Sunday, January 31, 2010

A Nation in Debt

Obama did an about-turn in spending after the Massachusetts voters sent a Republican to fill Ted Kennedy's seat. Exit polls show unease about the way Obama was spending money that would increase the role of the government in the economy and at the same time vastly increase the nation's debt. It was an ambiguous message since voters were also worried about unemployment that remains stubbornly high.

So Obama is now freezing his spending in some areas while maintaining the growth in others:

..."Exempted from the cuts, however, are national security, veterans programs, Medicare, Medicaid and Social Security — the most expensive and fastest-growing areas of the budget. By filling in the details behind the freeze, the administration hopes to show critics that it used a scalpel rather than an ax to keep spending for the targeted domestic agencies to $447 billion annually through 2013, saving $10 billion in the coming fiscal year"...

Source: NY Times

Anyone following the fiscal conditions of the US would or should be shaking his/her head at this "scalpel" exercise which is purely window dressing.

Why? Because the larger picture shows fine tuning the spending will not affect meaningfully the overall indebtedness of the nation.

To seriously de-leverage the nation would have to mean substantial cuts (by an axe, not scalpel) and higher taxes. Increasing taxes in the minds of US politicians has always been considered an act of political suicide.

So much so even when the nation went to war, the politicians refused to ask the nation to make an economic sacrifice. It is a curious mindset since the same leaders are asking their young people, the nation's future, to make the ultimate sacrifice by going to war to die for their country.

The economic consequence of war without raising taxes necessarily results in high national debt. It happened during the Vietnam war because LBJ wanted guns and his Great Society Programs fully funded -- by debt. This continued under Richard Nixon.

The 8 years of supposedly fiscally conservative Republican government under George Bush went over the fiscal cliff influenced by crackpot ideologue economists such as Arthur Laffer, among others. Bush believed in fighting wars (Iraq and Afghanistan) and cutting taxes at the same time. In fact most tax benefits accrued only to the very rich, his financial base of his political supporters.

By the time this Obama went into office, the indebtedness of USA was already off the chart:

But the government was not the only guilty party. Why? Take a look at household debt and national savings. The chart below marks clearly how the mentality of "instant gratification" of the American consumers has been a factor in the nation's high indebtedness.

Put simply, the consumers apparently believe in having a great life style NOW even if that meant going into debt. Put it another way, the American people have been living a great life even though they could not afford it -- without hocking their children's future to the bankers.

This larger picture paints a disturbing narrative.

Politicians are quick in sending citizens to battlefields to die without the honesty to ask their fellow citizens to pay for the wars. Even the "Yes We can" Obama bragged about his several tax cuts in his State of Union speech while Iraq and Afghanistan continue to drain the country's coffers. Perhaps we should change his slogan to "No, You Can't".

Citizens are so used to living the good life as the "pursuit of happiness" was so fixated in their minds as a God given right enshrined in the US Declaration of Independence that "saving for the raining days" as an idea has become Un-American!

But do the American people really believe that or perhaps they had gotten so lied to by their leaders that you can have both guns and butters -- followed by inevitable inflation cutting down their debt in real terms -- that they decided to go along for the ride?

During WWII the people in America, indeed everywhere, understood instinctively the need to tighten belt to finance that war. Why didn't their leaders after WWII decide to behave as if voters were self-centered, stupid and selfish who wouldn't give up some comfort to fight for a national cause?

Is it really the profligate US consumer the root of the fiscal problem or cowardly politicians who couldn't inspire the people to make the fiscal sacrifice. It is rather a small price to pay for "national security" if indeed the foreign wars were essential to that security.

Many would argue none of the wars after 1945 were essential. David Halberstam's heart wrenching account of the war in Korea "The Coldest Winter" showed how the ego and the madness of MacArthur's desire to take war to China that created the larger Korean conflict.

The Vietnam War was essential to national security? Even Robert (Mac the Knife) McNamara admitted it was unnecessary. Again Halberstam's "Best and the Brightest" is a classic in showing the hubris of the ruling elite. That war was unpopular. Neither LBJ nor Nixon had the spine to ask for a tax increase.

The Iraq invasion under George Bush because Saddam Hussein "possessed" weapons of mass destruction that would destroy Manhattan turned out to be just as ridiculous as the late Secretary of State Dean Rusk telling the Senate back then: "We are in Vietnam, Senators, because we don't want to fight one day in Los Angeles a billion Red Chinese armed with nuclear weapons".

OK, even if that might have been a possibility, and not a figment of over ripe imagination, you should have raised taxes to finance that war.

How ironic the billion Red Chinese are now the single largest creditor to the profligate American ruling elite, mostly educated at those universities elite families around the world want to send their own children to school? You know where they are. The three most prominent ones are located in Cambridge, Mass., New Haven and New Jersey.

The 20 Century was American.

Unless the American ruling elite stops its propensity to wage wars without asking for necessary but relatively small financial sacrifice from the people whose children must bear the life-n-death burden of actually fighting the country's supposed mortal enemies, then the 21st century will surely by default belong to someone else who has a stronger balance sheet.

That would be a result more of the US behaving fiscally irresponsibly than the other country being smarter, more creative, freer than the US.

The charts here contain a serious story of "national security".