Debt to GDP...

[John Jabson]

I know some of you don't like political discussions but they directly apply to money, so it's relevant.

I don't care about whether or not you believe in "stimulation" economics or whatever. I don't care if you want to push Keynesian crap. Don't want to hear it and I don't care to discuss any of that.

I want to know what you, personally, believe about the debt ratio and at what point it is impossible to return to a stable economy. Right now we're running 1 trillion deficit per year, even after the recent taxation (of everyone, by the way).

How much more can our economy handle? We cannot run deficits forever. It has to stop. So how far is the point of no return?

[Jon Holdman]

The trouble is "we" collectively don't want to get out of debt. The federal government debt is different than household debt in that there's really nobody to clamp down and say "You're at your credit limit, stop spending!" If you or I maxed out ever credit card and just went and got another one, it wouldn't take long before every bank would say "no". Not so with the US government. The money isn't just created out of thin air. Its borrowed. The government sells treasure bonds and people keep buying those. So far, those buyer (lenders) haven't stopped.

But like you and I, the debt is created simply by spending more than you take in. Federal spending is about 50% higher than revenue (from memory, I researched this a while back for another post, but I'm too lazy this morning to go dig up the exact numbers again.) So, either EVERY federal program has to cut by one third, or income (i.e., TAXES) have to be hiked by 50%.

If taxes aren't increased, the military - cut by a third (know anyone in the military or who works for a company that supports the military? have military tenants?) Social security payments - cut by a third (know anyone getting these?) Housing subsidies - cut by a third (have any section 8 tenants?) Medicare - cut by a third (know anyone on medicare?) Medicade. Roads. Airports. ETC. ETC. ETC. Have your favorite programs that absolutely can't be cut? OK, then something else gets cut in half.

Yeah, I hear all the "eliminate waste and inefficiency". No doubt there are inefficiencies. But I have to think (no data to support this) the vast majority of the spending actually goes out to door to buy guns and ammo, asphalt and concrete, and to pay doctors and hospitals.

OK, lets raise taxes. Look at the fight that just happened. That was to raise taxes on a small group of people from 35% to 39.6%. That's a 13% increase on income over $400K or $450K. Not an increase on all the income of people making over those thresholds. Taxes, even for those high earners, are unchanged on income below those amounts. The increase applies only to the marginal income over those thresholds. That's a long ways from the 50% across the board increase needed to balance the budget.

What about deductions and other tax breaks. None of us have deductible mortgage interest, right? That would be no big deal. Notice that tax rates on dividend income didn't change. That's helpful if you're a fix and flipper who takes some of the income as dividends from their corporate entity. But nobody does that, do they? You can thank the electric companies for that tax break, actually. They want to be able to raise money by selling their dividen producing stocks, so they fought hard to keep the low rate on dividends.

Around here, wind power is a big deal. These companies thought their tax break was going away, and work ground to a halt. Lots of folks lost jobs with these companies, both on the manufacturing side and the installation and wind power production side. But that credit was renewed for another year. And the rules where changed so you only have to start a project, not complete it as was the case under the old rules. 2013 is going to be a boom year for wind.

And that's really the problem with every penny. What looks to you like a wasteful spend or a useless deduction has SOMEBODY attached to it. Everyone here benefits in some way. My dividend tax rate example is one way. Mortgage interest deductions both for properties we own and for the buyers of properties we sell. More subtly are 30 year fixed rate loans. Those don't exist in Europe, where the free market dictates terms for OO loans that are much more like commercial loans here. But government intervention in the form of Fannie and Freddie give us 30 year fixed loans. Try to take away any of these things and people will scream bloody murder.

I don't think there is imminent danger of an economic collapse in the US. I do think there is risk of prolonged stagnation, like in Japan. The scary part is that I don't see a way forward. We hire our leaders to make the hard decisions and come up with some workable plan. Instead, they have become beholden to their specific supporting interests and have become just like everyone else. They're more interested in protecting their specific supporters than coming to a compromise that moves the country as a whole forward.