Economic Laws are not Optional

Posted By Elgin Hushbeck

As Republicans struggled last week to make even modest cuts and Obama proposes a $3.73 trillion Federal budget with a record high deficit of $1.65 trillion, one point often gets ignored.   Many politicians delude themselves into thinking that the only pain that they really need to concern themselves with is the pain that will come from cutting.  What they ignore is that economics laws are not merely abstract concepts nor are they optional.  Economic actions have real economic consequences and simply ignoring them does not make them go away.

Currently the national debt as a percentage of GDP is rapidly approaching Greek levels, while the deficit, the amount of new debt we add each year, is ten times larger than just three years ago.  Getting this budget under control will likely cause considerable pain, particularly for those federal employees whose jobs are cut and for those who depend on programs that are reduced or eliminated.  But the failure to get the budget under control not only might be worse; it will be worse, considerably worse.

Politicians, the treasury and the Federal Reserve can play games that might mask the problems for a period of time, but they cannot do it forever, and in the end these games have their own negative consequences. An individual can mask financial problems for a period of time by borrowing money, but eventually the bills come due and when they do the situation only gets worse.  The longer they mask the real problem, the worse things will be when time, and credit, runs out. Eventually they get to the point that they are not even masking the problems, they are simply borrowing more money to keep previous commitments, till finally they cannot even do that and it all comes crashing down.

Over the last three years the government has borrowed trillions, increased the annual deficit 10 fold, and doubled the money supply by simply printing vast amounts of money, all in an effort to mask the financial problems of the country.   The best they can say for it is that the stock market is rising, but serious questions exist as to whether the rise is real, or if it is being artificially inflated by the Fed’s QE2 policy, i.e., is it just more masking.

All these actions will have economic consequences, and potentially drastic ones. At the very least, the money must be paid back, and that will burden future generations, because of our folly.  But severe consequences may be much closer.  It has been called, “a slow train wreck coming and we all know it’s going to happen.

If Congress and the President cannot get the debt under control, market forces will take hold and the debt will be effectively reduced by inflation, and potentially hyper-inflation like this country has never seen.  Inflation is already growing faster than expected,  and fears of high inflation, resulting from all these government actions, continues to mount. If we go through a period of even high-inflation, much less hyper-inflation, the last three year could come to look like good times.  And yet, looking at a record $1.65 trillion budget deficit for this year alone, Republicans are having trouble making significant cuts, and Obama wants to cut even less.

If they do not act soon enough, then market forces will “solve” this for them as they lose control of the economy.  Currently the U.S. dollar is the reserve currency for the world, and that has allowed us some additional flexibility in dealing with these problems, but because of our debt there are growing calls from other nations to change this.

How long do we have?  That is the scary part–no one knows.  It could be a few years like some are predicting, or it could be already too late.  At the rate politicians are going, it currently looks far more likely that their efforts will be too little too late.  In short the politicans are playing a very dangerous game of economic chicken, and as usual the American people may be the big losers.

Feb 16th, 2011

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