Is a debt crisis coming to your neighborhood?

Posted by on Saturday, May 1, 2010 · 9 Comments 

Debt Rises Times Five
Debt Rises Times Five

An excellent article here on a possible US debt crisis coming to your neighborhood in the future.  The chart above is a projection of interest payments on the national debt over the next decade.  They’re projected to grow to such an extent that they’ll constitute a large percentage of all annual spending.   This chart was put together by the congressional budget office and I don’t have access to their interest rate assumptions, but it should be noted that current interest rates are at historic lows and any return to a more normal level would most certainly drive interest payments much higher.  Of course if the US looked like it might be at the risk of default, creditors would treat us like a subprime borrower and interest rates would be even higher.  The CBO is notoriously rosy in projections like this and as bad as the picture looks, it will likely be even worst.

This is the main reason why the administration has convened a bi-partisan deficit reduction commission and even before that commission has brought forward its recommendation, Obama’s economic advisor, Paul Volker, has been floating a trial balloon about the imposition of a value added tax or national sales tax.

As a CPA, I’ve always thought that a consumption based  tax would be far more efficient to administer even though it would eliminate much of the work for legal and accounting professions as well as that of the IRS.  This tax would effectively tax the underground economy whose economic activity doesn’t  show up in the normal channels and hence raise raise more money than the existing income tax system.

My problem is having both a broad based consumption tax and an income tax in place at the same time as that just simply squeezes the taxpayer absent a commitment from the government to actually reign in spending.  Unless the proceeds from the VAT are specifically ear marked for debt reduction, all its implementation will do is allow the government to continue spending. 

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  • http://diasporablack.blogspot.com/ Black Diaspora

    I like what you done to the place! A VAT? Okay, if it replaces income taxes, which I’m sure it won’t. A national sales tax might do the trick, if it brings in sufficient revenue.

    Here’s the problem with taxes: They’re everywhere, at the local, state, and federal levels. You can’t buy anything without first paying the sponsor–one or more of this nation’s government entities.

    And we know that it’s not the role of government to solve problems, but to acerbate them, giving the impression that real reform has taken place.

    The problem: The people aren’t the government, as the government would have us believe. Government exists, not for the people, but for the government. Hence, the taxes that we pay to it daily.

    We won’t see a concerted, bi-partisan, cooperative effort to reduce our national debt, or to pay off the interest on our national loans, because the two parties will never see that it is in their best interest to do so. The adversary relationship that each party has developed over the years, will make sure of that.

    Yes, I’m that cynical.

    The American people need to come together and create, not another party, but a PAC, where they are the special interest. The two parties serve every other interest but the people, and they do it, because those special interest throw money their way.

    If we really wish to make an impact on the government, the people need to operate outside of the party system, and join the special interest fray. If the parties can’t put aside partisan bickering and represent our interests, then we will give our money to those that will.

    We still have the power of the ballot box whether we use it judiciously or not.

    • http://withintheblackcommunity.blogspot.com Constructive Feedback

      My dear friend Black Diaspora – How are you doing? :-)

      Fear not.
      The hard heads and heavy hearts that are presently entrenched in their positions are going to be forced to compromise when the fiscal underpinnings of the United States become unglued. Look no further than Europe at present. The P.I.G.S. are wreaking havoc upon the finances over there. (PIGS = Portugal, Italy, Greece, Spain).

      The debt as a percentage of GDP in these nations that are troubled is also the case in the UK. Only the power of the UK economy has allowed them to escape the same fate.

      Today in the USA the local and state governments are shedding hundreds of millions of deficits in their budgets. Some people are calling for massive federal intervention to cover these debts. This merely allows Americans to retain a STANDARD OF LIVING that our economic productivity is no longer able to afford us. The debt will grow in the attempt to retain this standard. The result is that the day of reckoning is drawn nearer.

