Saturday, February 6, 2010

Our Unsustainable Debt

I am posting an essay by one Joseph Lupo, an executive in the financial industry who is part of our Tea Party staff. Joe is our go-to guy in all matters of fiscal and monetary policy - he writes today of the most recent bit of fiscal insanity:
Congressman McMahon did our country a great disservice this week. Our Congressman yielded to Nancy Pelosi's arm-twisting and voted with other liberal Democrats to increase the federal national debt limit by $1.9 trillion to an astounding $14.3 trillion. This partisan vote demonstrates a complete lack of fiscal responsibility and an utter disregard for the economic and monetary consequences of unrestrained spending.

Our great country is nearly bankrupt. The federal government is exacerbating a painful recession by pursuing economic policies that threaten the stability of our fiscal and monetary system. Instead of encouraging fiscal discipline and curbing the growth of discretionary spending, the Democrats in Congress have chosen to exponentially increase the crushing debt burden that will be inherited by the next generation of Americans. In fact, the Congressional Budget Office projects that deficits over the next 10 years will total $6 trillion. Where does the insanity stop?

Congressman McMahon should take heed of the current fiscal crises currently spreading throughout the Eurozone. In the past two weeks, the economies of Greece, Spain and Portugal have been severely damaged as international investors increasingly doubt their ability to fund massive budget deficits via the public debt market. As a means of comparison, lets consider the debt-to-gdp ratios of these countries (Debt to GDP ratio measures total outstanding government debt divided by gross domestic product, expressed as a percentage). Portugal is currently projected at 90%, Greece at 125% and Spain at 50%. So where does the United States stand - projected at 94%! This simple statistic should concern every American and our Congressional representatives should be mindful of the tremendous risks associated with uncontrolled government spending.

What typically happens when this ratio eclipses 100%? Many economists argue that debt-to-gdp ratios above this figure represent an economic "point of no return" whereby future gdp growth is permanently constrained by the insurmountable costs associated with debt interest payments and higher interest rates. Should our country permanently sacrifice an ever improving standard of living to fund an insatiable Congressional appetite for tax dollars and a proven proclivity for wasteful spending? Congressman McMahon should understand that no country can spend their way to prosperity.

Sustainable economic growth is fostered through sound fiscal and monetary policies, a low tax burden, free market competition and productivity improvements. However, the Democratic Congress has pursued exactly the opposite. The proof is everywhere - the US dollar is trading at decade lows, gold (an inflation hedge) is near all time highs, liabilities on the Federal Reserve balance sheet total over $2 trillion, unemployment is hovering around 10%, income and capital gains tax rates are going higher, and the federal government is re-regulating every industry from banking to energy.

The federal government has kept interest rates artificially low by essentially becoming the largest securities buyer in the public market. For example, the Federal Reserve now owns more than $1 trillion in mortgage backed securities and agency debt. This intervention has kept mortgage rates and treasury rates low - but these quantitative easing measures are short term and extremely difficult to reverse. Once these programs run their course, our economy will once again be subject to natural market forces and the laws of supply and demand.

Massive federal deficits only make the eventual transition to a fully private market all the more risky. Furthermore, the federal necessity to auction billions of dollars in treasury securities every month essentially "crowds out" private borrowing - that is to say private corporations have increased difficulty competing for capital since the US government is issuing billions of dollars in treasuries and forcing interest rates higher.

In a year that has already seen Dubai essentially declare bankruptcy and the state of California once again contemplating the issuance of IOU's, Congressman McMahon and his Democratic allies should read the tea leaves - stop the uncontrolled spending lest our great country end up like some third world banana republic. The American public is watching.