US Government Spending Must Fade to Black

Four key numbers - government spending, federal tax revenue, the budget deficit, and national debt - provide important and sobering insight into our current fiscal health. 2010's raw numbers are dramatic and mind boggling to the point of distraction, but relating them to our $14.3 trillion Gross Domestic Product (GDP) make them relevant, easier to comprehend, and relatable to one another. Those ratios are as follows: government spending/GDP is 28%; federal tax revenue/GDP is 16%; the budget deficit/GDP is 12%; and the national debt/GDP is 85%. Those ratios are horrendous, especially considering, for example, that the European Union requires members to have national debt and budget deficit ratios less than 40% and 3%, respectively, when they join the union, considerably lower than ours at the moment.

The current budget deficit is 12% of GDP (28% -16%); and will add to our national debt. That deficit means that our economy is currently borrowing 45 cents of every dollar it spends, and at that level it should push our national debt to 109% of GDP within a couple of years (85% + [12% x 2]). That would put us in the esteemed company of Greece and well on our way to the disastrous path of Japan.

Arithmetically, there are two major solutions: decrease spending, increase taxes, or do some of each. Politically, the solution is not so easy. The liberals (usually democrats) want to increase taxes, believing that corporations and the wealthy should pay more to meet our needs. The conservatives (usually republicans) want to decrease spending, pointing to government waste and inefficiency and a spending level similar to some of the European socialist governments. They also say that the top 10% of taxpayers already pay more than 70% of all federal taxes, so it is unlikely that further tax increases targeting only the wealthy will yield enough tax revenue to mitigate our fiscal problem.

Obviously, fiscal policymakers would like to tinker with all four numerators of those ratios, but they should also consider policies that might increase the denominator, GDP, which would also help solve the problem. History and the facts seem to favor the conservative strategy of cutting government spending and cutting taxes as effective catalysts for economic growth. Apparently, across-the-board tax cuts worked well for both democrat and republican administrations, under Calvin Coolidge in the 1920s, John Kennedy in the 1960s, Ronald Reagan in the 1980s, and Bill Clinton in the 1990s.

Reducing our future budget deficits will limit our compounding national debt, and should be our immediate objective. However, reducing our national debt should be a very close second objective. When our debt's interest rates, currently artificially low at 3%, double, triple or worse, the attendant increase in debt payments could cripple our financial system and economy. Rising interest rates will be an inevitable part of the global recovery and it may happen sooner than later. An expanding global demand for capital, global inflation, and a potential reduction in the US credit rating, are among the major factors that could easily cause a dramatic increase in those interest rates and our interest payments. And, as those debt interest payments become a greater proportion of the spending budget they will either crowd out important investment and consumption spending or increase the budget, thereby further expanding our national debt and our fiscal problems. It will come at the expense of our economic growth, productivity and standard of living.

Some expect the government to continue printing money as it and many other governments have done during similar crises in history. This time may be different, however, as the major holders of our debt, especially China, may have something to say about the US deliberately devaluing its debts and their investments. Although inflating out of the problem effectively grows the denominator, GDP, it does so artificially in inflated (not real) terms, and ravages US financial and fixed income assets, such as bank deposits, savings bonds, social security and pension funds. It may also ruin the US dollar. Is that better than a smaller government and reducing government spending?

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Lies, Damn Lies and Government Statistics

Too often, we think the data is straightforward math and simply draws on the underlying data sources. The reality is that it is anything but. The following example will hopefully illustrate the point.

Recently in Washington a rather large number of economists from academia and government met to resolve an issue with data gathering. It has become more serious in the US and has distorted how we value the American economy itself. Central to this issue is how imports into the US are accounted.

For example, when a part for $100 is imported from China and is used in an American automobile... something that happens much more often these days... the stats show that the finished car is American-made because it was assembled in the US. As a result, the US GDP is raised by that same $100 when in fact it should have been deflated by that figure instead. In the process, American workers who might in the past have made the part are no longer doing so and hence a job is lost.

