Well, probably not, but let's give it a try. Currently, we are basically here: 1) Revenues roughly $2.4 trillion (collected via taxes) 2) Expenses roughly $3.5 trillion 3) Deficit roughly $1.1 trillion (financed via treasury debt) 4) Trade deficit roughly $0.5 trillion 5) Total debt roughly $16.3 trillion Our trade deficit provides foreign countries with dollars of which they may choose to buy treasury debt which we in turn use to pay for some of our deficit spending. Since our deficit spending now surpasses foreign surpluses, the rest of the deficit must be financed internally. Therefore, the Federal Reserve has undertaken episodes of quantitative easing. Beginning in January, the Fed will purchase approximately $45 billion of treasury debt per month. Combined with foreign purchases, this should allow the government to continue running deficits around $1.0 trillion dollars for 2013. Of course, the major components of the US budget are Social Security, Medicare/Medicaid, and Defense/Security. All of these, especially Medicare/Medicaid, are growing faster than the economy which means if nothing is changed, deficits will grow larger and larger and the Federal Reserve will be forced to increase quantitative easing (monetizing the debt) over time. The interest on the debt grows larger as the principal (total debt) grows from $16.3 trillion to over $20 million by 2016. However, the interest paid to the Federal Reserve is paid back to the Treasury after expenses and losses are subtracted. The Federal Reserve is also purchasing MBS (mortgage backed securities) from banks at the pace of $40 billion per month. I would assume the Fed will realize paper losses here or else the banks would not be selling the securities to the Fed. For the purpose of this post, I'll ignore such losses although for all I know, they could be in the tens of billions or more once some of this stuff is defaulted on. One concern I've heard is how will the Federal Reserve ever shrink their balance sheet as it grows exponentially with monetized purchases? The answer is, it won't. It can't. Maybe that isn't so bad. Follow me now. Let's say the deficit continues to increase. Maybe the deficit reaches $2.0 trillion in 4 or 5 years. Why can't the Fed merely continue printing money (digital entries) to make up the difference that foreigners can't buy? As long as the interest paid to the fed is put back in the treasury at the end of the year, it seems this game can be played out for some time to come. Let's even get more creative. Instead of raising taxes, let's say the government were to totally abolish all income and payroll taxes. Now the deficit goes from $1.1 trillion to $3.5 trillion. The Fed has to purchase roughly $3.0 trillion and foreign countries purchase the other $0.5 trillion. Businesses no longer pay taxes, and some of that gain is passed on to employees. Employees see their take home pay increase anywhere from 20-30% (since no taxes are taken out). As a result, personal debt is paid down, and spending accelerates. This drives up the economy, but the velocity of money accelerates as well bringing on inflation. Now what. Suppose fractional reserve lending was eliminated or greatly reduced. Banks would have to limit loans to what they have on deposit or a small fraction over that rather than the current 10 or 12 times. This would slow down the growth in the money supply which would offset the increased velocity as a result of the increase in net take home pay by the population. Banks might require borrowers to make down payments of 20% or more to make large purchases (homes/cars) and interest rates would rise on such loans. This would theoretically drive down prices of houses and cars and would encourage people to save more and borrow less. This would also help to slow down the velocity of money resulting from people having more money to spend. But what about wealth disparity? Currently half the population pays only payroll taxes anyway, and the wealthy would no longer have to pay taxes. Wouldn't inequality only increase more? Perhaps the minimum wage could be increase to $12 an hour and also we could faze out things like EIC which place downward pressure on wages. In summary: 1) Continue and even accelerate QE 2) Allow deficits to expand 3) Eliminate or greatly reduce fractional lending in the banking system 4) Eliminate or reduce taxes 5) As the economy picks up and net income increases, reduce welfare programs which enable employers to pay lower wages The above is merely a thought exercise. There is no free lunch, and the current system is unsustainable. In fact, I would argue we have allowed the mathematics to become so out of whack, the current system can no longer function without massive and constant intervention. What I've outlined may be as nutty as what we have now, maybe worse, but if the country expects to continue honoring promises (entitlements) without impoverishing the masses, something very different that what we are looking at - raising taxes and/or slashing benefits - must be considered. Those policies are being enacted in Europe and are failing. They will fail here too.
Get a new set of Senate Representatives and House of Representatives that actually care about doing what is best for America. Of course, what you mentioned could work too but I give up on trying because the ones who can actually make the change needed will not do the right thing.
My solution is to go over the cliff and see what happens. Hold everyone....Rs, Ds, Indys, TP, Libertarians accountable for the result.
I agree. The fiscal cliff is a bipartisan piece of... legislation signed by none other than Obama, who called it a "serious down payment on the deficit reduction we need".
Hornpharmed, I think you have it right... I'm starting the JNAE project... "JNAE: Just not an encumbent" When given an option I voted 3rd party this last time and then my second consideration was 'whoever was new'.
I have a problem with the President .... the Executive Branch .... getting this involved in the conversation. I prefer the Executive Branch to stay out of matters not more specific to that office -- that Branch -- of the government. This should lay squarely on the shoulders of the Legislative Branch of government, as should many things the Executive Branch has progressively over the years gotten involved in. The way Obama has gone after things, is more like a King or autocratic ruler who dictates to the country how things must be. If we can get back to separation of powers more so than not so, then the country can better focus on where the responsibility lies in what got us into this mess to begin with, and how best to get out of it. We'd have less partisanship because there would be no need for one side of the aisle to "side" with the President -- he'd be a non-player and a true bi-partisan leader in the Executive office -- and the other side of the aisle would have no need to rail against the Party of the President. Obama, as Chief Executive Officer of the government is what is causing there to be side-taking in the mess. It turns everything MORE SO into power party politics. Not say it would not be that way anyhow, but that it is even more so when the Executive Branch gets involved as a full participant. That is just not the job of the President. He should remain neutral, should not pose any plans, and just stay out of it. Encourage results, but stay out of the discussions of how to go about it. This is why we have three branches of government. I find Obama the most divisive leader in my lifetime, and he's really spent too much time wanting to be king of the country and some kind of leader who can say, "I led the way and did everything. Without me...without a King... you people would not be able to do anything." I say let the House and Senate work this out. Whatever they do or don't do, we can vote in and out of office in two more years. I want the President to stay inside his branch of government and quit trying to be a sociologist and economist and preacher. Just sign the damn bills and do your President thing and try and keep the world from blowing up in our foreign policy efforts.
