Bad Budget Deal Leads to S&P Credit Warning

Tuesday, 19 Apr 2011 12:55 PM

By Chris Freind

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It is a sad truth that America has been transformed from a tough-as-nails powerhouse into a nation that prefers to bury its head in the sand, pretending problems will go away if simply ignored.

Being the world’s only superpower, the United States has gotten away with that dangerous mentality for years. But now it is finally time to pay the piper, yet Congress’ continued lack of action has pushed America to the brink of insolvency.

America’s debt (the total amount owed) stands at $14.3 trillion, and its deficit (the amount of red ink incurred just this year) is nearly $1.7 trillion.

As a comparison, the 2011 deficit equals the ENTIRE budget in 1999. In other words, we are borrowing more this year than all government expenditures for all of 1999.

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The recent effort to “rein in spending” by cutting $100 billion from the current budget turned into a $38 billion compromise. But the independent Congressional Budget Office (CBO) concluded that the actual savings were just one percent of that, a mere $352 million.

Since trillions and billions are meaningless, incomprehensible terms (a point not lost on those wishing to confuse the public), it makes sense to break down America’s dire fiscal situation in real-world terms.

Let’s say the Debt and Deficit Restaurant (D & D) wants to dramatically expand, something it has done each year for decades. Despite the fact that D & D is already stretched thin because of its numerous loans for past expansions, and the fact that the debt holders are starting to view its mounting debt warily, there is faith that it will pay its bills, and financing is once again approved.

For its current operating year, D and D’s revenue is $21,000 (equivalent to the nation’s $2.1 trillion in tax receipts). Not enough to satisfy the owners (Congress), another $17,000 (our $1.7 trillion debt) is borrowed to buy everything else they want but can’t afford.

The restaurant already owes a staggering $143,000 to its creditors ($14.3 trillion debt), but the owners, rather laying off employees or downsizing, think the best action is to borrow more and expand anyway, ignoring the fact that skyrocketing interest payments now account for a huge percentage of revenue.

Some D and D patrons (the electorate who voted the GOP into power), foreseeing the negative impact of that strategy, have suggested that the owners cut back and make hard decisions that, while painful, are necessary if the five-star restaurant is not to become a fast-food joint, or worse, close its doors altogether.

Reluctantly, the owners agree. At first, they commit to cutting about 6 percent of the $17,000 they borrowed this year, equating to $1000 (the original $100 billion figure), not enough to make a dent. But upon reconsideration, they lack the courage to commit, and settle for a cut of $340 (the $38 billion compromise).

The owners are quite happy with their self-proclaimed business acumen, but an independent auditing firm (CBO) concluded that the cuts actually amount to less than one percent of the $340 compromised figure!

So D and D’s “solution” to its impending disaster is to cut three dollars out of the $17,000 owed this year, resulting in its total debt ballooning to $160,000 (the debt will rise to $16 trillion next year because the deficit was not reduced).

It doesn’t take an economist to see that D & D will soon become insolvent. In real life, D & D would have failed long ago, but the U.S. government has been printing money to stay afloat. But inflation is now rising, and interest payments on the debt will soon consume so much tax revenue that basic government functions will go unfunded.

Here’s what the political class is missing. It makes absolutely no difference whether it’s conservatives or liberals making excuses for lack of cuts and justifying budget deals, and it doesn’t matter how much merit their programs have.

Two plus two always equals four, whether or not we believe it. For all practical purposes, the United States’ insolvency it is a mathematical certainty, short of monumental change. Could the iceberg be averted? Sure, but the political will simply isn’t there from either party to steer the ship to safety.

From forsaking energy independence to raising debt ceilings to treating entitlements as sacred cows, the lack of action has led the republic to the edge of the abyss.

And as Lou says to Charlie Sheen’s character in the film "Wall Street": “Man looks in the abyss, and there's nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss.”

Standard & Poor's downgrading of America’s credit worthiness confirms that our nation is unquestionably looking into the abyss. The question is: Do we possess the character to keep us out of it?

Chris Freind is an independent columnist and television commentator who operates his own news bureau, www.FreindlyFireZone.com. He can be reached at CF@FreindlyFireZone.com



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