Tuesday, March 2, 2010

Does the Debt Matter? – Questioning Assumptions

In my post "Does the Debt Matter? - Alternate Projections" I wrote:

“The Obama administration projections assume substantial growth in tax revenues averaging 12.5% each year for 2011 through 2014 and reductions in the growth of federal spending such that spending growth averages 2.9% over the same period. For the years 2001 through 2007, year over year actual increases in tax revenues averaged 3.7%. Average annual increases in federal spending were 6.2%.”

I then projected 2014 revenue and spending based on the 2001 through 2007 averages. But what if the average results for 2001 through 2007 overestimate revenue increases and underestimate the growth of federal spending?

What if Congress passes “Cap & Trade” driving more businesses and jobs overseas?

What if consumers continue to pay down their personal debt?

What if “boomers” realize they’re closing in on retirement and because they haven’t saved any money they establish a new normal personal savings rate of 6% or more – like it was in the 1950’s?

What if the published unemployment rate remains over 9% and the real unemployment rate remains over 15% through 2014?

What health care is reformed and raises premiums for people with insurance, raises taxes on businesses, and adds taxes on medical devices – just like the bill that passed in the House of Representatives and like the bill passed by the Senate?

What if, because government prevents banks from foreclosing on defaulting mortgages, ten times as many homeowners with “underwater” houses use that “Get Out of Jail Free” card – and default on their own mortgages to pay down other debt - all while remaining in their homes?

What if foreign governments – especially China and Japan – stop buying U.S. Treasury Bonds and their yields jump to 14%?

What if rising interest rates drives us deeper into recession and drives unemployment even higher?

What if there are 50 other things that could go wrong that I haven’t mentioned or thought of?

I oversimplified in my previous posts in order to make my points. For example, if Treasury bond yields rose to 10% tomorrow and stayed there, it would take years for overall interest payments to reach the 10% level. Much of the debt is in 10 to 30 year bonds and only a portion comes due each year. Still, the trends are representative and the revenue and spending projections are conservative.

Some have proposed we get out of this situation by intentionally inflating the currency – been there – done that – it doesn’t work! Rising inflation reduces economic growth, increases unemployment, and drives up spending – and deficits.

So how do we get out of this mess? Don’t know. But it has to be a combination of:

(1) Real federal spending cuts and that means cuts in entitlements; Medicare, Medicaid, Social Security, and all others.

(2) Restructuring the tax code to promote economic growth without counterproductive net tax increases – the "Fair Tax" would do it.

(3) Opening up for oil and gas exploration and production all of the currently prohibited areas in the United States including, Alaska and off the east, west and gulf coasts.

What are your ideas?

Quote of the Day
“We should never despair, our Situation before has been unpromising and has changed for the better, so I trust, it will again. If new difficulties arise, we must only put forth new Exertions and proportion our Efforts to the exigency of the times.”
George Washington

Link to Other Topics in the Special Report: Does the Debt Matter?

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