Monday, March 23, 2009

Obama's plan will double the national debt.

President Obama is really pretty ignorant about the economy. The deficit for 2008 was $1,017,071,524,650

Deficit since October 1, 2008 till March 23, 2009 was $1,027,338,381,750. Sure Obama has inherited a pretty nasty economy, but his deficit is going to hit well over $2.5 Trillion in his first year. I have even read that he believes the deficit totals over ten years will be $11 Trillion! Ok, that sounds pretty bad. A doubling of the national debt. Guess what it is just plain ruinous.

I even read that our elected representatives or their appointed puppets are talking about a sustainable debt levels again. They are saying that we could sustain 4% deficits, but 5% cannot work. These wackos think that with a GDP of $13 Trillion, we can sustain continued deficits of $520 billion a year. What are these idiots drinking.

A few years ago I put together a paper showing why any continued deficit is bad.

For years politicians have measured deficit spending as a percent of Gross Domestic Product (GDP). GDP is the sum total of all goods and services produced in the United States. In 2002 the GDP was around $10 Trillion with federal budget revenues of $1.9 Trillion or about 19% of GDP. This 19% includes FICA taxes collected from both Employee and Employer. FICA taxes by law cannot be used for any purpose other than to pay for the Social Security and Medicare programs. FICA taxes are loaned to the US Treasury and in return are paid interest. The Medicare and Social Security programs are about 35% of total federal spending. In addition the Medicare and Social Security programs by law cannot borrow money.

Many have stated running 1.5 to 2% deficits are manageable. Is this true? Would your family budget survive having to borrow 1.5% of your income yearly? It is relatively simple for the layperson to check if this is a correct statement. A spreadsheet is ideal for this calculation. What we want to do is look at the long term trend.

Separating out FICA revenues from federal revenues produces what I call General Revenues which are about 12% of GDP. Since Social Security and Medicare cannot borrow money, the deficit is attributed to General Revenues. The purpose of showing both is to highlight the dramatic difference between them. Politicians are misleading the American people by resorting to using Enron style accounting.

It does not mater if you do not use actual GDP numbers. We are interested in the Percent cost of financing deficits as a percent of GDP and of General Revenues. I began by using 100 as my GDP. In the first year 19% revenues of GDP would be 19, a 2% deficit of GDP would be 2 and interest amounts to 0.06. Financing Cost as a percent of General Revenues is calculated by dividing Interest on Debt by General Revenues. The cost of financing the national debt increases each year. What many fail to understand is that each year the national debt increases, the greater the cost ratio of debt interest to federal taxes. In short, there will come a time that the total interest on the debt will consume the total federal revenues paid by all Americans, leaving nothing for any government program.

Mark Souder made a comment in the October 31, 2008 debate that he could not just let the country go down the tubes and so he voted for the first bailout. Well Congressman, which is worse: being able to pay your way with pain or bankrupting the entire country. In simple terms, reducing all to the lowest common denominator.


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