News out yesterday (12th December '12) that the US ran up a budget deficit of $292 billion in the first two months of fiscal 2013---up from $236 billion from a year ago. So, get ready for another $1 Trillion budget deficit next year. Tax revenues are rising but spending is rising faster. From AP,
With the economy and hiring improving a bit, the government is receiving more tax receipts. Overall tax revenue rose 10 percent in the first two months of the budget year to $346 billion. But spending has risen faster, up $87 billion or 16 percent.Obama wants Tax AND Spending Increases
Bad news from the fiscal cliff discussions is that Obama is not interested at all in spending cuts. In fact, he wants tax AND spending increases going forward. Obama is a "tax and spend" Democrat on steroids. I wonder if some in his party are getting nervous? I think they should be.
Democrats Loving the Bush Tax Cuts
Another stunning "flip-flop" from the Obama camp is how much they love the Bush tax cuts, so much that they want to extend them for 98% of tax payers. Obama is now saying that it's the Republicans who want to raise their taxes!! What an asshole! Obama, in his typical intellectual incoherence, agrees that if income taxes go up that it would hurt the economy. So, increasing taxes on the top 2% won't hurt the economy? You can't have it both ways. The truth is that increased taxes are always a "brake" on the economy. If the economy is very strong, the drag may be welcome in the same way the Fed raises interest rates in a strong economy: to dampen the 'enthusiasm.' But increasing taxes in a weak economy is risky---even when the tax increase in on the top 2%.
The Federal Reserve Now Monetizing $1 Trillion per Year
And what's worse news for the long term health of the US economy is that the Federal Reserve announced that it will be buying a total of $85 billion per month of bonds. Notice that, at this rate, the Federal Reserve will be monetizing $1 Trillion or buying bonds nearly equal to the entire year's deficit. So, we've arrived at the end of the world as we know it when one arm of the Federal government, prints money out of thin air to buy $1 Trillion of debt--almost equal to the annual amount of out-of-control Federal spending. Ladies and Gentlement, this is called "debt monetization." This is the stuff of the great hyperinflationary episodes in world history.
The Fed is now the "great facilitator" or "co-dependent" of a dysfunctional Congress supporting extreme levels of government deficit spending. In doing so, it prevents any pressure to Congress to reform spending and especially entitlement spending. It's a $1 Trillion stimulus package every year (not really as only sudden increases or decreases in gov't spending will impact GDP).
Since, in the US, this newly created money doesn't go into circulation until it's loaned out, there has been no big inflation event yet. It doesn't appear that it's going to happen anytime soon. But this is a dangerous game the Fed Reserve is playing---a game that's never been played before in this country but a game that's ended in disaster historically.
Keynesian Boobs Like Krugman Want Even More Spending
People like Paul Krugman say that we must spend even more! To him, I ask: "on what exactly?" Traditionally, the answer is often another war! That is not a good answer.
We saw what a joke the so-called 2009 "stimulus" was! A paltry 5% of the money went to 'infrastructure' projects and the money is still not spent. Deficit spending and "stimulus" didn't work in the 1930s, it hasn't worked since 2009, and it hasn't worked in modern day Japan for the past 20 years. Japan is on stimulus #20 and government debt of over 229% of it's GDP and something like 20 times their annual tax revenues. This means that this debt can never be paid back!
Imagine if we took Krugman's advice and pissed-away even more money. Since there is NEVER any cuts in government spending, can you imagine our nation running routine government deficits of $1.5 trillion or $2 Trillion? Can you imagine how much worse---even calamitous---such spending would increase during a recession? Or worse, if that spending had to be suddenly reduced due to "unfavorable market conditions?"
Add Krugman, Bernanke and Obama to the list of "intelligent" idiots---the worst kind of idiot.
There Can Never Be Any Fiscal or Monetary Discipline Again
As debt piles up for the Federal Government, it will be difficult to raise interest rates when inflation rises further (inflation is already 2% with 0% interest rates--rates should be 2 or 2.5% now!). Why? Because the increase of interest payments on outstanding debt will increasingly blow a hole in the budget. We're already spending some $360 billion in interest payments with interest rates at zero percent!
When you have $16 Trillion, soon to be $20 Trillion, in outstanding debt, a 1% rise in interest rates equates to $200 billion increase in interest payments. If inflation pops up to 3%, the Fed can no longer raise interest rates to 3 or 3 1/2% (which would raise longer term debt rates to 4 or 5%). The increase of rates by 3% equates to $600 billion INCREASE in interest payments portion of the budget (or about the same as current US defense budget). That's on top of $360 billion in interest today.
It will be difficult for the Federal Reserve to fight inflation in the future--especially if it's "stagflation" where inflation is rising in a slack economy. Not only will interest payments crowd out other government spending, but there will be pressure to increase entitlement spending for the next 40 years. The budget will never again be balanced.
Can you see a vicious circle here? Budgets can never be balanced, inflation can't be fought. I call it a treadmill to hell.