An equation to understand America’s financial woes

An equation to understand the current confusion: National debt = issuance of Treasury bonds = printing dollars (Q.E.), and increasing the supply of money = federal spending.  Therefore, national debt = federal spending.  It’s the principle of equivalency.

All those who work for a living, and who make their own way, pay this debt.  The recipients of this spending, like welfare and entitlement beneficiaries and federal subsidies like E.V. credits, ride on the effort of those who work.  Corporations don’t pay debt; they increase the price of their products and pass it along to buyers.  Bottom line: Every citizen bears the burden of federal spending.

Here is another simple equation: Federal spending in excess of tax revenue = debt.  So our government’s inability to live within its means, as we citizens do, creates a debt burden on us.  Did any of us agree go into debt personally?  Fact is, we are being placed into debt against our will, by bureaucrats who are paid through our taxes and politicians whom we elected.  This is insane.

Some would suggest that we tax the rich.  How did taxing the rich out of business work out for Hitler, Stalin, and Mao?  Fact is, we already do: over 50% of all tax revenue comes from the top 5% of earners.  The tax rate is already very progressive — especially when one considers that the bottom 50% of wage-earners pay no taxes, but receive federal benefits in excess of their tax.  Like debt, tax rates are self-limiting.  As tax rates go up, tax revenue declines because the source of revenue, private businesses and jobs, declines.  Excess taxation is not the solution.

It gets worse.  Our Treasury bonds are used by other nations as a form of currency.  Sovereign nations buy our Treasuries because they feel safe doing so; they believe they will receive their principal back with interest.

As national debt increases, and our private economy declines, these nations will question our ability to repay Treasuries.  Some nations will use our weakness to establish their currencies as the safe harbor, the currency of exchange.  China, Russia, and others are doing just that.  In other words, there is an endgame when our nation can no longer issue debt because no one will buy it.  The market is implacable.  Nothing can long spend in excess of revenue. 

We have already run into the problem of not being able to sell our Treasuries, and we issue debt.  In 2008, the administration started Quantitative Easing (Q.E.), whereby the Federal Reserve printed U.S. dollars to buy U.S. Treasuries.  Because no other nation wanted to buy our debt.  Instead of heeding this dire warning, our government issued $8 trillion in new debt — debt that you have to repay.  Remember that federal debt = federal spending.  The market warned us once in 2008; it is warning us again.

It would be far better if we took charge before other nations do.  We need to elect only those politicians who understand that they must reduce federal spending.  That means cutting federal programs and employment.  If we do not, other nations will.  Whatever pain we feel at reducing spending on our own, pales in comparison to the disaster of foreign intervention.

All federal spending appears to have two objectives: keep politicians in their jobs and pay bureaucrats and federal employees.  Before screaming at this, ask what good these federal programs are doing; ask if they are getting some value therefrom.  It’s your money.  You have a right to know what good it does when they take it from you.

To make matters worse, our private economy is being crushed by excess federal spending.  Our working citizens are being crushed with this debt, with inflation , with devaluation in the buying power of their dollars, and with lower wages (normalized for inflation).

There is a much better balance between the needs of our government and our private economy.  We are not anywhere close to that balance.  Federal spending is extreme.  It is absolutely unsustainable.  It must be brought in line.

Federal spending is the source of the problem.  Sharp reductions in federal spending are the solution.

Jay Davidson is founder and CEO of a commercial bank.  He is a student of the Austrian School of Economics and a dedicated capitalist.  He believes there is a direct connection joining individual right and responsibility, our Constitution, capitalism, and the intent of our Creator.

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