US bond rating start a small ripple around the world.  Meanwhile the Tea Partiers are thinking, gosh, we can be heroes, so we can’t go along with some charade based upon the bond value drop.  Day three is upon us.  No answers, just more posturing and extreme ideology spouting coming from the White House and the Hill.  More calls, but many of these from Wall Street market makers and bankers.  Face is already being lost almost everywhere, and the level of public frustration at ineptitude of our government is rising steadily.  The dollar drops more.  Suddenly, no one’s making deals internationally because the currency markets have become terrifying with no handle on dollar values.  China is sweating bullets.  Commodity prices are taking frenetic swings.  Gold rises rapidly to $2000 an ounce with no end in sight.  The world’s economy stalls.  Day four and suddenly official Washington realizes that what was a meaningless debate if the ceiling were increased, has become a major global destructive force that now is too late to rein in.
This fantastic scenario probably wouldn’t happen quite this fast, but, who knows?  With the incredible interconnectedness of international finance, it might be even quicker.
This is not the time or place to have the Armageddon debate about balancing this country’s books.

Tuesday, April 5, 2011

How the Budget Battle is Destroying America

Where are we right now?  By my estimation, we are deeply in the cesspool and it appears that we are getting ready to overflow.  After all, even a great cesspool has a capacity, and there is one more flush which will someday push it to overflow.  And that, literally, will stink.  But, sadly the odor of that fetid accumulation of political fecal regress, is not just offensive, but is becoming deadly.
First, we have to find a way to overcome the political polarity which is destroying all rational thought.  In my opinion, in the Washington political hierarchy, there are only two rational elected representatives.  There’s Bernie Sanders, who is getting ready to leave office soon, and who can blame him (the sole true independent who takes no campaign money from the oligarchs).  And, there’s Ron Paul, who refuses to sing in any Congressional chorus, although he’s holding office as a Republican.  After that, no one.  And, I’m not even saying that I agree with the view points of either, but at least they aren’t tied to some pre-ordained world view, and tend to think and view things with honesty, and don’t propose canned solutions just to satisfy the wealthy sources of election contributions.
We are now under the control of the TEA PARTY, although they represent a fairly small percentage of the Republican majority in the House.  It’s not necessary to analyze why, that is obvious:  in today’s politics, the extremes control because the extremes are the ones who capture the media.
Paul Ryan has offered his version of the cure for the budget deficit and overwhelming national debt.  It will not work.  Why?  Simple.  It fails to address the fundamental problems we have, but focuses on spending only.  The Democrats rightfully object to his proposal, however, if you can’t present a viable effective alternative, then best be silent until you can.  Sadly, in this debate, we don’t hear much of anything about what should be done.  Most of the focus is on things that we find objectionable.
So, how can the problem be solved?  First, keep the government running at all costs.  The present fiscal year ends in less than six months.  Just let that go, so that we can focus on the future.  The debate on a new budget for the next fiscal year is the one to have, beginning now.
So, where do we go now?  We can start with the recommendations of the Budget Commission.  You know, the bi-partisan group which went through months of debate over how best to resolve our fiscal quagmire.  I don’t agree with much of what they came up with, but I also believe that this is the most useful way to begin the debate.  Just deconstruct their recommendations, and start there.
There are a few things which will have to be done to make any solution work:
1.       Through away the present tax code and all of its inequities.  I mean ALL OF THE PRESENT TAX CODE, EVERY WORD, EVERY PAGE.  Replace it with a completely simple code, which would set a two tier personal income tax rate, say about 20% up to the first million, and then 35% over everything else, including dividends, capital gains, interest earnings, benefits, etc. (for the higher tier only).  Eliminate corporate taxes completely, or tax corporations only for profits they make for overseas operations.  Reinstate the Estate Tax for estates valued at more than a million.

2.      Cut military spending by at least 50%.  That’s easy.  That can be done by leaving Afghanistan and Iraq, and closing all of our overseas bases, and eliminating unnecessary weapons systems.  Don’t talk to me about national security being jeopardized by this.  It won’t be, and, in fact it will enable us to focus much more on our borders.

3.      Reduce our present non-military national security from its present size of 15 agencies to only the two necessary ones, the FBI and CIA.  This will make national security far more reliable and effective, rather than a hodgepodge of ineffectively communicating bureaucracies which can’t seem to control much of anything, including their budgets.

4.      Start taxing all carbon emissions.   If we don’t do that, not much else will matter.  Devote at least $30 billion to infrastructure and the same amount to non-fossil fuel, non-nuclear energy research and production, and pay for that with the carbon tax.

5.      Have the FED stop monetizing our debt.

There are lots of other ideas which could help, and, sooner or later we will have to completely replace the present absurd health care laws with a realistic workable program, but that’s a different, but perhaps as meaningful debate.
Will any of this happen?  Not a chance.  The can will keep being kicked down the road until we fail.  It’s the normal cycle.  Can you say Mayans?  Romans?  Greeks?  Egyptians?  There are other examples in our 10,000 year civilized history.   We are on the brink, and, sadly, when it happens, there will be global chaos.  Ask not for whom the bell tolls ….  It’s tolling for 7.5 billion people.