The following is a personal outlook paper by the founder of The Jacksonian Party.
With all the debt limit finger-pointing, yelling, screaming and such going on it is hard to take these supposed 'leaders' Upon The Hill seriously. We hear words of 'default' and 'Armageddon' plus 'Doomsday' bandied about. So what is it, exactly, that is going on?
First the government has allowed itself to spend approximately $4.4 trillion dollars this FY of which $2.4 trillion is deficit to be added on to the debt. Congress has previously set a debt limit, decades ago, to help keep tabs on spending so that everyone has to agree on the basis for new spending. That debt limit is coming and has actually been here, save for some Federal Reserve and Treasury accounting tricks. The tricks, smoke and mirrors are just about cleared out, now, and we are getting to see the problem without them.
If you back a 'compromise' then please set in your mind that you want a federal government that spends approximately 1/7th to 1/6th of our economic productivity in accrual of debt we can't pay now. While that has usually been bought by foreign investors, the Federal Reserve has been pumping money into the system to get that debt and has been the largest buyer at the last couple of debt auctions. Their hope is that either this blows over, or they are left controlling the purse strings of future federal spending.
Nice folks, huh?
Second if you back 'compromise' you are kicking the can further down the road to larger, more intrusive government that eats up more of our economy and, in the end, must do away with 'entitlements' as economic activity to sustain them falls through the floor. Who will invest in a people who can't get a government to spend within its means? Or seek to have a large part of its population unproductive by choice? That isn't working out so well for Greece, Italy, Spain, Portugal and Ireland... or the UK and France, for that matter. That is the future ahead for more spending on our shores if you support a 'compromise'. You will live to see that.
Now what happens when the debt limit is reached and there is no compromise?
First even Turbo Tax Timmy, the man who can't figure out his taxes but is the head of the Treasury, admits that we will continue current debt maintenance. Left and Right that is admitted. If we DIDN'T do that it would be a DEFAULT. The US will not default on its debt as that is the reason the federal government was CREATED in 1787: to take care of Revolutionary War debt that was breaking up the States in the old Confederacy. If the federal government can't do the #1 primary job it was CREATED TO DO then it must go through civil means to allow We The People to figure out something that WILL make good our promises to others. I expect that would happen via elections and a Constitutional Convention in which States that spent themselves broke will not get much of a hearing from solvent States, either. So the debt will be paid because, for the first time in over a century, it is not clear that Progressives and Liberals will be able to sway the outcome of a Constitutional Convention. They don't like that, so they want our debt payments to continue.
From the approximately $2 trillion the US government takes in, about $600 billion (or $0.6 trillion) is in debt payments. You have about $1.4 trillion left to spend! I bet you could run a government on that....
What gets paid for next?
Well Obama is the Executive and in lean times Executives get a bit of a say in things for cutting back when the money isn't there. Remember, Congress unwisely put up an unsound budget and it is now up to Obama to cut spending back to meet revenue.
Stop that laughing!
He has no choice in this.
His first real choice will be between 'entitlements' plus the Constitutionally mandated cats & dogs (DoD, parts of State, a bit of the Interior, US Mint, USPTO, Government Accounting Office plus various other items mentioned in the Constitution which I tend to lump together as 'cats &dogs') or the other discretionary areas plus some entitlements plus the cats &dogs. The cats & dogs will take a haircut, probably around 20%, which doesn't free up much money.
Here is the deal: if Obama wants to have all the discretionary parts of government that are non-entitlement continue to work (like Labor, Education, Energy, EPA, FCC, FAA, IRS receipts offices and so on) then those will be fighting for money with the 'entitlements'.
Now after decades of fearmongering we have the visage of the most Progressive and Liberal US President in our generation having to cut government. First, think of that on its own and take a look at the holder of the Office of the President of the United States. He has no choice.
If only Nixon could go to China, then only Obama can cut government.
What will he do?
Well he could go against everything that every Democrat has said for over a generation and cut entitlements! That would be seen as a basic betrayal of The New Deal and The Great Society... by one of the most Progressive and Liberal Presidents in our generation. That is an abyss to step into for him as it is his name that will be on that, not that of Reid or Boehner.
So we can take it for granted that at most we will see a bit of trimming around the edges of 'entitlements' which will, itself, be a watershed moment.
That leaves between $60 billion and $100 billion dollars left to fund EVERYTHING ELSE outside of 'entitlements' and the cats & dogs. He can go the 'skeleton crew' route and keep an executive staff in each, but no other functions. All the regulatory stuff goes into limbo for as long as this 'stand off' lasts. There are some places that would eat up all of that and want more, like Agriculture that consumes at least $700 billion per year... it would be hard to keep on anything but a few top people there for $100 billion a year, so you can bet that baby will close down to allow shifts to other, more politicized entities, like Dept. of Justice. DoJ is not a cat or dog, but a discretionary organization that didn't exist before FDR. Before that Agencies and Departments were responsible for bringing their own prosecutions. Keep DoJ open and you don't have much left for anything else.
The spending, basically, stops for a large part of the discretionary part of government outside of the 'entitlements'. See how that works?
Outside of this what else happens?
