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Editor/Founder: Bill Smith, Ph.D. [aka: OzarkGuru & 2010 AFP National Blogger of the Year]
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One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors. -- Plato (429-347 BC)

Tuesday, February 15, 2011

Belated Valentine’s Day - A Debt That Cannot Be Paid

by William Warren:

A Debt That Cannot Be Paid
By Bill Wilson: On Feb. 14, Barack Obama submitted his ten-year budget from the White House Office of Management and Budget (OMB). With a straight face, he said of the proposal, “[W]e’re going to have to get serious about cutting back on those things that would be nice to have but we can do without.” Obama explained, “That’s what families across the country do every day — they live within their means and they invest in their family’s futures. And it’s time we did the same thing as a country. That’s how we’re going to get our fiscal house in order.” Again, all with a straight face.

Unfortunately, Obama does not propose doing “the same thing” as families do every month, which is actually balance the budget. In fact, under his plan, the budget will never be balanced. The national debt, now $14.1 trillion, will never be repaid. It will continue to grow into perpetuity, as it has every year since 1958. Even under the rosiest of scenarios projected by the Obama Administration, the debt will be growing faster than the economy and be larger than the economy — for the foreseeable future.

By 2021, under the Obama budget, the national debt will balloon to $26.3 trillion from its current level of $14.1 trillion, an 86.5 percent increase. The Gross Domestic Product (GDP), on the other hand, will only grow by 69 percent during that same time frame to $24.896 trillion. This year alone, the national debt will grow to $15.4 trillion, larger than the entire economy for the first time since World War II. Thereafter, the debt-to-GDP levels will stay above 100 percent, growing every single year.

If spending is not cut drastically and the debt paid down at fixed intervals like a mortgage payment, one day the debt will become too large to service, let alone be paid down. Net interest alone will be $844 billion annually by 2021, a number that will easily double by 2030, if not triple. But even that number hides the full amount of interest that actually must be paid on the debt. “Net interest” as reported by the government does not include the amount of interest paid into the Social Security, Medicare, and other government trust funds, according to an obscure spreadsheet released by OMB entitled, “Outlays for Mandatory and Related Programs: 1962–2016”.
For example, in 2010, the government reports that $196 billion in “net interest” was paid. What it does not readily mention is that in 2010, the Treasury actually paid out $413 billion in interest. $216 billion went into the trust funds, but were subtracted out from the deficit, even though they essentially added to the debt. And even though it is a real obligation that must be paid.

This accounting gimmick allows the government to underreport the real budget deficit every single year and simultaneously count the trust fund interest payments to Social Security and Medicare solvency. House Budget Committee Chairman Paul Ryan had a similar objection to $500 billion in Medicare cuts from ObamaCare being counted twice by the government to make its numbers look better.

Of course, nobody believed ObamaCare’s claims to being deficit-neutral. And nobody should believe the government’s similar claims that these interest payments can be controlled. Right now, this financing challenge for the Treasury is currently met only by borrowing ever more money. That the challenge is understated by their own government should be alarming to most Americans.

In reality, the total interest owed will actually be over an eye-popping $1.2 trillion in 2021. And since the government never anticipates the debt being paid down, the number will easily grow to over $2.4 trillion by 2030. Again, that’s a real obligation that must be paid — every year. But eventually, we will not be able to pay it. What nobody can say for certain is where the tipping point is. But what is certain is that no system can be sustained that always spends more than it takes in and never repays any debt. It has never happened in history, and it never will happen.

That is why Congress must consider real proposals to significantly reduce the deficit and pay down the debt, before these numbers become reality. Because once they do, and once the debt becomes so large that it cannot be serviced, the U.S. will default on its obligations. Will we default at 100 percent of debt-to-GDP? 200 percent? 300 percent? Again, it is hard to say when it will happen, but it is certain that we will eventually default on this trajectory.

It is through this lens that all spending proposals must be judged, whether from Obama or congressional Republicans. Does the proposal avert the now-inevitable default? Does it prevent the debt from growing by leaps and bounds? Does it include a repayment plan? So far, no serious plan answers those questions. But those are the questions that Americans across the country can easily answer about their own family budgets. They are not in danger of default, because they reduce their debt load every year and make their payments on time and in full. That, in fact, is “what families across the country do every day” and what government has not been able to do for more than a generation.

Americans really do want a government that can live within its means. But that is not what Obama is offering. If his budget is not brought under control soon, it will reduce the standard of living for every American family. When the house of cards comes tumbling down, the dollar will collapse, interest rates and taxes will soar, and it will be perfectly clear that the debt cannot be paid.
Bill Wilson is the President of Americans for Limited Government.

Tags: National Debt, Obama, Obama Rhetoric, Political Cartoons, Valentines Day, Washington, Spending Addiction, William Warren, Bill WilsonTo share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. Thanks!
Posted by Bill Smith at 3:51 PM - Post Link


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