Dumb and Dumber: Yes im talking about Congress and the Executive branch.

Remember the movie Dumb & Dumber? When Lloyd and Harry "found" a suitcase with a few million dollars and they spent it on anything and everything and then replaced each item they bought with a piece of paper... an IOU?

Now, Harry and Lloyd have no money, they, like our government, are broke losers (I was referring to the movie actors as losers but this will play here as well). How do you suppose they pay it back? They would borrow it? But from whom? What if they borrowed from the people that now hold the IOU's, you know, the people whom they "borrowed from" initially? Lets keep this scenario for an exercise later, bare with me until then.  

With the stroke of a pen, President Obama extended the payroll tax cut this past Wednesday, putting between $20-$2000 dollars back into the pockets of working Americans each week. While I firmly believe cutting taxes is always a good measure, I have to question this particular measure, as how to pay for it; just doesn’t make sense.

It was the same logic of George Bush Jr who cut taxes, slashing revenue and dramatically expanded government. Sure, it’s more money back in peoples pocket but it’s going to be much more expensive down the road in the form of interest payments on the accumulation of budget deficits that end up making the public debt liability in the national debt.

When you cut taxes, it has to come from somewhere. So, anytime you cut taxes and do not make cuts in existing programs or services to pay for them its not really a tax cut, it’s a loan at interest with dollars that are becoming worthless by the day. To call it a tax cut, while already in a 1.3 Trillion projected hole without cutting a single thing from even the deficit, further expanding the budget deficit is counterintuitive if not just flat out a lie. Unlike the Bush and the Republican favored (and flawed theory) of supply side economics, coupled with increase spending, the means to pay for this tax cut comes right out of the coffers of… Social Security.

I find that interesting because when Obama was running for President he was singing a different tune and  from then senator Obama's website:

"Obama believes that the first place to look for ways to strengthen Social Security is the payroll tax system. Currently, the Social Security payroll tax applies to only the first $97,500 a worker makes. Obama supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century" 

The reason we had a surplus in Social Security was a payroll tax raise (the opposite of what’s going on here with Obama’s tax cut) by Ronald Regan. I’m not a big fan of “the Gipper” like so many are, that call themselves a fiscal conservative (because he wasn’t one). However, he knew baby boomers where going to retire and need to collect from a diminished population numeric wise; thus a surplus was needed. He then, proceeded to raid it in 1987 as did George Bush Sr following him and lest not forget Bill Clinton. Hell, this goes back to LBJ in the sixties if you want to see who is culpable for raiding social security.

According to the Social Security Administration, as of 2010, Social Security should have had a 2.6 Trillion dollar surplus, but I find that odd? How can the federal government put into its budget each year a bill for Social Security when the FICA tax is already being removed from your paycheck to pay for Social Security? Is this not the essence of double taxation? So, where is this surplus? It’s been raided and spent and replaced with IOU’s (bonds) with things like wars in Afghanistan/Iraq and other toys that politicians want - but don’t want to pay for… like this tax cut. In other words, it's a gigantic slush fund used by politicians to keep their feet from the fire.  

(Image by MIT OpenCourseWare.)

In 2005 George W even had the chutzpah to admit it... while raiding it !!!  

“There is no trust fund, just IOUs that I saw firsthand that future generations will pay—will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs.” 

It’s rather humorous to me that this is the only measure where you will find bi-partisan support in such a partisan political scheme that is Washington these days. Its also why I write my blog, to show this type of fraudulent partisan logic, as if there was really a difference on the important issues. Why the bi-partisan support? Because its politically expedient for both parties.

The Democrats can say they are helping out Joe-six pack with more money in his pocket, while the Republicans can hold up their oath to Grover Norquist. The best part of this tax cut is it comes out of an existing program that so many people & elected leaders from both “sides” rail on for not being solvent. We have heard about the entitlement tsunami that is coming… I wonder why?

Now, both parties can appease to their constituents so that they can be reelected; totally disregarding what the cost/benefit factor is. The "rich" (anyone over 110K), who won’t collect social security anyway, can get some of their money back. Joe-six pack can break even now, to make up for the rising gas prices and other commodities and maybe even save spend a few dollars (literally a few) at Wal-Mart buying Chinese trinkets or Snuggies (never mind, they are via China as well). It’s a win-win. I guess.

But don’t tell that to Tom Harkin (D-Iowa).

“I never thought I would have to see the day when a Democratic president of the United States and a Democratic vice president would agree to put Social Security in this kind of jeopardy. Never did I ever imagine a Democratic president would be the beginning of the unraveling of Social Security.”

Now think back to the beginning with the movie exercise. We, are the person that the suitcase belongs to. Harry and Lloyd are your local congressman and President and Senator... not only do they borrow the money, but they do so at interest or whats called the coupon, through bonds (IOU's). How can we have an outlay (and subsequent budget deficit and then subsequent accumulating national debt) for social security in the budget each year with FICA coming out of our checks to pay for it?

Because of this budget deficit you will also incur a bill that will be an interest payment on the principal of the national debt, which again, is an accumulation of every budget deficit in our history. This is simply because you are spending more then you're collecting in revenue. So, unlike Harry and Lloyd, we are not just going to borrow from the suitcase owner to payback the IOU's we replaced the initial money with. No, the government takes it one step further and promises to pay back those IOU's with future obligations, ie taxes and the circular logic continues. This will go on forever if drastic measures are not taken to stop this, but without strict terms limits, I cant see that happening. After-all, intergovernmental debt doesn't have to be paid back, right? In the words of Lloyd Christmas:

Its as good as money sir, those are IOU's... go ahead and count it, every cent is accounted for. 

Blue, white... and red? Is the US on the same path of Greece?

With Greece out on the corner whoring for another bailout and Standard and Poor yesterday lowering Greece’s credit rating to CCC (the lowest in the world) joining Moodys, who dropped Greece two weeks ago… it’s a great time to reflect. Or fittingly enough hold up a mirror to ourselves. Could the mighty US ever be in the same mess the Greeks find themselves in now? They are socialists you say and we’re capitalists, surly that couldn’t happen. Or Could it?

The Greek GDP is 329 Billion (2009). Obviously its not Rwanda. But let’s put that into perspective. The 2009 revenue of Wal-Mart was over 400 Billion. Wal-Marts annual revenue surpassed 174 nations that year. And being Wal Mart is just one company in the US, it gives you a feel for how truly large and powerful we are. So much so, that the US GDP is nearly three times its nearest competitor standing at 14.2 Trillion.

What separates the US from Greece? Sure we collectively output 45X in a year then they do collectively, but our external debt to GDP ratio is 100% on the nose as of tonight’s check. What we have that Greece don’t have is simple. We have a printing press. Our currency is traded throughout the world as the default currency. All we have to do is print our recovery (at the expense of massive inflation of course amongst other undesirables). The Greeks have to rely on a bailout from the European Union or default and declare bankruptcy. In many ways bankruptcy isn’t a bad thing for Greece. Because the sooner they can weed out mal-investment, waste and become more efficient the sooner they can get started in rebuilding. We on the other hand are so disillusioned our reckoning is going to be a lot slower and much much more painful.

So Greece having to default on its debt is one thing, for us to do it… that surly would send a ripple effect throughout the world. And that’s where the conversation truly ends. That’s where you get into raising the debt ceiling. Because after all, its not just the Chinese holding debt, its average Americans too. We can stick it to those red chinamen… but we refuse to and won’t default on Grandma Sherley. I mean, Standard & Poor's may be forced to take away our AAA credit rating, or what basically what amounts to as being a credit card with no limit!

At the current rate, in a few months we will start to default on our debt. The disease of debt and living beyond our means at a national level are over. The diagnosis isn’t going to change. The treatment is the only choice we have. Take the medicine now by choice, or be forced to do it later. And we have two responsible options to do this now and one irresponsible one that will only make things worse.

We can default on our debts and admit to the world and to ourselves that we are living well beyond our means or raise taxes and pay our way. If our 2011 budget deficit is 1.6 Trillion and we have roughly 160 million working Americans, all we will need is 10g per working American to cover this years shortcoming (hows that for stimulating the economy, suck 1.6 trillion out of citizens hands and into the coffers of out of control and out of touch government).

Or we can do what what politicians always are in favor of doing, and that is to let the next guy worry about it and continue to kick the can down the road, raise the debt ceiling, creating an oncoming tsunami at what point could be a country in total chaos. Lets see what kind of chutzpah these elected “leaders” have the rest of this summer. Based on past results, i dont think the shoe business should need a bailout.