Thursday, September 25, 2008

Deficits and Debt

You've seen me rail against debt lately. The problem is that during prosperous times (the last 6 or 7 years), the government has been running massive deficits (spending more than it takes in). This is due to three major items: the Bush tax cuts (yea!), the enlargement of Medicare(BOO!), and Iraq (DOUBLE BOO!). Where did the money come from then? We borrowed it from China (and other countries) by issuing debt (i.e., Treasuries). A lot of it. Almost $5 trillion, effectively doubling the debt and increasing the debt as a % of GDP (domestic productivity) from just below 60% to almost 70%.

Now deficits are not always bad. In bad times, deficit spending can help jump start the economy (see The New Deal) by injecting cash into the economy. However, we were deficit spending in good times. Unprecedented deficit spending.

Which leads us to today. We can't deficit spend our way out of this mess without long term negative ramifications to the dollar, inflation, and GDP. Pardon my French, but it's truly f*&$ed up. We're already in a serious hole and now we're going to dig it deeper.

Our options will be to raise taxes to pay for the debt (which will slow down growth) or just throw caution to the wind and let the dogs of hyperinflation loose (just print more money) in order to make the debt cheaper to pay off (which completely screws us over - just think Zimbabwe today or Germany in the 20s).

I honestly have no idea how we are going to get out of this mess. We need to see massive GDP growth (highly unlikely anytime soon) or cut both discretionary (things like defense and farm aid) and non-discretionary spending (things like Social Security and Medicare) off at the knees (a sure political loser).

Here's hoping for people much higher than my pay grade to solve this. Now I need a drink.

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