Monday, April 11, 2005

When will the Deficit punch crunch? has an excellent Post on the 'Impact' time of current methodology of Government spending. Bad Budget policy will show up sooner, rather than later; ask Anyone who has ever cooked the Books in any Business. This Author predicts the economic climate will so alter in the immediate future, that the Bush Tax Cuts will not just run out in 2010, but will be repealed early. He also predicts that sacred Cows of Defense and Security will be pawed over extensively.

The Bush administration uses Accounting practice and procedures common to the Reagan administration, the greatest being that Deficits and Debt could climb forever. They systematically intone that the current Debt is not such a huge percentage of GDP, like the Federal Government was like some Teenager married couple who would eventually work themselves out of Debt. Economists, as least smart Ones, could explain it don't quite work that way!

The total Money Supply of the World reflects the total Net worth of the World(okay, some Economists would say World economy--a distinction few Readers will understand). This total Money Supply is not composed simply of Cash, or even Demand Deposits. It is the total construct of Savings and Liabilities existent. The key element here is that Cash(Demand Deposits same-same here) plus Savings must equal all Liabilities debt service--else Inflation enters the Equation. Inflation functionally remains nothing more than devaluation of assets, this due to their inability to produce sufficient Profits as to pay off their Liabilities.

The preceding paragraph may be important to Economists, but does little to explain the problem of the Federal Debt to Laypeople. The problem of the Federal Debt is not one of percentage of the GDP, but the fact they are Liabilities in the equation of the total Money Supply of the World economy. Dollar-denominated assets must produce sufficient Profits to equal Dollar-denominated Liabilities debt service, or there will a less-valuable Dollar which cannot buy as much as before. Another way of looking at it is: Dollar Liabilities debt service minus Dollar Profits equals Inflation.

Federal Politicians extol the great engine of American productivity, because they like to spend lots of Money they don't actually own: it belonging either to Taxpayers or Creditors. The problem comes from the fact that Dollar-denominated Productivity has hit a plateau, One not where Profits are not increasing as they are, but One where those Profits are not increasing as fast as Politicians like to spend. Just like the Tech 'Balloon' of the last Boom, Federal Spending will have to deflate. lgl