      Once the investors in US Treasuries see that our entire system is unsustainable they will be disinclined to put their money at risk into our system. Higher interests rates will have to be paid to incentivise them to purchase our debt.

      If it is true that nature responds to imbalances in an effort to reset herself back to a norm – so is the case with the global economic system. The USA risks a loss in its long term economic power because of the short-sightedness of its leadership and the consumption habits of its people (oh yeah – and the compensation demands of people beyond what their value contributes to the bottom line. This is the case with the poor maker of widgets and the Wall Street middle man coin changer)

      • http://diasporablack.blogspot.com/ Black Diaspora

        @CF: “The hard heads and heavy hearts that are presently entrenched in their positions are going to be forced to compromise when the fiscal underpinnings of the United States become unglued. ”

        Compromise doesn’t necessarily lead to reform. We know what the problems are (the shadow banking system, the lack of transparency, and too big to fail). The real question: Does our government representatives (who have pocketed vast sums of money from financial entities) have the collective backbone, and will to do more than a cosmetic touchup of the system? Nothing short of a complete overhaul will do.

        “The debt as a percentage of GDP in these nations that are troubled….”

        That’s troubling, but we have our own ratio problems: This nation’s six largest banks have assets that are 63% of our nation’s GNP. Just a few years ago it hovered around 17%. What happened in the interim to allow this to happen? I think we both know: new laws, and a repeal of old laws, and an appalling lack of oversight from Federal regulators.

        “This merely allows Americans to retain a STANDARD OF LIVING that our economic productivity is no longer able to afford us.”

        We once had a vigorous manufacturing sector, and, I know, you’d argue that the Unions stepped in and destroyed that. What manufactures wanted were obscene profits, while keeping workers’ slices as small as possible . I know this wasn’t always the case. Yet, this model mostly prevailed, and predominated. When unions insisted, rightly, on a large piece of the pie, manufacturers took the pie to countries whose workers would settle for smaller slices.

        “The USA risks a loss in its long term economic power because of the short-sightedness of its leadership and the consumption habits of its people….”

        Excessive consumption is an integral part of the system. What’s the capitalistic mantra, “Greed is Good.” Our leaders aren’t “short-sighted,” they’re bought off to the tune of millions of dollars each year by those who want benefits, but not liabilities. Our leadership know what is best for America, but they’re more interested in what’s best for them. This doesn’t make them “short-sighted,” it makes them greedy.

        I’m happy to see that you lumped Wall Street into the mix of those who have “compensation demands of people beyond what their value contributes to the bottom line.” In some cases, those who’re compensated most, contribute nothing to the economic “bottom line.” They’re leeches, sucking the life-supporting blood out of the economy, while gorging themselves.

  • Greg L

    Thanks BD. WordPress came out with a nice three column theme that can be customized. I really liked the Pressrow theme I was using earlier, but this one is so much better, so I figured I’d upgrade.

    You raise several very salient points here BD. To be perfectly honest, I’ve become jaded on the entire political system as I think it’s owed lock, stock and barrel by the monied interests in this country and our tax dollars are simply something they’re just appropriating for their purpose and the people be damned. So, VAT or not, nothing is going to work unless there is substantive change in not only how the government is run by in how we the people operate.

    The government is really a reflection of us. The people are more attentive to the trite and banal and that’s reflected in the governments. It’s a mirror of us. I think in many ways the same can be said about the entirety of American society. We have truly become Rome—a fat hegemon trying to sustain itself off of a far flung empire that we can no longer sustain, so the system is collasping upon itself. The people really needed to have demanded something much different, but we got fat, dumb and happy instead.

    They’re certainly going to propose that the VAT run on top of the existing income tax system and on top of existing consumption taxes we have already like the exise taxes on gasoline, telephone bills and etc. Unfortunately, I think the die is cast on a tax increase of some sort as we’re not going to be able to cut enough expenses to get us out of this mess.

