How to Balance the Budget

cropped-bob-shapiro.jpg   By Bob Shapiro

The US federal Budget has been in Deficit for generations. Our leaders in Washington have borrowed from our children without any prospect that the money will be paid back, at least not in Dollars with anywhere near the same value.

The current National Debt stands at over $18 Trillion, and with annual deficits resuming their previous $1+ Trillion, some projections are that the National Debt will double within 10 years. If the current levels are not sustainable, why would any sane person expect that a $36 Trillion National Debt could be reached without a collapse of the US Economy?

As it stands today, the FED is the major buyer of US Treasuries – sometimes the ONLY buyer. As the Budget Deficit balloons once again, it is unlikely that private buyers will, all of a sudden, be drawn to plunk down their hard earned Dollars in exchange for interest that is lower than the official CPI measure of price increases.

FED Monopoly Money

We also can’t expect players around the world to buy the extra Treasuries either. Globally, there are more purchases of government debt by the various Central Banks than there is debt issued (first time in world history!). So, we can expect the FED to increase its purchases, whether they call it Quantitative Easing (QE) or something else.

All this buying by the FED – using “created out of nothing” new Dollars – will start to show up not only in the real world, but also in the manipulated CPI numbers – and then the public will catch on that, “Hey, prices are going through the roof,” and the FED will have to stop the money creation.

At that point, the US government will have to default. At that point, there will be no money in the Treasury to pay for all those Food Stamps, Welfare, or Medicaid programs. Money won’t be there to pay for retirees’ Social Security or Medicare or still working people’s ObamaCare. Millions of people will become destitute overnight – UNLESS we change things now.

Changing things means not only Balancing the Budget but also running Surpluses – to pay down the insane debt our leaders have built up as they’ve bought votes. Let’s institutionalize it by passing a Balanced Budget Amendment which has a clause requiring a Surplus until the National Debt is paid off.

Budget Deficit

Additionally, let’s pass a Constitutional Amendment setting a Dollar limit on Federal Spending. This will work to limit the FED’s ability to expand the money supply, since the general price level only goes up as the paper money is debased. If the politicians want the same purchasing power to spend, they have to control the FED’s cheapening of the Dollar.

If we control the FED all at once, interest rates will rise to Free Market levels – possibly triple or more than current rates (depending on maturity. All the mis-allocations of Capital throughout the US Economy caused by the Zero Interest Rate Policy (ZIRP) will come home to roost all at once. Many businesses will fail, and a lot of people will be thrown out of work – all at once.

I would prefer that we control the FED by making them allow rates to find Free Market levels gradually, possibly over a two or more year period, but on a preannounced specific schedule. If you prefer a cold-turkey approach, write a comment and convince me.

To run a Budget Surplus, you have to spend less money. Where do you cut? I would start with a program which should be declared Unconstitutional – program grants to the States – which costs Uncle Sam about $600 Billion.

With all this money available (mostly through matching funds), local legislators in effect are forced to defer to the federal government on how a huge chunk of local tax collections get spent. The US government in effect is dictating policy to State (and local) governments, and this is Unconstitutional, violating the 10th Amendment. Once again, I would prefer to phase out the grants – 10% cuts per month? – rather than cut the grants cold turkey.

Grant Money

Other spending which can be phased out includes Welfare & Food Stamp Entitlements, Medicare, and Social Security. Welfare & Food Stamps would be phased out possibly over a 1 year period, while Social Security & Medicare might require 40 years.

Controlling how the FED buys Treasury Debt, and what it does with the interest it earns, while FED buying is allowed to continue, also would save Hundreds of Billions.

With current government revenue around $3 Trillion each year, I would Balance the Budget by the end of year one, and keep cutting until we had a Budget Surplus of about $1 Trillion, perhaps during year three.

Is this aggressive? You Bet! Remember that we’re in an unstable situation. If we allow things to go on as they have been going on, the US Economy likely will collapse from the huge debt burden and/or the FED’s Monopoly Money printing policies.

Given the choice of change or die, I’d choose to change. What about you?

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