The unemployment data finds the unemployed worker and accounts for him or her, but the car that is assembled does not, and when it is produced and sold as its value makes its way through the system, it appears productivity has risen, when in fact it has not. {False conclusion of data: Fewer workers needed to make a car}

As one of the economists attending that meeting said,

We don't have the data collection structure to capture what is happening in a real-time way, or what is being traded and how it is affecting workers. We have no idea how to measure the occupations being 'offshored' or what is being 'inshore.'

Or as the Assistant Commissioner for International Prices at the Bureau of Labor Statistics (that's a socialist sounding title if I've ever heard one) Mr William Alterman, said regarding the problem:

What we are measuring as productivity gains may in fact be nothing more than changes in trade instead.

This is not an insignificant problem. The US has become much more international in its trading scope. Back in 1975, imports into the US were only 5% of our total economic activity, but in recent years that has swelled to 12%, excluding imports of energy. Thus, many imports into the US are being valued as though they were manufactured here in the US, when indeed they were manufactured abroad and merely assembled here in the US.

In autos, computers, appliances and similar manufacturing industries this is a large and growing problem, but the same is happening in areas of service as well. For example, when an accounting firm out-sources some of its number-crunching to a group in India and then bills the client in the US, the work is done abroad but being recorded as having been done in the US, adding to US GDP when clearly that is not the case. The same scenario plays out in medicine when patient files are sent to India and billed back to the US in US dollars. GDP rises here in the US when it really should have been accounted for in India; productivity goes up; GDP goes up, when in reality neither has happened.

It is important to look at the big picture when analyzing data, especially when assumptions of years past have changed considerably. Just as we adjust for inflation, we need an adjustment for outsourcing our productivity.

Mitch Biggs spent 14 years flying F-15s for the USAF. Then he transitioned to a Fortune 200 company. As a Director, he left and is now semi-retired mentoring aspiring entrepreneurs. Follow me on Twitter @BizWingman Please visit my Blog. There is a video that takes you inside the F-15 cockpit on a mission. Pretty Cool! Article Source: http://EzineArticles.com/?expert=Mitch_Biggs http://www.pippoproducts.com/familyfinance/index.html

Gold and the New Standard

It's a beautiful thing to behold. It represents scarcity, value, glory and prestige but most of all it represents stability. As these months pass, more and more of my friends who thought I was nuts for suggesting we return to a commodity backed currency over our inflationary, prone to radical abuse monetary system are beginning to seriously consider what was once out of the question - gold.

We are at a precipice today; what was once considered the 'good as gold' greenback is now the least risky of all other currencies denominations, but least risky by no means implies secure and stable. The time has come when real alternatives have to be considered.

The benefit of having one is that it is fully transparent and as a consequence self-correcting since the marketplace controls its value, not a minority of 'masters of the universe' central bankers.

Under a gold standard, governments cannot increase the money supply without buying the equivalent value in gold.

A gold standard is not fool proof. There is the risk of deflation but that was a problem before the era of lightning speed electronic transactions and down to the decimal accounting and limited mining capabilities.

Whatever we do, we have to accept the fact that the Federal Reserve does not perform its function as was intended upon being signed into law under The Federal Reserve Act on December 23rd 1913. Here's a quote on what then President Woodrow Wilson wrote the day he signed it - keep in mind that many question its complete authenticity but having read the history so thoroughly, I believe it is authentic and is ironically verified in the congressional record as authentic.

"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." -Woodrow Wilson 1913

As ominous as that sounds, consider what President Thomas Jefferson warned about central banking back in 1791. The authenticity of this quote is complete:

"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country" Thomas Jefferson, 1791

All the nations of the world who have sold out their liberty for the false sense of security provided by fiat based currencies in the exclusive control of central bankers need to consider alternatives; gold is only one, if there are others, I'd love to hear them and discuss it openly.

Peter Manousakos Publisher & Editorial Director Horus Onoma Group inc. http://www.horusonoma.com Article Source: http://EzineArticles.com/?expert=Peter_Manousakos http://www.pippoproducts.com/products2.html