    We definitely need some structures other than the two party system we have

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  • http://diasporablack.blogspot.com/ Black Diaspora

    “I’ve become jaded on the entire political system as I think it’s owed lock, stock and barrel by the monied interests in this country and our tax dollars are simply something they’re just appropriating for their purpose and the people be damned.”

    The people, it seems, are nothing more than a “necessary evil.” We deserve better than a financial system that fleeces the people with the blessings, and cooperation of congress, but we seem to lack the collective will to do more than just complain.

    There’s more “ado” over the Arizona law to profile brown people, than over a corrupt financial system that exists to grow fat and bloated at our expense. In Greece, we’re seeing one response to the neglect of politicians and the people to make government accountable, as well as responsive to what is best for the people. I pray that we’ll have the intestinal fortitude to act early, rather than late, to forestall the protests that we’re seeing there–protests that’re more violent than peaceful.

    • Greg L

      BD,

      Here’s an excerpt from an article in today’s WSJ about the riots in Greece:

      “ Under the terms of the deal with the EU and IMF, the government has announced a EUR30-billion package of austerity measures that will slash public-sector wages, cut pensions, freeze public- and private-sector pay and liberalize Greece’s labor laws. In addition, Greece has pledged to raise taxes including a two-percentage-point increase in Greece’s top value-added tax rate to 23%, and hikes in excise taxes for fuel, tobacco and alcohol. “

      This is what has them pissed off and in the streets. This is the standard IMF prescription that’s been played out all over the world. It used to be reserved for places like Haiti, but now the PIGS are going to be relegated to third world status on the backs of the people in those countries while the oligarchs who got bailed out get away scott free. Sounds like America doesn’t it?

      I see very few with any backbone in the congress to face down the oligarchs and demand that they play by a reasonable set of rules.

      The main hope for the people is to “unhook your wagon from the train”. I think often of the Amish people here in PA. They’re basically unaffected by all of the economic fallout mainly because they have no need for a lot of money as they make or grow that which they need. Self sufficiency and being somewhat independent of the existing economic system is what will save most people.

      • http://diasporablack.blogspot.com/ Black Diaspora

        Already we’re seeing a negative tugging on the Dow, the financial crisis overseas dragging it down a few hundred points. We know who the culprits are, and what needs fixing here and abroad, our mostly unregulated financial systems, but politicians seem unwilling to do what’s necessary.

        Riots in the streets may work off some steam and prove to be cathartic, but the people of Greece have few options to weather their financial storm. The most they can hope for is that the government will seriously address how the problem came to be, and make changes, draconian or otherwise.

        In the meantime, the people are left holding the bag, while the fat-cats who created the problem get to spend out their years on the Riviera, if they can escape with their lives.

  • Greg L

    Indeed. That tug on the Dow became an all out yank before the plung protection team intervened to save the day. Clearly, I’m not believing the whole thing about someone transposing some numbers on a trade.

    BD, I’m convinced that there’s a global playbook that’s being used in Greece that’s a variation of what happened here in the US. The difference is that it’s simply a much harsher form of the play which we will ultimately experience here. At issue is who should lose–the oligarchs or the people.

    When someone imprudently lends money, then they should shoulder the fallout of the deal gone bad. Instead, the people are forced to bail them out. That’s what’s occuring in Greece and what will occur elsewhere including here. The real solution is to let the market impose discipline and allow those who took the risks to lose. That’s what free markets mean, however some are prepared to adhere to that concept only when it comes to seizing an advantage and not when it comes to paying for unwise decisions.

    Governments have to be truly representative of the people to have the backbone to do the right thing. Those in the EU appear to have the same problems in that respect as ours here in the US,. So essentially, the German government is taking the people’s money to bail out Greece as a backdoor bailout for the bankers so they don’t have to lose. The imposition of austerity measures is simply a way of supporting this bailout.

    The people see through this and this is why they’re in the street. I feel this is only the beginning of a summer of discontent and it won’t be limited to Greece.

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