George Sarant

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One of the basic problems we face today is that our appetites exceed our resources. Privately we are in debt, often to buy stuff we don’t really need, while publicly we are saddled with increasing public debt for things the government shouldn’t be doing. Americans at least have been paying down personal debt. Unfortunately the same cannot be said for the federal government, which continues to run up record deficits. Many states are in even worse shape because unlike the feds, they cannot print money.

How have we arrived at this juncture? By allowing ourselves to be deluded by the sunshine scenario- that is that things are going well and will only get better so there will be more money in the future. This is how states like New York, California, Illinois, and others have gotten into trouble, along with countries like Greece and countless individuals who have overextended themselves. These states spent every penny of incoming revenue and then some at the height of an economic boom, then filling budget gaps with gimmicks to maintain a level of spending that never should have occurred in the first place. By taking the best case scenario as their baseline they have presumed that things will only get better with more growth generating more revenue. The logic here is that people are making more money so we should increase our cut. When revenues fall short their solution is ever higher taxes rather than spending cuts, which only drives people away if they are lucky enough to be able to move.

The great error here is using the sunshine scenario as a baseline by assuming that henceforth this is the minimum we will take in. As a result these states were thoroughly unprepared for a drop in revenues. The more prudent course would have been to baseline on more conservative assumptions, i.e. what current conditions yield, so that any further increase would ideally then go to tax reductions. The wise course would be to accept the current situation as the new normal, and use it as the baseline for future projections. There is a lesson to be learned here if politicians will adhere to it. Individuals in the U.S. are finally saving and cutting back, which in the real world ought to be a good thing, though some economists think it is bad. But financing the world economy on credit cards is as unsustainable as the current federal deficits we are running. These are also projected on the assumption of future growth. What we need is a zero baseline. That is the only way that government can be contained and get its fiscal house in order. Rather than projecting increasing deficits, we need a deficit reduction plan now. Then perhaps we can begin to align our appetites with our resources.

Written by georgesarant

February 28, 2010 at 3:34 PM

Posted in economy, government

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Every day the dollar continues to decline against other currencies. There are some who think this is good because it increases exports, but there are downsides as well. The government is pursuing a weak dollar strategy to the long-term detriment of the country as well as the rest of the world. The decline is caused by increasing debt and a balance of payments deficit. This is before the government goes further in the red with health care and other spending schemes that will only exacerbate the situation.

A weak dollar is not in anyone’s interest. First it means a decline in living standards relative to the rest of the world, second imports and travel become more costly, third it generates currency instability throughout the world, and fourth it makes each one of us lose wealth because our assets and income are worth less. This is what usually happens with high inflation, which we don’t have yet, but is almost inevitable down the road if deficits continue to pile up.

This is the classic state solution to debt- inflate the currency so that dollar debt holdings are worth less and easier to pay off. This does not just screw the Chinese who are holding massive amounts of dollar debt, but any citizen who has savings or lives on a fixed income. This is beneath the dignity of the United States, but under the present course it will happen. This will end the dollar’s reign as the world’s reserve currency because its stability cannot be counted on. We will lose many of the advantages that come with reserve status, and it will represent an overall decline in American strength and influence.

A strong, stable dollar is in everyone’s interests. We need a reliable and predictable standard of value that we can trust in. Unfortunately the government has an ongoing interest in inflating currency because it is easier than the pain involved in cutting spending and reducing debt. But once the world loses faith in the dollar the government will be reduced to the constraints usually born by third world countries. So it is that the President of the United States this week was the recipient of humiliating lectures on fiscal responsibility from Asian countries.

Written by georgesarant

November 18, 2009 at 12:09 AM

Posted in economy, government, international

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