We will have to see if the “Tea
Party” politicians will learn from their humiliating defeat on the budget
debacle and play smarter politics going forward. I think they have
unfortunately hurt their cause and set it back. Compromise is how things
get done in Washington and unless you control the commanding heights (i.e.
Presidency and both houses of Congress) you need to bide your time and play
better defense. I think the Republican caucus needs a bit of Tennyson
recitation in the form the “The Charge of the Light Brigade” where he so
eloquently described the futility of a British Light Cavalry Brigade in 1854
charging a well-prepared Russian artillery battery with excellent fields of
fire resulting in high casualties and no gains.
The markets once again called
Congress’ bluff with not much of a sell-off and are now poised to go on to new
highs. The scary part of this political game is that the politicians will
take this as a cue to keep their antics going and will eventually send us off
the cliff if they keep this game up. I keep hoping these budget
escapades will finally cause some focus to be made to the long-term insolvency
problems the country faces but with each delay the problem only grows. It’s
a classic case of avoiding pain and being unable to delay gratification.
We can spend more than we make right now because our creditors allow it and as
the world’s reserve currency we get a pass. But this can and will change
at some point if we fail to act.
The U.S. government is
currently spending about $3.8 trillion per year while taking in about $3.15
trillion in taxes. So we’re essentially spending 20% more than we
currently “make”. At some point we will have to pay for all this extra
spending that keeps adding to the total Federal debt that is now 100% of
GDP. The larger the debt grows the more it reduces future GDP growth and
the more work and taxes will be required of our children to pay for it.
Fixing the current deficit would require huge spending cuts or significant tax
hikes with of which would send the economy into recession. Since no one
is willing to endure this “austerity” now we just keep piling on the debt and
hoping that GDP growth in the future will be large enough to cover the
gap. Wishful thinking in deed especially considering that the future
spending required for the present level of entitlement spending is set to
explode with our changing demographics. If we can’t change it now how
will we be able to do it in the future when it will be even more
entrenched? The Federal Reserve is covering us for the moment with its
massive bond purchases but in the end their actions are just cosmetic and the
bill will have to be paid.
Strangely enough, if we just change the future trajectory
of entitlement spending we can give ourselves and our children the ability to
increase their standards of living rather than being weighed down by the burden
of debt and its debilitating societal ramifications. After correcting the
long-term we would then be able to recognize the benefits of living within our
means and how that helps to increase economic growth in the long run.