Debt Ceiling Invites More Gimmicks
Published: Tuesday, 24 May 2011 9:14 AM ET
By: Ivory Johnson
Scarborough Capital Management, Inc
President Obama’s gyroscopic legislative endeavors helped the nation survive the worst financial crisis since the 1930’s. It would have been unfathomable to risk America’s image of economic invincibility and allow the free markets to punish bad behavior. Instead, the Federal Reserve printed money to inflate the stock market and promote economic growth, all courtesy of a low interest rate environment. Now Congress is faced with yet another debt ceiling, and sure enough, they’re scrambling for the next fiscal stunt.
The unpopular stimulus package, albeit a short-term solution, created up to 2.1 million jobs that may have prevented a depression. Real estate agents rejoiced at the $8,000 first time home buyer credit and state governors used contemptuous contemptuous federal handouts to balance budgets later fashioned as dexterous fiscal stewardship. Wall Street bailouts, unemployment benefits and unfunded military ventures were all the rage; the glass house falling victim to the blunt force of capitalism.
While the military continues its search for more terrorists, Santa Claus struts through the halls of Congress in plain sight, soliciting public money for distribution to prized constituents in the form of counterproductive tax cuts, corporate welfare and social programs. To nobody’s surprise, the debt ceiling was reached last week and the treasury had already identified ways to adjourn the day of reckoning, this time dipping into public pension funds to close the gap.
In years past, these cosmetic strategies would have passed as successful laissez faire remedies. President Reagan took office during a period of slow economic growth, and despite his many accomplishments, increased the national debt by 189 percent (a 60 percent spike as a percent of GDP) and changed the way CPI was calculated to mask the true rate of inflation.
According to Burton Folsom’s “New Deal or Raw Deal?”, President Franklin D. Roosevelt, instrumental in ending the Great Depression, spent more money in his first five years of office than all 31 presidents before him. Concerned that Americans would redeem their diluted dollars for gold, he confiscated all gold holdings in exchange for paper money at a price of $20.67 an ounce. Just eight months later, federal legislation revalued gold at $35 an ounce.
The United States is out of gimmicks. In ten years, 92 cents of every dollar in government revenue will be used just for social security, Medicare, Medicaid and the interest on our debt. Taxes would have to increase by 81 percent to eliminate the debt and no economy can grow itself out of that much red ink.
Our government no longer has the luxury of securitizing smoke and mirrors through Uncle Sam, his own hand cupped before opportunistic institutional investors and foreign countries that don’t have our best interest in mind. We can print all the money we want, fabricate every economic indicator available and kick the can down the road until we reach a dead end, but the best opportunity to prevent the collapse of fiat currency is some combination of tax reforms, private sector solutions and reduced entitlement spending.
So it’s all come down to this, Congressional temper tantrums and unsustainable deficits that prompted Standard & Poor’s to lower the outlook on U.S. debt to negative, a narrative currently attributed to Greece. A number of Americans appear obtuse to the idea that we may have to give something up, forgetting that either our parents or grandparents, sometimes both, were subject to food rations during World War II, a time when patriotic car magnets didn’t cut it. Two parts apathy, one part math is a dangerous concoction. Some say it’s been brewing for years.
Ivory Johnson is the director of financial planning at Scarborough Capital Management, Inc. He is a Certified Financial Planner, a Chartered Financial Consultant and a frequent guest on CNBC. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance.