Monday, February 14, 2011

Budget Battles

There are budget battles going on in Washington DC.  Republicans in the House have proposed up to $100 billion in cuts.  Obama has proposed cutting $1.1 trillion from the deficit.  This would be decent if it weren't for the fact that the $1.1 trillion in cuts would be over 10 years.  This calculates out to just over $100 billion per year.

The Republican cuts are a real joke.  They are playing games with the numbers, counting things as cuts from future spending increases.  Even if these were real cuts, they are still a joke.  The deficit for this year alone is expected to top $1.5 trillion.  Therefore, a cut of $100 billion isn't even 10% of this amount.  And don't forget that this is just the deficit.

So even if Obama and the Republicans came up with $100 billion in cuts, it means we might have a deficit of $1.4 trillion next year.  This means another $1.4 trillion added to the national debt, which is already sky high.

The Republicans could propose cuts in all sorts of programs.  They could scrap the Education Department. They could get rid of all subsidies to farmers.  They could end all foreign aid.  These would be easy things.  In fact, they don't just have to propose cuts, they can actually do it.  They hold control of the purse strings.  The president can only sign what is put on his desk.  If the Republicans never pass a budget with these things, then they will automatically be gone.  The same goes for Obamacare.

Aside from the easy things that won't even happen, the only way to balance the budget is to look at military spending and so-called entitlement spending (Medicare, Medicaid and Social Security are the big ones).  There is no will to touch any of these things.

So what does this whole thing mean for the big picture?  It means the federal government is heading over a cliff at a high speed.  Maybe they can stop the car from accelerating.  Maybe they can even slow it down by one M.P.H.  But unless they slam on the brakes right now, this car is going off the cliff.  This means some kind of default.  It will mean painful defaults for people that will be counting on Medicare and Social Security.  It will mean high inflation.  It may mean an outright default on bonds.

All of your speculative investments should be counting on a weaker U.S. dollar for the long-term.  The politicians in DC are guaranteeing this outcome.  The Fed will go along until it faces hyperinflation.

No comments: