Debt Crisis is Ultimately a Spending Crisis

Beefs and Beliefs

Time to face the link between government programs, spending and debt, here and overseas.

Published on: July 5, 2012

I have heard all the misinformation I can stomach on the European "debt crisis."

A debt crisis is always, ultimately, a spending crisis.

Most of us who live in the real world realize this. Some don't deal with it well and must be reminded with the punishments of bankruptcy. Overall, however, I believe most of the responsible members of our society, those who work and pay taxes, understand this principle in their own lives.

Why they can't understand the same rules apply to our government, and to the governments of others, is beyond my powers of logic.

Let me present you with an example. In my home state of Oklahoma we have a balanced budget requirement in our state constitution. Every year the legislators are required to cut spending to match income. If they miss the mark it will be leveled next year with ever more of those "austerity measures" the Europeans hate so much.

The result of this constitutional requirement is we don't have any debt.

We don't make excuses. We don't blame Germany. We don't say private debt was the cause of public debt. We just cut back until we can pay our bills.

Yet that's not what we hear from Europe and it's not what we hear from our federal government bureaucrats and lawmakers.

Every day when I listen to or read the financial and political news most reporters and those they interview are mystified by the "debt crisis." They ask stupid questions and get stupid answers. They talk in circles. They report on public protests. They focus on "tax evasion."

Perhaps worst of all, they write about how further loans will end the debt crisis.

Whatever happened to the old truism that you can't borrow your way out of debt?

Instead of holding feet to the fire and asking where the money is spent, reporters seek out anything they can imagine as human suffering – things like putting off government-funded retirement from age 62 to age 64. Oh, woe to those poor souls!

I did a fair amount of internet searching this week on the debt crises, or collective crisis, in Europe and particularly in Greece, Spain, Portugal and Ireland and I learned that truth is a side-note to the reality in which most in the world, or at least most reporters seem to live.

In a June 18 story on Greece, the BBC seemed able to state the problem but unable to explore it. The reporter wrote: "Greece was living beyond its means even before it joined the euro. After it adopted the single currency, public spending soared. Public sector wages, for example, rose 50% between 1999 and 2007 - far faster than in other Eurozone countries."

Oops! That story quickly devolved into blaming other factors, such as the "global economic downturn."

In fact, I could not find one citation on how any of these problem governments break out their expenditures. It seems to be a mystery.

But the austerity measures listed are all in socialistic, centrally planned government programs, government employment and government subsidies which I would label "largesse."

The real news is that our country is headed pell-mell down the same path. We have a bigger economy and more economic might and clout but there's an old saying that giants make a bigger crash when they fall.

Kevin Hackett, whose Hackett Money Flow report I value highly, addressed the issue of the looming U.S. federal debt crisis this week. Hackett is quite apolitical but tries to call things as he sees them for his investor clients.

In short, he says we have further to fall before we find a bottom and decide to deal with the debts we have created through unchecked federal spending.

He says the result will include these outcomes. In his words:

1. Social security, Medicare/Medicaid and state pensions will have to be paired back substantially to only those in the greatest need. Most Americans will have to accept the fact that all the monies that have been paid out over the last 30 years for these entitlement programs were nothing more than an extra tax in the end. Promises were made that cannot be kept and that is the hard truth of the matter.

2. U.S. sovereign debt will have to be restructured by a combination of debt forgiveness and the swapping of much of our current debt with the creation of long term (I am thinking 50 years) bonds. These long term bonds would only require principal and accrued interest to be paid at the end of the 50 year period thereby freeing huge amounts of cash flow to be diverted to more economically productive endeavors.

3. The U.S. Dollar will be devalued against all major currencies to rebalance the global economy so that the U.S. can reestablish a competitive fiscal balance with the rest of the world. I am thinking a Dollar index value near 50 would likely be what is required to regain a global balance.

Hackett's analysis of long-term charts and fundamental principles says 2013 and 2014 will be the deepest part of the trough where all these things must be faced.

You can subscribe to Hackett's reports on his website.

My point is this: The sooner we accept the fact we can't spend our way out of debt and that pain will be part of our healing process, the sooner we can begin to heal.