Monday, 1 August 2011

Summary and Outlook on US Debt Crisis


The US is 14.5 trillion in debt in terms of national debt. The increases in spending because of bills passed like No Child Left Behind, Obamacare, and rising Social Security along with an expensive military to maintain are the drivers behind the increasing deficit. Basically, if the US doesn't cut any spending, the deficit will increase annually therefore the national debt continues to go skyward. That's the background.

There is a constitutional law that limits the amount of borrowing the US can do. Reagan increased it all the time, Clinton, Bush etc...Usually it passes like clockwork and no one really notices it. However, this time the Republicans wanted cuts. Which is fair, as they cannot afford the expensive programs they've been instituting. However, at the same time the Democrats wanted to increase taxes, which again is fair as the US has one of the lowest tax rates in the Western world.

John Boehner is the speaker for the Republicans and has been negotiating a deal with Obama. Obama has been fighting for tax increases and compromising with spending cuts. Boehner, due to the idiocy of populist politics and the rantings of the tea party, has declined to agree to any tax increases. The tea party is the main reason for this, a group of uneducated people who still think America's main threat is Obama being a closet Muslim. The risks of not getting a deal done is Moody's will downgrade the American debt from their precious AAA Rating causing turbulence in the markets, rising interest rates, and just general panic. The biggest fear though is of default, which would render America's currency less valuable in comparison to many of the other top currencies. Default is the worst fear, but it most likely will not happen.

Currently, Boehner has negotiated a deal that reveals Obama to be pretty spineless, as the deal that is expected to be announced is 2.1 trillion in spending cuts (good but not enough), a nonpartisan Budget committee to find more ways to slice the deficit down (good idea - should of happened years ago) and a two step plan for increasing the debt again when it has to be done which will involve more negotiated cuts. There will be no tax increases, which is very unfortunate as the US simply needs more tax revenue to pay their bills.

I realize I am biased against Obama but I am frustrated at him not standing up and getting some tax increases, 2.1 trillion in spending cuts isn't even enough (over 10 years). With straight line, that's 210 billion per year, which in terms of America's budget isn't good enough. Right now, if the deficit spending continues, interest payments will become America's largest annual expenditure (above military and Social Security).
Nobody doubts the tea party's effectiveness, they have succeeded n pushing the entire American spectrum to the right. Were they right? Hell no.

American tax revenue right now is around 14% of GDP. Right now, the rich contribute about 18% of total tax revenue, down from 30% around a (decade?) ago - I forget the timeline. This is the lowest percentage of tax revenue from GDP since the 1950s. Contrary to what most people think, Americans spend a ton of money on healthcare - I think it's above 15% of GDP and more than any of the wealthy nations. They have the largest military, which isn't cheap. In the last decade, they've engaged in 2 large wars. Obamacare adds to the cost, and really the legislation does nothing except give big pharmaceuticals more money. No Child Left Behind was shown as one of the most idiotic pieces of legislation by around 70 teachers (?) or something like that being caught in lifting average test scores so they would get higher salaries. And that bill cost a ton of money. Social Security costs far too much, and a lot of this is actually universal in the Western world. Part of the reason is the retirement age must be lifted. The 65 years old thing was based on old living expectancy (I think 67 at the time) - now I think most Western countries are around 75 - 80.

American government is too big, sure and they're spending like there's no tomorrow. But, taxation is actually at its lowest in a long time. And that ladies and gentleman is why were are in this mess. Republicans appease voters by lowering taxes while the Dems grab votes by offering social services. How can one continue to spend more money when you're not bringing in more? The answer is you cannot.

The Tea Party has a good central idea of government needs to be lessened - I agree. I agree that stimulus is never the answer and Keynesian economics don't work when you only practice in bad times. However, the riots and the idea of DON'T RAISE TAXES is something the Tea party is most known for and has Republicans catering them by refusing to raise taxes. Taxes NEED to be raised. They are just too low right now in the US. And taxes will be raised, it's only a matter of time before the government is forced too.

This is all of the top of my head, so look up the stats if needed - I'm pretty sure they're all close. If you want to know how to make money from this, short the American dollar and short any US Bank. Historically, when there have been low taxes on the rich there has been a quick boom followed by recovery. And we will enter the recovery stage sooner or later.

11 comments:

Anonymous said...

The Kardashians should should make a home made sexy video, so the giovernment can collect taxes off the proceeds! Oh wait, Kim Kardashian already did it for FREE! Check out the link !

HeffleyBoy said...

Raising taxes was a no-brainer I thought. It astounds me to watch how the US political systems is manipulating things for personal and corporate gain.

The average American does not look past their skewed 'news' from biased sources. The middle class are in for a shock and awe campaign to their everyday lives.

With a strong hold on govt the republicans will cut and cut and cut while not raising taxes until it is 'too late'. You would think people would learn that their method has done nothing but ruin the balance sheet of their entire country decade over decade since WWII.

"What we learn from history, is that we don't learn from history."

I really hoped that Obama would be able to push through some taxes, at least take back the unnecessary breaks given to corporations from W Bush. Its really a test put forth to anyone to take office in such a time as he did. Bush Jr left quite a mess.....and then the recession was the cherry on top.

Even more proud every day to be a Canadian.

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