Sunday, September 07, 2008

They Are Both Lying - or Fools

Both John McCain and Barak Obama are promising to cut taxes. Both are lying, or worse, are fools.

The truth is that the U.S. has been living on borrowed money and time. And both are beginning to run out. Two of today's news stories prove it (more on those below.)

The U.S. government is broke. George W Bush has seen to that. He massively lowered taxes while waging an expensive war. The war in Iraq has cost the U.S. over $1.2 TRILLION so far. (1.2 trillion is the low estimate - as of January 2007. 3 trillion the high estimate - for a projected end of war in 2010.) The war is costing about $400 billion a year.

Co-incidentally, that is about what the projected U.S. government deficit is for 2008. The U.S. government is spending about $400 billion a year more than it takes in. Every year !

The total U.S. federal government debt is $9.7 trillion !! That's $31,000 for every man, woman and child in the U.S. - $120,000 for a typical American family. And that is over an above State and Local Government debt, and of course does not count personal debt.

And those numbers pale when compared to the $59 trillion in unfunded future liabilities the U.S. government has to Social Security, Medicare, and Medicaid - essentially promises it has made to the American people and which many rely on for retirement and health care.

Two news stories today underscore that the shit is about to hit the fan. First, the U.S highway trust fund, the fund that pays to maintain the U.S. interstate highway system, as well as federal bridges (remember the bridge that collapsed in Minneapolis a year ago) is going broke. According to a story in the New York Times
An important account in the federal Highway Trust Fund will run out of money this month, a situation that could hamper completion of road and bridge construction projects across the country, Transportation Secretary Mary E. Peters said on Friday.

Because the trust fund’s highway account is draining away, the Transportation Department will have to delay payments for projects, Ms. Peters said at a news conference. Since money from Washington typically pays 80 to 90 percent of the cost of federally aided road work, states with shaky finances may have to consider curtailing projects.
The fund is hurting because: (a) after years of putting off highway and bridge maintenance, more work is being demanded now; and (b) with the U.S. economy slowing down, and gas prices rising, the flow of gas taxes that goes into the fund has slowed. Congress will need to raise gas taxes, or otherwise pump money into the fund in order to allow federally funded road work to continue.

The second big story today is that the U.S. government has effectively nationalized the two biggest mortgage banks in the U.S. - Freddie Mac and Fanny Mae. In one fell swoop it has assumed another $5 trillion of shaky debt. While it is unlikely that all this debt will turn out to be bad, it is entirely possible that by the time the government re-privatizes this debt, it will have had to "eat" 10 - 20% of it. Thus today, in one fell swoop, the U.S government has agreed to pay out the equivalent of one-to-two years of Iraq war effort - adding up to $1 trillion to the real debt it owes; another $12,000 per U.S. family.

Who did this help and who did it hurt? Well it hurts U.S. taxpayers - and all American citizens. They now owe more. And it helped the owners of Freddie and Fanny stock - who stood to lose everything if these two companies had gone bankrupt. And who owns these stocks? Well of course, some is held by little old ladies in Peoria, but most is held by rich people and other banking institutions. It also helped the holder of Freddie and Fanny's bonds. Again, mostly wealthier folks.

But beyond the short term problems, shady ethics, and poor policy choices these two stories reveal, is the bigger fact that the U.S. government is essentially broke. It is living on the good will of its creditors, who are still afraid to pull the plug. But it will become harder and harder for the U.S to borrow more money to finance its daily operations and pay off its old debt as it comes due. Big debtors may be stuck with their existing - and now worrisome - U.S debt holdings, but they will not continue much longer to throw additional money that way.

The U.S. has been living off borrowing for too long. The gig is about to be up. It will have to start paying its way. And the only way to do that is to raise taxes, not lower them. The alternative is a major devaluation of the U.S. currency - causing major inflation - and serious cut backs on U.S. government services - causing serious pain as roads deteriorate, schools go to hell, the military is cut back, and the minimalist U.S. social safety net falls apart.


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