What can be done about the deficit?
President Obama has pledged to reduce the deficit created by the out-of-control spending by the Congress and his administration by 50 percent. The Fiscal Year 2009 surpassed $2 trillion, three times that of 2008, though the Bush administration created deficits that were not fiscally sound. How does he intend to accomplish this? There are only three ways to reduce the deficit that I am aware of.
1. CUT SPENDING: We have seen absolutely no desire to cut spending in any fashion. And, in fact, Congress and the president are now planning to increase spending and the deficit by over $1 trillion over the next 10 years to finance the health-care bill now being finalized in Congress. The cost estimate comes from the Congressional Budget Office, who has been notorious for low projections. Any cuts in spending would require reduction of existing programs or scaling back the massive spending increase for the current year.
Since a small fraction of the $700 billion stimulus money has actually been spent, and the banks are now repaying their loans, why not return the remainder to the Treasury to reduce the deficit, rather than keeping it around as a slush fund to be spent at will. It would appear that once Congress and the administration get their greedy little hands on tax dollars, they are extremely reluctant to give them back to the people.
There is much controversy over what we see taking place in the seemingly rebound of the economy as to whether it was caused by the stimulus dollars or simply the normal economic cycle adjusting to the market. Economists differ substantially on the answer and those who credit the stimulus are generally those who favor government intervention. The high unemployment rate would seem to refute the effects of the stimulus.
2. RAISE TAXES: Any politician, other than apparently the Progressive Congress, who votes to raise taxes on any group, person, small business, corporate, excise tax, etc. knows that that is the best way to get sent home without a job at the next election cycle. The amount of a tax increase to cut the deficit in half, without spending cuts, would place such a heavy burden on the American people as to be oppressive. That's how the Boston Tea Party got started.
The idea that the cost of all this massive spending can be borne by the top few, those who have an income over $250,000, is ridiculous. The top 1 percent of taxpayers already pay an amount approaching 50 percent of federal revenue. These are the very people who create the new jobs that keep our economy growing.
3. INFLATION: What causes inflation? When the supply of money in circulation increases, relative to the rest of the world's currencies, the dollar declines in buying power, especially since the economies of the world are now so closely intertwined. Typically, the cost of goods and services increases faster than wages, therefore, it takes a higher percentage of your income to buy anything. We saw the devastating effect of rampant inflation during the 1970s.
On top of rising prices, you are hit with the double whammy in your tax bill. If tax rates remain constant and your income increases, you pay more of your income to the various governments in the numerous forms of taxation we are burdened with. As a result, your disposable income goes down and your buying power is decreased.
How does the government create inflation? Simply by increasing the money supply, the rate of inflation increases. The government gets more of your income, percentage wise, relative to buying power. They can then buy back debt at a reduced value because the value of the dollar has declined and the national debt and deficit are reduced.
This is the most likely option we will see employed to reduce the deficit. It is already happening. The Fed is printing money at a breakneck pace to keep up with the infusion of cash by the Federal Reserve into banks, insurance companies, automobile manufacturers, the housing sector, and a myriad of other enterprises. By manipulating the money supply, the Fed can create inflation when neither supply or demand for goods and services increases.
Another method is by monetizing the debt, when the Fed prints money to buy Treasury Bonds issued to pay for deficit spending. Late spring or early summer of the past year, Fed chairman Ben Bernanke testified before Congress that the Fed would never monetize the debt. HE LIED. In late July, an auction was held to sell Treasury Bonds with a maturity date of seven years. The majority of these bonds were bought by the Chinese government. Just ten days later, the Fed bought back 80 percent of the bonds that had been issued with money they had printed. This is a dishonest method to monetize the debt through the back door.
To further compound the problem, there is significant concern worldwide over the wild spending spree the U.S. has embarked upon that the rate of interest the government is required to pay to get anyone to buy our debt has doubled over the past few months, thus increasing the deficit to make interest payments or buy back debt. As a result, interest rates are destined to rise due to the credit shortage caused by the government taking up so much of the money supply. The Fed is presently keeping interest rates low artificially for they know that rising interest rates will immediately stifle the economic recovery, but it is coming.
During the 1970s, we saw interest rates above 20 percent for home mortgages and even higher rates and scarce credit throughout the economy. If we continue down the path we are headed, this could happen again and the economy will collapse much further than we have seen so far.
The primary factor in causing this situation is the action by the Fed. What we have spent on TARP, stimulus, and other bailouts and social programs is chump change compared to what the Fed is capable of doing, and already has done. It is time to disband the Fed and return control of the money supply to Congress and the Treasury wher the Constitution mandates it belongs.