Tuesday, July 14, 2009
Reaching the national credit card limit
History has been made by President Obama and the Democrats running the United States Congress. For the first time in American history, the annual deficit has hit one trillion dollars, (1.086 trillion dollars to be exact.) Further, the end of federal government’s fiscal year is not until October. By that time it is estimated that the budget deficit for the fiscal year 2009 will be 1.84 trillion dollars. That will be nearly four times last year’s deficit.
The dramatic increases in federal spending and in the federal budget deficit have made traditional investors in the federal debt concerned about the future value of the dollar and their investments. It is not a good sign when the Secretary of the Treasury is making trips to China and the Middle East to assure investors that the dollar is safe from runaway inflation. Runaway inflation is traditionally the result of dramatic spending and debt increases. There have been deficits and debts before, but not since the Civil War, has the reliability of the future of the dollar so openly been discussed among foreign investors.
There is a logical reason for their apprehension. Washington has an insatiable appetite to borrow and spend. Such a deficit is before President Obama’s drive for health care reform goes through. The President wants it completed by the end of the fiscal year, which could break the two trillion mark. At the very least the overall national debt has now went over twelve trillion dollars and the annual interest payments are over 450 billion dollars and climbing.
To put the above numbers in perspective, think about the following: the interest payments are larger than the money spent by the federal government on any other part of government other than the entitlement programs and defense. There is simply no concrete effort at any sort of spending restraint.
What the Congress and the President have offered so far this year is not the traditional Keynesian approach of moderate deficit spending. Instead, what is happening is a complete transformation of the American government’s role in the economic system. The federal government owns control of some financial institutions and General Motors. Take General Motors for example, the traditional “big government” approach to General Motors would have been for the federal government to buy a large numbers of cars from GM, and perhaps encourage the states to do so as well. Instead, the federal government bought a majority interest in GM. Unprecedented acts like that and an unprecedented budget deficit have traditional foreign investors in the US dollar concerned. Most astute investors in the US dollar did not see such acts coming a year ago. What they are likely concerned about now is what will happen in the next year.
While it is clear that the shift in culture in American business away from long term planning and rewarding those who produced created the economic mess we are in, the overreaching response from Washington will likely compound the problem. Ironically, it will likely be the acts of those who railed against the shift in business culture that could eventually do the most harm to the American way of life.
Liberals often fancy themselves above the laws of economics. They find the laws of economics to be brutal and cold and unfeeling. However, the behavior of the United States Congress and the President of the United States so far in 2009 could bring about the harshness that they rally against. The burden of the debt will eventually take its toll. The laws of economics will come into play. Investors will refuse to buy more American debt. Entrepreneurship will cave into the burden of big government. Interest rates will feel the pressure and rise as will inflation. When both business and government act against the laws of economics, failure will eventually come. Borrowing and spending inefficiently to stave it off only makes the failure bigger when it comes. The only way to truly recover is for the government and business to return to economic principles that made the American economy so strong in the first place.