The 2011 Fiscal Picture Made Clear and Simple

Any discussion of economics can give you headache when the numbers are analyzed. This is even more the case when discussing government numbers because the government breaks just about every accounting law.

The fiscal picture for the future of the United States is not grim. It is one of a fast, painful death. You probably think that is hyperbole, but let’s look at the simple numbers that are not objective.

The federal government takes in about $2.2 trillion dollars a year in tax. The total cost of Social Security, Medicare, interest on the national debt and other mandatory programs in 2011 will be $2.5 trillion dollars. This means we are $300 billion in the red.

Now here is the killer. These numbers don’t include the $890 billion spent on defense.

Cuts

What about the much discussed cuts we’ve seen President Obama and the Republicans debate? Laughably irrelevant. In addition to the numbers above, the federal government spends roughly $450 billion on discretionary matters. Cutting $60 billion, $100 billion or whatever from this just doesn’t matter. Don’t get me wrong. It is great, but it is a drop in the button when you consider the numbers above that don’t even include the discretionary budget.

Solution

The potential solutions are all brutal. The classic answer is to slash spending, revise mandatory programs including Social Security, Medicare and defense, while raising taxes. That is a suicide pill for a politician to swallow because any of them will result in the individual being a former member of Congress or President.

An alternative approach is to play a trick with the value of money. Specifically, one can try to devalue the dollar to make it easier to pay the debt. This is exactly what the Federal Reserve is doing these days.

How does this work? Well, consider an example. Let’s say you have a home loan that requires you to pay $1,500 a month. Let’s say you make $5,000 a month in salary. Now the dollar devalues by 50 percent. Your salary slowly goes up to $7,500, but you still owe the $1,500 a month on the house. It is easier to make that monthly payment, no?

This is a very simplified example of what is currently going on. The Federal Reserve has recognized that the politicians will simply not act till a crisis occurs in the form of a debt default. Interestingly, the move by the Fed would also seem to suggest the real power in this country is not in the White House, Congress or Supreme Court, but in a bank.

Is that a good thing?

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