Rhetoric on U.S. ‘Deficit-Reduction’ is Nonsense

Originally posted at BullionBullsCanada.com

In every way, the “negotiations” between Republicans and Democrats on “deficit reduction” are a complete joke. As always, the best place to start when engaging in logical analysis is with definition of terms.

A “deficit” is the annual budget-gap between what a government spends, and what it brings in with revenues. Officially, the U.S. deficit has never exceeded $1.6 trillion. Obviously, you can’t “reduce” a number which has never exceeded $1.6 trillion by $4 trillion – but it sure sounds impressive when you spout such drivel.

Back in the real world (a place shunned by both U.S. politicians and the mainstream media), here is what is really taking place at the political circus in Washington. Republicans and Democrats are (supposedly) negotiating to reduce a small portion of future U.S. deficits, totaling $4 trillion over a period of many years. Suddenly this “Grand Bargain” doesn’t sound quite so grand, does it?

In fact, if they wanted, U.S. lawmakers could proclaim an even “bigger deal” when these anti-climactic “negotiations” mercifully come to an end: they could “reduce the deficit” by the same amount each year – but continue this “deficit fighting” over a 100 years (or a thousand), and “reduce the deficit” by $20 trillion, or $50 trillion (depending on how “hard” these deficit-hawks were prepared to “fight”).

The general problem here is an obvious one: the U.S.’s debts, liabilities, and current deficits are so gigantic (and totally unsustainable) that merely reducing the annual deficits by 15%, or even 25% falls far, far short of what is necessary for the U.S. to avoid outright bankruptcy. Thanks to the harsh mistress known as “compound interest”, the only way the U.S. economy can avoid bankruptcy is to eliminate the deficit completely now, and return to real budget surpluses – not the ‘smoke-and-mirrors’ budget “surpluses” which the Clinton regime pretended to achieve.

If the U.S. were forced to pay the same interest rates that Greece is paying today, this alone would double the current U.S. deficit, and increase the cumulative total of U.S. deficits by well over $10 trillion (during the same interval in which Republicans and Democrats claim they coud “reduce the deficit(s) by $4 trillion”). I’ll return to this topic later, but at the moment I wanted to get to the specific reason why this entire debate is unrealistic to the point of absurdity.

A large portion of the current U.S. deficit is “structural” in nature. For those without a background in economics, this is the opposite of a “cyclical” deficit, where the deficit exists merely because of a trough in the business cycle – and it will disappear on its own (or at least most of it) as soon as the economy “returns to normal”. Generally, this is what our political leaders are pretending in all Western economies, but specifically this is the implicit assumption which forms the basis of the “plan” being publicly cobbled together by Republicans and Democrats.

Meanwhile, back in the real world, the vast majority of the current U.S. deficit is “structural” in nature: specifically, it is an economy which is now “structured” to produce far too little revenues to fund the U.S. government. This is no “secret”. I showed this conclusively in a chart I included with a recent commentary.

Beyond that, all credible economists (and even many semi-credible ones) have reached the same conclusion: it is utterly impossible to successfully-and-substantially reduce the current U.S. deficit without significant tax increases (i.e. the majority of any/all deficit reduction). This is simply a matter of arithmetic (a field of study which is apparently incomprehensible to U.S. political leaders).

The chart above is in nominal dollars, not “real” ones (i.e. adjusted for inflation). If we were to convert the numbers above into inflation-adjusted revenues for the U.S. government, what you would see is much more of a “cliff” formation – with the rate of collapse in revenues accelerating.

Compounding this fiscal train-wreck, thanks to the massive total debt (and massive annual deficits) a larger chunk of every tax dollar (every year) is consumed – i.e. totally wasted – in paying interest on debt. When you have revenues plummeting downward and with more and more of each of those precious dollars being snatched-away in interest payments, it is mathematically impossible to fund any government – let alone one which insists on maintaining the largest war-machine in the history of the world.

Again, none of this is a secret. When the Bush regime enacted “the Bush tax-cuts” (and the Obama regime extended them), this was the single, largest tax-windfall ever bestowed upon the wealthy of any nation – and it substantially added to what was already a large, structural revenue-shortfall. Even a Republican should be able to grasp the elementary concept that you can’t solve a “revenue crisis” with tax-cuts.

This is not the end of the fantasy in this theatrical farce, but rather only the beginning of it. Part of the reason why politicians love to announce “plans” which will take place over many years in the future is because it allows them to make “assumptions”. These assumptions are the proverbial “fine print”. Without the assumptions being valid, none of the headline numbers have any validity either – and (of course) the assumptions being used for the U.S. economy are not remotely plausible.

There is no need to analyze these individual assumptions one at a time, since they all fall into a single category: assuming that the U.S. economy “will return” (and is returning) to “normal”. I have already rebutted this nonsense on countless occasions.

One way to invalidate it is with “pictures”.

Does this look like an economy that is “returning to normal”? There are a hundred others just like it – all produced by the U.S. Federal Reserve, so presumably the elected representatives of the U.S. government who are currently involved in these supremely important economic issues are familiar with them.

The other way to invalidate this rubbish is through simple logic, indeed I need merely trot-out a premise which I have already mentioned: the U.S. spends an ever greater proportion of each and every dollar which its economy generates paying interest on debt – with total public and private debts amounting to around $60 trillion.

Think of a “runner” who considers himself so superior to all of the other runners that he can tie a weight around his waist and still win a race against his competitors (let’s call this runner “U.S. economy”). Let’s assume that the runner is actually able to win his race with a small weight around his waist.

Oblivious to the realities of physics, the runner continues to tie bigger and bigger weights around his waist – and “predicts” he will still be able to win his races and run just as fast. No one would believe such an arrogant idiot, for obvious reasons.

The laws of arithmetic are just as absolute. No economy can waste an ever larger proportion of its resources every year and still perform at a level consistent with long-term trends (i.e. “normal”). Thus, when this whole farce began, and U.S. politicians announced the “assumptions” which were underlying their “Grand Bargain”, the appropriate response of the mainstream media was not to stand up and applaud like trained seals.

The appropriate response would have been to laugh loudly and retort, “Good joke. Now why don’t you use some real numbers and try again.”

The arithmetic (and logic) here is irrefutable. It will never be possible for the U.S. economy (or any of the other Western debt-sinners) to perform “normally” ever again, unless/until total debt is substantially reduced (i.e. after many years of budget surpluses, not merely smaller deficits). To argue otherwise directly implies that one is either incapable of comprehending the most elementary arithmetic or that one is being intentionally dishonest.