A major part of this is the Treasury no longer holding debt auctions as there is no new added debt to auction. That is about $2.4 trillion not getting soaked out of the global economy, or $1.8 trillion discounting the amount the Fed. holds. The Fed might auction some of its recently purchased debt off, but that is just the 13 largest banks in the US trying to dump US debt which doesn't look all too hot on the banking front. It is like shooting yourself in the head to get rid of a headache: not so smart. Still they don't hold enough to go past a single normal auction... sooner or later US debt stops soaking up investment money.
That freed up money then will be invested elsewhere as the surest way to make money is to invest in productive industry.
Now if most of the Interior and EPA go to the point they can't process forms, industrial firms will look to the States, point to the track record of the company and ask the State if they can do drilling in off-shore waters. After a couple of months of non-processing of forms (in other words going back on a good-faith forms processing concept) the States will find themselves asked if they want productive energy sector jobs to open up. Without the federal government there to process forms, responsibility drops down to the State level. States have their own safety requirements and they are still open for processing forms. My guess is the day after the first debt non-auction, the States will hear from the energy companies. Maybe sooner.
If the Dept. of Labor isn't there, then no one will be backing its paperwork for businesses, loans and such. OSHA goes with that. A lot of those regulations are part of industrial standard work, at this point, so they will be kept up with or without an enforcement arm for awhile. Put in a few months of non-government and industry will begin to realize that there is no one telling it how much to pay people. Fun, fun, fun! The States do have regulations on this, of course....
The EPA has been trying to reneg on coal agreements, sequester land from energy exploration and, generally, trying to stymie energy production in the US. Without them the States get to decide as the federal government doesn't OWN any of that land but is allowed to USE IT by the States. Right there in the US Constitution that the federal government can only use land with the agreement of the State involved. States will begin pulling land back as the federal government really can't stop them from doing that, even with the EPA. Wonder why they haven't done that?
Consider something like BATFE which got scooted over to DoJ save for the IRS interest in the revenue part which is 'A' or Alcohol which is alcohol tax stamps. That 'A' part will remain open, more or less, to collect money on those stamps... actually it probably goes straight to collections. On the 'F' side, which is Firearms, the IRS has interest in the tax transfer amount on fully automatic weapons ($250 per transfer) but not much else. As no one is there to enforce the making of new weapons of that type it is possible that 6 months into not funding BATFE you will see a new market for these weapons arise with a base price of construction, plus materials, plus $250. And as no one is there to federally license manufacturers, and no one can stop individuals from manufacturing arms, and the 2nd Amendment has similar language in nearly every State Constitution... well we might see the end of the cutting up of old military full auto weapons and the direct importation of them. Mind you, before 1976 this is what it was like in the US, and we didn't have an FA shooting spree then and we won't have one if this happens, save for criminals who can ALREADY get their hands on such things. Private security firms may handle something like background checks to ensure that felons don't get their hands on weapons and if the States really want the federal instant background check they can pony up a bit of cash to run that part of the bureaucracy.
What doesn't happen in all of this is interesting.
Anyone who has federal securities continues to get their interest payments. A lot of retirement funds have them. These large institutional investors will see that 'the full faith and credit of the United States' is still good. So will the bond rating services. Do you downgrade a spendthrift who mends their ways, stops spending on frivolities and keeps on paying down their debt? I wouldn't as that person is making good their promises and mending their ways. Why would the US get a downgrade for doing the exact, same thing?
A lot of federally dependant jobs add to the unemployment situation, which might go up a full percentage point. Sucks, that. But there isn't a federal government to suck up investment dollars, either. Hmmm.... why there will be businesses without regulatory overhead, without mandates, without worries about credit... who knows what they will do when there is some CERTAINTY that they will not be PUNISHED for hiring people via new REGULATIONS? If and when that money comes off the sidelines the 'crisis' will end as unemployment drops and economic activity picks up. As soon as everyone realizes that the federal government is the problem and that you can get by without it, then why, on Earth, would you want to bring all that back?
It is that last part that is the worry of the political and economic elites. They are living in the 20th century and now see that Americans would be more than willing to chuck all the centralized controls in the 21st century. Anyone saying that a 'moderate' solution to continue spending into pure insolvency is very immoderate to do so. We have hit our credit limit and can turn back and not be Greece, Italy, Portugal, Spain, Ireland, the UK, France... why that might be a GOOD THING, no? That is how much the equations have changed in the last few years: the old 'moderates' are not in the middle, just addicted spendthrifts who can't say 'no' to more spending.
Of course this will be messy.
It will be painful.
You will have to be prepared for it.
I've been saying that for awhile now and am getting prepared even as we speak.
Not to march on the streets, but to help my fellow citizens through the tough times ahead.
If you aren't doing that, then your hours to prepare are few.
Because the day after debt limit Doomsday is not Armageddon, not global meltdown, but the beginning of the first day on a path to freedom and liberty. I see that day coming much, much, much faster than I ever expected it. Yet I have done the prudent and cautious things as the survivors will step with Prudence who is one of the best women I know of to walk with as she always warns to pick your steps and be prepared for bad days. It is better to be prepared and never need those preparations as you can sleep well at night and be unafraid of the future. I can't sleep soundly due to physiology, at this point, but I have no fears.
In a crisis will you be yelling, screaming, finger pointing and waiting for someone to save you who may never come?
Or will you be prepared to help your fellow man through hard times?
I will join with those doing the saving, may you never need my help as it isn't free and you will be expected TO help TO BE helped. No free rides to salvation, sorry.