Reality Break

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Reality Break

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When any mainstream media outlet breaks the story that the federal government is on a collision course with a catastrophic federal debt crisis, you know their editors are seriously concerned.

[The current federal debt is about 63% of GPD, a number that has already destroyed smaller economies that were – or will be – partly bailed out, and is heading to 95%, a number that, in classic economic understatement, is a “tipping point”. As I have pointed out earlier, the US federal government has temporarily been propped up by Chinese lending, but can no more be bailed out than, say, Godzilla can be rolled into a local clinic for an emergency appendectomy.]

See today’s San Francisco Chronicle piece. “National Debt on Course for Crisis”

“Lost amid last month's passage of the new health care law, the Congressional Budget Office issued a report showing that within this decade, President Obama's own budget sends the U.S. government to a potential tipping point where the debt reaches 90 percent of gross domestic product.

“Economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University have recently shown that a 90 percent debt-to-GDP ratio usually touches off a crisis.

“This year, the debt will reach 63 percent of GDP, a ratio that has ignited crises in smaller wealthy nations. Fiscal crises gripped Canada, Denmark, Sweden, Finland and Ireland when their debts were below where the United States is shortly headed.”

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/04/05/MNI21COVR1.DTL#ixzz0kFk3691a

Adjust for political bias (The Chronicle has not uttered a harsh word about the congressional democrats or Mr. Obama over last two years). Translation: We have to actually do something about this, the neglect of the congress and POTUS notwithstanding.

When neither political party seems to know what to do with the latest, “everybody knew we were heading to the edge of the cliff’, fiscal warning, floated as fresh news, we should all be scared.

Here’s the problem in a nutshell: The democrats have become the party of impossible promises. And the republicans are being maneuvered into becoming the party of dashed hopes.

To the Toxicrats and the Procrasticans: Your time is up.

This is what football fans recognize as a turnover moment. The democrats have dropped the ball somewhere in center field. The republicans have no choice but to pick it up and run with it. The heavy lifting required cannot be underestimated. The urgently needed changes in federal spending and borrowing practices required will collide with existing law (most federal spending is not “discretionary”, meaning that making the necessary bankruptcy-avoidance cuts will require the congress and executive to radically change the legal status of the heretofore sacred programs). There is an equally wrenching collision in the making, with entrenched interests, a mix of democratic and republican core constituencies.

For example: Private sector unions and corporate bureaucrats were complicit in destroying two American car manufacturers, then in corrupting the bailout packages. Worse, public sector unions have infested federal employment, operating as a huge obstacle to achieving leaner, smaller and more efficient operations. Crony capitalism, the selective use of subsidies, regulatory punishment and favors, profoundly cripples the free market job creation machine, the “golden goose” on which liberal programs have depended all these years.

In an earlier piece, I advanced the notion of “ruthless optimism” based on an assessment (a recap of my argument and additional details will follow in a later post) that the latent wealth-creation capacity of the USA provides us with a one-off supply-side path out of the fiscal crater, provided we act early enough. [Climbing out of a mere crater is easier than crawling out of an abyss.]

I didn’t use the word “ruthless” lightly: The productive private sector of the US economy is so seriously hobbled by regulation and repressive taxation by every level of government that its mere removal will spark exponential growth if the resulting development paths are kept secure and level for at least ten years. Why at least ten years? Investors are like the Peanuts character whose repeated attempts to kick a football was frustrated by the trickery of the character Lucy; they are not willing to engage in long term investments if they believe that their rewards will be sucked out prematurely. Hint: the pathological predilection of the investment class to seek out short term bubbles is a result of the tendency by the political class to punish long term investors by starving the golden geese (forgive the overused metaphor here). Unleashing the US productive sector will work only if we don’t wait too long. Putting the suite of measures in place to accomplish that, including facing down some union and other political blowback, will require more than ordinary optimism and grit.

Stay tuned...

JBG

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“The Stranded Ones” is a thriller set in a not too distant world where the patent laws have collapsed and we face a real “alien immigration’ threat.

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