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Posted: September 01, 2011

The Economist: The deficit/debt fiasco

Tucker Hart Adams

As I expected, Congress dealt with the debt ceiling crisis at the ninth hour by raising the ceiling and appointing a committee (the third), leaving the basic problem unaddressed. The market for U.S. Treasury securities yawned - there is still no safer place for your money - while the stock market swooned, then bounced back.

The basic problem is simple: We spend more as a country than we raise in taxes. It gets politicians reelected but has serious long-run repercussions.
I am totally disgusted with our representatives in Washington, whether they are Democrats, Republicans, Independents, Progressives or Tea Partiers. No one seems to care about the outlook for anything except their chances of getting reelected. Perhaps we should adopt the Minnesota approach and try running things without a government for a while.

I'm no expert on constitutional law, but I find it hard to understand why Congress even has the right to vote on the debt ceiling. They voted to spend the money. They voted to levy the taxes. Which, it seems to me, means they voted to run a deficit and add to the debt. How can they now have the right to vote on whether to borrow to pay those bills?

Maybe we should all adopt that approach in our personal finances. We will buy the fancy new car, the big house and the big-screen TV. We will cut back on what we earn because we find that going to work five days a week, 50 or so weeks a year, interferes with the way we want to spend our time. Then we will "vote" not to increase our borrowing because we don't approve of "deficit" spending, i.e., running up a lot of credit card debt.

I assume we, the American people, like the way Washington is doing things. Otherwise, why do we return the same people to Congress year after year? Why is it political suicide even to raise the possibility of cutting Social Security, Medicare and Medicaid when fourth-grade math shows there is no other way to balance the budget?

We are fortunate that Europe is teetering on the brink of disaster because of the debt of Greece, Ireland, Portugal and possibly Italy and Spain. If the European Union and the euro were solid right now, we would see a massive exit from U.S. government debt and the dollar. Our interest rates would be soaring and our exchange rate collapsing. But, as bad as the situation is here, the world's investors apparently think the situation in Europe is even more frightening. So they have continued to place trust in the full faith and credit of our government and of the dollar.

That won't continue forever. At some point investors will move to Europe or Asia as they look for a safe place to park their money. Our deficit and debt will soar as we have to pay higher and higher rates on Treasury bills and notes and bonds, leaving less and less to provide the goods and services our country needs.

A television station called a few days ago to ask me about the impact on Colorado Springs (where I live) if there were no debt compromise. No one knows for sure, but it isn't hard to make an educated guess. Social Security checks wouldn't show up on time. (I made sure there was plenty in my banking account to cover my August mortgage payment if that occurred.)

 The military at Fort Carson and Peterson Field and the Air Force Academy wouldn't get paid. The impact would quickly ripple through the grocery stores and gas stations and restaurants, where we would be spending less money. Anyone with a variable rate mortgage would see a big jump in the monthly payment, as interest rates rose.

That's the Armageddon scenario. We avoided it this time. A compromise was reached, delaying the day of reckoning a few more months. Meanwhile, the world's confidence in our ability to manage our spending and borrowing responsibly is slowly eroding.

And we will go to the polls in 2012 and return the same people to Washington? What ever are
we thinking?
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Tucker Hart Adams, president of the Adams Group, monitored and analyzed the Colorado economy for 30 years. She can be reached via her website, coloradoeconomy.com.

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Readers Respond

The ripple effect you mentioned would be enormous. Why? Because we have become too dependent on government and deficit spending. If our economic model was sound, the effect of government spending would be negligible. We increasingly borrow from the future to pay for the present. When the idea of mortgages first came to the U.S., they were 5 to 7 years and required 50% down. Now we have 5 to 7 year car loans and 30 year mortgages. Many years ago when I was more naive, I would have gladly paid my share of the government debt if they would truly go to a balanced budget without accounting tricks. It's clear now that will never happen without a complete meltdown. There are many other factors without the space or time to comment now. By John Gimple on 2011 09 09
It's kind of like they say in AA; "You have to reach bottom before you can start up." I expect that this country might be going that way, but I'm afraid that when we reach bottom someone may step on us. End of another great civilization. By John Wray on 2011 09 09
Why do we keep asking why? Its because we dont have a leader in the White House that knows what they are doing other than spending more of our money to buy votes! End of story! By Jay on 2011 09 09
When most Americans are on the dole either for welfare or financial assistance with some construction project or tax loopholes, the system will not change. The way I see it the only way things will change in Washington is when the house of cards comes falling down. When Government has nothing to give because their promises are no longer supported by the ability to print money (which will eventually become worthless)then things will change. I do believe eventually that will happen. By Ronald Nebelsick on 2011 09 09
I've always like the quote that: "Americans will usually do the right thing after they've exhausted all other options.' I believe that our representatives go to Congress with good intentions and then they must become corrupted. I'd like someone to look up the data for net worth for them on entry and on exit. I'll bet it would be very revealing. It's no wonder that so many people want to get elected. Betsy Markey, for example, is set for life for one term. The cost is astounding. When are we going to get term limits passed?? By John Wray on 2011 09 09

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