Deficit Spending

While I don’t advocate the lyrics or the lifestyle of G-Unit, he did get one thing right; Money Makes the World go Round. The flow of money and debt around the world shapes policy, dictates relationships, and greatly effects individual countries financial markets. The interconnection of monetary markets from the US to China and everywhere in-between causes each country to care deeply about the other players in the game. No country lives in comfortable seclusion away from the ups and downs of the rest of the world. For countries to truly prosper, the other markets need to be at least stable. For this reason, at the G-20 summit that ended in Canada yesterday, the consensus among our European brethren was for the world’s leading economic countries to halve their deficits by 2013. Why would they want such a thing? Because they know that fiscal irresponsibility around the world hurts everyone, even the responsible. So, the very Europeans that have led the way into socialistic style government spending are realizing that their actions are not sustainable. To right the financial markets, government spending has got to be reined in and deficits must be addressed. The idea of borrowing to increase current consumption is becoming a bad idea (always has been, but turns out politicians are good at skewing facts to make bad ideas look good). Using debt for future growth is not necessarily a bad thing, using it for present consumption, not such a bright idea.

Even with many leaders calling for governments to cut deficits, there was at least one that’s not quite ready to turn in his credit card, enter Mr. Barack Obama. Leave it to him to still believe spending your way out of a recession works, when clearly, it hasn’t. Check the unemployment numbers. Before the first stimulus passed, guarantees were made that unemployment numbers would not pass 8%. We are trying hard to get 10% currently; maybe another stimulus or two will get us to the mythical double digit range. The 8% promise was made around a year and half go and we’ve been flying over 9% for over a year now. Just a tad bit off there fellas. And also, the stimulus has been poorly directed, the small businesses that create the majority of US jobs missed the boat for the benefits, but somehow will get stuck with the bill. Not sure of that logic. I wouldn’t be surprised to see this government buy the fishing poles from fishermen and call that a stimulus.

In defense of his spending habits, Obama warned that if the world moves to quickly to cut the deficits that we would risk a deeper worldwide recession. German leaders countered with a more logical argument in that failing to act would create unsustainable debt and raise the cost of borrowing. After years of getting it wrong, Europeans are figuring it out (hopefully). Stimulus spending is not only unsustainable in the long term, but the short term benefits are minimal at best.

As of now the US credit rating is near perfect and the government can borrow at very favorably low rates, but the current rates will not last forever. The weak economy has made debt even cheaper as investors are more apt to seek the safety of treasuries instead of the volatility of the public stock and bond markets. The scary prospect is when the US overspends and faith in American markets begins to wane. This will drive interest rates upwards and those who had sought the safety of American debt will leave the market for other assets. I truly hope this never happens and we will always have access to cheap debt to help fund government expenditures. However, it’s hard to overlook the current crisis in Greece that came about because of irresponsible government spending and not think that we are immune to heading down the same road. At the current pace, a Greek style financial crisis is in the making.

Quick fact: In 2009, 7.7% of America’s tax income went to servicing the national debt. That percentage may seem low, but consider that percentage is $383,071,060,815.42 of the total taxable income.

American does not have to suffer at the hands of poor fiscal policy. The recent recession has brought about tough political decisions and some of the very ideas put in place to help the economy recover have weighed us down and handicapped us moving forward. Nevertheless, it’s not too late to reverse the trend. Spending can be controlled and a responsible government can start making strides towards a prosperous future. The answer is not in thousand page spending bills that nobody fully comprehends but in promoting an economy that supports the growth and profitability of business. No more irresponsible stimulus, how about a tax code that allows those that hire and grow the economy to prosper. Wake me up when November comes.

And trust me, I obviously know what I’m talking about, I opened with a rap lyric by G-Unit……